Commerce Commission: Final Pricing Principle

, posted: 2-Sep-2009 14:43

3.15pm I have no idea what that means in Commission speak so will stay tuned. They're going to discuss TSLRIC (tea-ess-lyric) versus Bill and Keep (BAK) or BAK hybrid that includes something about out of balance traffic.

no idea what that means.

TSLRIC - a: the forward looking cost over the total plant attributable to the cost and b: forward looking common costs, more or less.

We're going to talk about whether TSLRIC or LRIC is more appropriate.

Experts from consultancy WIC are present (WIC wrote some of the Commission's analysis of cost in NZ) and will address the issue.

Costs would be allocated to services in direct proportion to all the services so there would be nothing left for common costs.

Contrasted with the pure LRIC approach promoted by the European Commission.

Termination would be the very last service provided by the network. All other costs have been allocated to those services that require them and only the additional cost that would be caused by having termination would be considered as the actual cost of termination.

The bottom up cost model - all services provided including termination would be allocated and that would give you a price per minute. Then in the second run you would deduct only that part of demand caused by termination and that would give you a cost for termination. The cost determinted will be only a fraction of that proposed under TSLRIC.

Commission Q: What would changing from TSLRIC to LRIC mean for the industry.

Telecom: if follow LRIC wouldn't replicate what happens in competitive markets. Firms have to recover their costs somehow. Generally there will be some sort of pure marginal cost to recover. The proposition here is that termination is somehow special and shouldn't contribute to common costs. At odds with a competitive market.

Would be fairly radical from a regulatory perspective. FCC is in consultation over this, as is the EC, but in all regulation there currently are allocations of common cost. Quite a shift in regulation (beyond telco) to remove it from common cost.

Two Degrees: Immediately to cost recovery issue. In real life we don't see 3 or 4 firms enter a market at the same time but in sequence and the last firm is disadvantaged. Should be most concerned about the cost recovery of the last entrant because the early movers have an advantage and will already have recovered cost.

Likely to be an unbalanced traffic flow and if termination rates were symmetric, it would imply that the small entrant would be asked to contribute to the common cost of the incumbent.

Vodafone: how we allocate costs across networks is a bigger issue than just termination rates but the basic principle is we'd start from TSLRIC because that's what we always do in these situations.

TSLRIC is recovery of all costs, why depart from that.

Kordia: need to change the current act if LRIC were to come in. Need to have the debate about LRIC in a broader context of all commerce legislation. Decision to be deferred to determination stage (later on) regarding which model to use.

One of the benefits of moving to LRIC, says Ofcom, would lead to an elimination of on-net/off-net pricing among other things. (Ofcom is the UK telco regulator)

TelstraClear: Don't support LRIC. It's right to share common costs. There is a broader debate about LRIC versus TSLRIC and the current act is completely predicated on TSLRIC and it makes no sense to remove it simply for the purpose of mobile termination.

Hybrid Bill and Keep

Q: Is BAK a good idea for SMS given it has a balanced traffic flow.

Vodafone: Rationale for BAK is for situations where there are calling externalities in place and they're not there in SMS. Doesn't make the basic economic test therefore no need to do it.

Two Degrees: if need to take calling externality into account that would reduce price below LRIC. If you define LRIC as the cost you would incur if you built a network so you had no off-net traffic and you divided that by the total number of minutes you'd end up with a very low number as cost. The US and Canada do it and get very small numbers.

At that point it's an open question as to whether you shouldn't just convert to BAK.

The efficient price would be the marginal cost of connecting the call minus the externality cost and it would be incredibly small number. Let's look to a world where we have sensible rational termination rates.

Telecom: The question is BAK or TSLRIC, not BAK or LRIC. Important distinction. Incentives matter. There are trade offs. If you drop MTR for SMS you would expect to see lower off net SMS prices. On the other hand, there's the impact of the waterbed effect and how important is that for the SMS issue. That needs to be taken into account.

Q: What would going to BAK for one service in a wider market would do to that market?

Two Degrees: SMS is critically important for us to get into the market. Generally speaking they're bundled together - voice and TXT. If you can't get into TXT you cannot attack the voice market.

All our international TXT relationships are BAK except for the deal with Telecom and with Vodafone.

