Home Latin America I 1997 Interconnection – New Policies Promote Competition

Interconnection – New Policies Promote Competition

by david.nunes
Bruce EdgertonIssue:Latin America I 1997
Article no.:3
Topic:Interconnection – New Policies Promote Competition
Author:Bruce Edgerton
Title:Expert Consultant
Organisation:The Strategis Group, USA
PDF size:64KB

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Article abstract

The drive towards a truly competitive telecommunications market will lead to a proliferation of wireless networks as new systems are licensed. Traditional interconnection practices favour operators with dominant market position and disadvantages new competitors. To ensure success of a competitive market, transparency in interconnection access and pricing is essential.

Full Article

The drive towards a truly competitive telecommunications market will lead to a proliferation of wireless networks as new systems are licensed. The viability of new wireless networks will be based in large part on their ability to interconnect with existing networks on reasonable terms. However, traditional interconnection practices favour operators with dominant market position and disadvantages new competitors. To ensure success of a competitive market, transparency in interconnection access and pricing is essential. Transparent Interconnection is Critical to Competitive Markets and New Service Generation Wireless services provide vital communication links, but to enable the services desired by wireless subscribers, the wireless networks must be interconnected with each other and to the Public Switched Telephone Network (PSTN). The worst case is a lack of interconnection which can easily impede the growth of a new wireless service. For example, many Local Exchange Carriers (LECs) refused to interconnect paging networks for many years in the United States. This is one of the major reasons it took paging carriers almost 20 years to achieve a base of 1 million subscribers. In the last 25 years however, paging has grown from 1 to almost 40 million subscribers. Interconnection with the PSTN is crucial in order for a wireless network to offer value and utility to its subscribers. In the wireless industry, interconnection pricing has two component costs, the actual price to use the network, which include transport and switching factors, usually priced in a per minute increment, and the price to lease connection to the point of interface. The overwhelming expense of interconnection is the per minute price for use of the network. Interconnection pricing uses cost models to derive the value for access to a network. Historically, the models have reflected embedded costs, thus distorting the pricing analysis. Additionally, costs are usually developed for bundled services, including both transport and switching elements, regardless of whether the connecting network requires such services. These non-transparent pricing practices make the interconnection of new networks inefficient and saddles new competition with significant transfer payments to incumbent operators. New wireless services that will generate hundreds of minutes of use are disadvantaged under traditional interconnection cost models to such an extent that in some cases they are not even viable. In the United States, the Strategis Group estimates wireless centrex services would not be commercially viable under traditional models as over 50 percent of revenues would be paid to interconnection. Transparent interconnection would enable new services, with high minutes of use to be deployed creating a more competitive market place. The Pace of Change in Argentina and the United States Argentina and the United States are both moving towards more competitive markets at different speeds (Table 1). Argentina will license two Personal Communication Service (PCS) operators during 1997, although the ability for the new and existing licensees to offer Wireless Local Loop (WLL) services is restricted by the extension of a monopoly basic telephony service into the next century. The United States is moving more rapidly towards a competitive market for telecommunications services. The Federal Communication Commission (FCC). auctioned PCS spectrum and LMDS frequencies are to go on the block soon. Despite the different time frames for achieving true competition, both Argentina and the United States took major steps in January of 1997 and August 1996, respectively, towards achieving more transparent interconnection. The changes adopted are very similar and provide a model for other markets in the Western Hemisphere to use in the move towards a truly competitive market. To understand the impact on the wireless communications service and as a lesson for other markets, interconnection practices in each market need to be scrutinised. Wireless Interconnection Practices in Argentina The principles for interconnection, which is regulated by the Comision Nacional de Comunicaciones (CNC), were established under resolution 62 of 1990, the Entel privatisation decree, and resolutions 506 of 1992 and 1461 of 1993. From a new carrier’s