Activities of Study Group 3

1. Activities of Study Group 3 Saburo TANAKA Councellor, TSB/ITU Seminar in Guatemala City, November 2002 http://www.itu.int/ITU-T/othergroups/tal/index.html 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.

2. Agenda • Is SG3 different from other SGs? • SG3 is unique • But not different • What are the hot issues studied in SG3? • For Int’l Telephone services • For INTERNET • For Mobile Termination Service • What are the concerns of administrations and how do they react?

3. International Telecommunication Union • A UN Specialized Agency • Intergovernmental organization, governments represented through their telecommunication Administrations (constitutional Members) • Other entities (Recognized Operating Agencies, Scientific Industrial Organizations, regional and international organizations) admitted as Sector members • “Basic Law” = Convention and Constitution, to be modified by Plenipotentiary Conferences

4. ITU-T Membership (End 2001) • Member States: 189 • Sector Members: 179 ROAs 234 SIOs 39 others (including ISOC, regional, International organizations, etc.) 30 Associates • New applicants: 2001: 71 2000: 66 1999: 17 1998: 57

5. ITU-T mission • ITU-T's mission is to ensure an efficient and on-time production of high quality standards covering all fields of telecommunications. • Standardization work is carried out by the ITU-T Study Groups in which representatives of the ITU-T membership develop Recommendations for the various fields of international telecommunications. • More than 2800 Recommendations currently in force.

6. NGOsISO,IEC,IEEE, ETIS,ETSI, ECMA,TTC,Committee T1,ARIB, TIA, SCTE Intergovernment ITU (ITU-T and ITU-R) Task Force IETF Forums & Consortia 1394TA 3GPP 3GPP2 AIM AMF AMI-CAOEMA AOW ATMF BINTERMS Bluetooth Cable ModemsCBOP CDG CIF CII CommerceNet CommerceNet JCOS CTFJ DHF DISA DOPG DSLFECE ECHONET ECOM ECTF EDIFICE EEMAEIDX EMA EMF ERTICO EWOS FCIAFCIA-J FIPA FRF FSAN GSM Assoc. HNFHome API HomePNA HRFWG IDB Forum IFIP IFSAIMTC IMWA IrDA ITS America ITS UK JAVAJCTEA JECALS JEDIC JEMA JICSAP JIMMJMF LONMARK MCPC MDG.org MITF MMCFMobile Web MOPA MPLSF MSForum MWIF OASISODVA OIF OMG OSGi PCCA PCISIGPCMCIA PHS MoU PICMG POF Salutation SCFSDR SSIPG STA TINA-C TMForum TOGTSC UMTS USBIF UWCC W3C WAPWDF Web 3D WfMC WIN Forum WLIF XTP Forum ……… ITU positioning

7. IO SG3 is unique SIO Administrations ROAs • Because of its composition Ladies Gentlemen Developedcountries DevelopingCountries

8. Dealing purely with non-technicalstandards and … • Tariff/regulatory/Policy related issues • There are 4 Regional Tariff Groups

9. ITU–T SG 3 Major achievements • New Remuneration system • Termination charge system • Settlement rate system • Special arrangement • Difficulty to quickly implement these systems • Condition is to reach cost-oriented rate, but • No cost data or model for some administrations • Regional Tariff Groups developed cost models • SG3 is now developing cost principles and guidelines for negotiation • Transitional arrangements • To facilitate staged reduction to cost based rate • to avoid sudden fall of revenue (smooth transition)

10. 10 Annex E to Recommendation D.140 “indicative target rates” by Teledensity (T) Band, in SDR (and US cents) per minute. ( end 2001) (end 2001) (end 2001) (end 2001) (end 2001) (end 2001) (end 2001) FCC : 15 ¢ (January 1999) FCC : 19 ¢ (January 2001) FCC : 23 ¢ (January 2002/2003) 19 ¢(J.2000) Note: The correspondence between teledensity band and income group shown in the bottom row is intended to be approximate, not precise. Source: ITU-T SG3 Report. 1 SDR = US$1.39.

