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

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 General market aspects General market aspects Service regime Interconnection Price setting and tariff regulation 2

Basic and mobile telephony markets in Nicaragua Fixed lines Cellular lines 9.00% • Mobile telephony market % 8.00% 0 2 . 8 % (Approx. 500 000 users) 2 % 7.00% 3 5 7 . 9 . Teledensity 2003 6 – Bellsouth – 1992 (TDMA and % 6.00% 8 % % 8 . 5 6 6 5 5 % . . 5 5 % 9 CDMA 2X) 5.00% 0 3 . 5 % 8 % 4 . 0 2 5 % 4 . 3 4.00% % 0 4 . 0 % – Enitel – Dec 2002 (GSM 1900) 9 . 4 % % % 7 % % % % 4 . % 3 % % % 4 3 8 7 8 8 1 7 4 5 5 . 7 3 7 1 6 3 3 3 3 . 3 . . 2 3 3 3.00% 2 . . 3 . 3 . 1 2 . 3 3 . 3 3 . 3 . 3 – PCS – Dec 2002 (GSM 1900) 2.00% – 250 000 new lines in the last 16 1.00% months 0.00% E Y H Y R Y Y L T R R A N R C I L S E R R R E E M U U R U E B A A P B B B A J J G U U A O M M M M N U R T E E E A A C B V C T J E P O O E Market share F E D N S 90% 81% 80% 73% • Basic telephony market 70% 62% 60% – Enitel – Exclusivity until next year 54% Share 50% 45% (April, 2005) 40% 29% – Over 205 000 lines 30% 25% 24% 20% – 50 000 new lines installed in past 2 27% 15% 20% 21% years 14% 10% 3% 8% – Lowest teledensity in the region 0% Q1-03 Q2-03 Q3-03 Q4-03 Q1-04 Bellsouth Enitel Móvil PCS Quarter 3

Contents General market aspects Service regime Service regime Interconnection Price setting and tariff regulation 4

Service regime SPECIAL INTEREST PUBLIC SERVICES Licensed – direct Regulated by law Basic telephony (Local, LDN, Trunking, Beepers, LDI), Telex, Telegraphy Teleconferencing, Intermediaries, Infrastructures using spectrum, SERVICE ONLY EXCLUSIVE SERVICES Community relays REGIME GENERAL INTEREST SPECIFIC INTEREST Licensed – direct or through Authorized or registered, as bidding process appropriate Mobile telephony, Public Private telecommunication telephony, Cable television, UNREGULATED services not provided to third Data transmission, Bearer parties. Registered services, Radio and television 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 Guarantee communication BY LAW TO INTERCONNECT between customers of different Commercial and technical networks and access to services arrangements by which service (e.g. emergency calls) providers ensure interconnection of their equipment, networks and services with other providers so that one service provider’s customers can use the Protect the user (e.g. avoid tariff other’s services and vice versa. structures with unreasonable Interconnection is critical to the public margins) interest, and so TELCOR has an obligation to regulate it in order to: Iron out distortions created by imperfect competition (e.g. entry barriers from high interconnection costs or high tariffs in markets not subject to competition) 7 Public interest

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 "D" Telephone "A" Telephone "B" ENITEL MOVIL BTS 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 Origin and Termination Origin and Termination: : Interconnection $0.024 BellSouth ENITEL 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 Origin and Termination Origin and termination $0.024 Interconnection BellSouth ENITEL Fixed exchange Mobile exchange Call 1 Origin: ENITEL Termination: BellSouth 278-0000 Cell 1 Customer PCS/EM $0.1216 $0.154 Enitel $0.032 777-4444 TARIFFS FOR INTERCONNECTED SERVICES ARE ASYMMETRICAL 10 BETWEEN OPERATORS

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. 11

Contents General market aspects Service regime Interconnection Price setting and tariff regulation Price setting and tariff regulation 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 by maximum CPI – X rule regulation rate of return Little incentive to reduce costs Little incentive to reduce Dynamic forward-looking rule costs and risk of ? P 1 Q 0 = (CPI-X) ?PoQo Barriers to investment if overinvestment to constantly Allows regulation with asymmetrical marginal costs are used drive rates up information Information asymmetry Information asymmetry Allows multi-product regulation (range of products) Availability of real cost and Availability of real cost and demand data demand data 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 14 unrecoverable costs

? P1Qo = (CPI-X) ? PoQo Tariff regulation: Basic telephony Local residencial Ranges of services Local business Long-distance Hardware Installation or connection 120m from public thoroughfare Monthly subscription Basic charge Call time included Basic concepts Call time billed Local (same Department) National long-distance (between Departments) Consumption Itemized billing International long-distance (rounding) Interconnected services (e.g. cellular) Peak rate Tariff periods Reduced rate 15

Mobile telephony Mobile – Mobile (On Net) Traffic direction Interconnection (Off Net) Pre-payment Mobile tariff schemes Flat rate by period and destination Deferred payment Conventional Controlled account Scale of rates by destination and period Basic concept On Net Minutes included Everywhere, anytime Mandatory or deferred payment and Actual consumption pre-payment Subsidies Penalty for termination of contract Off Net tariffs Differentiated tariffs 16

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. 17

THANK YOU FOR YOUR ATTENTION jose.rodriguez@enitel.com.ni Tel: (505) 270-8378 18