perspective, the framework was vague – interconnection pricing was to be cost based, but of an unspecified nature. Also, the decrees do not clarify the dominant position of the monopoly basic telephony operators, an oversight which hindered subsequent interconnection agreements. In the Argentine cellular telephone industry, interconnection pricing has been based on the call origin and destination with respect to Local Mobile Calling Areas (LMCAs) which are fairly large geographical areas that are analogous to Local Access and Transport Areas (LATAs) in the United States. Argentina’s three cellular regions are divided into 44 LMCAs: 22 LMCAs in the South region, 21 in the North region and the remaining LMCA in the Area Metropolitana de Buenos Aires (AMBA) region. In general there are three possible scenarios for interconnection pricing: within LMCA, between LMCAs in the same cellular region, and between LMCAs in different cellular regions. For wireless carriers, the majority of the mobile-land calls are intra-LMCA in nature. Intra-LMCA pricing varied based on geography. In the interior of the country, calls originating and terminating in the same LMCA were billed at $0.065 per minute rate in the provinces, $0.02 per minute in most of Buenos Aires, and $0.14 per minute in certain outlying areas of AMBA. All inter-LMCA mobile-fixed calls were required to interconnect at the closest point to the call origin and transit over the PSTN to its destination. The subscriber was billed at the full toll rate for mobile-fixed calls between LMCAs like regular long distance traffic, although the wireless operators were allowed to keep about 58 percent of the toll rate billed to the customer. For inter-LMCA calls that went out of the cellular region in which the call originated, the same interconnect scheme with the PSTN was used, causing the customer to be billed at the going toll rate although the operators kept approximately 35 percent of the toll rate billed to the customer. Toll rates were distance sensitive, causing the effective interconnection rate to vary but this restriction limited cellular carrier’s operational flexibility. RNI Improves Interconnection Terms for Wireless Competition On January 27, 1997, a new Reglamento General de Interconexion (RNI) was published, marking an important advance towards creating transparent interconnection and promoting competition. Among the more important elements addressed in the RNI were: Ÿ the use of long-term margin cost as a basis for developing pricing. The CNC is likely to order the use of Total Service Long Range Incremental Cost (TSLRIC) methodology for determining costs for interconnection. TSLRIC is a concept used in the United States that uses forward-looking incremental costs for a specific service, such as local residential service. Since TSLRIC does not use embedded costs, lower interconnection rates are a direct result of mutual or reciprocal compensation. This gives mobile operators the right to charge for calls terminated on their networks. Ÿ a definition of dominant and non-dominant positions. Dominant carriers are to provide pricing on an a la carte basis for local access, switching facilities, and transmission facilities. The process of arriving at actual costs for unbundled services may be difficult: there is some talk in the market that an average of pricing in more mature markets may be used to establish some pricing elements. Ÿ allows the non-dominant carrier to select the point of interconnection and access to co-location. ANI Will Lower Wireless Interconnect Costs and Improve the Competitive Environment The RNI significantly improves transparency for interconnection in pricing and giving non-dominant carriers greater flexibility. By shifting to a forward looking cost-based model and changing to a mutual compensation, the Strategis Group expects intra-LMCA and inter-LMCA toll rates will be reduced by about 40 per cent from their former levels by the CNC’s action. As a result of the RNI, wireless carriers will now be allowed to use their own facilities to transport inter-LMCA calls. This will further reduce their interconnection costs, plus allow them to offer expanded calling options to their customers. Most of the wireless carriers already have some inter-LMCA facilities that are currently only used for signalling links. These will need to be augmented with additional facilities for voice traffic but these additions can be effected rather easily. Green Light for the ANI In a political move, the Argentine government chose to bundle the RNI with several other telephony issues, including a controversial tariff re-balancing, issued during the summer holidays. The RNI should not be affected by the pending outcome of the Supreme Court’s review of the local element of the tariff re-balancing, although any changes in tariff re-balancing may influence inter-LMCA connection costs. Despite Argentina’s gradual pace towards reform, the RNI provides a signal of the country’s dedication to future competition and advanced wireless services by establishing transparency in interconnection. With the regulatory changes recently