11. Annex E Recommends also • That transit Administrations move towards the indicative target rate (upper limit) of 0.05 SDR (0.07US $) per minute. • To negotiate asymmetrical accounting rate (other than 50/50) if both administrations agree to move below the indicative target rate. Example: Operator A belongs to teledensity band EOperator B belongs to teledensity band FA and B agree to achieve TAR 0.2SDR (<0.118x2) • A can request settlement rate of 0.09 SDR • B accepts to pay 0.11SDR to A

12. Resolution 41 Updated “indicative target rates” by Teledensity (T) (Year 2002)

13. Termination charge • Destination operator (or Government) sets the charge • Charge should be established based on costs • Termination Charge includes • International exchange • National extension, including local loop • And if appropriate, international circuit • Other costs imposed on carriers by the national regulation • These components should be separately identified (Unbundled) • Charge applies to all traffic from any source • However if significant variation in costs, charge may vary (volume discount) • Termination charge may be introduced on a bilateral agreement basis

14. Accounting rates and Termination Charges What’ s the difference

15. International call terminating on mobile network • SG3 revised D.93 in year 2000, allowing to negotiate • a separate rate for traffic terminating on a mobile network • however, this is by bilateral negotiation and when the rate is cost orientated • The difference between the two rates should be as small as possible • Many countries now request very high settlement rates (3 – 5 times) • A review is now going on in SG3

16. Interconnection with mobile networks • key regulatory issues involving interconnection with mobile networks. These issues include: • The role played by market structure and competition in setting mobile interconnection rates; • The asymmetry of retail prices for fixed-to-mobile and mobile-to-fixed calls, stemming in part from asymmetrical interconnection rates; • Difficulties in obtaining technical interconnection, including quality-of-service problems; • The lack of transparency in setting prices for fixed-to-mobile and mobile-to-fixed calls; and • The design of appropriate interconnection arrangements for Short Messaging Services (SMS) and General Packet Radio Service (GPRS)—and emerging mobile Internet access in general.

17. Countries 40 35 30 25 20 15 10 5 0 Africa Americas Arab Asia- Europe States Pacific Countries with an Interconnection regulatory framework, by region Source: ITU Telecommunications Regulatory Database.

18. Countries imposing regulatory obligations Countries 60 50 40 30 20 10 0 Incumbent Fixed All fixed All mobile Mobile Other (fixed) only operators operators operators operators SMP SMP Source: ITU Telecommunications Regulatory Database.

19. Interconnection in Europe • Existing regulatory framework • Many different sector-specific directives, notably Interconnection Directive (97/33/EC) • Two parts: Recommendations on Interconnection pricing and accounting separation • Methodology for identifying “best practice” pricing • Lowest 20% of published interconnection offers in 15 EU Member States at local (0.9 €/100), single transit (1.5 €/100) and double transit (1.8 €/100) • New technologically-neutral regulatory framework • Access to, and interconnection of, electronic communications networks and associated facilities • First reading in European Parliament on 4 July 2001 • Amended proposal available at: • http://europa.eu.int/information_society/topics/telecoms/regulatory/new_rf/com2001-369en.pdf

20. Interconnection Rates in selected European countries under CPP (in US $ / minute, end year 2000) In 2001, there is an estimate indicating that the average of Fixed-mobile decreased to 0.136 and mobile to fixed has not changed

21. Fixed-to- mobile Mobile-to- fixed DOUBLE Lowest TRANSIT Best-practice Mobile-to- (20%) guideline fixed SINGLE Highest TRANSIT Mobile-to- fixed LOCAL 0 5 10 15 20 25 30 Range of Interconnection rates in EU, US$ per minute Source: ITU, compiled from ECTA/Analysys, EU Interconnection Tariffs in Member States, ITU Regulatory Survey 2000.

22. Selected European interconnect and settlement rates, US cents per min, 2000 14 Double transit interconnect 12 Settlement 10 Rate to USA 8 6 4 2 0 Spain Italy France Germany Nether- lands UK Sources: ITU, EU, FCC.

23. InterconnectionRegulatory and technical issues • Policy makers must resolve such basic questions as: • which carriers require interconnection • How the costs will be calculated and recovered, and • At what points in the PSTN interconnection should occur • Regulatory issues • Establishing guidelines in advance (without it, interconnection negotiations are frequently protracted, delaying the introduction of competition) • Introducing competition requires “dominant carriers” to interconnect with other carriers • Cost orientation: excessive prices deter market entry, hinder competition, end user suffers and can provide a pool of revenue • Technical issues • Points of interconnection: incumbent operators permit inter- connection with their networks at any technically feasible point • Dialling Parity and Pre-selection: Call-by-call customer selection or Operator pre-selection by pre-subscription • Quality of Interconnection Service

