Interconnection Law and Policy: A Presentation for Nigerian Legislators and Judges: Interconnection Law and Policy: A Presentation for Nigerian Legislators and Judges R. Paul Margie United States Federal Communications Commission Nigerian Telecommunications Workshop Abuja, Nigeria, November 17-18, 2003 Note: This presentation is based on a presentation made by Alvaro Gonzalez, FCC economist


Outline: Outline Interconnection Definition Goals of Regulating Interconnection Monopoly pricing Mandated access to essential facilities Costing Methodologies Access Definitions and Types Pricing Issues Lessons for COMESA members


Interconnection - Definition: Interconnection - Definition Interconnection defined by the International Telecommunication Union as: “The commercial and technical arrangements under which service providers connect their equipment, networks and services to enable customers to have access to the customers, services and networks of other service providers.” (ITU, 1995)


Interconnection – Regulatory Justification: Interconnection – Regulatory Justification Under most conditions, owner of bottleneck facility will charge monopoly prices for access to that facility; and/or A network is unlikely to provide an input to its competitor at any price equal to or lower than the direct cost of access to that facility plus the opportunity cost (monopoly rents lost) from providing that input. These incentives lead to the economically inefficient use of, and investment in, telecom infrastructure.


Interconnection – Regulatory Goals: Interconnection – Regulatory Goals Any to any connectivity. Under some circumstances such as non-competing carriers, networks will interconnect on their own. Promote (not necessarily enable) competition in markets for telecom services. Interconnection must be regulated where competition in telecommunications services exists. However, competition is not an end but a means to an end (lower prices, high rates of innovation and investment, etc.)


Interconnection – What’s Next?: Interconnection – What’s Next? We established justification for interconnection regulation; We identified two main problems with interconnection (monopoly pricing and restricting access to essential facilities); What’s next? Address monopoly pricing through intervention by setting of interconnection rates Address disincentives to provide access to essential facility by mandating supply of interconnection facilities, setting commercial and technical terms of interconnection, monitoring compliance, and meting out sanctions for non-compliance. In either case, at the very least, regulator needs independent, objective and credible information on appropriate costs of interconnection services and facilities to set appropriate pricing.


Interconnection – Steps in setting prices: Interconnection – Steps in setting prices Step 1: Getting the “right” definition of costs so that the interconnection pricing levels are set correctly. Step 2: Setting the “right” rate structure so that recovery of costs is done efficiently.


Costing Principles: Costing Principles Carriers must pay for direct and indirect costs of interconnection; Issue of defining cost. Method of determining costs must be consistent, objective and transparent; and Issue of transparency if models are complicated; and Issue of objectivity—which usually means that cost model is based on economic theory—if theory is controversial. Interconnection should be sufficiently unbundled so that another carrier does not pay for network components or services that it does not require. Issue of how costly and complex it is to unbundle, and how costs of unbundling are allocated between carriers.


Costing Principles – Importance of a Cost Standard: Costing Principles – Importance of a Cost Standard Why a cost-based standard? When competition does not exist, this standard leads toward competitive pricing. Competition is the gold standard; Why is it important? Access charges represent a large portion of costs for carriers, thus affecting competition and market development; What is effect of choosing the wrong cost standard?: Sub-optimal network usage Preventing efficient entry or encouraging inefficient entry Undermining incentives for network maintenance and expansion Is there a “right” cost standard?


Access – Definition and Types: Access – Definition and Types Access Definition: The way that customers (retail) or networks (wholesale) gain right to purchase services and/or use elements of competing networks. Access Types: One-Way Access – One carrier pays for access to another network, but does not receive payment (e.g., long-distance carrier pays both originating and terminating local carriers); Two-Way Access – Each carrier pays the other to transport and terminate traffic. (Also known as transport and termination or reciprocal compensation); and End-User Access – What end users pay to originate or receive calls.


Important questions and choices:: Important questions and choices: (1) Do you use historic costs or forward-looking costs? (2) How do you allocate common costs?


Costing Principles – Two of Many Variants: Costing Principles – Two of Many Variants Fully Allocated Costs Long Run Incremental Costs (LRIC)


Other critical issues: Other critical issues Legal rules on quality of interconnection WTO Wireless International accounting rates


Vexing Choices and Problems: Vexing Choices and Problems How (and if) to regulate non-dominant (mobile) carriers; Same cost standard? Require non-discrimination clauses? For how long regulate? Symmetric or asymmetric charges? With asymmetry, there exist potential for regulatory arbitrage. With symmetry, not likely to be following charges based on costs since costs differ.


Recommendations: Recommendations Implementation is key Keep it simple, transparent, and focused—regulation never stays simple long; Regulate for market outcomes (low prices, high penetration, high-levels of investment, diverse service offerings, etc.) State goals clearly, follow them, ignore sidetracks; Standardize, harmonize and benchmark; and Remember: It is better to do a first rate job implementing a second rate solution than the other way around.


Conclusion: Conclusion For more information see www.fcc.gov. Thank you.