Telecom: International arrangements are fundamentally a different way of operating. There are a few different models and not sure what you can assume about local termination based on international relationships.

Vodafone: Internationally we've started off with low volumes but we monitor closely and when those links start to be used for one way SMS (eg spam) you can quickly create an imbalance we put in place billing arrangements to take care of that.

In the US there is a FTM and MTM termination rate that's about 0.55c per minute and the parties are free to enter into a BAK if they wish. it's up to each operator at what level that would kick in.

If we see any sign of Spam or application to person TXT (ATP) we move to a billing arrangement. If BAK were mandatory with no thresholds you get huge imbalances. eg Vodafone Australia discovered one provider receiving 1,000 TXTs a month but sending several million.

Vodafone and Telecom had BAK for SMS in 2001 because neither could bill effectively (!). But there was a threshold if imbalances move beyond 20% they could move to a paid arrangement, something that happened quite quickly. Early days of TXT market.

Two Degrees: disputes BAK with thresholds is real BAK. BAK drives traffic imbalances, cheaper calls mean you make more calls. Setting the threshold at 5% or 10% create an artificial balance. Set them at 300% and then we can talk about thresholds.

Telecom: Disagree. One of the fundamentals of BAK is that it's peer to peer that you assume there will be balance between in and out-going traffic. Thresholds are a good thing. Fundamentally different approach to BAK from Two Degrees.

Q: If BAK were used for SMS and benchmark pricing for MTM and FTM or if BAK were used for all mobile but not FTM, what would that do to the market?

Vodafone: SMS at BAK might not distort the rest of the market. Concerned that customers use phones for both TXT and voice and it could skew voice market as well.

Two Degrees: Makes sense to avoid all these costs and just move to BAK for efficiency reasons. With MTM the main concern would be the distortion between fixed and mobile networks (as mentioned this morning).

Telecom: could distort uptake of one service or the other by changing regimes.

CallPlus: The cost of setting up billing systems to do interconnect are more than the earnings from billing.

Kordia: You could regulate SMS at BAK and it wouldn't distort other services. But shouldn't have a different rate MTM versus FTM.

Telecom: We would need an explicit glide path in place when introducing new cost estimates.

Two Degrees: Already have a significant TXT imbalance, sending more to Telecom and Vodafone than receiving.

At least 90% of all TXT traffic is BAK (international). It would seem odd for voice to have BAK for mobile and not FTM.

Vodafone: Under BAK, off net TXTing becomes cheaper than on net so marketing moves to deliver off-net bundles rather than on.

Different kinds of customers - those that do a lot of TXT and those that don't... so they will be treated quite differently by the regulation. TSLRIC is the standard and the move to LRIC would be designed to address the late entry by the new entrant - need to be careful or you're saying to one group of shareholders (early adopters) that you're changing the rules to help a late entrant. The message that sends about taking risk and being first mover in a market.

Q: Asymmetric pricing - the EU has provided asymmetric rates for new entry: If our market conditions are the same as EU at what level should asymmetry be provided and over what time period/market share should they be phased out?

Telecom: Gives a leg up to the new entrant, don't think it's the right approach.

Kordia: Did you ask because it was in our submission? We withdraw it.

Commission - does anyone want to talk about asymmetry?

Question abandonned.

Q: Minute plus second or second plus second. Should it be included in the pricing principles as a specific requirement?

Kordia: Yes, because it's the international practice as we understand it. Second plus second basis.

Telecom: Don't think you need to include it as a specific.

Two Degrees: Couldn't believe there's minute plus minute billing in NZ. It must be second plus second. There is no justification for it. It stifles the ability to innovate at the retail level. If you have a poorly engineered network you can make lots of money by dropping calls.

Vodafone: Two issues - one is comparing benchmarking with undertakings/counterfactual and comparing properly. It can't also be assumed that those efficiencies in the wholesale market will be reflected in retail, eg Two Degrees offering minute plus minute at retail level.

Most determinations concluded by Commission have been minute plus second. Has become the norm in NZ and any change needs to be done with care.

Can't ignore flagfalls and time of day changes etc internationally. That has been lead by retail pricing, not wholesale regulation.

