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International interconnection:

International interconnection: Part 2: Managing the transition from revenue-sharing to cost-orientation. Dr Tim Kelly, International Telecommunication Union (ITU) SSGRR, L’Aquila, 26 Oct 1999.

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International interconnection:

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  1. International interconnection: Part 2: Managing the transition from revenue-sharing to cost-orientation Dr Tim Kelly, International Telecommunication Union (ITU) SSGRR, L’Aquila, 26 Oct 1999 Note: The views expressed in this presentation are those of the author and do not necessarily reflect the opinions of the ITU or its membership. Dr Tim Kelly can be contacted by e-mail at Tim.Kelly@itu.int.

  2. Agenda • The accounting rate regime • From revenue-sharing to cost-orientation • ITU Focus Group Recommendations • Indicative target rates, direct and transit • Transition path towards cost-orientation • Comparisons: Focus Group indicative target rates and FCC benchmarks • Wider context: • Rising share of market open to competition • The implications of the Internet • Conclusions and Next steps

  3. What are accounting and settlement rates? Collection charge The amount charged to the customer by the Public Telecommunication Operator (PTO) Accounting rate Internal price between PTOs for a jointly-provided service Settlement rate Payment from one PTO to another. Normally, half the accounting rate

  4. What the accounting rate covers International Transmission Facility Country X International Switching Facility (Gateway) Call Termination

  5. Traditional regime:Joint provision of service X X

  6. Accounting rate characteristics • Negotiated bilaterally • major operators have 200+ correspondent relations • smaller operators use other transit operators • Revenues are shared 50:50 • By implication, costs are assumed to be same • General framework established by International Telecommunication Regulations & ITU-T Recommendation D.140 • Accounting rates excluded from WTO basic telecommunications agreement

  7. How are accounting rates currently implemented? • Four main existing options (D.150): • Flat-rate price procedure (rare) • Traffic unit price procedure (rare) • Accounting rate revenue-division (common) • Sender-keeps-all (rare) • US International Settlements Policy • 50/50 split • parallel rates among US carriers • proportionate return of traffic • Regional agreements (e.g., TEUREM, TAS)

  8. Emerging regime:Market entry and interconnection X X X

  9. Emerging regime in a common telecom market: Least cost routing and hubbing X X X

  10. Revenue-sharing and cost-orientation: What’s the difference? • Revenue-sharing • Traditional means for dividing revenue from a call among origin, destination and transit operators • Based on bilaterally-negotiated accounting rates and settlements (as described in International Telecommunication Regulations) • Cost-orientation • Emerging regime, based on actual costs incurred in carrying and terminating calls • Should, in theory, be transparent and non-discriminatory

  11. Good news: Settlement rates are declining rapidly ... 1.2 Global average 1.06 1.04 1.02 1.00 0.98 1 0.95 0.92 0.87 0.85 0.81 0.8 Pre-1992 (D.140) Change = -2% p.a. 0.67 0.6 Settlement rate, in SDR per minute 1996-98 0.50 0.4 1992-1996 Change Change = -4% p.a. = -21% 0.2 p.a. 0 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 Source: ITU-T Study Group 3 (COM 3-53). 1998 estimate is a minimum projection based on D.140 Annex D.

  12. Bad news: Settlement rates are still way above costs on most routes ... 1.2 Global average 1.06 1.04 1.02 1.00 0.98 1 0.95 0.92 0.87 0.85 0.81 0.8 0.67 0.6 Settlement rate, in SDR per minute 0.50 0.4 0.2 FCC benchmarks EU guidelines for interconnect 0 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 Source: ITU-T Study Group 3 (COM 3-53). 1998 estimate is a minimum projection based on D.140 Annex D.