announced by the CNC, Argentina has made important strides in creating a more competitive environment. These changes will have a favourable effect on pricing for wireless services. Wireless Interconnection Weighs Heavily on Operators in the United States Interconnection costs represent a significant expenditure for the wireless industry in the United States. As detailed by the Strategis Group in its study Interconnection: Wireless Industry Rates and Trends, wireless interconnection payments reached $936 million in 1995. The current rates have some cost-basis but often include substantial margins of profit plus contribution towards the universal service objectives. These pricing practices keep service costs high and serve as a competitive disadvantage to companies that in the future will want to provide service offerings similar to basic telephony. Movement Towards Transparent Interconnection The interconnection decision (Docket 96-98) rendered by the Federal Communication Commission (FCC) on August 8, 1996 allowed compensation to wireless carriers and lower interconnection rate structures. Among the most important elements included in the decision were: Ÿ mutual compensation. Wireless carriers will now be compensated for traffic that originates on a local exchange carrier’s (LEC) network and terminates on the wireless network. Ÿ rates using a forward looking cost-based model. Total Element Long Range Incremental Cost (TELRIC) is essentially an adaptation of the TSLRIC methodology which has been used by the LECs in the U.S. and is being introduced in Argentina. A number of recent decisions by state commissions have resulted in cost-based rates using the TELRIC methodology suggested by the FCC. Ÿ unbundling network elements. Stopping competing carriers, including: o different rates for essentially the same services or functions. New rates must be the same for a given service or function, or wireless if desired, may order different functions on an a la carte basis. o the new rates also must be non-discriminatory among telecommunications providers. There was ample evidence in the record that the LECs were charging different rates to different telecommunications providers. The Interconnection Decision Will Lower Pricing The Strategis Group has calculated that interconnection rates would decline by 80 percent from current levels using the FCC’s pricing rules. Although these rules have been stayed by the Court of Appeals, a number of decisions at the state level have resulted in rate reductions of 60-78 percent from current levels. In both instances, these estimates include the effect of reciprocal compensation. Considering reciprocal compensation by itself, the Strategis Group estimates the requirement will probably reduce the existing interconnection rates by about 22 percent. The amount of the actual reduction will depend on the percentage of traffic that is land-mobile as well as the percentage of traffic that terminates within a MTA and is considered eligible for reciprocal compensation. In the United States, interconnect pricing varies by region and type of connection. The Type 2A is the most commonly used interconnection in the wireless industry and, until late last year, the average price for a Type 2A connection was about US$0.029 per minute of use. Recent decisions using cost-based rates have resulted in interconnection rates that are in the $0.0065 to $0.012 range. The Impact of the Decision on Interconnection Payments The Strategis Group analysis projected that interconnections fees paid to LECs under traditional pricing models would reach $5.6 billion per year in 2005 as additional wireless networks came on line. Under mutual compensation, the cost is estimated to be $1.1 billion. Over a ten year span, from 1995 to 2005, the introduction of mutual compensation would result in a 67 percent reduction of interconnection fees to wireless carriers, from $34 billion to $11.3 billion. As telephony markets become more competitive, these transfer payments would have significant competitive impacts. Interconnection Decree on Hold The landmark interconnection decision was confronted with formidable legal challenges. On October 3, 1996, the U.S. Court of Appeals for the Eighth Circuit issued a stay of the pricing aspects of the FCC’s order which could remain in effect as long as 18 months unless the Supreme Court accepts a plea from the FCC. Although a large portion of the FCC’s order has been stayed by the U.S. Court of Appeals, the stay on the reciprocal compensation portion of the order was removed. Currently, the state commissions are deciding the compensation issues. Conclusion Interconnection transparency is imperative to creating a truly competitive telecommunications market. Interconnection represents a significant expenditure for the cellular, PCS, wireless centrex, mobile satellite, and WLL. Scraping old interconnection in favour of forward looking cost-based models, mutual compensation, and non-discrimination will create a more equitable landscape for the entrance of new competition and new services.

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