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Draft report for TM

Access List Determination Key Strategic Issues for 2008

CO N F I D E N T I A L Network Strategies Report Number 28013. 3 April 2008


0 Executive summary [to be completed]

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Access List Determination Draft report for TM

Contents 0

Executive summary

i

1

Introduction

1

2

Issues from MSAP 2005 pricing for 2008

3

2.1

Fixed network termination services

4

2.2

Mobile network termination service

6

2.3

Domestic network transmission service (DNTS)

8

3

Wholesale regulation: international experiences

13

3.1

Themes in wholesale regulation

13

3.2

Europe: a common regulatory framework

15

3.3

United Kingdom: handling uncertainty in cost-oriented price controls

20

3.4

Finland: cost-oriented mobile termination in a dynamic environment

22

3.5

United Kingdom: should the evolving broadband market be regulated?

24

3.6

United States: should the evolving broadband market be regulated?

26

3.7

Ireland: reducing regulation when competition grows

28

3.8

Norway: adapting to address local market conditions

29

3.9

Lebanon: guidelines for the forthcoming wholesale market review

31

3.10

Hungary: LRIC is not the only option for price control

33

3.11

Concluding remarks

34

4

Achieving national objectives in communications

35

4.1

Telecommunications penetration in Malaysia

35

4.2

Are national objectives being achieved?

40

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4.3

Has the USP scheme delivered?

45

4.4

Investment in fixed infrastructure

49

4.5

Proposed economic framework

54

5

Conclusions and recommendations

57

Annex A: Tax incidence of USP levy

A1

Annex B: Access deficit surcharges: international experience

B1

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1 Introduction In 2008 the Malaysian Communications and Multimedia Commission (MCMC) will review the list of regulated access services in Malaysia and set regulated pricing for a range of existing and possibly new wholesale products and services. The previous review in 2005 involved many proposed changes in the scope and pricing of Malaysia’s list of regulated telecommunications access services (‘access list’). In response to the 2005 review Network Strategies Limited was commissioned to assist TM with developing a constructive response to the Commission’s proposed changes. In March 2005 Network Strategies facilitated a set of focussed workshops with key stakeholders across TM’s business. The workshops helped identify TM's position on all of the proposed access list changes and assisted with prioritising issues based on potential business impact. Output from the workshops, subsequent scenario analysis and comparison of the MCMC positions with those of regulators in other developed and developing countries provided key input to TM’s response to the MCMC. The constructive nature of the response assisted MCMC in its deliberations and opened valuable channels of communication between TM and MCMC staff. As was the situation in 2005, it will be vital for TM to be in a position to make a compelling case to both the MCMC and Government to ensure that the financial future of TM will not be further jeopardised by inappropriate regulated charges. TM will be able to ‘make the case’ only with robust evidence with respect to costs of service provision and the likely business and economic impacts of the proposed MCMC rates and pricing methodologies. In preparation for the forthcoming review Network Strategies has been commissioned to report on:

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key problems with 2008 access service pricing originating from the 2005 MSAP

provide an economic framework with which TM can address the key issues associated with the MCMC’s review of the access list and access pricing for the years 2009 to 2011.

Our report will seek to influence the MCMC’s approach to pricing of existing and new access services prior to the publication of the papers calling for formal submissions on these matters. The economic arguments will assist TM in its negotiations with the MCMC over the forthcoming implementation of new access prices. Following the current Introduction, in section 2 we discuss key issues from the 2005 review that will be important for 2008, in section 3 we review relevant wholesaling pricing principles, in section 4 we outline key issues for achieving national objectives, and in section 5 we present our conclusions and recommendations.

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2 Issues from MSAP 2005 pricing for 2008 In February 2006, the MCMC released its determination of the Mandatory Standard on Access Pricing (MSAP). This document summarised the outcome of the Commission’s consultation with industry and investigation into access services and pricing carried out during 2005. The MSAP determination seeks to identify suitable pricing for key access services for the years 2006, 2007 and 2008, based on TSLRIC modelling of these services in 2005. In most cases, prices for subsequent years are based on running the Commission’s 2005 model using Commission forecasts for the changes in traffic volumes, equipment prices and other (unspecified) market changes in Malaysia for the year in question. In other cases, the TSLRIC model has been used to set 2008 prices in the above manner, and a “glide path” determined between TM prices for 2006 and TSLRIC in 2008. The concept of predicting future TSLRIC pricing based on current models and forecast changes is relatively common, as is the use of glide paths from existing pricing to TSLRIC prices. However, the accuracy and relevance of TSLRIC prices for future years based on forecasting is entirely reliant on the accuracy of the market forecasts and the stability of the technology base used to deliver the access services. TSLRIC pricing was developed for bottleneck PSTN access services, based on highly stable market conditions and technologies in developed markets in the US and Europe. Successful extrapolation of TSLRIC prices to future years relies on the volumes of traffic in a network being stable and predictable and knowing the exact costs and configurations of technology used to deliver services. If either the stable traffic/market or technology conditions are not met, any future TSLRIC prices determined using a current model must

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be reviewed on a very short term basis (at least annually) to determine whether the modelling they were based on is still relevant. Specifically for Malaysia, this means that, without the stability of a fully developed market, a historical TSLRIC cost based pricing model cannot be used in isolation to reliably predict appropriate access service prices for three years into the future. In particular, prices set in the MSAP for 2008, based on the Commission’s forecasts from 2005, are likely to be inappropriate and must now be reviewed on the light of actual 2007/2008 market conditions.

2.1 Fixed network termination services Section 7(a) of the MSAP, February 2006, sets out the 24 hour weighted average prices (sen per minute) for fixed network termination of voice services (Exhibit 2.1) 2006

2007

2008

Local

2.95

2.63

2.52

Single Tandem

6.61

6.17

6.07

Double Tandem

10.41

9.85

9.77

Double Tandem with Submarine Cable

24.82

24.71

25.09

Exhibit 2.1:

Fixed Network Termination Prices [Source: MCMC, MSAP 2006]

These rates are almost identical to draft figures published earlier in 2005 and it appears that the fixed TSLRIC model used to calculate these prices was unchanged from the one viewed by TM on 5 October 2005. This outcome was highly significant for TM. It demonstrated that the MCMC’s original 2001 MSAP intention to reduce fixed interconnect rates to around 2 sen per minute by 2006 was incorrect and highlighted the dangers associated with using a historical TSLRIC model to predict future prices in a dynamic market. In particular, the 2001 determination failed to predict the extremely rapid growth of mobile and fixed-mobile substitution in the Malaysian market.

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Access List Determination

The most notable feature of these 2006 MSAP prices (Exhibit 2.1) is that, once again, fixed termination prices are expected to fall over time. Network Strategies understands that this reduction is a direct output of the model and that it was based on the MCMC view that fixed traffic will cease to decline (i.e. remain constant) in the period between 2006 and 2008. The reduction in fixed termination prices is therefore a direct consequence of the modelled capital cost of equipment falling each year due the negative price tilt (usually minus 5%) for relatively short lived items of equipment such as PSTN switches. In response to MCMC data requests in 2005, TM identified that, based on 2004 data, PSTN traffic volumes were changing at a significant rate. The key traffic items and the measured rate of change of network minutes are listed in Exhibit 2.2 below. Traffic type

Annual rate of change

Local calls

-8%

National calls

-12%

Exhibit 2.2: Observed changes in traffic minutes for high volume call

International calls

-3%

Calls to mobile

+2%

types, 2004

-14%

[Source: TM,

Internet calls Single tandem termination service

-5%

Double tandem termination service

-8%

Single tandem transit service

Network Strategies]

-68%

During viewing sessions of the MCMC TSLRIC model in 2005, Network Strategies noted that the model had implemented a number of traffic forecast scenarios, one of which was the continuation of the 2004 trends listed above over the years 2006 to 2008. Setting this scenario, we noted that the single tandem fixed termination prices (sen per minute) were recalculated as shown in Exhibit 2.3. 2006

2007

2008

Single tandem, MCMC forecast scenario

6.61

6.17

6.07

Single tandem, TM forecast scenario

6.61

7.07

7.36

Exhibit 2.3:

Comparison of fixed termination price scenarios [Source: MCMC, Network Strategies]

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It is clear from Exhibit 2.3 that, rather than falling, fixed termination prices based on the MCMC’s 2005 TSLRIC model should be increasing if traffic volumes on the PSTN network have reduced. Information from TM indicates that such a traffic reduction has in fact occurred with, for example, fixed termination traffic minutes falling by approximately 26% annually between 2005 and 2007. The consequence of the Commission’s decision to model PSTN traffic as unchanging for the 2006 to 2008 period is that the resulting falling price trend leads to significant divergence from actual TSLRIC costs which are on an increasing per minute cost trajectory. This is particularly important for 2008 as it is at this point that prices and costs have diverged most significantly. The example in Exhibit 2.3 predicts a divergence of over 1 sen per minute for 2008, but the Commission’s model loaded with actual 2007/2008 data may identify a much larger discrepancy. The situation in 2008 is very similar to the results of the 2001 MSAP determination that predicted costs well below those of the Commission’s model using actual 2006 data.

2.2 Mobile network termination service In 2005, the MCMC accepted submissions from TM and Network Strategies which sought to demonstrate that the Commission’s TSLRIC mobile model, viewed in October 2005, significantly overstated the numbers of base stations required for mobile coverage in Malaysia. We understand that the model was subsequently adjusted in a manner similar to that suggested by TM and Network Strategies. To our knowledge, the final TSLRIC model was never made available for viewing. The MSAP mobile termination pricing for 2006 is a TSLRIC calculation which addresses 2G service only, and adopts a single rate based on a hypothetical equal distribution of market share among active firms (that is, the prices reflect the TSLRIC costs of an average firm in Malaysia). The 24 hour average mobile termination prices (in sen per minute) determined by the 2006 MSAP are listed in Exhibit 2.4 below.

