Annexes to C(1998)50 - 98/195/EC: Commission Recommendation of 8 January 1998 on interconnection in a liberalised telecommunications market (Part 1 - Interconnection pricing)

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dossier C(1998)50 - 98/195/EC: Commission Recommendation of 8 January 1998 on interconnection in a liberalised telecommunications market (Part 1 - ...
document C(1998)50
date January  1, 1945
ANNEX I


COMPONENTS OF INTERCONNECTION CHARGES FOR CALL TERMINATION

Directive 97/33/EC requires the interconnection charges of notified operators to follow the principles of cost orientation. This Annex considers the implications of this requirement for the components of an interconnection charge for call termination.


1. Pricing the local loop for interconnection purposes

The local loop refers to the final links between the customer and the local exchange. In a fixed network using wired or wireless local loops, the cost of an unswitched local loop is largely a one-off cost, with periodic maintenance costs. Where call termination is being purchased, the 'lowest` place in the network where this can occur is on the main network side of the local switch (1). Interconnection at this point may impose additional switch capacity costs, but there is no additional capacity cost or investment requirement relating to those components of the local loop which are dedicated to a particular customer (i.e. the pair of copper wires in a traditional network).

It follows from the principle of cost orientation that since the provision of interconnection does not lead to any increase of costs in the dedicated components of the local loop of the terminating network, the calculation of interconnection charges should not include any component relating to the direct cost of the subscriber-dedicated components of the local loop. The cost of those components in the unswitched local loop that are dedicated to a particular customer should therefore be recovered from that customer through a subscriber line charge, or as a combination of this and revenues from other services, to the extent that competition permits.

A difficulty arises if the incumbent is prevented from rebalancing its tariffs by regulatory measures and thus cannot charge an economic price to its own customers to cover the cost of the local loop. This gives rise to the so-called 'access deficit`. In a monopoly environment the operator compensates for the deficit in the 'access network` (i.e. the local loop) by charging prices in excess of economic cost for other services, such as international calls. With cost-oriented interconnection, competitors are able to capture some of this long distance and international traffic, and the incumbent's ability to compensate for the access deficit is reduced. An access deficit scheme involves contributions being imposed on other operators to compensate the incumbent for the loss of revenues that would have been used to fund this deficit.

Access deficit contribution schemes always provide inefficient investment signals, and raise overall industry costs. They are also administratively cumbersome, and lack transparency. As mentioned in the 'Guidelines on costing and pricing of universal service` published by the Commission in November 1996 (2) it is expected that access deficit type schemes will only be applied on a temporary basis, up to the year 2000, by which time a sufficient level of re-balancing should have been completed in all Member States.

In accordance with the Interconnection Directive, any contribution to 'access deficits` paid by interconnecting parties must be clearly separated from the interconnection charges. Payment of 'access deficit contributions` by interconnected parties is only permissible under Community law where Member States impose regulatory constraints on the retail tariffs of notified operators. Where an operator is not prevented by regulatory measures from rebalancing its tariffs, and 'access deficit` charge is not justified.


2. Pricing uncompleted calls for interconnection purposes

Uncompleted busy hour calls that originate from interconnected networks may impose additional capacity costs on a terminating network. In some cases, however, the reason for call failure could be lack of performance of the incumbent's own network. The Interconnection Directive places the onus of proof regarding costs on the network operator, so any operator seeking to include in its interconnection tariffs a fee for uncompleted calls would have to demonstrate that lack of performance of its own network had not been a reason for call failure.


3. Call set-up charges for interconnection purposes

In a fixed network, switch costs are mainly driven by two factors - call duration and call events (i.e. signalling and call set-up). A great deal of information is required to determine the proper balance in terms of cost causation between these two types of costs. Partly because of this, it is common for regulatory authorities to allow recovery of switching costs only on the basis of duration of completed calls. A charge for call set-up could only be considered to be a valid component of an interconnection tariff if the operator could demonstrate the extent to which calls originating from interconnected networks imposed incremental costs on the terminating network in terms of additional processing power required to handle the additional call set-up attempts occurring during the peak period. If a call set-up charge is used, the corresponding call duration charges should be lower than when there is no call set-up charge.


