Price setting, Competition and Regulation ENITEL, NICARAGUA Jos - - PowerPoint PPT Presentation

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Price setting, Competition and Regulation ENITEL, NICARAGUA

José Angel Rodríguez Z. – ENITEL Israel Zamora – TELCOR ITU Seminar on Costs and Tariffs Paramaribo, May 2004

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General market aspects General market aspects Interconnection Price setting and tariff regulation Service regime

Contents

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Basic and mobile telephony markets in Nicaragua

• Mobile telephony market

(Approx. 500 000 users) – Bellsouth – 1992 (TDMA and CDMA 2X) – Enitel – Dec 2002 (GSM 1900) – PCS – Dec 2002 (GSM 1900) – 250 000 new lines in the last 16 months

• Basic telephony market

– Enitel – Exclusivity until next year (April, 2005) – Over 205 000 lines – 50 000 new lines installed in past 2 years – Lowest teledensity in the region

Market share

81% 73% 62% 54% 45% 24% 20% 15% 29% 25% 3% 8% 14% 27% 21%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% Q1-03 Q2-03 Q3-03 Q4-03 Q1-04 Quarter Share Bellsouth Enitel Móvil PCS

3 . 1 7 % 3 . 2 1 % 3 . 2 6 % 3 . 2 7 % 3 . 3 1 % 3 . 3 7 % 3 . 3 8 % 3 . 3 8 % 3 . 4 4 % 3 . 5 3 % 3 . 7 9 % 4 . % 4 . 3 2 % 4 . 5 % 4 . 8 3 % 5 . 9 % 5 . 5 6 % 5 . 5 6 % 5 . 8 8 % 3 . 7 4 % 3 . 5 8 % 8 . 2 % 7 . 3 2 % 6 . 9 5 %

0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 6.00% 7.00% 8.00% 9.00%

J A N U A R Y F E B R U A R Y M A R C H A P R I L M A Y J U N E J U L Y A U G U S T S E P T E M B E R O C T O B E R N O V E M B E R D E C E M B E R

Teledensity 2003 Fixed lines Cellular lines

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General market aspects Interconnection Price setting and tariff regulation Service regime Service regime

Contents

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Service regime

PUBLIC SERVICES GENERAL INTEREST SERVICE REGIME

Regulated by law Basic telephony (Local, LDN, LDI), Telex, Telegraphy Licensed – direct or through bidding process Mobile telephony, Public telephony, Cable television, Data transmission, Bearer services, Radio and television ONLY EXCLUSIVE SERVICES

SPECIAL INTEREST

Licensed – direct Trunking, Beepers, Teleconferencing, Intermediaries, Infrastructures using spectrum, Community relays

SPECIFIC INTEREST UNREGULATED

Registered Internet access, Voicemail, Electronic data interchange, Fax store and forward Authorized or registered, as appropriate Private telecommunication services not provided to third parties.

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General market aspects Interconnection Interconnection Price setting and tariff regulation Service regime

Contents

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ALL OPERATORS ARE OBGLIGED BY LAW TO INTERCONNECT Commercial and technical arrangements by which service providers ensure interconnection of their equipment, networks and services with other providers so that one service provider’s customers can use the

• ther’s services and vice versa.

Interconnection is critical to the public interest, and so TELCOR has an

• bligation to regulate it in order to:

Guarantee communication between customers of different networks and access to services (e.g. emergency calls) Protect the user (e.g. avoid tariff structures with unreasonable margins) Iron out distortions created by imperfect competition (e.g. entry barriers from high interconnection costs or high tariffs in markets not subject to competition)

Public interest Interconnection

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Current network topology

Tx IGW Satellite

ENITEL

Telephone "A" Interconnection point Interconnection point Telephone "B" Tx Telephone "C" Telephone "D"

BELLSOUTH

MSC BTS

SERCOM

MSC BTS

ENITEL MOVIL

MSC BTS IGW Bellsouth City Sercom Enitel mobile Carrier Intl.