24. Key Interconnection Rules in the WTO Reference Paper

25. Economic issues The economic issues involved in interconnection largely come down to question of costs: cost definition, cost measurement, cost allocation and cost recovery • How can interconnection costs be measured? • Theoretical Frameworks (Historica, Fully Distributed costs, LRIC) • Cost study Approaches (Top-Down, Bottom-Up, Outside-In) • Interconnection charge • Cost based charges • Retail-based charges • Price Caps • “Bill and Keep” or “Sender Keeps All” • Revenue Sharing

26. Cost Model OBJECTIVES • MARKETING • Minimize opportunity for arbitrage • Generate more revenue by increased traffic • TECHNOLOGY • Enhancement towards global technology • Long term cost/benefit of technology and options • Impact of technology on global relations • BUSINESS DECISIONSUPPORT • Pricing and Product Planning • Investment evaluation • Economics of direct/transitrouting • FINANCIAL CONTROL • Monitor actual performance and compare with plan and past trends • Cost control • Identify Cross Subsidy • REGULATORYCOMPLIANCE • Set D.140 as globally acceptable standard • Rationalize tariff charges • Derive TAR, USO

27. Costing Methodologies METHODOLOGIES ACCOUNTING CONVENTION COSTING APPROACH HISTORICALCOSTACCOUNTING CURRENTCOSTACCOUNTING FULLYDISTRIBUTED COST APPROACH INCREMENTALCOSTAPPROACH • Incremental costs only • Often long-run incremental costs only • Cost of today of providing service • Mirrors competitors potential cost • Actual costs incurred • All costs areallocated to services

28. Not many differences if… • Current cost accounting is used • FDC=Historical Cost is no more relevant • Costs of efficient services provision are used • this should be the aim of all operators • spare capacity (legitimate if transparency) • Disagreement on time horizon to achieve this • Principle of cost causality is applied (ABC) • Common cost must be attributed to the service on the basis of the causality priniple • However an exhaustive application of an ABC approach may be very costly • Need for cost recovery realised appropriately • IC approach should contain a markup

29. Agreed General principles • Principle of open availability of information: The open availability of information used in the cost deviation process used to substantiate rate claims. Alternatively, if prices from competitive environments are used as guides/proxies for actual cost data, the open provision of this price data and information (regarding the competitiveness of these market environments). • Principle of practicability : The ability to implement a costing methodology with reasonable demands being placed on data availability anddata processing in order to keep the costing exercise economical, yet still useful. • Principle of cost causality : The demonstration of clear cause-and-effect relationship between service delivery on the one hand and the network element and other resources used to provide it on the other hand, taking into account the relevant underlying cost determinants. • Principle of contribution to common costs : Costing methodologies should provide for mutually agreed reasonable contribution to common cost as defined in Recommendation D.140. • Principle of economic provisioning : The use of a costing methodology that reflects the principle of economic provision of services taking into consideration all the reasonable circumstances that affect the conditions in each country, for instance, macro-economic conditions, network size and teledensity levels, etc. and recognizes the need for a better combination and use of resources over time.

30. Cualquier metodología para la fijación de costos propuesta debería incorporar, como mínimo, el siguiente conjunto de principios:Principio de libre disponibilidad de la información; La libre disponibilidad de la información utilizada en el proceso de cálculo de costos para justificar las pretensiones de tasas. Alternativamente, si se utilizan precios aplicados en entornos competitivos como guía u orientación para los datos de costos reales, la provisión libre de estos datos e información de precios (en relación con la competitividad de estos entornos de mercado). Principio de practicabilidad: Aptitud para aplicar una metodología de cálculo de costos, imponiendo exigencias razonables en lo que respecta a la disponibilidad y el procesamiento de datos, para que el ejercicio de fijación de costos siga siendo económico y útil. Principio de causalidad: Demostración de una relación clara de causa y efecto entre la prestación del servicio, por un lado, y los elementos de la red y otros recursos utilizados en dicha prestación, por otro, considerando los factores pertinentes que determinan los costos implícitos. Principio de la contribución a los costos comunes: Las metodologías de cálculo de costos deben asignar una contribución razonable a estos costos, tal que se definen en la Recomendación D.140. Principio de prestación de servicios económica: Utilización de una metodología de cálculo de costos que refleje el principio de prestación de servicios económica teniendo en cuenta todas las circunstancias razonables que afectan a las condiciones en cada país, por ejemplo las condiciones macroeconómicas, el tamaño de la red y los niveles de densidad telefónica, y reconozca la necesidad de una mejor combinación y utilización de los recursos en el tiempo. Los cinco principios :

