GOVERNMENT OF CHILE Ministry of Transport and Telecommunications Telecommunications Subsecretariat Tariff regulation in the Chilean telecommunication market Buenos Aires, June 2005 Applicable legal and regulatory framework Tariff regulation: Normative aspects • The General Telecommunications Act (Act No. 18.168 of 1982) and the amendments thereto, in particular the provisions of Article 24 bis, 25 and Section V, on tariffs. • Regulations governing the procedure for, announcement of and participation in the tariffsetting process, as laid down in Section V of the General Telecommunications Act (Act No. 18.168) (Supreme Decree No. 4 of 2003). Tariff regulation: Normative aspects • • Tariff freedom (the general rule) Services affected under the Act (Articles 24 bis and 25) § Services provided by public service licensees and intermediaries through interconnection arrangements. Metering, billing, charging and collection services provided to carriers by public service licensees (Supreme Decree No. 95 of 1994). § Tariffs for services provided under interconnection arrangements enable these licensees to charge for the cost of using their networks. Tariff regulation: Content aspects • Basic principles of tariff-setting: § § § § Tariffs charged to users reflect costs. Guaranteed absence of cross-subsidies between services and tariff areas. Use of efficient enterprise model generates incentives for the actual licensee to introduce technology enhancements in its network and in regulated services, thereby increasing their efficiency. Through the tariff-setting process it is possible to pass on to the consumer the efficiency gains made by the company as a result of its improved management coupled with technological advances. Tariff regulation: Content aspects • Efficient company (Act 18.168, Art. 30A and F): § § § § § § Provides only regulated services. Only those costs that are essential to their provision. Using available technology. Maintaining quality. Determination of costs of each service: investment and operation, including capital cost. Indivisibility of unregulated services: only fraction of costs used, consistent with the proportion of assets used. Tariff regulation: Content aspects • Incremental development cost (IDC) (Art. 30) § § • General rule: marginal cost charging § Plans for expansion of each service by tariff area. § The incremental development cost is obtained for each expansion plan. Exception: Long-run marginal cost § In the absence of expansion plans. Total long-run cost (Art. 30C) § § Asset replenishment plan for the efficient company. Average volume of different services provided. Tariff regulation: Content aspects • Efficient tariffs (Art. 30E) § § § • Generate revenue equivalent to the IDC (marginal cost). In case of more than one regulated service in a tariff area, equal profit margins. Where expansion plan provides for unregulated services: only fraction of IDC used, in keeping with the proportion of asset usage. Definitive tariffs (Art. 30F) § § § § Only where there are economies of scale. Efficient tariffs increased until total long-run cost reached. Inefficiencies minimised. Where efficient company provides unregulated services: only fraction of total long-run cost used, in keeping with the proportion of asset usage. Tariff regulation: Content aspects • Capital cost rate (Art. 30B) § § § § • Risk-free rate of return. Company's systematic risk. Risk premium. Capital cost rate = Risk-free rate + Systematic risk * Risk premium Indexation § § § An index is determined for each service. Based on published input price indices. Representative of cost structure of the efficient company. Procedure: Technical and economic bases Participant Participant registration registration notice notice Licensee Elaboration Elaborationof of technical technical& &economic economic bases bases(TEBs) (TEBs) Draft TEBs Registered Registered Third Thirdparties parties Opinions TEB proposal Subtel Review Reviewand and elaboration elaborationof of preliminary preliminaryTEBs TEBs Submission of preliminary TEBs Licensee Review Reviewand and compilation compilationof of points pointsof of disagreement