Accounting rate reform and what it means

1
Activities of Study Group 3
Saburo TANAKA Councellor, TSB/ITU

Seminar in Guatemala City, November 2002
http//www.itu.int/ITU-T/othergroups/tal/index.htm
l
Note The views expressed in this presentation
are those of the author and do not necessarily
reflect the opinions of the ITU or its membership.
2
Agenda

• Is SG3 different from other SGs?
• SG3 is unique
• But not different
• What are the hot issues studied in SG3?
• For Intl Telephone services
• For INTERNET
• For Mobile Termination Service
• What are the concerns of administrations and how
  do they react?

3
International Telecommunication Union

• A UN Specialized Agency
• Intergovernmental organization, governments
  represented through their telecommunication
  Administrations (constitutional Members)
• Other entities (Recognized Operating Agencies,
  Scientific Industrial Organizations, regional and
  international organizations) admitted as Sector
  members
• Basic Law Convention and Constitution, to be
  modified by Plenipotentiary Conferences

4
ITU-T Membership (End 2001)

• Member States 189
• Sector Members 179 ROAs 234
  SIOs 39 others (including ISOC,
  regional, International
  organizations, etc.) 30
  Associates
• New applicants 2001 71 2000
  66 1999 17 1998 57

5
ITU-T mission

• ITU-T's mission is to ensure an efficient and
  on-time production of high quality standards
  covering all fields of telecommunications.
• Standardization work is carried out by the ITU-T
  Study Groups in which representatives of the
  ITU-T membership develop Recommendations for the
  various fields of international
  telecommunications.
• More than 2800 Recommendations currently in
  force.

6
NGOsISO,IEC,IEEE, ETIS,ETSI, ECMA,TTC,Committee
T1,ARIB, TIA, SCTE
Intergovernment ITU (ITU-T and ITU-R)
Task Force IETF
Forums Consortia
1394TA 3GPP 3GPP2 AIM AMF AMI-CAOEMA AOW ATMF BIN
TERMS Bluetooth Cable ModemsCBOP CDG CIF CII Comm
erceNet CommerceNet JCOS CTFJ DHF DISA DOPG DSLF
ECE ECHONET ECOM ECTF EDIFICE EEMAEIDX EMA EMF ER
TICO EWOS FCIAFCIA-J FIPA FRF FSAN GSM
Assoc. HNFHome API HomePNA HRFWG IDB
Forum IFIP IFSAIMTC IMWA IrDA ITS America ITS
UK JAVAJCTEA JECALS JEDIC JEMA JICSAP JIMMJMF LO
NMARK MCPC MDG.org MITF MMCFMobile
Web MOPA MPLSF MSForum MWIF OASISODVA OIF OMG OSG
i PCCA PCISIGPCMCIA PHS MoU PICMG POF Salutation
SCFSDR SSIPG STA TINA-C TMForum TOGTSC UMTS USBI
F UWCC W3C WAPWDF Web 3D WfMC WIN Forum WLIF XTP
Forum

ITU positioning
7
SG3 is unique
IO
SIO
Administrations
ROAs

• Because of its composition

Ladies
Gentlemen
Developedcountries
DevelopingCountries
8
Dealing purely with non-technicalstandards and

• Tariff/regulatory/Policy related issues

• There are 4 Regional Tariff Groups

9
ITUT SG 3 Major achievements

• New Remuneration system
• Termination charge system
• Settlement rate system
• Special arrangement
• Difficulty to quickly implement these systems
• Condition is to reach cost-oriented rate, but
• No cost data or model for some administrations
• Regional Tariff Groups developed cost models
• SG3 is now developing cost principles and
  guidelines for negotiation
• Transitional arrangements
• To facilitate staged reduction to cost based rate
• to avoid sudden fall of revenue (smooth
  transition)

10
Annex E to Recommendation D.140 indicative
target rates by Teledensity (T) Band, in SDR
(and US cents) per minute.
10
(
end 2001)
(end 2001)
(end 2001)
(end 2001)
(end 2001)
(end 2001)
(end 2001)
FCC 19 (January 2001)
FCC 15 (January 1999)
FCC 23 (January 2002/2003)
19 (J.2000)
Note The correspondence between teledensity
band and income group shown in the bottom row is
intended to be approximate, not precise. Source
ITU-T SG3 Report. 1 SDR US1.39.
11
Annex E Recommends also

• That transit Administrations move towards the
  indicative target rate (upper limit) of 0.05 SDR
  (0.07US ) per minute.
• To negotiate asymmetrical accounting rate (other
  than 50/50) if both administrations agree to move
  below the indicative target rate. Example
  Operator A belongs to teledensity band
  EOperator B belongs to teledensity band FA and
  B agree to achieve TAR 0.2SDR (
• A can request settlement rate of 0.09 SDR
• B accepts to pay 0.11SDR to A