  13. Even worse news: Prices are not falling as fast as settlement rates: USA, 1990-97 1.2 1.1 Average US revenue per billed int'l minute 1 0.83 0.9 Mark-up over gross 0.8 0.68 US$ per minute 0.7 130% settlement rate 0.6 0.64 0.5 212% 0.4 Average US settlement rate per minute 0.3 0.32 0.2 1990 1991 1992 1993 1994 1995 1996 1997 Source: ITU, adapted from FCC. Note: “Average US revenue per billed minute” = total int’l IMTS revenue divided by total outgoing int’l minutes.

  14. Convergence: Accounting rate to US in US$ per minute, four European countries 1.6 1.4 Italy 1.2 France 1 UK 0.8 Germany 0.6 0.4 0.2 0 1993 1995 1997 1999 Source: FCC. Data for year-end except 1999 = September 1999

  15. One approach: FCC Benchmarks • 3 elements: • international transmission; • int’l gateway; • national extension • Based on operator’s tariffs and FCC estimates • For each income level, an average of the tariff rates for countries in that category were used to set the benchmark NB: Many smaller countries were excluded from the analysis but are nonetheless included in income group averages

  16. FCC Benchmarks: Examples from Asia-Pacific region Where do you fit in?

  17. Problems with FCC benchmarks • Almost universally rejected by other countries (90 countries registered comments with FCC) • Based on highly suspect data (“Price-based costing”) • Sets price caps (ceilings?) which are too high for developed, competitive markets (15 cents per minute) • Ignores concerns of least developed (e.g., transit costs, dependency on net settlements)

  18. An alternative approach: ITU Focus Group • Open membership • Chaired by Amb. Anthony Hill (Jamaica) • Working methods • E-mail reflector & website (http://www.itu.int/intset/focus/index.html) • Plenary meetings in June & September 1998 • Report by 6th Nov 1998; discuss in Dec 1998 • Objectives • “development of proposals for solutions for transitional arrangements towards cost orientation beyond 1998, including ranges of indicative target rates”

  19. Defining “indicative target rates” for direct relations • Interim transitional mechanisms (4 options considered) • Price caps • Designated target ranges • Case study cost components • “Best practice” rates existing in the market • Agreement to use 4th option • Primarily based on teledensity groups (income groups also considered) • Choice of indicative target rates • Based on average of lowest 20 per cent of settlement rates in each teledensity group

  20. 1.4 Afghanistan, settlement rate to NZ = 1.307 SDRs per minute 1.2 1 0.8 Line of best fit (exponential) -0.023x y = 0.4602e 0.6 2 R = 0.4952 0.4 Monaco, teledensity 0.2 level = 99 0 0 20 40 60 80 100 20 Relationship between teledensity and lowest settlement rates (in SDR per min) Lowest settlement rates, in SDR Teledensity, 1/1/98 Source: ITU Focus Group, Methodological note on Transition Path, Contribution No. 75.

  21. 21 Focus Group Recommendations on “indicative target rates” by Teledensity (T) Band, in SDR (and US cents) per minute. Note: The correspondence between teledensity band and income group shown in the bottom row is intended to be approximate, not precise. Source: ITU Focus Group Report. 1 SDR = US$1.39.

  22. 22 “Indicative target rates”, based on average of lowest 20 per cent 1.4 1.2 1 0.8 Lowest Settlement rate , in SDR 0.6 Target rate (average of 0.4 lowest 20%) 0.2 0.251 0.327 0.162 0.043 SDR 0.118 0.210 0.088 0 0 1 5 10 20 35 50 100 Teledensity, 1/1/98 Source: ITU Focus Group, Methodological note on Transition Path, Contribution No. 75.

  23. 23 “Optional” indicative target rates for small island states and LDCs Source: ITU Focus Group Report. 1 SDR = US$1.39.

  24. 24 Estimated average transit shares from US to other regions, in US$ per minute 0.17 E. Europe 0.21 Caribbean 0.22 Asia 0.24 W. Europe 0.24 S. America 0.25 World 0.30 Middle East 0.33 Pacific 0.40 Africa Note: These rates are based on the average revenue per minute derived from transit operations, 1996. Source: Methodological note on transit (contribution 28). Data adapted from FCC.

