Price setting, Competition and Regulation
ENITEL, NICARAGUA
José Angel Rodríguez Z. – ENITEL
Israel Zamora – TELCOR
ITU Seminar on Costs and Tariffs
Paramaribo, May 2004
1
Contents
Generalmarket
marketaspects
aspects
General
Service regime
Interconnection
Price setting and tariff regulation
2
Basic and mobile telephony markets in Nicaragua
Fixed lines
Cellular lines
8.2
0%
9.00%
3.5
3%
3.5
8%
5.5
6%
3.3
8%
3.4
4%
5.5
6%
3.3
8%
3.3
7%
JU
LY
5.0
9%
3.3
1%
JU
NE
4.5
0%
3.2
7%
3.00%
3.2
4
6% .32%
4.00%
3.2 4.0
1% 0%
5.00%
4.8
3%
6.00%
5.8
8%
6.9
5%
7.00%
3.1 3.7
7% 9%
Teledensity 2003
(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
7.3
2%
8.00%
3.7
4%
• Mobile telephony market
2.00%
1.00%
MA
Y
AP
RI
L
AU
GU
ST
SE
PT
EM
BE
R
OC
TO
BE
R
NO
VE
M
BE
R
DE
CE
M
BE
R
Market share
M
AR
CH
JA
NU
AR
Y
FE
BR
UA
RY
0.00%
90%
80%
81%
73%
70%
Share
• Basic telephony market
62%
60%
54%
50%
45%
40%
29%
30%
20%
10%
20%
24%
25%
27%
15%
3%
14%
21%
8%
0%
Q1-03
Q2-03
Bellsouth
Q3-03
Enitel Móvil
Q4-03
PCS
Q1-04
– 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
Quarter
3
Contents
General market aspects
Serviceregime
regime
Service
Interconnection
Price setting and tariff regulation
4
Service regime
SPECIAL INTEREST
PUBLIC SERVICES
Regulated by law
Licensed – direct
Basic telephony (Local, LDN,
LDI), Telex, Telegraphy
Trunking, Beepers,
Teleconferencing, Intermediaries,
Infrastructures using spectrum,
Community relays
SERVICE
ONLY EXCLUSIVE SERVICES
REGIME
GENERAL INTEREST
SPECIFIC INTEREST
Licensed – direct or through
bidding process
Mobile telephony, Public
telephony, Cable television,
Data transmission, Bearer
services, Radio and television
Authorized or registered, as
appropriate
UNREGULATED
Registered
Private telecommunication
services not provided to third
parties.
Internet access, Voicemail,
Electronic data interchange, Fax
store and forward
5
Contents
General market aspects
Service regime
Interconnection
Interconnection
Price setting and tariff regulation
6
Interconnection
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
other’s services and vice versa.
Interconnection is critical to the public
interest, and so TELCOR has an
obligation 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
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Current network topology
Satellite
Bellsouth
Carrier Intl.
IGW
City
BELLSOUTH
BTS
MSC
IGW
Tx
Tx
ENITEL
Interconnection point
Interconnection point
Enitel mobile
Sercom
Telephone "C"
Telephone "A"
BTS
ENITEL
MOVIL
Telephone "B"
Telephone "D"
SERCOM
BTS
MSC
MSC
8
Call scenarios with Bellsouth
BellSouth
ENITEL
882-5555
$0.18
267-1111
Cell 2
Call 3
Origin: BellSouth
Termination: ENITEL
Call 2
Call 4
$0.024
: Origin and Termination
ENITEL
Origin and Termination:
BellSouth
Interconnection
Fixed exchange
Mobile exchange
$0.12
Call 1
Origin: ENITEL
Termination: BellSouth
278-0000
Cell 1
Customer
Bellsouth $0.24
$0.27
Enitel
$0.032
777-4444
9
Call scenerios with the other mobile operators
PCS/Enitel Mobile
ENITEL
882-5555
267-1111
Cell 2
Call 3
Origin: BellSouth
Termination: ENITEL
Call 2
Call 4
$0.024
Origin and termination
ENITEL
Origin and Termination
BellSouth
Interconnection
Fixed exchange
Mobile exchange
Call 1
Origin: ENITEL
Termination: BellSouth
278-0000
Customer
PCS/EM
$0.1216
$0.154
Enitel
$0.032
Cell 1
777-4444
TARIFFS FOR INTERCONNECTED
SERVICES ARE ASYMMETRICAL
BETWEEN OPERATORS
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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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Contents
General market aspects
Service regime
Interconnection
Pricesetting
settingand
andtariff
tariffregulation
regulation
Price
12
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.
13
Tariff regulation for regulated services
Basic tariff regulation mechanisms
Cost-based price
regulation
Little incentive to reduce costs
Regulation by maximum
rate of return
Barriers to investment if
marginal costs are used
Little incentive to reduce
costs and risk of
overinvestment to constantly
drive rates up
Information asymmetry
Information asymmetry
Availability of real cost and
demand data
Availability of real cost and
demand data
CPI – X rule
Dynamic forward-looking rule
? P1Q0 = (CPI-X) ? PoQo
Allows regulation with asymmetrical
information
Allows multi-product regulation (range
of 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
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unrecoverable costs
? P1Qo = (CPI-X) ? PoQo
Tariff regulation: Basic telephony
Ranges of services
Installation or connection
Basic charge
Local residencial
Local business
Long-distance
Hardware
120m from public thoroughfare
Monthly subscription
Call time included
Basic concepts
Consumption
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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Mobile telephony
Traffic direction
Mobile – Mobile (On Net)
Interconnection (Off Net)
Mobile tariff schemes
Pre-payment
Flat rate by period and destination
Deferred payment
Conventional
Controlled account
Scale of rates by destination and period
Basic concept
Minutes included
On Net
Everywhere, anytime
Actual consumption
Mandatory or deferred payment and
pre-payment
Subsidies
Penalty for termination of contract
Off Net tariffs
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
or 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
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