12
Resolution 41 Updated indicative target rates
by Teledensity (T) (Year 2002)
13
Termination charge

• Destination operator (or Government) sets the
  charge
• Charge should be established based on costs
• Termination Charge includes
• International exchange
• National extension, including local loop
• And if appropriate, international circuit
• Other costs imposed on carriers by the national
  regulation
• These components should be separately identified
  (Unbundled)
• Charge applies to all traffic from any source
• However if significant variation in costs, charge
  may vary (volume discount)
• Termination charge may be introduced on a
  bilateral agreement basis

14
Accounting rates and Termination Charges
What s the difference
15
International call terminating on mobile network

• SG3 revised D.93 in year 2000, allowing to
  negotiate
• a separate rate for traffic terminating on a
  mobile network
• however, this is by bilateral negotiation and
  when the rate is cost orientated
• The difference between the two rates should be as
  small as possible
• Many countries now request very high settlement
  rates (3 5 times)
• A review is now going on in SG3

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Interconnection with mobile networks

• key regulatory issues involving interconnection
  with mobile networks. These issues include
• The role played by market structure and
  competition in setting mobile interconnection
  rates
• The asymmetry of retail prices for
  fixed-to-mobile and mobile-to-fixed calls,
  stemming in part from asymmetrical
  interconnection rates
• Difficulties in obtaining technical
  interconnection, including quality-of-service
  problems
• The lack of transparency in setting prices for
  fixed-to-mobile and mobile-to-fixed calls and
• The design of appropriate interconnection
  arrangements for Short Messaging Services (SMS)
  and General Packet Radio Service (GPRS)and
  emerging mobile Internet access in general.

17
Countries with an Interconnection regulatory
framework, by region
Source ITU Telecommunications Regulatory
Database.
18
Countries imposing regulatory obligations
Countries
60
50
40
30
20
10
0
Incumbent
Fixed
All fixed
All mobile
Mobile
Other
(fixed) only
operators
operators
operators
operators
SMP
SMP
Source ITU Telecommunications Regulatory
Database.
19
Interconnection in Europe

• Existing regulatory framework
• Many different sector-specific directives,
  notably Interconnection Directive (97/33/EC)
• Two parts Recommendations on Interconnection
  pricing and accounting separation
• Methodology for identifying best practice
  pricing
• Lowest 20 of published interconnection offers in
  15 EU Member States at local (0.9 /100), single
  transit (1.5 /100) and double transit (1.8
  /100)
• New technologically-neutral regulatory framework
• Access to, and interconnection of, electronic
  communications networks and associated facilities
• First reading in European Parliament on 4 July
  2001
• Amended proposal available at
• http//europa.eu.int/information_society/topics/te
  lecoms/regulatory/new_rf/com2001-369en.pdf

20
Interconnection Rates in selected European
countries under CPP (in US / minute, end year
2000)
In 2001, there is an estimate indicating that the
average of Fixed-mobile decreased to 0.136 and
mobile to fixed has not changed
21
Range of Interconnection rates in EU, US per
minute
Source ITU, compiled from ECTA/Analysys, EU
Interconnection Tariffs in Member States, ITU
Regulatory Survey 2000.

22
Selected European interconnect and settlement
rates, US cents per min, 2000
14
Double transit
interconnect
12
Settlement
10
Rate to USA
8
6
4
2
0
Spain
Italy
France
Germany
Nether- lands
UK
Sources ITU, EU, FCC.
23
InterconnectionRegulatory and
technical issues

• Policy makers must resolve such basic questions
  as
• which carriers require interconnection
• How the costs will be calculated and recovered,
  and
• At what points in the PSTN interconnection should
  occur
• Regulatory issues
• Establishing guidelines in advance (without it,
  interconnection negotiations are frequently
  protracted, delaying the introduction of
  competition)
• Introducing competition requires dominant
  carriers to interconnect with other carriers
• Cost orientation excessive prices deter market
  entry, hinder competition, end user suffers and
  can provide a pool of revenue
• Technical issues
• Points of interconnection incumbent operators
  permit inter- connection with their networks at
  any technically feasible point
• Dialling Parity and Pre-selection Call-by-call
  customer selection or Operator pre-selection by
  pre-subscription
• Quality of Interconnection Service

24
Key Interconnection Rules in the WTO Reference
Paper
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Economic issues

• The economic issues involved in interconnection
  largely come down to question of costs cost
  definition, cost measurement, cost allocation and
  cost recovery
• How can interconnection costs be measured?
• Theoretical Frameworks (Historica, Fully
  Distributed costs, LRIC)
• Cost study Approaches (Top-Down, Bottom-Up,
  Outside-In)
• Interconnection charge
• Cost based charges
• Retail-based charges
• Price Caps
• Bill and Keep or Sender Keeps All
• Revenue Sharing

