Principles Governing the Pricing of Interconnection Related Services
1. — Introduction
This Appendix specifies the principles that a Dominant Licensee must use to develop the prices for Interconnection Related Services (“IRS”) contained in its Reference Interconnection Offer (“RIO”).3
3 IDA used these principles to develop the prices on which Dominant Licensees must offer to provide certain key IRS, which are specified in Appendix Two.
2. — Charging Standards
Cost Bases
2.1.2.1.1 IDA considered 3 methodologies that a Dominant Licensee could use to determine the costs of IRS:
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Historical/Embedded Costs are the costs that a Licensee incurred in the past and that are recorded in the Licensee’s books of accounts. They reflect historical purchase prices, regulatory depreciation rates, system configurations and operating procedures.
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Current/Replacement Costs (“CRC”) are the present-day costs of replacing an asset with another asset that provides the same service potential. The replacement asset need not be the same asset, but rather an asset that hypothetically is the best (least cost) option given the current technology.
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Forward Looking Economic Costs (“FLEC”) are the prospective costs a Licensee would incur in producing a service using best-in-use technology and product practices. When calculating forward-looking economic costs, costs are valued at current prices.
2.1.2 IDA selected the FLEC methodology for the following reasons:
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In a competitive environment, market prices would be driven toward FLEC, even if these were lower than the firm’s embedded costs.
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FLEC creates the right investment incentives for facilities-based entry by competitors, whilst preserving current investments.
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Charges based on FLEC will lead to lower prices for consumers.
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FLEC-based charging minimises the Dominant Licensee’s ability to engage in anti-competitive cross-subsidisation.
Cost Standards
2.2.2.2.1 A Dominant Licensee must use long run average incremental cost (“LRAIC”), which is a common measure of FLEC, for the computation of most IRS prices contained in its RIO.
2.2.2 LRAIC consists of all variable costs and those fixed costs that are directly attributable to the incremental change in the IRS and the share of indirect costs that are discernibly caused by the provision of those services.
Structure of Charges
2.3.—2.3.1 In establishing IRS charges, a Dominant Licensee must ensure that the structure of charges mirrors the cost behavior of IRS provision, where material. This means that costs that behave differently must remain segregated in the charging structure and must be recovered differently.
Special Considerations Applicable to Broadband
2.4.—2.4.1 IDA recognises that, in the broadband context, FLEC poses certain challenges. There are practical issues associated with the application of FLEC, as the Licensees would be required to design the “best-in-use” (or best practice) network architecture. This could be difficult and time-consuming to determine in the evolving broadband context where standards and technologies for network interconnection may be embryonic. The “best-in-use” technology also evolves rapidly, requiring updates to the interpretation of FLEC on a regular basis by IDA and the Licensees. Given the issues in implementing FLEC, a Dominant Licensee may use CRC, where appropriate, to develop prices for IRS used to provide broadband services.
2.4.2 A Dominant Licensee may not impute a “risk premium” in calculating prices for IRS that can be used to support broadband services. The experience in broadband deployment in other jurisdictions does not support the notion that such investments carry a higher risk. To the contrary, publicly available data indicate that many companies in virtually all segments of the info-communications industry have made significant investments in broadband facilities. Moreover, inclusion of a risk premium would increase interconnection costs and impede the development of competition.
3. — Responsibility for Bearing Charges
Physical Interconnection, Unbundled Network Elements, and Essential Support Facilities
3.1.3.1.1 A Dominant Licensee must comply with the following principles governing responsibilities for the bearing of charges in providing Physical Interconnection, Unbundled Network Elements and Essential Support Facilities in its RIO:
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A Dominant Licensee must offer to pay the initial costs of establishing a Point of Access (“POA”). The Dominant Licensee may recover the costs incurred in establishing a POA through the prices that it charges Requesting Licensees to which it provides Essential Support Facilities and Unbundled Network Elements. The Dominant Licensee may require Requesting Licensees to compensate it for the costs incurred in establishing and maintaining POAs, or in using facilities, based on relative use. The Dominant Licensee must allocate the costs based on the expected number of users and the duration of use. The Dominant Licensee must allocate costs equally for non-traffic-sensitive facilities. For traffic-sensitive facilities, the Dominant Licensee must allocate costs based on the number of connections, actual usage and capacity requested.
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Capacity requirements are typically defined at the time a Point of Interconnection (“POI”) is established. The level of capacity requested can materially affect the cost of the interconnection. Due to the uncertainties in inter-network interconnections, it is difficult to ensure that Requesting Licensees will request no more capacity than required for efficient operations. A Dominant Licensee need only offer to provide specified levels of capacity for 2 key elements where capacity is clearly constrained: co-location space and power supply to co-location spaces.
Origination/Transit/Termination Services
3.2.—3.2.1 A Dominant Licensee must comply with the following principles governing responsibilities for the bearing of charges in the provision of Origination/Transit/Termination services in its RIO:
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Origination charges result from the costs of conveying the traffic generated by the originating Licensee’s End User to the terminating Licensee’s system - thereby enabling the originating Licensee’s End User to use a service offered by the terminating Licensee’s system or provided by a Services-based Licensee connected to the terminating Licensee’s system. Termination charges result from the costs of conveying the traffic generated by the originating Licensee’s End User to the terminating Licensee’s system, enabling the End User or Services-based Licensee connected to the originating Licensee to establish one-way or interactive communication. Unless the parties agree otherwise, each Licensee is responsible for its own costs in setting up a POI.
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The origination charge compensates the originating Licensee when the terminating Licensee, or the Services-based Licensee connected to the terminating Licensee, bills the End User directly. The origination charge then compensates the originating Licensee for the incremental cost of access.
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For fixed-to-fixed interconnection, origination and termination charges must be applied on a symmetrical basis.
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A Dominant Licensee need not pay termination charges for fixed-to-mobile interconnection. However, IDA will revisit this issue (along with the issue of “Calling Party Pays”) in future.
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Transit charges must be paid by the Licensee that originates the traffic, regardless of the payment flows between End Users and Licensees. A Dominant Licensee that acts as the transit Licensee need not be a party to the commercial negotiations between the interconnecting Licensees.