Break for afternoon tea, back at 4.30pm

Commissioner sets off defining the role of the afternoon - discussing Initial Pricing Principles (IPP).

Vodafone: Commission verging on price setting because have to decide whether or not to accept undertakings (commercial offers from industry players) and comparing those with regulation ... Needs to be some rigour around that.

Vodafone doesn't want the Commission to do more than it would normally but to do less than the minimum work in this area is not good either.

Two Degrees: Sees benchmarking useful as a quick look at the work the commission undertakes. On formal Undertakings, 2D has real concern if too much time is taking on benchmarking and giving incumbents time to take their offers closer to the regulated offer.

Telecom: Benchmarking should be to determine the right price. International practice is to employ a glide path to cost but the Commission is ignoring that. By not including those jurisdictions in the model we see a skewed model in NZ that is misleading.

In Europe, glidepaths start from around five or six years in duration down to a couple of years.

Two Degrees: in Austria new entrants get same rate as set for the incumbents (in NZ that would be 50c/minute) for the same period of time. He feels new entrants should get a glide path rather than the incumbents.

If MTRs are bad and distort the market, there is no justification for having a glidepath at all.

Commission butts in - not ready to talk about specifics yet, still sorting out whether the general approach is right or not re: benchmarking.

Vodafone: benchmarking - same level of rigour should be applied before deciding to regulate as after because the decision to regulate itself is very important.

Undertakings very valuable part of the process and there's an opportunity to resolve this for the next five or six years and we should be as rigorous as possible at this point.

Two Degrees: supportive of the Commission's benchmarking process. Concerns - that benchmarking takes on a life of its own and simply a delaying tactic.

Kordia: The goal of the exercise is to achieve the likely regulated price a few years down the track. One should use the best possible information available and that may not be the best possible information available. Commission should have discretion to use cost models or whatever information/process it deems necessary.

Commission: country benchmarking

Was the Australian model TSLRIC based or not?

WIC (the analyst that ACCC used) is here supporting the Commission and answers.

Some debate around the ACCC model. In Australia, the ACCC has said its own model is too fierce and lowers rates too far.

Commissioner wants to know what they base this on.

Telecom and Vodafone argue that the ACCC approach is similar to what the Commission is proposing yet the Commission runs the risk of adopting the Australian number in its benchmarking when the Australian regulator has already rejected it.

WIC talks about differences between Aus and NZ environment and how the differences would impact.

Two Degrees: Hopes we won't be comparing every single country and every single cost model to compare and contrast fully. Much better to just trust the Commission and "these things will even out".

Telecom: Do we take the rate that informed the model or just take the rate. Doesn't think there's anything in the Act which says can only benchmark against TSLRIC prices.

All jurisdictions have models and then use them to make a decision beyond the model. So why can't the Commission accept where the ACCC got to at the end of its approach.

Commissioner doesn't understand why she should consider any adjustments made internationally that don't reflect costs should be included.

Telecom says that's not the test in the Act... there are many factors, including waterbed etc, that must be looked at. Commissioner says when it comes to benchmarks they must be cost reflective and where regulators have made adjustments that don't reflect costs, how can we have regard for them?

General disagreement and discussion about how regulators work around the world.

Some talk about glidepaths and how they're implemented. Some discussion around cost reductions over several years...

European Regulators Group (ERG) has said it expects declines of 40% over three year period... also profoundly sceptical of the regulator's move to change the methodology. This is interesting given the ERG is made up of a group of regulators, yet they don't trust the European regulator's thinking. Interesting.

Question of benchmarking - cost or price? In the past we've used price but have moved to cost. That alone drops the rate hugely.

Two Degrees: Probably we should be using the 25% not the 50% (as mooted for today) or 75% as has been used in the past.

Commissioner asks Kordia whether there's been enough of a market failure to warrant moving to the 25% and its impact on investment.

Commission claims lack of investment in the mobile market ... seems to have forgotten about XT network and 3G Extend among others.

CallPlus: serious issues in mobile sector coupled with lack of investment right across the industry means we need a radical overhaul and we shouldn't worry about being conservative but about being too conservative. It's better for the regulator to be more intrusive than less.

Telecom: Going to 25% means setting rate below cost and could very well be destructive in the market. Benchmark has to be a reasonable proxy for what you're setting. Concerned that the Commission would look below the median.