disagreement Procedure: Technical and economic bases Licensee Review Reviewand and compilation compilationof ofpoints points of ofdisagreement disagreement Submission of disagreements and possible request for assistance from committee of experts Subtel Analysis Analysisand and decision decisionon on definitive definitiveTEBs TEBs Notification of definitive TEBs Licensee Elaboration Elaborationof oftariff tariff study studycommences commences Background Committee Committee of ofexperts experts Opinion Procedure: Tariff-setting Licensee Elaboration Elaborationof of tariff tariffstudy study Tariff proposal Opinions Registered Registered third third parties parties Ministries Review Reviewof of tariff tariffstudy study Background Report on objections & counter-proposals Licensee Incorporates Incorporates or orinsists insists Report on insistence Ministries Final Final decision decision Committee Committee of ofexperts experts Opinion Procedure: Tariff-setting Ministries Final Final decision decision Substantiating report Ministries Elaboration Elaboration& &signature signature of oftariff tariffdecree decree Tariff decree Comptroller-General of the Republic Possible objections Constitutional Constitutionaland and legislative legislativereview review Processing of tariff decree Official Bulletin Publication Publicationof of tariff tariffdecree decree Background Ministries Clarification Clarificationof ofthe the tariff tariffprocess process Consultations Procedure: Tariff processes Presentation of CoE disagreements report and request for committee of Setting-up and expert (CoE) swearing-in assistance of CoE Presentation of TEB proposal Official Bulletin Draft TEB announcement launching -360 process -365 -355 -380 (20) Participant registration 20 10 10 0 -340 5 -290 5 15 20 CoE Start of tariff clarification study report announced 5 25 10 3 30 -180 -270 5 2 70 30 40 Presentation of tariff study 90 80 180 Participant comments (Subtel calls for TEB proposal for new licensees) Subtel calls for CoE assistance Preliminary TEBs -180 -60 Request for clarification Definitive TEBs -30 0 -180 30 Opinions 210 Tariff study Presentation of tariff study 120 5 30 300 30 330 Setting-up of CoE Report on objections and counter-proposals Report on the modifications and insistence CoE report 360 Substantiating report and Tariff Decree Tariff regulation: Tariff aspects • The main services regulated in the context of public service licensees for mobile telephony correspond to: § § § Interconnection at network termination points Access to other telecommunication service licensees Administrative functions (metering, charging, billing, collection, balance management) Tariff regulation: Tariff aspects • The main services regulated in the context of public service licensees for fixed telephony correspond to: § § § Interconnection at network termination points Access to other telecommunication service licensees Administrative functions (metering, charging, billing, collection, balance management) Fixed and mobile telephony market: Current situation Chilean market: Fixed lines Evolution of fixed telephony: Lines in service and penetration (1990-2004) 4 000 000 25 Penetration Lines in service 3 500 000 21.6 20.4 3 000 000 22.4 22.1 20.5 20.6 20.7 20 18.3 15.6 2 500 000 15 13.2 2 000 000 11.0 11.6 9.4 1 500 000 10 7.9 6.5 1 000 000 5 500 000 0 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Chilean market: Mobile subscribers Evolution of mobile telephony: Mobile subscribers and penetration (1990-2004) 12 000 000 70 59.6 10 000 000 Lines in service 8 000 000 47.4 Penetration 60 50 41.1 40 34.0 6 000 000 30 22.2 4 000 000 20 15.0 2 000 000 6.5 0.1 0.3 0.5 0.6 0.8 1.4 2.2 10 2.8 0 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Chilean market: Internet connections Evolution of Internet connections (June 2000 – December 2004) 800 000 Switched 674 646 600 000 631 526 658 828 578 316 400 000 Dedicated 569 306 570 828 483 773 468 227 460 859 424 016 352 234 478 883 326 432 263 572 200 000 188 454 115 715 0 2 411 Jun - 2000 7 879 31 882 Dec - 2000 Jun - 2001 66 722 Dec - 2001 Jun - 2002 Dec - 2002 Jun - 2003 Dec- 2003 Jun - 2004 Dec - 2004 Chilean market: Penetration indicators Penetration of fixed telephony, mobile telephony and Internet in Chile December 2004 Internet connections per 100 households Internet connections per 100 inhabitants 12.6 5.0 67.3 Mobile subscribers per 100 households 59.6 Mobile subscribers per 100 inhabitants 51.6 Fixed lines per 100 households 20.7 Fixed lines per 100 inhabitants 0 10 20 30 40 Note: theelcase household penetration, the information is drawn from the aCASEN 2003 CASEN survey. 