31. Cost Study Methodologies Top Down (Total Company costs) Service Unit cost Results Outside In (Proxy inputs results) Bottom UP (Facility, operating cost inputs)

32. Cost model resolves everything? • Accounting rate is established by negotiation • Rates need to be agreed upon innegotiation • Market-determinde prices put pressure upon negotiation • Need to back up its claim for a charge • By showing the price of a comparable competitively offered service • Or for monopoly by providing relevant cost data • “Costs” = tools for negotiation, “costs” do not fix automatically the level of prices

33. Guidelines for negotiation of Accounting rates and Code of conduct • See Recommendation D.140, Annex C • See TAL Temporary Document, Section 2

34. The importance of interconnection Key to developing competitive markets Interconnection is the main driver of growth and innovation in telecom market, it promote efficient infrastructure development But constructing a sound interconnection framework is no easy task Approaches to Interconnection Policy National approach – by 2000 101 countries had established interconnection regulatory framework Regional Approach – European Union (interconnection directive), CITEL (Guidelines and Practices for Interconnection Regulation), APEC (Recommended Principles for interconnection), TRASA(proposed interconnection guidelines) WTO Reference Paper on Regulatory Issues Puts forward a series of interconnection commitments:- provide interconnection at any technically feasible point - non discrimunatory terms, conditions and rates - in a sufficiently unbundled and timely fashion - calls for transparency

35. Internet Interconnection • Internet Interconnection has slightly different meaning. Historically Internet interconnection has involved simply different Internet networks. • This Internet Interconnection policies have proved increasingly inappropriate in a commercial industry. • Many operator with larger networks often charge smaller ISPs a traffic-based interconnection fee • Many backbone providers have begun offering transit service networks. • Different type of Interconnection Arrangements • ISP Relationships with customers: usually via a dial-up • ISP-ISP Interconnection: peering or bilateral agreement • Multiple ISP Exchanges when several ISPs need to interconnect in a same city (use of an IXP) • International Regulatory Development

36. Inter-regional Internet connectivity 0.4 Gbit/s USA / Canada 162Gbit/s 41.8Gbit/s Europe Asia /Pacific 14 Gbit/s 0.77 Gbit/s 0.45 Gbit/s LatinAmerica Africa, Arab 0.1 Gbit/s Note: Gbit/s = Gigabits (1’000 Mb) per second. Source: ITU adapted from TeleGeography.

37. Recommendation D.50 The ITU-T, recognizing the sovereign right of each State to regulate its telecommunication, as reflected in the Preamble to the Constitution, noting a) the rapid growth of Internet and Internet protocol-based international services; b) that international Internet connections remain subject to commercial agreements between the parties concerned; and c) that continuing technical and economic developments require ongoing studies in this area, Recommends that administrations involved in the provision of international Internet connections negotiate and agree to bilateral commercial arrangements enabling direct international Internet connections that take into account the possible need for compensation between them for the value of elements such as traffic flow, number of routes, geographical coverage and cost of international transmission amongst others.

38. The TAL region Digital Divide Source: ITU.

39. International connectivity Commercial & operational International costs National connectivity connectivity National connectivity Commercial & operational costs Typical ISP cost comparisons <<<TAL countries OECD countries >>>

40. OECD average Internet retail pricing 30 hours of Internet access, US$, End 2001 Source: ITU adapted from ISPs / PTOs

41. Internet vicious circle

42. Virtuous circle

43. IP-Telephony Telephone to telephone (fax to fax) via Internet Internet Phone Gateway Computer Phone Gateway Computer Telephone Public Switch Telephone • Any telephone/mobile user to any other • Main motivation: Accounting rate bypass, market entry for non-facilities-based carriers • Potential service providers include any PTO with settlement payments deficit (e.g., US = US$5.7bn) • Market potential: 1.3 billion telephone/mobile users

44. IP TelephonyOpportunities and challenges • Opportunities • Reduce prices to consumers and the costs of market entry for operators • In terms of volume of traffic carried and level of investment committed • Challenges • Undermine the pricing structure of the incumbent Public Telecommunication Operators (PTOs) • Transition to IP-based networks also poses significant human ressource development challenges

45. Challenges Revenue gain and revenue loss

46. How the operators in developping countries stop IP-Telephony Operator check only this line PSTN Operator Switch ISP Users can call ISP but ISP is unable to call users

47. For additional informationPlease visit:http://www.itu.int/ITU-T/studygroups/com03/index.aspOr contact:saburo.tanaka@itu.intsophie.blondeau@itu.int