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Access List Determination

Local National National with submarine cable Exhibit 2.4:

2006

2007

2008

8.05

8.18

8.36

8.86

9.00

9.17

28.34

28.32

28.34

Mobile termination rates, 2006 to 2008 [Source: MCMC]

In the version of the mobile model viewed in October 2005, the Commission had implemented an across the board mobile network voice traffic growth of 5% per annum for the years 2006 to 2008. Unless other modelled costs were rising, this, in combination with reducing capital costs due to negative price tilts, should have led to a reduction of the per minute mobile termination rates over time, rather than the increases shown in Exhibit 2.4. One explanation for this anomaly could be that the MSAP prices have been, in some way, adjusted from their modelled TSLRIC values to include inefficient costs borne by operators due to T3 or other commitments. To test this hypothesis, Network Strategies has run its own mobile TSLRIC model to determine the likely reductions in termination costs due to 5% traffic growth per annum and negative price tilts since 2006. Assuming that the 2006 price contains no uplift costs, the results of the subsequent analysis for local termination is shown in Exhibit 2.5 below. 2006

2007

2008

MSAP 2006 local termination

8.05

8.18

8.36

Network Strategies model

8.05

7.54

6.97

0

0.64

1.39

Possible uplift (sen per minute) Exhibit 2.5:

Analysis of possible uplift in local mobile termination MSAP pricing [Source: MCMC, Network Strategies]

Given that the TSLRIC costs must reduce over time (with sufficient traffic growth and capital cost reductions), then the T3 (or other) uplift factor in the price must be increasing very rapidly (estimated over 100% increase from 2007 to 2008). To our knowledge, the MCMC has not provided an explanation of what costs the uplift is intended to cover, or how it was calculated.

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Given the scope for error due to market changes since 2006, we believe that it would be prudent for the MCMC to review the proposed MSAP 2008 mobile termination price in the light of this analysis. Instead of fixed and mobile termination prices converging or even crossing (as predicted by examining Network Strategies’ scenarios in Exhibit 2.3 and Exhibit 2.5), the 2006 MSAP fixed and mobile termination rates continue to diverge with no apparent logical explanation.

2.3 Domestic network transmission service (DNTS) The 2006 MSAP determines DNTS prices for 64kbit/s, 2Mbit/s, 34Mbit/s and 155Mbit/s core network transmission services (MSAP section 7(e)). The prices set for these services are then re-used directly in MSAP prices for Private Circuit Completion Service (section 7(f)), Domestic Connectivity to International Services (section 7(h)), Broadcasting Transmission Service (section 7(i)) and Bitstream Services (section 7(j)). DNTS pricing is key to the viability of TM’s ongoing wholesale business and the re-use of these prices in so many other access list service prices makes DNTS a key MSAP determination. For this reason, it is vital that TSLRIC pricing for DNTS accurately captures the efficient costs of providing these services in Malaysia.

2.3.1 MCMC approach to DNTS pricing Unlike the termination services discussed above, MCMC has chosen to implement its TSLRIC pricing as a “glide path” from current TM pricing in 2006 to TSLRIC in 2008. An example of the resulting prices (Ringgit per annum) for a 0 to 5km transmission link at each of the DNTS service speeds is shown in Exhibit 2.6 below. 0 to 5km transmission link speed

2006

2007

2008

64kbit/s

908

756

605

2Mbit/s

48 870

26 439

4 008

34Mbit/s

334 898

173 494

12 089

155Mbit/s

818 666

425 680

32 695

Exhibit 2.6:

Example of DNTS MSAP pricing [Source: MCMC]

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Access List Determination

It is immediately obvious from Exhibit 2.6 that:

the Commission’s glide path is simply a straight line interpolated between the 2006 TM price and the MSAP 2008 TSLRIC price

the slope of the glide path is extreme for high bandwidth services. In particular, the 2008 price for 155Mbit/s service represents a 96% reduction on the 2006 price

to be sure that regulatory error will not undermine TM’s wholesale business with 2008 prices that are significantly below cost, the Commission must have an extremely high degree of confidence in the process/model used to calculate the 2008 TSLRIC prices and the relevance of that calculation to the Malaysian network environment.

2.3.2 The DNTS TSLRIC calculation In October 2005, TM and Network Strategies reviewed the Commission’s fixed network TSLRIC model which contained, as part of its calculation of core network costs, the DNTS TSLRIC calculation. At the time, Network Strategies noted that:

the DNTS costs were based on calculating the costs of a 2Mbit/s path through the network and scaling those to estimate the costs of other bandwidth paths

the scaling used was naïve, assuming for example that the cost of a 64kbit/s circuit was simply the cost of a 2Mbit/s circuit divided by thirty

the result of the scaling was DNTS prices which were unreasonably low for 64kbit/s services and possibly too high for 155Mbit/s services

TM and Network Strategies brought the Commission’s attention to these shortcomings in the model and subsequently, the DNTS prices were changed by a scaling factor for the final MSAP determination. This scaling was never fully explained by the Commission’s consultant, but we believe that it was intended to turn the model’s TSLRIC calculation into prices which better reflected the consultant’s view of market reality. Network Strategies has now had the opportunity to compare the scaled DNTS prices in the 2006 MSAP with the TSLRIC DNTS costs calculated by the model viewed in October 2005. It appears that the 2005 DNTS model outputs for each speed of service have been

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multiplied by a unique scaling factor to determine the MSAP prices. These scaling factors are listed below in Exhibit 2.7. DNTS service speed

TSLRIC price scaling factor

64kbit/s

94.2%

2Mbit/s

21.1%

34Mbit/s

4.0%

155Mbit/s

2.7%

Exhibit 2.7: Scaling applied to DNTS TSLRIC prices [Source: Network Strategies]

The analysis in Exhibit 2.7 tells us that the consultant considered the modelled 64kbit/s prices to be approximately correct (scaling MSAP prices to 94.2% of the modelled prices) and that the modelled 155Mbit/s prices were considered to be hugely incorrect (allowing only 2.7% of the modelled price to enter the MSAP). Network Strategies fundamentally doubts the legitimacy of a process that scales TSLRIC prices (based perhaps on a benchmark) and still claims them to be TSLRIC prices. However, allowing that some scaling process was necessary because of weaknesses in the model, Network Strategies considers that the Commission’s consultant has made a serious error in applying the scaling process. As we have noted above, the calculation of core network and DNTS costs in the model was based on determining the costs of a 2Mbit/s links through the core network. This cost was used elsewhere in the model as a component of origination and termination prices and is a fundamental part of the Commission’s TSLRIC cost determination which cannot simply be scaled to 21.1% of its calculated value for the purposes of DNTS. Network Strategies’ key issue with the October 2005 DNTS prices was the way in which the 2Mbit/s price was scaled to the other DNTS speeds. For example, dividing the 2Mbit/s costs by thirty to calculate 64kbit/s service costs ignores real network costs and restrictions, such as:

it is not practical to always completely fill 2Mbit/s bearers with (30) 64kbit/s channels, leading to a need for models to consider fill factors. This kind of fill factor was not, to our knowledge, considered in the Commission’s model

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Access List Determination

64kbit/s channels require additional interface and grooming devices in the network which add to their TSLRIC costs (these devices were not present or costed in the Commission’s model)

on thin core routes in many real networks, 64kbit/s services can utilise virtually the same network capacity (equipment) as 2Mbit/s routes.

The only valid scaling that could have taken place to establish realistic DNTS TSLRIC prices for Malaysia would have retained the 2Mbit/s DNTS price calculated by the model (i.e. 100% scaling factor as opposed to 21.1%) and developed scaling factors for the other speeds around this base price, through determining fill factors, additional equipment requirements and economies of scale at the high bandwidths.

2.3.3 Risks associated with implementing the 2008 DNTS prices It is clear from the analysis above that the 2005 MSAP DNTS prices for 2008 were not calculated by any conventional TSLRIC methodology from the cost data provided to the MCMC by TM and industry in 2005. In all cases, the 2008 MSAP prices are lower than costs calculated using the TSLRIC model and, in the case of 155Mbit/s service, very much lower. Network Strategies considers that there is a very high risk that the MSAP 2008 DNTS prices do not represent robustly calculated, efficient costs for the Malaysian environment. We believe that the Commission should seriously assess the asymmetric regulatory risk associated with implementing these prices for the 2008 year, especially considering that more robust modelling may be possible as part of the 2008 access list review process. If, as we believe, some or all of the 2008 DNTS prices are below TM’s reasonably achievable cost base for most areas of Malaysia, implementation of the 2008 price list will:

punish TM with significant and unjustified losses of wholesale revenue (estimated to be approximately RM 34million by TM)

discourage facilities based investment in competing wholesale transport networks

encourage inefficient entry of service providers competing for the industry’s wholesale and retail revenues on an unsustainable low cost transport platform.

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If, on the other hand, the Commission freezes DNTS prices at the 2007 level for 2008, industry is at least partially protected from the above risks and more robust modelling can be given high priority in the access list review.

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3 Wholesale regulation: international experiences

3.1 Themes in wholesale regulation Examining practices in wholesale regulation around the world, we find that there are consistent and clear themes that emerge. Defining the

A market is defined as a group of products or services that are

markets

substitutable. This may be a generic product group (such as wholesale leased lines) or may be split into separate markets based on product or other characteristics, such as geography. For example wholesale leased lines may be divided in low and higher capacity circuits. The regulator’s market analysis should be able to identify whether disaggregation of a generic market is appropriate.

Identifying market

Specific ex ante telecoms regulation should only be applied to those

dominance

markets in which effective competition is not anticipated to develop within a relevant timeframe. This is established through market analyses which must have a forward-looking view of market developments.

Implementing

If a provider is found to have significant market power (SMP)

appropriate

within a relevant market, regulators have a wide range of regulatory

regulatory

remedies that they may choose to apply. These may include (but are

remedies

not restricted to):

•

transparency

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non-discrimination

price controls – which may use various methodologies including FDC, LRIC, retail-minus and price caps

accounting separation.

The extent of such remedies is determined on a case-by-case basis with consideration of the market analysis and likely future developments – a regulator can impose more stringent obligations on a provider in a market in which there is little or no competition than for that same provider in a market where competition is emerging. Remedies must be

It should also be noted that many regulators stress that even though

appropriate for

a market may be found to lack effective competition it does not

regulatory

necessarily imply that regulatory remedies will be applied to that

objectives

market. Consideration must be given to the regulator’s overarching objectives, which typically take the form of:

promoting competition

contributing to the development of the market

promoting the interests of consumer.