Commissioner uses on net pricing as a proxy for benchmark - suggests that level of activity (80% on net traffic) would imply what would happen if costs were reduced by a lot. Should move to 25%?

Telecom points out that we have no NZ model to compare contrast with.

Two Degrees: no demonstration anywhere in the world about what harm there is if benchmark is too low but have seen plenty of evidence if termination cost exceeds cost. Take the lowest benchmark (25% not cautious enough) because there's no demonstrable harm if we over-regulate.

Vodafone responds: we've been told there's a serious problem and we need to act. No demonstration has been made of what this serious problem is. Need to have a look at the actual model in the market with Two Degrees' entry into the market and see if there is any problem at all.

The benchmarking is "pretty casual" and lacks rigour. The range is so wide in benchmarked countries and they can't all be the same as NZ and there's a lot of uncertainty...

Telecom: very concerned that we don't know so many things about the market and yet we are now talking about 25%... "uncomfortable is too soft [a description]."

Commission staff ask: can anyone describe effects of a regulator that has regulated too low and what impact that's had.

Telecom: not aware of any. Regulators get a figure from a TSLRIC model and they go up from there.

Vodafone: have a look at the US market compared with Europe. Lots of data on US and accessability of mobile services to low-income groups. Big differences between US and Europe and elsewhere. Clear failure of regulation as described.

It's a brave regulator who comes out after the fact and says they got it wrong. Look at Australia re: MTRs. ACCC isn't pushing prices back up but has said it won't push prices down. it concludes that reducing MTRs simply hasn't delivered the results it wanted. Quotes ACCC talking about Telstra's failure to pass through savings. Points out that mobile operators in Australia have reduced from four players to three. Related? Quite possibly.

Two Degrees: US has seen massive reduction in FTM rates so should have seen some harm in the US market. Yet average penetration has risen across the board (fixed and mobile). Talks to mobile investment per subscriber... says the US is second in the world (NZ is fifth from bottom). No citation but part of Two Degrees' cross submission.

In the US 20% households are mobile only and increasing.

There's effective competition from a mobile operator competing against a fixed line company.

Acknowledges that Receiving Party Pays (RPP) can deliver lower market penetration but says outbound calling is very high.

Vodafone responds: Ofcom has looked at this and the US market's place is important.

Commission announces that it will reject Telecom's undertaking because it isn't available to the whole market (to bring it into line with the rejection of Vodafone's undertaking).

And that appears to be that. We will continue tomorrow bright and early.

Other related posts:
Of termination rates and regulatory holidays
Minister recommends regulation - Vodafone's response
Vodafone's response to the Commerce Commission's report

Comment by oxnsox, on 2-Sep-2009 21:02

Thanks for sharing the meeting notes people

Comment by simon14, on 3-Sep-2009 18:57

"In the US 20% households are mobile only and increasing."

Interesting.... can't wait till we catch up :)

Thanks for the notes too, good read.

Author's note by Paul Brislen, on 4-Sep-2009 10:21

I doubt we'll see a large percentage of mobile only households for a long time for two reasons:

1: Free local calling is entrenched in New Zealander's psyche. It's not free, of course. You pay the astonishing rate of $45+ a month to get it.

Can you imagine paying your mobile phone company $45 a month for free local calling? Seriously, why do people bother? I don't make $45 worth of local calls in a month. I doubt I do in a year.

2: Naked DSL is priced too high for it to make commercial sense. You have to have a landline (with the $45/month free local calling of course) if you want fixed line broadband at home. There's really no choice.

Until LTE is rolled out (and capacity built up to support it) we're stuck with only one nationwide option for broadband at home and that's copper and that means fixed lines for all.

Oh yeah, we might see FTTH in six or seven years' time... I'd like that but I fear it'll end up being priced on the same structure and that won't help at all.



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jointhedebate's profile

Paul Brislen
New Zealand

You’ll have heard about mobile termination rates and how the Commerce Commission is investigating whether or not to regulate them. But what is a mobile termination rate, how does it work and why is it so important?

In this blog, we’ll try to answer your questions, tell you a bit about what we think and keep you up to date with the Commerce Commission and its process.

Recent comments

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