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Fixed exchange Cell 2 Mobile exchange Cell 1

ENITEL BellSouth

Call 1

Origin: ENITEL Termination: BellSouth

Call 2

Origin and Termination: BellSouth

Call 3

Origin: BellSouth Termination: ENITEL

Call 4

: ENITEL Interconnection

278-0000 267-1111 777-4444 882-5555

Call scenarios with Bellsouth

$0.024

Customer $0.27

$0.12 $0.18

Bellsouth $0.24 Enitel $0.032

Origin and Termination

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Fixed exchange Cell 2 Mobile exchange Cell 1

ENITEL PCS/Enitel Mobile

Call 1

Origin: ENITEL Termination: BellSouth

Call 2

Origin and Termination BellSouth

Call 3

Origin: BellSouth Termination: ENITEL

Call 4

Origin and termination ENITEL Interconnection

278-0000 267-1111 777-4444 882-5555

TARIFFS FOR INTERCONNECTED SERVICES ARE ASYMMETRICAL BETWEEN OPERATORS

$0.024

Call scenerios with the other mobile operators

Customer $0.154 PCS/EM $0.1216 Enitel $0.032

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Economic distortions

• The justification advanced for high interconnection

charges was recovery of investment for mobile, i.e. promoting the development of new technologies.

• The outcome is inefficient use of resources and and

increasingly under-utilized fixed network.

• This results in mobiles replacing fixed networks.
• The regulator has initiated a new round of interconnection

charge review in TCN Bellsouth’s cellular telephone network in order to bring prices in line with market rates and prevailing regulations.

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General market aspects Interconnection Price setting and tariff regulation Price setting and tariff regulation Service regime

Contents

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Price setting for services subject to competition

• The main “driver” for setting prices is the

MARKET itself.

• However, tariffs must be cost-based with a

reasonable profit margin allowing return on investment.

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Basic tariff regulation mechanisms

Cost-based price regulation Regulation by maximum rate of return CPI – X rule

Little incentive to reduce costs Barriers to investment if marginal costs are used Information asymmetry Availability of real cost and demand data Dynamic forward-looking rule ? P1Q0 = (CPI-X) ?PoQo Allows regulation with asymmetrical information Allows multi-product regulation (range

• f products)

Incentives to reduce costs and increase efficiency Can cause problems in the event of cost variations outside the company’s control; may cause allocation inefficiency (margin not controlled); no incentives to increase quality; disincentive in respect of unrecoverable costs Little incentive to reduce costs and risk of

• verinvestment to constantly

drive rates up Information asymmetry Availability of real cost and demand data

Tariff regulation for regulated services

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Tariff regulation: Basic telephony

Basic concepts Consumption Ranges of services

? P1Qo = (CPI-X) ? PoQo

Local residencial Local business Long-distance

Installation or connection Basic charge

Hardware 120m from public thoroughfare Monthly subscription Call time included Call time billed Local (same Department) National long-distance (between Departments) Itemized billing International long-distance (rounding) Interconnected services (e.g. cellular)

Tariff periods

Peak rate Reduced rate

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Basic concept Actual consumption Traffic direction

Mobile – Mobile (On Net) Interconnection (Off Net)

Mobile tariff schemes Minutes included

Pre-payment Flat rate by period and destination Deferred payment Conventional Controlled account Scale of rates by destination and period On Net Everywhere, anytime Mandatory or deferred payment and pre-payment

Subsidies

Penalty for termination of contract

Off Net tariffs

Mobile telephony

Differentiated tariffs

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Regulatory principles for mobile services

• Mobile telephone operators obliged by law to submit their

tariff and price proposals for approval by the regulator.

• Non-discrimatory prices for users in the same segment.
• Price structure must be consistent with other similar

services.

• Prices must be comparable or better than current national
• r regional prices (benchmarks).
• Prices should cover costs plus a reasonable profit margin.
• Predatory practices prohibited. As a reference, it has been

established that interconnection charges should not be higher than an operator’s minimum price or tariff.

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THANK YOU FOR YOUR ATTENTION

jose.rodriguez@enitel.com.ni Tel: (505) 270-8378