To that end, regulators are reluctant to implement any remedies that could have an adverse effect on encouraging investment or be detrimental to the consumer. Treatment of

It is a common view that ex ante regulation – and in particular price

emerging markets

control – would be premature in emerging markets, which are characterised by rapid technological and commercial developments. This does not preclude regulation in the future, which may be imposed if the more stable market environment is found to have providers with SMP.

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Access List Determination

In this section we examine various key issues in wholesale regulation in a range of jurisdictions, including Finland, Hungary, Ireland, Lebanon, Norway, the United Kingdom and the United States.

3.2 Europe: a common regulatory framework As part of the 2003 Recommendation of relevant markets the European Commission (EC) listed 18 retail and wholesale markets for which specific ex ante regulation was required by telecoms regulators to deal with competition problems. The EC clearly recognises that the pace of developments in telecommunications would require its regulatory framework to be updated, and so in November 2007 a new Recommendation was adopted in which the list of 18 markets was substantially reduced. Most of the retail markets were removed, as well as a number of wholesale markets which the national regulators found to be effectively competitive (Exhibit 3.1).

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Market

2003

2007

1&2

Access to the fixed telephone network (previously separated into business and residential)





3

National/ local residential telephone services from a landline





4

International residential telephone services from a landline





5

National/ local business telephone services from a landline





6

International business telephone services from a landline





7

The minimum set of leased lines





8

Call origination on the fixed telephone network





9

Call termination on individual fixed telephone networks





10

Transit services in the fixed telephone network





11

Wholesale access to the local loop





12

Wholesale broadband access





13

Wholesale terminating segments of leased lines





14

Wholesale trunk segments of leased lines





15

Access and call origination on mobile networks





16

Voice call termination on individual mobile networks





17

International roaming on mobile networks





18

Broadcasting transmission





Exhibit 3.1:

Changes from 2003 to 2007 in relevant European markets susceptible to ex ante regulation [Source: European Commission]

For those markets that were removed, the EC no longer believes that there is an a priori case for sector-specific ex ante regulation by telecoms regulators. Instead, these markets should be dealt with by competition authorities using ex post instruments. If however a national telecoms regulator can demonstrate that within its country competition is severely hampered in one of these markets, telecoms-specific regulation could be continued. The EC has specified three criteria, all of which must apply, for identifying markets in which ex ante regulation may be warranted:

•

the presence of high and non-transitory barriers to entry. These may be of a structural, legal or regulatory nature.

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Access List Determination

a market structure which does not tend towards effective competition within the relevant time horizon. The application of this criterion involves examining the state of competition behind the barriers to entry.

the insufficiency of competition law alone to adequately address the market failure(s) concerned.

For those markets that remain within the 2007 Recommendation, it is considered that effective competition does not yet exist. Nonetheless the EC cautions that even if a market does remain on the list it does not follow that ex ante regulation is always warranted. Regulation must not be imposed or must be withdrawn if no operator has significant market power. The EC notes that: Newly emerging markets should not be subject to inappropriate obligations, even if there is a first mover advantage, in accordance with Directive 2002/21/EC. Newly emerging markets are considered to comprise products or services, where, due to their novelty, it is very difficult to predict demand conditions or market entry and supply conditions, and consequently difficult to apply the three criteria.1

For the 18 markets in the original 2003 Recommendation, some – but not all – of the 25 Member States have implemented price control, as summarised in Exhibit 3.1.

1

European Commission (2007) Commission Recommendation of 17 December 2007 on relevant product and service markets within the electronic communications sector susceptible to ex ante regulation in accordance with Directive 2002/21/EC of the European Parliament and of the Council on a common regulatory framework for electronic communications networks and services, 2007/879/EC.

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Exhibit 3.2: 1

Price control

2

method used in

3 4

each market by

5

European countries

6

[Source: European

7

Regulators Group]

Market

8

Cost orientation Price cap Benchmark Retail-minus

9 10 11 12 13 14 15 16 17 18 0

5

10

15

20

25

Number of countries

Below we outline the price control methodologies used by European Member States in a selection of wholesale markets.

Fixed termination (Market 9) In Europe, LRIC methodologies are the most widely used for determining cost-oriented fixed termination rates. According to the European Regulators Group (ERG) in 20072, 18 countries have cost-oriented rates, of which 60% use LRIC, 35% use FDC and 5% other methodologies.

2

European Regulators Group (2007) Regulatory accounting in practice 2007, April 2007.

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Access List Determination

Mobile termination (Market 16) Cost-oriented mobile termination rates in Europe are most commonly based on LRIC methodologies: ERG notes that of the 12 countries with cost-oriented rates as at 2007, 56% use LRIC, 38% FDC and 6% other methodologies3.

Leased line terminating segments (Market 13) Thirteen European countries have cost-oriented rates for leased line terminating segments, of which the most common methodology is FDC (46%)4. There was actually a decline in the percentage of countries using LRIC from 2006 to 2007 (31% to 23%) and an increase in the use of mixed methodologies (23% to 31%).

Leased line trunk segments (Market 14) This market was removed from the 2007 Recommendation. Market reviews undertaken by the national regulators identified quite different environments among the European member states:

•

effective competition: Austria, Belgium, Czechoslovakia, Finland, Hungary, Ireland, Latvia, the Netherlands, Sweden and Slovenia

•

no effective competition: Cyprus, France, Greece, Italy, Lithuania, Luxembourg, Malta, Portugal, Spain and the UK.

In Europe, the most common methodology for cost-oriented least line trunk segment prices is FDC, comprising 57% of the nine countries with cost-oriented rates5. The remaining countries use LRIC.

3

4

5

European Regulators Group (2007) Regulatory accounting in practice 2007, April 2007. European Regulators Group (2007) Regulatory accounting in practice 2007, April 2007. European Regulators Group (2007) Regulatory accounting in practice 2007, April 2007.

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3.3 United Kingdom: handling uncertainty in cost-oriented price controls One of the key problems in setting cost-oriented price controls, such as for LRIC methodologies, is the significant level of uncertainty associated with forecasts of critical inputs that influence the resultant price. Of particular relevance to mobile termination charges (and indeed also fixed termination) are traffic forecasts and future cost trends of key network elements. This problem was recognised by Ofcom, in its 2007 review of mobile call termination6. Given this uncertainty, Ofcom believed that it would be: ...undesirable to seek to derive efficient charge levels from a single scenario and set of assumptions. Instead, the purpose of Ofcom’s analysis has been to identify bounds on the uncertainty in order to inform a judgement of efficient charge levels.7

Therefore, Ofcom used a scenario approach to derive mobile termination charges, that reflected the uncertainty associated with key inputs to a LRIC model. Step 1: identify

Ofcom’s first step was to identify a set of relevant and reasonably

representative

representative “benchmarks” (estimates from Ofcom’s LRIC model,

benchmarks

each reflecting a different set of assumptions). These were based on four sets of traffic assumptions:

high voice and data traffic

medium voice and data traffic

low voice and data traffic

medium voice-only traffic.

Ofcom’s traffic forecasts considered forecasts from the mobile network operators, as well as traffic forecasts sourced from third party market research.

6

7

Ofcom (2007) Mobile call termination, Statement, 27 March 2007. Ibid, paragraph 9.153.

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Access List Determination

There were also differing assumptions relating to the marginal forward looking opportunity cost (MFLOC) of 3G spectrum and 3G spectrum cost allocations. The various combinations of traffic and 3G spectrum assumptions resulted in 12 different scenarios for input to Ofcom’s LRIC model. Step 2: determine

For each of the estimates derived from Ofcom’s LRIC model in

relative weights

Step 1, Ofcom assigned a relative qualitative weighting, based on

for each

careful consideration of the likelihood of realisation of each

benchmark

scenario. If a midpoint of the range of estimates were to be used, then the only values that determine the end result are the extreme values, which may be based on scenarios that are relatively unlikely to occur. Ofcom therefore considers that a weighted approach is preferable, in order to reflect the plausibility of the various scenarios.

Step 3: apply

In this step, Ofcom applied its own judgement to identify efficient

reasonable

charge levels, taking into account Ofcom’s objectives – to further

judgement to

the interests of consumers by promoting efficiency and securing the

identify efficient

maximum benefit for end users – as well as Steps 1 and 2 and any

charge levels

other relevant considerations, such as any asymmetry in the risks and impact of setting charges that turn out to be too low. Charge controls which, in practice, fail to enable recovery of efficient costs may have an adverse impact on investment, which would be detrimental to consumers generally. Ofcom has noted that charge controls should not be so tight as to impact adversely prospects for investment, particularly in the light of uncertainty about future traffic levels on 2G and 3G networks.8

8

Ibid, paragraph 9.168.

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While Ofcom notes that there may be an incomplete “waterbed” effect9 – whereby reducing termination charges may result in other prices rising – Ofcom believes that the asymmetric risk supports a charge control level that is above the midpoint of its range of benchmarks. Step 4: cross check

The final step cross-checks the appropriateness of the charge level

for reasonableness

determined in Step 3, by identifying specific scenarios consistent with the identified efficient charge levels and considering the reasonableness of the set of assumptions in those scenarios. This involves additional scenario modelling to identify the combinations of key variables required to give the charge levels identified in the previous step. This enabled Ofcom to confirm that the resultant charges could be obtained from the LRIC model using a reasonable input scenario.

3.4 Finland: cost-oriented mobile termination in a dynamic environment Mobile termination charges in Finland are determined via commercial inter-operator negotiations with the mobile operators. There are three national operators (DNA Verket Oy, Elisa Oy and Sonera Mobile Networks Oy) and a regional operator (Ålands Mobiltelefon Ab). It should be noted that Finnish mobile termination rates are amongst the lowest in Europe. Finland has seen significant fixed-mobile substitution, with mobile voice traffic now being around three times that of fixed, which has experienced a rapid decline since 2005 (Exhibit 3.3).

