cost issues in international settlements march 1998 dnta david n. townsend & associates...
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Cost Issues inInternational Settlements
March 1998
DNTADavid N. Townsend & Associates
[email protected]://www.dntownsend.com/dnta/
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Cost component definition: the ITU framework
ITU-T Recommendation D.140 defines three basic operational components (network elements) of international telephone termination service:
1. International transmission facilities
2. International switching facilities
3. National extension
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Cost component definition: the ITU framework
1. International transmission Earth station Submarine/terrestrial cable system Cable landing station International terrestrial radio links National links between these facilities and the
International Exchange
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Cost component definition: the ITU framework
2. International switching
International telecommunications maintenance and operations center
Telephone exchange Associated transmission and signaling equipment
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Cost component definition: the ITU framework
3. National extension ITU definition:
The national extension, used for international telephone traffic, consists of national exchanges, national transmission facilities and, if appropriate and identified under a bilateral or multilateral agreement, the local loop.
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Cost component definition: the ITU framework
3. National extension A. For combined international and national
administrations:
• Trunk switches/national exchanges
• National transmission facilities
• Local loop, “if appropriate and identified under bi-lateral/multilateral agreement”
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Cost component definition: the ITU framework
3. National extension B. For separate international and national
administrations:
Payment by international administration to national administration on the basis of:
Per minute Annual lump sum Revenue/Cost sharing (e.g. percentage of international
collections), or Combination of any of above three
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The FCC methodology: Tariffs as surrogate for costs
Two basic components to the FCC’s “Benchmark Order” (Docket 97280) on international settlement rates to be paid by U.S. carriers:
1. Development of cost estimates using a “Tariffed Components Price” (TCP) methodology; and
2. Development of “benchmark” settlement rates, based upon worldwide averages of TCP costs.
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The FCC methodology: Tariffs as surrogate for costs
1. International transmission The FCC uses tariff prices for international leased
circuits. Formula = price for 2.048 Mbps circuit (120 lines
x 8,000 mins per line) Results range from 0.7¢ per minute (Mexico) to
25.5¢ per minute (Kenya), with most countries’ results falling below 10¢ per minute.
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The FCC methodology: Tariffs as surrogate for costs
2. International switching The FCC utilizes the published switching
component of TEUREM (European) country settlement charges.
Countries are divided according to three categories of economic development.
Results range from 1.9¢ to 4.8¢ per minute.
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The FCC methodology: Tariffs as surrogate for costs
3. National extension The FCC uses a complicated formula of weighted
averages of local and in-country long distance tariffs.
Based upon a sample of incoming traffic to each country from the U.S.
The results range from a high of $25.2¢ per minute to a low of zero, for three countries that don’t charge for domestic calls on a per-minute basis.
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Problems with the benchmark approach
The term “benchmarks” is meant to describe average or target cost or price levels for an entire industry.
Benchmark prices do not necessarily reflect the actual cost experience of any given operator.
The goal is to establish an approximate industry-average cost, as an objective for all operators to move toward.
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Problems with the benchmark approach
Benchmarks assume that costs are, or should be, the same across widely different countries and economies. This is clearly not true.
Under the FCC policy, countries with above average costs must lose money on international settlements, while countries below can make a profit.
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Problems with the benchmark approach
Examples:
Russia TCP = 35¢ per minute
Thailand TCP = 17¢ per minute
Benchmark for both = 19¢ per minute
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Problems with the FCC “TCP” for national extension costs
Improper use of non-discrimination principle
Below-cost national tariffs
Ignores fixed charges
Rebalancing effects
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Problems with the FCC “TCP” for national extension costs
No accounting for domestic access charges
Miscalculation of local tariffs
Incorrect assumptions about commercial costs
Rejecting Universal Service contributions
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Toward a theoretical basis for national extension costs
Three components to economically “appropriate” national extension costs:
1. Incremental cost of national usage
2. Proportionate share of joint and common costs
3. Support for infrastructure development
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Toward a theoretical basis for national extension costs
1. Incremental national usage cost
National trunks Tandem switches Local switches
Total recurring capital + operating costs, divided by combined total minutes of use in network.
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Toward a theoretical basis for national extension costs
2. Share of joint and common costs
Administration and commercial overhead expenses (excluding marketing costs)
Local loop recurring capital and operating costs (existing loops only)
Subtract monthly subscription revenues
Divide result by total minutes of use in network.
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Toward a theoretical basis for national extension costs
3. Contribution to infrastructure (Universal Service)
Projected near-term annual network investment Subtract projected annual connection charge
revenues
Divide result by total minutes of use in network.
Yields an upper ceiling for contribution element.
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National Extension Cost ModelAnnual
Annual Operation +Capital costs Maint. costs Total
1. Incremental national usage costNational trunksTandem switchesLocal switches
Total/ minutes of use= Cost/minute
2. Proportionate share of joint, common costsLocal loopAdministration + commercial
Total- subscription revenues= Net cost/ minutes of use= Net cost/minute
3. Contribution to infrastructure development(ceiling)
Annual investment in netwk expansion- connection chg revenues= Net cost/ minutes of use= Net cost/minute
Total National Extension Cost