2003. Nota:In Para casoofde la penetración en los hogares la información corresponde la encuesta 50 60 70 80 Results: Tariff processes Tariff regulation: Tariff processes • • • During the most recent period, the regulatory body conducted a series of tariff processes with the aim of establishing regulated tariffs for the services in question in the various market segments. The processes covered public service licensees for mobile and fixed telephony and intermediate service licensees. They involved a review of the tariff decrees relating to the dominant enterprises and mobile and rural companies, bringing other companies into the arena. Tariff regulation: Tariff processors • The processes by segment correspond to: Mobile and of the same type: • Bellsouth • Entel PCS • Entel Móvil • Smartcom • Telefónica Móvil • Nextel (Multikom and Centennial) Rural: • CTR • RTC • Megacom Fixed: • CTC • Telefónica del Sur • TelCoy • EntelPhone • VTR • Manquehue • Telesat • CMET Intermediate: • Entel Mobile access charges: The new prices Time-based structure for access charges ($/min) 140.0 120.3 120.0 100.0 86.7 84.2 80.0 60.0 40.0 20.0 65.1 Normal 43.4 Reduced Night 0.0 Former regulatory framework Tariff Decree 2004-2009 Mobile access charges: The new prices Time-based structure for access charges (USD/min) 0.300 accessPromedio charge = USD 0.110/min CargoAverage de Acceso = 110 cUS$/min 0.200 0.171 0.124 0.120 0.100 Normal Reduced 0.093 0.062 Night 0.000 Former regulatory framework Tariff Decree 2004-2009 Comparison of charging periods Current time-band structure Time band 00:00 - 08:59 09:00 - 13:59 14:00 - 19:59 20:00 - 23:59 Working days Reduced Normal Normal Reduced Sundays Saturdays and public holidays Reduced Reduced Normal Reduced Reduced Reduced Reduced Reduced Traffic distribution: Normal rate : 57.9% Reduced rate : 42.1% Proposed time-band structure Time band 00:00 08:00 14:00 20:00 - 07:59 13.59 19:59 23:59 Working days Night Normal Normal Reduced Sundays Saturdays and public holidays Night Night Normal Reduced Reduced Reduced Reduced Reduced Traffic distribution: Normal rate : 61.4% Reduced rate : 33.5% Night rate : 5.1% Access charges: Decreasing prices Access charge 2004-2008 ($/min) 80.00 77.98 77.59 77.50 77.20 77.26 76.42 76.81 75.00 72.50 70.00 0 1 2 3 4 5 6 Local access charges: Normal rate Local company access charges by primary zone (in pesos as at December 2003) 14 13 12 11 10 8 7 6 5 4 3 2 1 CTC ETPH CMET VTR (*) MNET TSAT TSUR TCOY Primary zones Curicó Rancagua Santiago Valparaíso San Antonio Quillota Los Andes Ovalle La Serena Copiapó Antofagasta Iquique 0 Arica ($/minute) 9 Local access charges: Normal rate CTC ETPH CMET VTR (*) MNET TSAT TSUR TCOY Primary zones Puerto Aysén Coyhaique Ciudades Medianas Décima Región Puerto Montt Osorno Valdivia Punta Arenas Temuco Los Ángeles Concepción Chillán Linares 30 28 26 24 22 20 18 16 14 12 10 8 6 4 2 0 Talca ($/minute) Local company access charges by primary zone (in pesos as at December 2003) Telephone line service Local company telephone line service per tariff area (in pesos as at December 2003) 16 000 14 722 14 000 ($/Line-month) 12 000 9 701 10 000 8 000 6 632 7 655 8 044 8 059 8 179 8 090 10 131 8 012 6 000 4 000 2 000 0 Santiago Valpara íso Concepción Antofagasta, La Serena and Chillán Iquique, Arica, Copiapó, Quillota, Los Ovalle, San Andes, Curicó and Linares Antonio, Talca, Los Ángeles and Punta Arenas Tariff areas Rancagua and Temuco Valdivia, Osorno and Puerto Montt Coyhaique Isla de Pascua THE END Tariff regulation in the Chilean telecommunication market Buenos Aires, June 2005 by Roberto Baltra T. Adviser , Subsecretario de Telecomunicaciones