9

See for example Genakos, C. and Valletti, T. (2007) “Regulating the mobile phone industry: beware the ‘waterbed’ effect”, in CentrePiece Autumn 2007, London School of Economics, Centre for Economic Performance.

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Mobile

Exhibit 3.3:

Fixed

Voice call minutes, 4000

Finland, Q1 2005 to

Minutes (millions)

3500

Q3 2007 [Source:

3000

FICORA]

2500 2000 1500 1000 500

7 20 0

Q

3

20 0

7

7 Q

2

20 0

1 Q

Q

4

20 0

6

6

6

20 0

3 Q

Q

2

20 0

6

5

20 0

1 Q

Q

4

20 0

5

5

20 0

Q

3

20 0

2 Q

Q

1

20 0

5

0

The Finnish regulator, FICORA, requires that mobile termination rates be nondiscriminatory and cost-oriented. FICORA regularly assesses the rates charged for mobile termination, requesting operators to submit up-to-date and detailed pricing calculations. FICORA’s assessment considers those calculations, but is not bound to the specific cost accounting and pricing principles used by the operator. This assessment10 is based on the FICORA Full Allocated Cost (FIFAC) model, which uses the operator’s top-down costs and demand volumes. FICORA may also assess operator efficiency by comparing costs with reference data if it is found that prices substantially exceed the general price level or if the costs of items exceeds that reported by other operators. The regulator also recognises that new entrants have higher initial costs than more mature operators, and so some price differences are justified. However over time, these differences should be reduced. FICORA stresses that any changes in regulated pricing be implemented gradually:

10

FICORA (2006) FICORA’s principles for assessing mobile termination pricing, 7 December 2006.

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‌as fast and significant changes in the price level and in price differences among operators may cause harmful effects on the market.11

Based on its 2006 assessment, FICORA recommended that mobile termination rates be reduced over the period 2007 to 2009, with operators able to set rates within specified minimum and maximum charges. If commercial negotiations fail to set an agreed rate, a more rapid glide path applies. It should be noted that FICORA monitors operator’s costs and demand volumes, in addition to overall market developments, and updates its estimate of reasonable prices at least once each year. This ensures that prices are not based on out-of-date assumptions.

3.5 United Kingdom: should the evolving broadband market be regulated? The UK regulator (Ofcom) is currently undertaking a review of the wholesale broadband access market, in order to ensure that the regulatory framework at the wholesale level is appropriate given existing market conditions. Local loop unbundling is central to Ofcom’s approach for promoting competition in the retail broadband market. However, Ofcom recognises that there are some geographic areas in which LLU is not viable, and thus require regulation at the wholesale level. Ofcom also notes that unnecessary regulation must be removed in geographic areas in which there is network competition12. Regulatory remedies imposed by Ofcom as a result of the 2003/04 Review differed slightly for BT and KCOM, but did not include price control. The key obligations concerned nondiscrimination, transparency and accounting separation. Since the previous Review in 2003/04, Ofcom found that:

11

12

Ibid. Ofcom (2007) Review of the wholesale broadband access markets 2006/07, Explanatory Statement and Notification, 15 November 2007.

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…there has been a noticeable change in competition in the provision of wholesale broadband services and that competition varies significantly by geographic area and that regulation needs to recognise this change.13

Ofcom has defined four distinct geographic markets within which competitive conditions are similar:

geographic areas covered by exchanges where KCOM is the only operator (“the Hull area”), comprising 0.2% of UK homes

geographic areas covered by exchanges where BT is the only operator (“Market 1”), consisting of 19.2% of UK homes

geographic areas covered by exchanges where there are two or three Principal Operators and exchanges where there are four or more Principal Operators but where the exchange serves less than 10 000 premises (“Market 2”), encompassing 15.7% of UK homes

geographic areas covered by exchanges where there are four or more Principal Operators and where the exchange serves 10 000 or more premises (“Market 3”), comprising 64.4% of UK homes.

Ofcom considered that KCOM had significant market power (SMP) in the Hull area, and BT in Market 1 and Market 2. Ofcom’s provisional conclusion is that BT does not have SMP in Market 3. Within the Hull area, Market 1 and Market 2, Ofcom is proposing to implement the following regulatory remedies:

requirement to provide Network Access on reasonable request

requirement not to discriminate unduly

requirement to publish a reference offer

requirement to notify terms and conditions

requirement to publish technical information

requirement to have accounting separation.

It is important to note that Ofcom has explicitly discounted the option of setting price controls for each of these markets because: 13

Ibid.

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…in a developing market characterised by growth and innovation, such as broadband, there is a risk of setting the price control at an inappropriate level. In particular, in such a situation there is a risk a price control could result in a reduced level of investment in the market, which would ultimately be to the detriment of UK citizens and consumers. Ofcom explained, however, that it had not ruled out the imposition of price controls in future.14

3.6 United States: should the evolving broadband market be regulated? In the United States, the Federal Communications Commission (FCC) has recognised that the immaturity of the broadband market creates a very different situation for regulation: The Commission developed its distinction between dominant carriers, which possess individual market power, and non-dominant carriers, which lack individual market power, to enable it to develop a regulatory environment appropriate for a telecommunications industry that was in the early stages of evolving from one “where service was provided largely on a monopoly basis to one where a degree of competition [existed] for the provision of some communications services.” … this market environment differs markedly from the dynamic and evolving broadband Internet access marketplace before us today where the current market leaders, cable operators and wireline carriers, face competition not only from each other but also from other emerging broadband Internet access service providers. This rapidly changing market does not lend itself to the conclusions about market dominance the Commission typically makes to determine the degree of regulation to be applied to well-established, relatively stable telecommunications service markets. On the contrary, any finding about dominance or non-dominance in this emerging broadband Internet access service market would be premature.15

Over the period 2000 to 2006 the broadband market in the United States has been dominated by cable modem services (Exhibit 3.4), which are offered by the cable operators, not the telecoms operators. Since 2000 there has been steady growth in the market share of ADSL (30.8% of the market for high speed lines, as compared with cable 14

15

Ibid, paragraphs 5.46, 5.120. Federal Communications Commission (2005) Wireline Broadband Internet Access: Report and Order and notice of Proposed Rulemaking, FCC05-150, 23 September 2005, paragraph 84.

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modem services comprising 38.9% as at December 2006), and over the past two years wireless services (27.1%). Even more recently, there has been a rapid deployment of fibre – such as Verizon’s Fiber to the Home service (FiOS), launched in 2005, which as at January 2008 had 1.5 million FiOS broadband customers, and is planned to pass 18 million homes by the end of 201016. In 2006 AT&T launched a FTTN service (“U-verse”) which by January 2008 had passed 7.9 million homes, and is expected to pass 30 million homes by the end of 2010. There are over 350 fibre providers, including CLECs and local government.

90 80

Subscribers (millions)

70 Other

60

Satellite & wireless Fibre Cable modem SDSL & traditional wireline

50 40 30

ADSL

20 10 0 2000

Exhibit 3.4:

2001

2002

2003

2004

2005

2006

High speed lines (over 200kbit/s in at least one direction) in the United States 2000 to 2006 [Source: FCC]

Clearly, the broadband market is still evolving. The FCC has concluded that the market should develop without regulatory intervention: Applying a traditional market dominance analysis to a situation where the facilities-based wireline carriers have been required to provide service on specified terms and conditions

16

J. Ruff (2008) The Fiber Future: Verizon’s FiOS deployment, Broadband and Beyond Conference, 4 March 2008.

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while the market was still relatively undefined (and remains dynamic and evolving even today) would lead to a result that would be misleading and could be self-fulfilling. Therefore, we believe that a conclusive finding about dominance or non-dominance of these carriers in this context is ill-suited and inappropriate. Instead, for an emerging market that cannot be characterized with certainty at this particular point in time, and will likely be subjected to rapid technological and competitive developments, we find that the public interest is best served if we permit competitive marketplace conditions to guide the evolution of broadband Internet access service.17

3.7 Ireland: reducing regulation when competition grows The Commission for Communications Regulation (ComReg) issued its first analysis of the Irish leased line market in 2004. This review found that the incumbent operator, eircom, had significant market power in the market for terminating and trunk segments of wholesale leased lines. A set of regulatory remedies18 – including price controls – were imposed to address the lack of effective competition in both these markets. This review mandated the provision of two wholesale products: traditional Wholesale Leased Lines (WLLs) and Partial Private Circuits (PPCs). Since 2005 the wholesale market has experienced a migration from WLLs to PPCs, but there does continue to be a significant installed base of WLLs and there are some circumstances where there is a continuing need for the WLL product. A second analysis19 was undertaken in late 2007. This found that since the earlier review, competition had increased in market 14 (trunk segments of wholesale leased lines) to the extent that no operator had SMP, and thus no ex ante regulation was required for this market. However eircom retained SMP in market 13 (terminating segments of wholesale leased lines).

17

18

Ibid, paragraph 85. ComReg (2005) Market analysis: retail leased lines and wholesale terminating and trunk segments of leased lines (national), Decision No D7/05, 30 March 2005.

19

ComReg (2007) Market analysis: leased lines markets, Document No 07/77, 1 October 2007.

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ComReg proposes the following regulatory remedies for the terminating segments of wholesale leased lines:

access to and use of specific network elements and associated facilities

transparency

non-discrimination

price control and cost accounting

accounting separation.

The second review mandated the continuation of both the WLL and PPC products. ComReg proposes that PPC prices will continue to be based on FL-LRIC. WLL prices are currently based on retail-minus, with the minus set to 8%. ComReg proposes to undertake a consultation process to determine whether WLL prices should be cost-oriented, however the retail-minus price control will continue as a transitional measure.

3.8 Norway: adapting to address local market conditions While Norway is not a member of the European Union, its regulatory framework is largely based on that of the EC. To that end, the Norwegian regulator (NPT) has also undertaken a series of market reviews over the period 2004 to 2006 to identify whether operators have SMP in any of the 18 markets identified in the 2003 Recommendation. NPT concluded that Telenor, the incumbent operator, had SMP in the wholesale markets for leased lines and imposed a number of regulatory obligations20. The analysis of SMP examined two separate markets:

wholesale leased lines up to and including 8Mbit/s

wholesale leased lines with capacities over 8Mbit/s (including dark fibre and optical channels).