26
Cost Model
OBJECTIVES

• MARKETING
• Minimize opportunity for arbitrage
• Generate more revenue by increased traffic

• TECHNOLOGY
• Enhancement towards global technology
• Long term cost/benefit of technology and options
• Impact of technology on global relations

• BUSINESS DECISIONSUPPORT
• Pricing and Product Planning
• Investment evaluation
• Economics of direct/transit routing

• FINANCIAL CONTROL
• Monitor actual performance and compare with plan
  and past trends
• Cost control
• Identify Cross Subsidy

• REGULATORYCOMPLIANCE
• Set D.140 as globally acceptable standard
• Rationalize tariff charges
• Derive TAR, USO

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Costing Methodologies
METHODOLOGIES
ACCOUNTING CONVENTION
COSTING APPROACH
HISTORICALCOSTACCOUNTING
CURRENTCOSTACCOUNTING
FULLYDISTRIBUTED COST APPROACH
INCREMENTALCOSTAPPROACH

• Incremental costs only
• Often long-run incremental costs only

• Cost of today of providing service
• Mirrors competitors potential cost

• Actual costs incurred

• All costs areallocated to services

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Not many differences if

• Current cost accounting is used
• FDCHistorical Cost is no more relevant
• Costs of efficient services provision are used
• this should be the aim of all operators
• spare capacity (legitimate if transparency)
• Disagreement on time horizon to achieve this
• Principle of cost causality is applied (ABC)
• Common cost must be attributed to the service on
  the basis of the causality priniple
• However an exhaustive application of an ABC
  approach may be very costly
• Need for cost recovery realised appropriately
• IC approach should contain a markup

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Agreed General principles

• Principle of open availability of information
  The open availability of information used in the
  cost deviation process used to substantiate rate
  claims. Alternatively, if prices from competitive
  environments are used as guides/proxies for
  actual cost data, the open provision of this
  price data and information (regarding the
  competitiveness of these market environments).
• Principle of practicability The ability to
  implement a costing methodology with reasonable
  demands being placed on data availability
  anddata processing in order to keep the costing
  exercise economical, yet still useful.
• Principle of cost causality The demonstration
  of clear cause-and-effect relationship between
  service delivery on the one hand and the network
  element and other resources used to provide it on
  the other hand, taking into account the relevant
  underlying cost determinants.
• Principle of contribution to common costs
  Costing methodologies should provide for mutually
  agreed reasonable contribution to common cost as
  defined in Recommendation D.140.
• Principle of economic provisioning The use of a
  costing methodology that reflects the principle
  of economic provision of services taking into
  consideration all the reasonable circumstances
  that affect the conditions in each country, for
  instance, macro-economic conditions, network size
  and teledensity levels, etc. and recognizes the
  need for a better combination and use of
  resources over time.

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Los cinco principios
Cualquier metodología para la fijación de costos
propuesta debería incorporar, como mínimo, el
siguiente conjunto de principiosPrincipio de
libre disponibilidad de la información La libre
disponibilidad de la información utilizada en el
proceso de cálculo de costos para justificar las
pretensiones de tasas. Alternativamente, si se
utilizan precios aplicados en entornos
competitivos como guía u orientación para los
datos de costos reales, la provisión libre de
estos datos e información de precios (en relación
con la competitividad de estos entornos de
mercado). Principio de practicabilidad Aptitud
para aplicar una metodología de cálculo de
costos, imponiendo exigencias razonables en lo
que respecta a la disponibilidad y el
procesamiento de datos, para que el ejercicio de
fijación de costos siga siendo económico y
útil. Principio de causalidad Demostración de
una relación clara de causa y efecto entre la
prestación del servicio, por un lado, y los
elementos de la red y otros recursos utilizados
en dicha prestación, por otro, considerando los
factores pertinentes que determinan los costos
implícitos. Principio de la contribución a los
costos comunes Las metodologías de cálculo de
costos deben asignar una contribución razonable a
estos costos, tal que se definen en la
Recomendación D.140. Principio de prestación de
servicios económica Utilización de una
metodología de cálculo de costos que refleje el
principio de prestación de servicios económica
teniendo en cuenta todas las circunstancias
razonables que afectan a las condiciones en cada
país, por ejemplo las condiciones
macroeconómicas, el tamaño de la red y los
niveles de densidad telefónica, y reconozca la
necesidad de una mejor combinación y utilización
de los recursos en el tiempo.
31
Cost Study Methodologies
Top Down (Total Company costs)
Service Unit cost Results
Outside In (Proxy inputs results)
Bottom UP (Facility, operating cost inputs)
32
Cost model resolves everything?