4. Interconnection charges and retail pricing

Some countries have in the past calculated interconnection charges on the basis of discounted retail tariffs. However, current retail tariffs are not necessarily cost-oriented, and this approach would in most cases be incompatible with the requirements of Community law.

Even if retail tariffs were cost-oriented, the approach is not desirable because it tends to lock new entrants into the same retail tariff structure as that of the incumbent, thus preventing the development by new entrants of innovative retail tariff schemes targeted at different types of user. The variety and choice of retail tariff schemes currently available on mobile networks in Member States shows there is considerable scope for innovative retail tariffing as a means of providing consumer choice and increasing the market demand for telecommunications services.

Where interconnection charges include time of day and day of week variations, they should be applied in a non-discriminatory manner to new entrants and to the incumbent's own traffic.


(1) The provision of 'unbundled` local loop, whereby a new entrant takes over and has exclusive use of a local loop installed by an incumbent, for an appropriate fee, is not strictly 'interconnection` in EU terms.

(2) COM(96) 608, 27. 11. 1996.


ANNEX II


'BEST PRACTICE` INTERCONNECT CHARGES AND THEIR DERIVATION


1. Approach

The approach taken is to use the interconnect charges in the three lowest cost Member States (for which data was available at 1 September 1997) as the starting point for a set of 'best current practice` figures at which to aim in the short term.

The figure below shows the level of interconnection charges for Member States. The costs in this figure refer to call termination on fixed networks at peak rates. Call set-up charges are included where they exist, but other non-traffic-related charges are in general not included. The figures do not include any 'access deficit` type contributions or universal service contributions. These additional contributions will not be required in many Member States, but where they are required as part of the regulatory environment in a Member State, they must be calculated and shown separately from the interconnection charge, in accordance with the Interconnection Directive.

Note that these figures concern one specific element of the cost of interconnection, i.e. the charge for call termination. They do not represent the full interconnection charges that may be payable in a given country.


1997/1998 - Interconnection rates

>REFERENCE TO A FILM>

Figure 1

Interconnection charges for local, single transit and double transit levels, at peak rates

(rate in ECU/100 per minute, based on a three minute call duration)

The tables in section 3 give the data upon which this chart is based.

There are factors such as average density of connections, labour costs, geological factors, permitted rate of return on capital employed (1), which vary between EU Member States. While such variations will to some extent affect the cost of interconnection, the differences are not considered to be large enough to invalidate the 'best current practice` charges recommended here (2).

It is intended to review the figures in this recommendation during 1998, and it is to be expected that the 'best current practice` interconnection charges will be progressively reduced in the future to reflect both the downward trend in network costs and better estimation of those costs. Currently interconnection charges worldwide are reducing at about 8 % per annum.

It must be stressed that these 'best current practice` charges are higher - in some cases considerably higher - than those which would be expected using a bottom-up LRAIC calculation. Nevertheless given the situation in the EU as of January 1998, it is considered that these 'best current practice` charges represent a realistic intermediate goal.


2. Derivation of 'best current practice` interconnection charges

The price ranges were derived from the tariffs that were available as of 1 September 1997. Changes in interconnection tariffs occurring after that date have not been taken into account.

The top price in each range shown above corresponds to the charge that applied at 1 September 97 in the third lowest-cost Member State, rounded up to the nearest ECU/1 000.

The bottom price in each range corresponds to the charge that applied at 1 September 97 in the lowest cost Member State, rounded down to the nearest ECU/1 000, and with an adjustment to the 'double transit` rate to take account of the fact that in smaller Member States a distance component of less than 200 km may be appropriate.


3. Detailed cost data for Member States

>TABLE>


(1) Historically, the real cost of capital has been higher in some countries, and some regions of the world compared with other. Rates of return on capital employed may therefore differ between states by several percentage points per annum.

(2) The density of connections is largely reflected in access cost, a dedicated cost to the end customer, rather than imposing great differences in interconnection rates. A similar argument can be made regarding differences in geological factors.