20

Norwegian Post and Telecommunications Authority (2007) Draft decisions on designating undertakings with significant market power and imposing specific obligations in the wholesale markets for leased lines, 19 February 2007.

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This differs from the EC definitions in which the two markets for wholesale leased lines were terminating segments (market 13) and trunk segments (market 14). This distinction was made due to the nature of the Norwegian market for wholesale leased lines, where products cannot be categorised as being either access or trunk, and prices are not dependent upon whether the circuit is a terminating segment or a trunk segment. NPT notes that distinctions between terminating and trunk network elements are changing over time, for example as the point for transmission equipment and multiplexing in Telenor’s network is moving closer to the customer. Given these changing distinctions, it was considered that a node-based product definition may create problems if differing regulatory obligations apply to each segment. It should be noted that prior to the market review, prices for Telenor’s wholesale leased lines were required to be cost-oriented, and were capped. In addition there is a universal service obligation as part of Telenor’s licence to offer 64kbit/s and 2Mbit/s leased lines to any place with a permanent year-round population or commercial activity. As a result of the market review, obligations placed on Telenor for wholesale leased lines include:

transparency

non-discrimination

accounting separation.

NPT has imposed price controls for wholesale leased lines up to and including 8Mbit/s, but not for circuits over 8Mbit/s. For the former, Telenor’s prices must be cost-oriented and based on historical costs. In both markets, prices for access to co-location and other necessary additional services must be cost-oriented. So, why did NPT impose price controls only for the lower capacity leased lines? In its market analysis21, the regulator found that competition problems in both markets relate to vertical leveraging, horizontal leveraging and single market dominance. However, the differing levels of obligations were seen to reflect the differing degrees of infrastructure competition for the two markets – the market for higher capacity leased lines being more 21

Ibid.

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competitive. NPT views the obligations for wholesale leased lines up to 8Mbit/s as essentially a continuation of current regulation. Reducing regulatory obligations for the higher capacity leased lines via the removal of price controls was perceived to encourage a positive effect on infrastructure competition.

3.9 Lebanon: guidelines for the forthcoming wholesale market review Much of the material available on wholesale regulation concerns developed countries, in particular from Europe and the United States. Wholesale regulation to date in the developing world has largely focussed on fixed and mobile termination, however some regulators are starting to extend their scope to other wholesale markets. In December 2007, the South African regulator (ICASA) gazetted a list of retail and wholesale markets22 which ICASA will analyse to determine whether any providers have SMP and the effectiveness of competition in those markets. ICASA will subsequently publish a conceptual framework and the methodology it will use for the market analysis. The Lebanese regulator is currently reviewing a range of retail and wholesale markets. In June 2007 the Telecommunications Regulatory Authority (TRA) issued draft guidelines23 for the control of significant market power. The TRA’s programme will consist of four activities:

define relevant markets in terms of product/services, customer groups, retail/wholesale and geography/route.

undertake market analyses of each of the relevant markets, to determine whether any providers have SMP in those markets

22

issue Decisions as to providers having SMP in a relevant market

impose regulatory obligations on those providers identified as having SMP.

Independent Communications Authority of South Africa (2007) Regulations pursuant to Section 67(4) of the Electronic Communications Act No 36 of 2005, Government Gazette Vol 510, 21 December 2007.

23

Telecommunications Regulatory Authority Lebanon (2007) Significant market power guidelines, draft for consultation, 7 June 2007.

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The guidelines list the various retail and wholesale markets, the latter comprising:

access circuits (narrow and broadband) to a public telecommunications network

call origination from a public telecommunications network

call termination on a public telecommunications network

transit services over a fixed public telecommunications network

international roaming on public mobile networks

unbundled access (including shared access) to metallic loops and sub-loops for the purpose of providing narrowband and/or broadband services

terminating segments of leased lines

trunk segments of leased lines

For the wholesale leased lines, at least three different types of circuit will be considered:

up to 2Mbit/s and those over 2Mbit/s

“short” or “urban” leased lines

“long distance” or “backbone” leased lines.

The guidelines state that in order for relevant markets to be eligible for ex ante regulation, the markets must be:

characterised by high and non-transitory entry barriers

the emergence of effective competition must not be foreseeable, and the application of ex post controls must be insufficient to address the market failures concerned.

Regulatory remedies that could be imposed upon providers with SMP may include licence conditions, price controls, universal provision, and quality of service requirements, however the TRA notes that the identification of a relevant market as lacking effective competition does not necessarily imply that regulatory remedies will be applied to that market. As in other countries, the regulator does not believe that emerging markets should be regulated:

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As a general principle, emerging markets should not be subject to ex-ante regulation but should be allowed to develop according to the normal dynamics of market forces. However, where large Providers use existing infrastructure to deliver new services in an emerging market, TRA may need to consider how to grant and maintain access to new entrants to nonreplicable network elements on equivalent terms. Defining the evolution of an emerging market into a mature market will depend on the context.24

The SMP regulation is expected to be released very soon and will include final guidelines for the market analysis.

3.10 Hungary: LRIC is not the only option for price control At the end of 2005, the Hungarian regulator (NHH) commenced a second round of market analyses to determine whether any provider has SMP. For wholesale markets 10, 14 and 15, NHH identified that there was no operator with significant market power. NHH has imposed regulatory obligations on operators identified as having SMP in the other wholesale markets. These obligations include:

transparency

accounting separation

cost-based and controllable prices

– LRIC for market 11, market 12 (local bitstream access) and market 16 – retail minus for market 12 (IP bitstream access) and market 13 •

24

non-discrimination.

Ibid, paragraph 83.

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3.11 Concluding remarks There are many complex issues facing regulators seeking to implement regulatory remedies to address the lack of effective competition in wholesale markets. However the fundamental tasks are common to all:

establishing if providers have significant market power

assessing whether regulatory remedies are warranted

if regulatory remedies are required, determining the type and extent of the measures to be imposed.

The range of case studies examined above illustrates that solutions vary from country to country and from market to market – the challenge for the regulator is to ensure that regulatory intervention is an appropriate tool that will ultimately benefit consumers through the encouragement of competition and investment. The regulatory approach must be tailored for the local environment and must be cognisant of future technological and market developments.

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4 Achieving national objectives in communications In this section we review telecommunications penetration in Malaysia (Section 4.1), consider whether national objectives are being achieved (Section 4.2), discuss the current USP scheme (Section 4.3), examine investment in fixed infrastructure (Section 4.4) and propose an economic framework that would be conducive to achieving national objectives (Section 4.5).

4.1 Telecommunications penetration in Malaysia Over the last ten years in Malaysia mobile penetration has increased steadily to almost 80 mobile lines per hundred while fixed penetration has decreased to under 20 fixed lines per hundred (Exhibit 4.1). The declining trend in fixed penetration is observable from 2001.

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Number of fixed lines and mobile subscribers per 100 inhabitants

36

80 70 60 50 Fixed Mobile

40 30 20 10 0 1997

Exhibit 4.1:

1998

1999

2000

2001

2002

2003

2004

2005

2006

Mobile and fixed teledensity in Malaysia [Source: ITU]

During the same time Internet penetration has steadily increased to reach 18 subscribers per 100 in 2006 (Exhibit 4.2).

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Internet subscribers per 100 inhabitants

20 18 16 14 12 10 8 6 4 2 0 1997

Exhibit 4.2:

1998

1999

2000

2001

2002

2003

2004

2005

2006

Internet subscribers per 100 inhabitants in Malaysia [Source: ITU]

Clearly mobile has had a significant impact in Malaysia on extending the delivery of telephony services. As Exhibit 4.3 shows, it is the case now that many developing countries with low fixed line penetration (“teledensity�) have much higher levels of mobile penetration. In many situations it has been possible to roll out mobile infrastructure relatively rapidly and cost effectively in areas that previously had no telecommunications services at all. Thus the true level of service penetration needs to be considered by aggregating mobile and fixed services.

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100% Mobile users as % of total telephone subscribers

38

Nepal Philippines 90% Jamaica Madagascar Malaysia Trinidad Indonesia 80% Chile Seychelles St Vincent Sri Lanka Finland French Polynesia 70% Mauritius Comoros 60% China Costa Rica 50%

United Kingdom Australia Canada

40% 30% 20% 10% 0% 0

10

20

30

40

50

60

70

Teledensity (fixed services per 100 inhabitants)

Exhibit 4.3:

Mobile users as a proportion of total telephone subscribers, 2006 [Source: ITU]

When we compare mobile penetration in Malaysia with that of countries with a similar level of income we observe that Malaysia is above the trend line, indicating a higher level of penetration than we would anticipate for its income level (Exhibit 4.4).

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Mobile subscribers per 100 inhabitants

140 Lithuania 120 100 80

Jamaica

Malaysia Turkey

60 40 20 0 3000

Brazil

Slovak Republic

Latvia Poland Chile

South Africa Saint Lucia Mauritius Botswana Uruguay

Costa Rica

4000

5000

6000

7000

8000

9000

10000

GDP/capita (USD)

Exhibit 4.4:

Mobile subscribers per 100 inhabitants, 2005 [Source: ITU]

We also find that in relative terms Internet subscriptions per 100 inhabitants in Malaysia has grown more rapidly and exceeds that of many other developing countries (Exhibit 4.5), including countries with higher fixed teledensity than Malaysia.

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Internet subscribers per 100 inhabitants

35 30 25 20 15 10 5

Exhibit 4.5:

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

0

Malaysia Madagascar Indonesia Comoros Nepal Chile Seychelles Trinidad and Tobago Mauritius China Costa Rica United Kingdom Australia Canada

Internet subscribers per 100 inhabitants [Source: ITU]

4.2 Are national objectives being achieved? In 2002 a new universal service regime – Universal Service Provision (USP) – was introduced with an overall aim of meeting certain national objectives for ubiquity for the communications and multimedia sector. These included increasing the fixed line penetration rate from its 2001 level of 22% to 30% by 2005, and increasing penetration in rural areas from the existing level of 11% to 18% by 2005. These targets have clearly not been achieved so what has gone wrong and does it matter? With respect to the latter issue in some developing countries the absolute priority is extending telephone service and whether this occurs via fixed or mobile infrastructure rollout is immaterial. The Malaysian USP system recognises the need to provide universal

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access to underserved areas25 and underserved groups within the community26 and it focuses on the following objectives (in order of priority):

collective access to basic telephony and public payphone services

individual access to basic telephony services

collective access to Internet access services

individual access to Internet access services.