• Accounting rate is established by negotiation
• Rates need to be agreed upon in negotiation
• Market-determinde prices put pressure upon
  negotiation
• Need to back up its claim for a charge
• By showing the price of a comparable
  competitively offered service
• Or for monopoly by providing relevant cost data
  
• Costs tools for negotiation, costs do not
  fix automatically the level of prices

33
Guidelines for negotiation of Accounting rates
and Code of conduct

• See Recommendation D.140, Annex C
• See TAL Temporary Document, Section 2

34
The importance of interconnection

• Key to developing competitive markets
• Interconnection is the main driver of growth and
  innovation in telecom market, it promote
  efficient infrastructure development
• But constructing a sound interconnection
  framework is no easy task
• Approaches to Interconnection Policy
• National approach by 2000 101 countries had
  established interconnection regulatory framework
• Regional Approach European Union
  (interconnection directive), CITEL (Guidelines
  and Practices for Interconnection Regulation),
  APEC (Recommended Principles for
  interconnection), TRASA(proposed interconnection
  guidelines)
• WTO Reference Paper on Regulatory Issues
• Puts forward a series of interconnection
  commitments- provide interconnection at any
  technically feasible point
• - non discrimunatory terms, conditions and
  rates
• - in a sufficiently unbundled and timely fashion
• - calls for transparency

35
Internet Interconnection

• Internet Interconnection has slightly different
  meaning. Historically Internet interconnection
  has involved simply different Internet networks.
• This Internet Interconnection policies have
  proved increasingly inappropriate in a commercial
  industry.
• Many operator with larger networks often charge
  smaller ISPs a traffic-based interconnection fee
• Many backbone providers have begun offering
  transit service networks.
• Different type of Interconnection Arrangements
• ISP Relationships with customers usually via a
  dial-up
• ISP-ISP Interconnection peering or bilateral
  agreement
• Multiple ISP Exchanges when several ISPs need to
  interconnect in a same city (use of an IXP)
• International Regulatory Development

36
Inter-regional Internet connectivity
0.4 Gbit/s
USA / Canada
162Gbit/s
41.8Gbit/s
Europe
Asia /Pacific
14 Gbit/s
0.77 Gbit/s
0.45 Gbit/s
LatinAmerica
Africa, Arab
0.1 Gbit/s
Note Gbit/s Gigabits (1000 Mb) per
second. Source ITU adapted from TeleGeography.
37
Recommendation D.50

• The ITU-T,
• recognizing
• the sovereign right of each State to regulate its
  telecommunication, as reflected in the Preamble
  to the Constitution,
• noting
• a) the rapid growth of Internet and Internet
  protocol-based international services
• b) that international Internet connections remain
  subject to commercial agreements between the
  parties concerned and
• c) that continuing technical and economic
  developments require ongoing studies in this
  area,
• Recommends that
• administrations involved in the
  provision of international Internet connections
  negotiate and agree to bilateral commercial
  arrangements enabling direct international
  Internet connections that take into account the
  possible need for compensation between them for
  the value of elements such as traffic flow,
  number of routes, geographical coverage and cost
  of international transmission amongst others.

38
The TAL region Digital Divide
Source ITU.
39
Typical ISP cost comparisons
OECD countries
40
Internet retail pricing
30 hours of Internet access, US, End 2001
Source ITU adapted from ISPs / PTOs
41
Internet vicious circle
42
Virtuous circle
43
IP-Telephony Telephone to telephone (fax to fax)
via Internet
Internet
Phone Gateway Computer
Phone Gateway Computer
Telephone
Public Switch
Telephone

• Any telephone/mobile user to any other
• Main motivation Accounting rate bypass, market
  entry for non-facilities-based carriers
• Potential service providers include any PTO with
  settlement payments deficit (e.g., US US5.7bn)
• Market potential 1.3 billion telephone/mobile
  users

44
IP TelephonyOpportunities and challenges

• Opportunities
• Reduce prices to consumers and the costs of
  market entry for operators
• In terms of volume of traffic carried and level
  of investment committed
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
• Challenges
• Undermine the pricing structure of the incumbent
  Public Telecommunication Operators (PTOs)
• Transition to IP-based networks also poses
  significant human ressource development
  challenges

45
Challenges
Revenue gain and revenue loss
46
How the operators in developping countries stop
IP-Telephony
Operator check only this line
PSTN Operator Switch
ISP
Users can call ISP but ISP is unable to call users
47
For additional informationPlease
visithttp//www.itu.int/ITU-T/studygroups/com03/
index.aspOr contactsaburo.tanaka_at_itu.intsophi
e.blondeau_at_itu.int