Will the Jamaican regulator be successful in implementing interim interconnection rates?

At the best of times, matters related interconnection are contentious in most jurisdictions. The Jamaican telecoms regulator, the Office of Utilities Regulation, is expected to establish interim termination rates in the coming weeks. This post discusses benchmarking, and key factors that should considered when using this approach.

http://www.flickr.com/photos/68751915@N05/In recent days, newspapers in Jamaica have been discussing proposals from the telecoms regulator, the Office of Utilities Regulation (OUR), that Digicel should decrease its mobile termination charges to JMD 5.00 (approximately USD 0.06) – at least a 50% drop from its current levels. This proposal would be an interim measure, pending completion of a cost study that is currently being conducted to examine the cost of delivering calls (to receiving parties) across a provider’s own network and between different networks.

As expected, the key affected telcos, Digicel and LIME, have had diverse reactions. Digicel, whose mobile market share is reported to be almost twice that of LIME’s, and would be growing thanks to its acquisition of Claro (formerly owned by America Móvil), did not appear keen on the proposed decrease, and was quick to point to the process needed to implement the change. On the other hand, LIME was encouraged by the regulator’s position, and even hoped that that the final determination would be lower than JMD 5.00 “so that consumers could reap even greater benefits” (Source: Jamaica Observer).

Thanks to a recent amendment of the Telecommunications Act 2000, the OUR is now empowered to establish interim interconnection charges. Equally important, it can rely on a broader set of options to make rate determinations, such as benchmarking.

However, recognising that interconnection is and has been a highly contentious issue in Jamaica, and the rate structure that has been in place over the past 10 years has generally favoured one player (Digicel) over another (LIME), adjusting those rates will not be an simple matter. This post examines the method the regulator will most likely be using to establish interim termination charges, and factors that would strengthen its proposal, hopefully leading to successful and timely implementation.

What is benchmarking?

Benchmarking is a comparison process, which is useful to set interconnection charges in the absence of a cost study. As discussed in Will the proposed amendments to Jamaica’s Telecoms Act improve LIME’s competitiveness?, cost studies are expensive and lengthy to implement, and typically may require data from the telcos for their successful completion. However, some players, particularly those that believe the outcome could be to their disadvantage, often opt to delay the process. Hence benchmarking allows the regulator to examine the rates and charges established in other jurisdictions to provide some indication of what should obtain in their own context. While benchmarks cannot fully replace a well-executed cost study, they can suggest where local rates should fall, and are often use to corroborate the results of cost studies.

Considerations when using benchmarks for interconnection rate determinations

Based on the significance of benchmarks in the regulatory process, it is important that the methodology used can withstand the scrutiny. Many regulators opt to implement benchmarking using simple comparisons to make their determinations. Other approaches, such as those using statistical modelling require considerable granular data that might not be readily available, along with the expertise perform the exercise. Nevertheless, the integrity of the results, regardless of approach used, relies on the sample group established and the methodology used by those countries to produce the elements being compared.

At the core, benchmarking is a comparison, so it becomes critical that the exercise allows examination of “like with like”. In the case of a mobile termination charge determination, for example, the countries selected ought to have similar characteristics to the country under focus, such as:

  • http://www.freedigitalphotos.net/images/view_photog.php?photogid=1023population
  • gross domestic product
  • market maturity
  • geographical size
  • terrain
  • geographic region
  • country status (e.g. developed, developing, Small Island Developing States)
  • degree of urbanisation, etc.

Frequently, less than a handful of countries will fully match all of the selection criteria. As a result, there is usually a trade off between those criteria and having a larger sample group to increase the credibility of the results.

Another important consideration, which will also affect the sample group, is whether there will be any limitation on the rate setting methodology that the individual countries implemented to establish their mobile termination charges. To be clear, countries generally use three approaches to establish interconnection charges:

  • commercial negotiations between the telcos
  • benchmarking, and
  • cost studies.

Again, to strengthen the outcome of the comparison, it would be advisable that the sample be limited to countries and charges that have been derived from cost studies. Charges agreed through negotiations might have no bearing on costs, and benchmarking countries that had used benchmarks to establish their charges tends to introduce considerable uncertainty into the exercise. The key therefore would be to ensure that rates that are being benchmarked are themselves cost-oriented, which would indicate that they closely reflect what might be the true costs for interconnection in their respective countries.

Going forward

The OUR’s efforts to address call termination has been timely in light of recent reports of, among other things, rumours of LIME shutting down its operations in Jamaica (which so far the company denies), and the considerable losses that the company has been experiencing in Jamaica over the past several years due, in some measure, to the current regulatory framework. More importantly, prior to enactment of the Telecommunications (Amendment) Act 2011, the OUR was not necessarily in a position to be as responsive to the sector, which in various quarters means that regulatory interventions have been long overdue.

With the OUR now suitably empowered to provide interim rates, and if it employs benchmarks with a clear and defensible methodology (that includes the factors discussed above), it should be in position to propose mobile termination charges that should be able to withstand scrutiny, and cannot be easily dismissed. Having said this, and recognising the disparate positions of the key parties to the process, the regulator will ultimately be required to consider the supporting and opposing views against its own, and ensure that the final decision is in the nest interest of the sector.

Image courtesy of 401K, flickr; and Suvra Datta, FreeDigitalPhotos.net