Note that in general universal access objectives may consist of short and long-term measures, for example:

in the short-term, targets for providing some access to voice services through community access points (for example, payphones and/or Internet access) to communities of a specified size

in the medium to long-term, targets for rolling out network infrastructure.

Examples of universal access approaches are provided in Exhibit 4.6 for a sample of developing countries.

25

An underserved area is defined as an area where the penetration rate for basic telephony services is 20% below the national penetration rate.

26

An underserved group is defined as a group of people linked by similar characteristics from a socio-cultural or economic perspective, within a served area, who do not have collective and/or individual access to basic telephony services.

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Jurisdiction

Targets

Bhutan

One public payphone per village

Comoros

One public payphone per locality

Costa Rica

Public and private telephone access within 1km

Cuba

Telephone access in every village and community of more than 500 inhabitants

Ethiopia

One public payphone per town

Guinea

One public payphone per locality, one telephone exchange per administration

Iran

Telephone access in every village of more than 500 inhabitants

Jamaica

One public payphone per community with 90 or more inhabitants, access within walking distance, broadband connectivity in public institutions

Kenya

telephone access within walking distance

Kyrgyzstan

One public payphone per town, one telephone per home

Lesotho

One public payphone within 10km of any community

Madagascar

One public payphone per village

Maldives

One public payphone per 500 inhabitants, one telephone per island

Mozambique

One public payphone per district centre, access within 5km

Pakistan

One public payphone per village

Togo

Access within 5km by 2010, one public payphone per administrative/economic centre

Zambia

Public payphones in every public place (schools, clinics etc)

Exhibit 4.6:

Universal access targets in developing countries [Source: World Bank]

While some form of voice connectivity is the major concern in many developing countries, in the case of Malaysia key targets include the provision of Internet services. The Malaysian emphasis on extending fixed lines is implicit recognition that fixed connectivity may better support national economic and social goals with respect to high-speed Internet service availability. Indeed for some years Malaysia has been working towards the widespread delivery of high speed broadband access with targets specified in a National Broadband Plan (NBP):

•

2.8 million subscribers (50% of households) by end 2008

•

complete penetration (75% of households) by end 2010.

Furthermore, on 27 September 2007 the Malaysian government announced that TM had been chosen as the private partner for the RM15.2 billion high-speed broadband (HSBB) project, which includes last-mile fibre, core network and interconnectivity. The

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government has agreed to fund one-third of the overall project costs. There is a ten year time-frame for the whole project, with an initial objective to cover 2.2 million premises in key economic areas within the next three years. 27 Thus we can conclude that the declining fixed penetration must be of concern to Malaysian policy-makers as it may be a barrier to achieving these targets.

Is increasing fixed penetration essential for development? There is mixed thinking regarding the effect of the substantial increase in mobile telecommunications uptake in developing countries whilst fixed-line penetration stagnates. One point of view is that the lack of fixed-line access has led to widespread adoption of mobile in developing counties, which although expanding voice access could severely hamper high-speed broadband opportunities.28 There is also a more positive view for the future of mobile Internet access for developing countries, based on experiences in some OECD countries, notably Japan and Korea, where Internet access using mobile devices has come to be taken for granted. In the case of Japan the number of users accessing the Internet via mobile devices (for example cellular phones) exceeds the number using computers for that purpose. It is accepted that computers and cellular phones have different capabilities for accessing the Internet, some content and services are not available on mobile devices and historically pricing for mobile Internet access has been much higher than for fixed. However, competition is now driving innovation in pricing and content is increasingly being tailored for mobile access, for example the .mobi domain encourages content and service providers to develop for handheld devices. Internet access via mobile devices is developing outside the OECD also, notably in the Philippines and Nigeria. Fixed wireless options are also increasing in developed countries, which are useful where fixed or cellular services are not available. Prices have tended to be expensive for these

27

28

Telekom Malaysia (2007), 360W: a TM Group quarterly e-newsletter, December 2007. OECD (2007), Communications Outlook 2007.

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services, but can be affordable when used to link communities for shared use. There is significant research and development in this area which is expected to drive capability and make wireless access more feasible for rural communities in developing countries. Wireless operators and ISPs in developing countries are also marketing less expensive mobile Internet devices, for example the GSM Association is aiming to bring 3G multimedia services and mobile Internet access to the mass-market user base around world through affordable handsets (including using refurbished phones). CDMA handsets with Internet capability also becoming significantly more affordable than they once were.29 The World Bank has an optimistic view regarding wireless Internet potential for developing countries, noting that new services and more cost-effective wireless network solutions are being developed, especially in countries where service providers can build their own networks. New wireless technologies are prompting new business models, which is extending competition to all market segments with broadband infrastructure and access improving, including for poor users. Although wireless access is still expensive, it is considered affordable for connecting villages, providing shared Internet access.30

Why is fixed penetration decreasing in Malaysia? There are a number of potential explanations for the decline:

•

fixed-mobile substitution (FMS) as mobile subscribers give up their fixed lines in favour of only a mobile connection. Note that this is not only an issue of preference for the mobile service but also an economic issue as with the highly competitive mobile environment in Malaysia, mobile services are available at relatively cheap prices.

•

inability of the USP scheme to deliver its targets. This is discussed further in Section 4.3 below.

29

30

OECD (2008), Global opportunities for Internet access developments, February 2008. World Bank (2006), Information and communications for development: global trends and policies, 2006.

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constraints on investment in fixed infrastructure, including maintenance of existing fixed services and investment in new fixed services. This possibility is investigated in Section 4.4 below.

Naturally it is possible that all of the above issues may have played a part in the observed decline in fixed services.

4.3 Has the USP scheme delivered? The USP system introduced in 2002 recognised the need to provide universal services to underserved areas and underserved groups within the community. The scheme does not take into account the net cost of service provision for uneconomic customers (as it had in its previous form) and existing uneconomic areas are typically not captured within the costing calculations.

4.3.1 Funding Typical methods for funding universal service schemes are:

calculate the cost to the universal service provider and share this cost across eligible operators or licensees

establish a universal service fund (USF) using a contributory scheme.

In developing countries it is more common to have a fund which can be used to subsidise network rollout or meet specific targets in unserved or underserved areas. In this case there may not be a single nationally designated universal service provider – instead separate providers could be nominated for each service area. Contributions to USFs may be:

revenue-based – all operators pay a designated proportion of revenues into the fund (usually gross revenues). This means that when revenues are lower contributions are also lower and cause less of a burden to the operators.

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•

call-based – a per minute levy is applied to selected services – for example, incoming international calls. This approach means that the burden of the levy is placed on those deemed able to afford the additional cost.

A USF administrator is often established to collect the funds and distribute the subsidies. As revenue-based contributions can be highly variable it is difficult for the administrator to plan future subsidies. Although call-based contributions are also variable it is possible to model the call traffic and forecast the expected contributions. The advantages and disadvantages of these three solutions are compared in Exhibit 4.7. Solution

Examples of

Advantages

Disadvantages

Contributions are collected when required and not stored in a fund

Variability of contributions a disincentive to new entrants

countries Shared costs

Barbados, New Zealand

Costs may be passed onto consumers USF (revenuebased)

Malaysia and many others (see below)

Contributions are lower when Costs may be passed onto revenues are lower imposing less consumers of a burden on operators Difficult to plan subsidies with Very straightforward to ensure varying contributions correct amounts are collected as Monies may remain unused in the difficult to manipulate gross Fund revenues May encourage high-cost solutions particularly if the fund contains large reserves

USF (callbased)

Jamaica, Sri Lanka

Costs borne by those who can afford to pay e.g. overseas consumers

Arguable that schemes involving subsidies from elsewhere do not comply with WTO requirements

Incentive to new entrants

May be difficult to make accurate traffic predictions

Exhibit 4.7:

Comparison of universal service solutions [Source: Network Strategies]

4.3.2 Is the level of required funding an issue? Malaysia, like many developing countries, adopted a revenue-based fund. A key issue for such funds is the appropriate level of contributions. The level should be high enough to

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Access List Determination

provide an adequate fund for financing efficient solutions, but should not be set at a level which will impose an unnecessary burden on operators (or consumers as operators attempt to shift the burden). Exhibit 4.8 shows the level of required revenue contribution mandated in 32 developing countries. It is noteworthy that Malaysia, at 6% of gross revenues, has the highest required contribution. The range is from 0.01% to 6% with a median of 2%.

Exhibit 4.8:

USF operator levies [Source: GSM Association]

So where does the incidence of the levy or tax fall? In analysing this it is important to remember that price controls exist over most of the telephony services in Malaysia, although not on mobile calls, and these price controls affect the incidence. If there were no price controls, and the markets were competitive, the tax incidence would fall partly on

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consumers and partly on producers, the division depending on the relative elasticities of demand and of supply. The more supply conditions approach constant costs, the greater the proportion of the burden falling on consumers who would pay a higher price for a smaller volume of service. If the supply curve is not constant then the loss will be shared between the consumer and producer31. However, as there are price controls, and not all of the telecoms markets are competitive, the tax burden will fall initially on the producers. Unless the price regulations are altered or removed the producers will endeavour to shift as much of it as they can on to the consumers of non-price controlled services and also those for which they are monopoly suppliers. If they cannot do this (because the non-price controlled markets are too competitive), the producers (i.e. the licensed operators) will be forced to carry the burden themselves – in other words, their profits will fall. At a time when the Government is expecting TM to incur large capital expenditures to achieve the HSBB, this reduction in profits will constrain the financial ability of TM to meet its targets.