  25. 25 Final Report Recommendations on target rates for transit shares, in SDR (and US cents) per minute, by route Source: ITU Focus Group Report and methodological note No. 28. 1 SDR = US$1.39.

  26. Focus Group Recommendations on transition path • Apply indicative target rate for direct relations within three years (year-end 2001) • Extended transition period (to year-end 2004) for LDCs and low teledensity countries, as a function of dependence on net settlements • Apply indicative target rate for transit shares within two years (year-end 2000) • Indicative target rates could be applied: • Symmetrically, with both Administrations/ROAs applying the same rate which is at or below the target of the lower teledensity country • Asymmetrically, applying different rates below the target of the lower teledensity country

  27. 27 Worked examples of possible different transitional arrangements (1998-2001) 0.6 0.6 1 2a High and low teledensity 0.5 0.5 Low teledensity countries country 0.4 0.4 0.327 SDR 0.32 0.30 0.3 0.3 Asymmetrical Symmetrical and equal staged High teledensity arrangements 0.2 0.2 reductions of 13.2% p.a. or country applied during 0.06 SDR p.a. 0.1 0.1 transition 0 0 1998 1999 2000 2001 1998 1999 2000 2001 0.6 0.6 2b 3 0.5 0.5 Low teledensity Low teledensity country country 0.4 0.4 0.327 SDR Non-reciprocal 0.32 0.30 0.3 0.3 Asymmetrical treatment High teledensity arrangements 0.2 0.2 country High teledensity applied after 0.1 0.1 country target is attained 0.04 SDR 0 0 1998 1999 2000 2001 1998 1999 2000 2001 Note: These examples are based on a hypothetical bilateral arrangement between a high teledensity country and a low teledensity one. Both start with a settlement rate of 0.5 SDR in 1998. The figures cited are merely examples of the type of arrangements which might result from bilateral negotiations.

  28. 28 Focus Group Final Report and FCC Benchmarks compared

  29. 29 Potential impact of Focus Group Targets & FCC Benchmarks on Case Study Countries Source: ITU Focus Group Methodological Note on Transition Path towards Cost-Orientation, contribution 75. Note: The cost components shown show the lower estimates where multiple cost estimates were provided. All of the case studies have been validated by the regions concerned except Lesotho.

  30. The dilemma facing developing countries. How low dare we go? • If the rate of reduction is too low ... • Traffic will migrate to “least cost routes” • Increasing volumes of traffic will flow outside the accounting rate system (e.g., via Internet) • Local consumers will not benefit from lower call charges • Foreign correspondents may refuse to pay for traffic terminated • If the rate of reduction is too fast ... • There may be a sudden reduction in the volume of net settlement payments • This may reduce the ability of the incumbent operator to finance its network build-out • It may reduce the value of the operator ahead of possible privatisation • National tariffs may need to increase to compensate

  31. Net settlements to developing countries Payments Receipts Net settlement 18 16 14 12 10 8 6 4 2 - 1993 1994 1995 1996 1997

  32. Conclusions • Focus Group proposals would create new Annex E to Recommendation D.140 for transitional arrangements beyond 1998 • This would mark a significant step towards rates which are cost-orientated, non-discriminatory and transparent (D.140) • Provides “smooth transition” for countries most dependent on net settlements • Recommendations proposed are based on extensive research and represent a possible consensus • Presents multilateral alternative to imposition on US carriers of US/FCC Benchmarks Order

  33. Current status and next steps • ITU-T Study Group 3 reviewed Focus Group report at its meeting in December 1998 • Willingness to reach a multilateral agreement • But, the meeting ran out of time to conclude on the revised text (see square brackets) • Study Group 3 will attempt to conclude work at next meeting, June 2-11 1999 • Recommendation could be approved by end of the year • In the meantime, FCC benchmarks are being implemented … • Beginning with high income countries

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