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Access and Interconnection

Costs and Tariffs

The effective regulation of wholesale tariffs (i.e. interconnect charges) is essential in any market situation where competitive pressures alone may be insufficient to ensure that new entrant operators get access to interconnection services at a price which does not unfairly penalise them compared with the incumbent’s own retail operation. In addition, wholesale price structures exert a powerful knock-on effect on retail prices, making their control a pre-requisite to the regulation of end-user tariffs within the framework of a competitive telecommunications sector.

At the same time, regulated tariffs have to be at a sufficient level to permit the provider of interconnection services to make a reasonable amount of profit if there is to be any incentive for further investment in essential network elements. Increasingly, the regulatory approach used to achieve this balance is that of cost-orientated and account-separated pricing for interconnect charges. By requiring that wholesale tariffs effectively reflect the direct cost of providing the service, plus an agreed level of profit margin, regulatory authorities can ensure that incumbent operators see a fair commercial return on facilities provided to their competitors, whilst new entrants benefit from prices that are neither excessively elevated nor contain charges in respect of non-essential network or service elements.

Aligning service prices to costs necessitates that both operators and regulators fully understand the costs of providing wholesale services. It is not uncommon for providers to be unaware of their detailed costs, and the calculation of cost-oriented interconnection charges is normally facilitated by the development of a cost model based on a methodology recommended or approved by the regulator. Output prices for regulated services then need to be scrutinised for compliance with the agreed criteria and made subject to regulatory approval prior to their application.

Both the creation of a cost model and the implementation of a control regime for wholesale tariffs can involve a significant learning curve. InterConnect Communications has considerable experience and expertise in this area, and can assist regulators in the review of existing tariff policy and guidelines, the development of cost accounting methodologies and cost models for setting tariffs and interconnection charges, and the provision of recommendations for pricing controls.

To assist operators in complying with these requirements, InterConnect can assist with the practical development of cost models and associated accounting separation methodologies, and in presenting output tariffs to the competent authorities so as to gain regulatory approval. We can also support decision-making with the provision of studies on international benchmarking and best practice review, and providing targeted training of staff.