4.3.3 Are funds used efficiently? A particular feature of USFs to be noted is the high proportion of funds that appears to remain unused. A recent survey by the GSM Association of 15 of the USFs pictured in Exhibit 4.8 revealed that only 26% of the monies collected in these USFs (largely since 2001) had been distributed by 2006. Indeed in Malaysia from 2003 to 2006 only 4% of monies collected were distributed (Exhibit 4.9). Year

Expenditure (RM)

2003

404 181 253

10 638 967

2004

515 135 476

23 591 977

2005

697 298 212

44 121 315

2006

800 841 126

22 855 044

Total

2 417 456 067

101 207 303

Exhibit 4.9:

31

Contribution (RM)

USP contributions and expenditure 2003-2006 [Source: MCMC]

See Annex 1 for a fuller discussion of these economic issues.

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Access List Determination

It is also worth noting that in relation to those monies that had been distributed from the 15 sampled USFs the following breakdown was observed:

81% was distributed to incumbents for fixed lines

11.7% went to new entrants for fixed lines

4.6% went to mobile operators

2.7% was distributed for ICT projects.

4.3.4 Conclusion It appears highly probable that the USP system has not been conducive to increased fixed line penetration for the following reasons:

at 6% of gross revenues Malaysian licensees must pay an extremely high contribution levy for universal service but only 4% of monies collected since 2001 have been distributed

the current form of the system provides no incentive to maintain existing unprofitable lines.

4.4 Investment in fixed infrastructure

4.4.1 Drivers of investment decisions In a commercial competitive market there are pressures for investment funds to be channelled to areas of the business which promise the greatest returns. Thus in such an environment in normal circumstances we would not expect a profit-maximising firm to invest in uneconomic customers or areas, either to maintain existing investment (operational/maintenance/replacement) or to expand investment (new capital investment). At the same time it may be in the national and societal interest that such investment is encouraged or subsidised. In the case of maintaining existing telecommunications investment, this issue is often referred to as the problem of the access deficit while in the case of new investment in uneconomic areas we often refer to universal service schemes. In

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Malaysia the USP system seeks to address new investment but there is no mechanism for dealing with the problems caused by the access deficit.

What is an access deficit? An access deficit is the result of insufficient revenue from access line related charges to cover access line costs. It occurs despite the fact that some customers are economic (or profit-making) for the access provider if all their business is taken into account and not just their access line related business. The greater the number of overall economic customers of the access provider, the stronger the financial ability of the provider to sustain an access deficit. Prior to competition, access providers typically sustained loss-making access networks through cross-subsidisation from other lines of business – usually long distance and international business calls. Removal of cross-subsidies or ‘tariff rebalancing’ means that fixed costs resulting from the provision of lines need to be fully recovered by fixed line rental charges and connection charges, and variable costs caused by the conveyance of calls should be recovered by usage charges. At the same time, it may also be necessary for the access provider to rebalance usage charges between local and long distance calls reflecting underlying costs of service delivery. Price controls on line charges and local call charges can prevent an access provider from fully rebalancing and cause an ongoing access deficit. In these circumstances if market liberalisation occurs introducing competition in long distance and international services, the access provider will face very strong commercial pressure to rebalance tariffs as:

margins are eroded on the profitable lines of business

volumes are reduced on the profitable lines of business.

If price controls on access services are not relaxed, then there is a risk of price distortion as the access provider will seek to recoup this loss through other prices.

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Access List Determination

4.4.2 Access deficit in Malaysia As already noted, at present no mechanisms exist for addressing the access deficit in Malaysia. In recent years the MCMC has been studying the access deficit issue and TM has made submissions concerning the quantum involved but there has been no policy decision to resolve the issue. In general a number of different possibilities may be considered, including:

cross-subsidisation by the access provider

tariff rebalancing

special levy on other operators or service providers or on certain services (e.g. interconnection charges)

contributions to the deficit from other operators or service providers (e.g. via universal service scheme).

Cross-subsidisation and tariff rebalancing In the monopoly environment an access deficit caused largely by price controls may be sustainable through cross-subsidisation, but after liberalisation the access provider cannot financially sustain the access deficit. Cross-subsidisation by the access provider is untenable in the Malaysian environment, will create further price distortions, and will ultimately negatively affect long-term investment. Another option, of course, is for price regulation to be removed and the access provider to be allowed to rebalance tariffs fully. This would remove the access deficit. However, although retail rate rebalancing may be highly desirable from an economic efficiency point of view, the specific conditions in developing countries make it difficult to implement rapidly – rather a gradual process of rate reform may be more appropriate. In particular in developing countries there is typically:

low GDP per head which means that there will be affordability issues, particularly for rural areas, and tariff imbalances cannot be redressed immediately without adversely affecting consumers’ ability to take-up and maintain telephony services

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a need to create appropriate incentives for rapid network roll-out and the most efficient use of investment capital, to address low penetration levels

the need to take into account investor confidence, particularly if there appears to be a growing likelihood of market failure.

From a social policy perspective it is clear that gradual rate rebalancing would be far preferable to rebalancing at a pace and in a way which caused sudden or unwelcome increases in customers’ bills, or which deterred potential customers from joining and using the network.

Special levy on other services such as interconnection Historically some countries imposed access deficit contributions (ADCs) as a surcharge on interconnection rates. While it used to be common practice, over the past eight years the practice has largely been eliminated. There remains a small number of exceptions (discussed in Annex B) and in most of these, such schemes will shortly phased out. Common failings associated with such schemes are:

they provide incentives to bypass the incumbent’s network altogether, which in the long run makes the incumbent’s position unsustainable

difficult to ensure competitive neutrality

ADCs distort market – they are not justified nor sustainable.

The OECD states that: If there is economic loss due to the lack of rebalancing or other universal service provision in services such as emergency services and public phone services, this should be compensated through a competitively neutral funding mechanism, which does not distort competition or does not penalise specific user groups. If a competitively neutral funding mechanism is in place, there is no reason to recover deficits incurred by the incumbent to provide access services through interconnection charges.32

32

OECD (2001) Interconnection and local competition, Working Party on Telecommunication and Information Service Policies, 7 February 2001.

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Access List Determination

Rebalancing tariffs is viewed as the best solution.

Contributions via universal service scheme Another possibility is to subsume the access deficit within an appropriate universal service scheme which applies to everyone and compensates access providers for any loss which they make as a consequence of serving customers where it is uneconomic to do so. Such schemes have already been implemented in some countries, such as Australia and New Zealand, and the predecessor of the USP scheme in Malaysia also covered uneconomic areas. However in the current USP framework in Malaysia there is no provision for dealing with access deficit problems. This means that TM has alone been carrying the burden of the access deficit since 2002. One practical possibility is to extend the remit of the current USP scheme to cover uneconomic areas and customers. This would address the undesirable consequences of the existing access deficit, including the lack of incentives to maintain lines and connections for existing unprofitable customers, and the financial burden it imposes on operators that service unprofitable customers. This argument is further strengthened by the fact that a review and reorganisation of the USP may eliminate the current inefficient situation that exists with respect to the significant and persistent imbalance between contributions and disbursements.

4.4.3 Conclusion TM’s ability to sustain the access deficit diminishes year by year, and with significant competitive pressures and investment requirements for HSBB it seems inevitable that investment funds will not be available for uneconomic areas and customers in the absence of any external financial assistance. After examining a number of possibilities for redress, the only realistic possibility to resolve this situation appears to be via a reorganisation of the USP system in order to encapsulate the problems of the access deficit.

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4.5 Proposed economic framework Given the importance of the telecommunications sector in its own right and as an enabler for other sectors and society as a whole, continued growth and investment in the sector is essential. National universal service and broadband goals depend on fixed connectivity yet declining levels of fixed penetration are observable in Malaysia. In these circumstances it is imperative that the following issues are addressed:

the relatively high USP levy which is putting pressure on profits of some contributors that are unable to shift the incidence of the levy onto consumers

the lack of distribution of USP funds

the persistent access deficit that has been fully funded by the former incumbent since 2002.

TM’s financial situation is characterised by:

a high investment commitment for HSBB

expectations that it must continue to single-handedly sustain the access deficit

ongoing high contributions and obligations to the USP with an inability to pass these costs onto consumers

retail rate price controls on many services

with its exit from the mobile market, no further revenues from mobile.

In summary, at this critical time for Malaysia’s developmental and communications infrastructure objectives and targets, TM faces serious financial challenges that may lead to a downturn in investment. Consequently we recommend the following economic framework be adopted by Government that would ameliorate the current situation, in the absence of relaxation of price controls:

Immediate distribution of a large portion of existing funds from the USP back to licensees, with a higher proportion to TM as a once-and-for-all distribution to partly compensate for the historical access deficit that has existed since 2002.

Re-specification of the USP scheme to include uneconomic areas and customers as well as the existing targeted initiatives for unserved or underserved areas.

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Access List Determination

•

Reconsideration of the appropriate category of service or type of customer that should be targeted in funding the extended USP.

With respect to the latter issue, given that there is relatively high mobile penetration in Malaysia, and a competitive market with relatively low prices, a practical solution may be to focus on mobile services or customers for funding the extended USP. From our analysis it is apparent that non price-controlled mobile operators would be able to shift the incidence of the tax onto consumers. Note that in the existing USP scheme annual contributions of 6% are based on weighted revenues of designated services of licensees. When the scheme was introduced cellular mobile services were given a weighting of 0.5. This lower weighting reduced the contribution of mobile services to the development of USP, though subsequently a weighting on 1.0 was applied to mobile services in the amended USP regulations of 2003. With the substantial penetration of mobile that exists now, a policy decision may be considered that amends the existing weightings so that the more developed parts of the economy bear a larger proportion of the universal service burden. Another alternative is for a USP Development surcharge to be put directly on customers’ accounts. In this way all citizens and all businesses would transparently contribute to the desirable development of the USP and fixed connectivity. Such a system would introduce appropriate incentives for existing operators to commit fixed investment funds in hitherto commercially unviable areas or customers. At the same time potentially efficient new entrants would not be discouraged from entering the market.

