[Response by Eric P. Chiang, May 2009]
The measurement of costs is a top priority in implementing cost-based pricing. Many costing methodologies become useless if adequate data is unavailable. Thus, inefficient operation with accurate cost data can sometimes be a better starting point than a more efficient operation that is not documented. However, in reality, inefficient operation is often coupled with poor accounting, providing a daunting task to regulators in determining an appropriate costing strategy in setting interconnection prices. The use of alternative strategies, including benchmarking and revenue-sharing, is commonly used in practice when costing is infeasible.
Techniques that are well known and used, sometimes in conjunction with cost-based pricing or in certain sectors of the market, are:
Revenue-sharing: the entrant pays the incumbent operator a share of its revenues. This is a popular approach, even though it sometimes creates inefficiencies because the entrant has an incentive to hide revenues. A form of revenue-sharing is used in various sectors in many countries throughout the world, particularly in Asia (e.g., Thailand, India, Indonesia, and China) and in Africa (e.g., Uganda, Kenya, Gabon, and Algeria).
Benchmarking: prices are set based on the prices of other industries or countries that use cost-based pricing, such as LRIC. This is typical in countries where accurate cost data are not available, but is also used in other countries for its simplicity. Many countries use benchmarking in some form including Botswana, Venezuela, Singapore, the Bahamas, and others. Mostly similar countries are compared in benchmarking exercises but this does not necessarily need to be the case: for example, in 2003 Botswana chose to benchmark its initial interconnection prices against a group of EU countries that had already implemented LRIC pricing rather than against similar neighboring countries.
Full cost allocation (or fully distributed cost): is another approach of determining cost-based prices, where prices are based on the costs allocated to the service that incurs the cost, while common costs are allocated based on cost coefficients.
Bill-and-keep1 (or sender-keeps-all2): is the no charge approach when operators (typically of similar size) find equal or similar added value to interconnection and thus avoid measurement and administrative costs. Each operator pays for its own facilities up to the point of interconnection and terminates communications from the other network without compensation. Even with operators are of unequal size, a bill-and-keep approach can make economic sense when network externalities are large compared to the LRIC of interconnection.
Average-cost pricing: divides the total service cost so that each component pays its proportional share of common costs. Average-cost pricing is usually not efficient because it includes more common costs than incremental cost pricing, resulting in higher access prices which deter entry.
Ramsey pricing: more typically used for pricing retail services, is based on the notion of limiting distortions in demand on end customers. Higher prices are allocated to services with lower price sensitivity and lower prices to services with higher price sensitivity.
Finally, other factors influencing interconnection prices (usually used in conjunction with one of the methods above) include 1) implementing peak and off-peak charges to reduce congestion, 2) different approaches for pricing unbundled network elements (UNE), which allows access to part of an essential facility, and 3) universal service charges to help offset the incumbents universal service obligations which include providing telecommunications to high-cost service areas.
It should also be noted that general incremental costs models are offered by the World Bank. For example, Um, Gille, Simon, and Rudelle (2004) provide a standard cost model that can be adapted and customized for a particular country. Their focus is on Sub-Saharan Africa as the cost model incorporates features of telecommunications development in Africa, but the cost model can be adapted to any country.
The Theory of Access Pricing: An Overview for Infrastructure Regulators
Centre for Economic Policy Research Discussion Paper 2133, London, 1999.
Estache, A., and T. Valetti
Methods for Increasing Competition in Telecommunications Markets
University of Florida, Department of Economics, PURC Working Paper, 2008.
Jamison, Mark A.
Price Regulation of Access to Telecommunications Networks
Department of Economics, Boston University (undated).
WTO Agreement on Basic Telecommunications Services
World Trade Organization
A model for Calculating Interconnection Costs in Telecommunications
Washington, D.C.: PPIAF and the World Bank, 2004.
Um, Paul Naumba, Laurent Gille, Lucile Simon, Christophe Rudelle
- Bill-and-keep: a type of arrangement in which interconnecting operators do not bill one another for terminating communications on each other’s network. It is commonly used when interconnecting operators are of similar size as it significantly reduces measurement and administrative costs.
- Sender-keeps-all: another name for bill-and-keep