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5 Conclusions and recommendations [to be completed]

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Annex A: Tax incidence of USP levy In Exhibit A.1 prior to the levy consumers purchase q1 at price a. After the levy is applied there will be a shift in the long run average cost curve from its pure position (i.e. no levy) to a higher level taking account of the fee levied. Assuming that the supply curve is flat, then the fee may be shifted wholly onto the consumer. The supplier’s cost curve shifts from LRAC1 to LRAC2, the whole levy is passed onto the consumer and a new equilibrium is reached at c with volume q2 and price d. In economic terms, this results in a reduction in consumer surplus and a deadweight loss is incurred. Consumer surplus represents the difference between the amount the consumer is willing to pay for a service and the amount actually required to have the service (the price). If the price increases there is a decrease in consumer surplus. In addition a price rise reduces the volume of transactions and consequently the benefits derived from the service. This is the deadweight loss – an efficiency loss due to the levy – represented in Exhibit A.1 by the area bec.

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Exhibit A.1:

price

USO levy on operators with no

demand

price controls

total loss in consumer surplus

[Source: Network

deadweight loss c

d

LRAC2 b

a

Strategies]

e

q2

q1

LRAC1

quantity

Exhibit A.2 illustrates the case in which the USO provider is not able to shift any of the levy onto the consumer. Prior to the levy the cost curve is LRAC1 and the initial profit is abcd. With the levy (LRAC1 + levy) the cost curve shifts upward, the demand curve remains the same and the USO provider’s profits are reduced to abef.

Exhibit A.2:

price

USO levy on

demand

operators with price controls [Source: Network Strategies]

fixed price

a e

c

b f

d

LRAC1 + levy

LRAC1

q1

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quantity


Annex B: Access deficit surcharges: international experience Below we outline the situation with regard to access deficit surcharges in a number of countries, including European Union Member States, Australia, Hong Kong, Hungary, India, Malta, Moldova and Trinidad and Tobago.

European Union ADC schemes were permitted in European Union Member States until 2000. EU legislation is based on the assumption that in a liberalised market, tariffs are fully rebalanced and thus there should be no requirement for an ADC scheme. The European Commission (EC) recognised that ADC schemes were not an optimal solution, but if used – prior to 2000 – should be only as a temporary measure: 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 rebalancing should have been completed in all Member States.33

33

European Commission (1998) Commission Recommendation of 8 January 1998 on interconnection in a liberalised telecommunications market, 98/195/EC.

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Prior to 2000, ADC surcharges on interconnect rates were allowed in Member States under certain conditions: …contributions by interconnected parties to ‘access deficit’ type schemes are only permissible when tariff constraints are imposed by NRAs on the grounds of affordability and accessibility of telephone service in accordance with Article 12(2) of Directive 95/62/EC; whereas the Commission has indicated that it believes such schemes should disappear by 1 January 2000.34

Where an operator was not bound by regulatory measure from rebalancing its tariffs, the EC considered that ADC schemes were not justified.

Australia In Australia, there was a surcharge on the interconnect rate which was a contribution to the access deficit. The ADC comprised around 45% of the interconnect rate (Exhibit B.1)35. Year

Originating /

ADC

Originating /

ADC

ADC as

terminating

(AUD cents

terminating

(RM sen

% of rate

rate (AUD

per minute)

rate

per minute)

cents

(RM sen

per minute)

per minute)

1999-2000

1.80

0.84

2.38

1.11

47%

2000-01

1.53

0.69

1.91

0.86

45%

2001-02

1.30

0.57

1.64

0.72

44%

Exhibit B.1:

Access deficit contributions, 1999-2000 to 2001-02, Australia [Source: ACCC]

For a three year period from 2003-04 to 2005-06 the ADC component of the interconnect charge was gradually phased out, and so by 2006-07 this component was zero.

34

35

Ibid. Note that all currency conversions presented within this report use purchasing power parity (PPP) rates sourced from the World Bank.

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Access List Determination

Hong Kong A three-year access deficit contribution scheme was introduced in August 1993 and ceased in July 1996. This scheme comprised a surcharge on the interconnection fee for calls via the Hong Kong Telephone Company’s international gateway. The ADC was charged in addition to the country-dependent delivery fee, and was set to:

HKD0.45 (RM0.09) per minute – from August 1993 to October 1995

HKD0.358 (RM0.07) per minute – from October 1995 to July 1996.

The ADC scheme was replaced by a USO arrangement. This enabled the focus of subsidisation to shift from the more broadly based access deficit to the net cost of serving uneconomic customers.

Hungary From 1998, prices for access line rentals were governed by an RPI–X formula. Tariffs were lower than the underlying costs of those services, resulting in an access deficit. Rather than subjecting consumers to major increases in line rentals due to rebalanced tariffs, in 2002 the Hungarian regulator (NHH) introduced an ADC surcharge on interconnect rates of HUF2.0 (RM0.03) per minute, which represented 25% of the peak national termination rate (67% of the offpeak rate). Over the period 2003 to 2004, residential line rentals for the incumbent operator (Matáv, now known as Magyar Telekom) were permitted to increase by up to 10% per year, however there was also a CPI–3% price cap for a basket of services, which includes residential and business line rental as well as local, long distance and international calls. In February 2003, NHH reduced the interconnect rates. At the same time the ADC was halved to HUF1.0 (RM0.014) per minute, which represented about 16% of the new peak national termination rate (43% of the offpeak rate).

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According to Decree 3/2002 of the Ministry of Informatics and Communications, the ADC charge would be abolished by the end of 2004 – it was actually eliminated at the start of 2004. Note that Hungary joined the European Union in 2004.

India The Telecom Regulatory Authority of India (TRAI) introduced an ADC surcharge on interconnection fees in May 2003, with the intention of ensuring a smooth transition from a monopoly regime to market liberalisation. The ADC scheme was designed to have a finite lifetime, with the ADC gradually being reduced until by the financial year 2008-09 it would finally be phased out. The TRAI envisaged that ADC would eventually be integrated with the USO scheme. As at the beginning of 2008, the ADC had two components:

a levy36 of 0.75% on service providers’ adjusted gross revenue payable to BNSL (the incumbent operator) – this was eliminated as from 1 April 2008

international long distance providers pay BNSL INR1.00 (RM0.19) per minute on all incoming international calls – as from 1 April 2008 this was reduced to INR0.50 (RM0.09) per minute and will subsequently be eliminated as from 1 October 2008.

The TRAI recognised that the ADC scheme was not ideal: It is also undisputed that prolonged ADC puts avoidable burden on the customers, creates market distortion, gives rise to grey market for international calls and is a hurdle for innovation of services. ADC therefore is a double edged sword that needs to be used judiciously and for an appropriate period. It was therefore envisaged to be a depleting regime that would eventually be phased out and the responsibility of financial assistance to rural wirelines be transferred to USOF [Universal Service Obligation Fund] by 2008-09.37

36

37

Note that this ADC levy was in addition to the USO levy of 5% on adjusted gross revenue. Telecom Regulatory Authority of India (2008) The Telecommunication Interconnection Usage Charges (Ninth Amendment) Regulations 2008, 27 March 2008.

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Access List Determination

In commenting on the proposed elimination of the ADC, BNSL argued that tariff rebalancing of basic services was not feasible, as this would result in services becoming unaffordable and BNSL would be unable to compete with the offerings of other providers. It was the regulator’s view that BNSL had been able to open new revenue streams which it considered had a similar affect to that of tariff rebalancing with respect to recovering costs of wireline access. Following cessation of the ADC scheme, BNSL will receive additional support from the USO fund, to subsidise wirelines installed prior to April 2002. This subsidy will comprise INR20 billion (RM3.8 billion) per annum for a period of three years.

Malta In its May 2003 Decision on Interconnection38, the Malta Communications Agency (MCA) approved the allowance of an Access Deficit Contribution as a transitional mechanism, stating that it would monitor the factors contributing to the ADC and reserved the right to review its Decision during 2004. The ADC charge was approximately 36% of the average charge for national call termination. Malta joined the European Union in 2004. The MCA was subsequently advised by the European Commission that maintaining an access deficit contribution in interconnection services provided by the incumbent operator (Maltacom), was contrary to EU law. In April 2004, the MCA approved substantial rises in both residential line rental (increased by around 20%) and business line rental (about 30%). Further rebalancing was to continue under an RPI–X price cap mechanism. At the end of 2004, there was a review of the interconnect pricing39, and due to the tariff rebalancing of line rental, the MCA eliminated the ADC component.

38

Malta Communications Agency (2003) Interconnection in the Maltese telecommunications sector, Report on Consultation and Decision, May 2003.

39

Malta Communications Agency (2004) Interconnection pricing review – 2004/05, Decision Notice, December 2004.

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Moldova The Moldovan regulator, ANRTI, introduced an ADC surcharge on interconnection for calls from IP telephony service providers to the incumbent’s (JSC Moldtelecom’s) PSTN network in 2001. Since that time the ADC has been successively reduced to coincide with various stages of a tariff rebalancing exercise (Exhibit B.2). Implementation date

ADC

ADC

% reduction

(MDL per (RM per minute)

Exhibit B.2: Access deficit contributions,

minute)

2001 to 2005

March 2001

2.48

1.31

June 2001

1.34

0.71

-46%

Moldova [Source:

2002

0.98

0.49

-27%

ANRTI]

March 2004

0.50

0.22

-49%

March 2005

0.39

0.17

-22%

The tariff rebalancing exercise has taken longer than anticipated – the third stage was expected to be implemented in 2006 but was delayed, and thus the ADC set in 2005 continued to apply for 2006. The ADC will again be recalculated as part of the third stage of the rebalancing. Once the tariffs are fully rebalanced the ADC will be withdrawn.

Trinidad and Tobago The regulator in Trinidad and Tobago has explicitly prohibited ADCs, preferring to address any access deficit via tariff rebalancing: Where the Authority is satisfied that access deficit exists, it may authorize rate rebalancing. No access deficit contributions will be allowed in interconnection charges.40

40

Telecommunications Authority of Trinidad and Tobago (2005) Recommendations for an Interconnection and Access Policy, September 2005.

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