cost issues in international settlements

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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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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2. International switching

International telecommunications maintenance and operations center

Telephone exchange Associated transmission and signaling equipment


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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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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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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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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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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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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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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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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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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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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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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

cost issues in international settlements

Documents

international administration

international settlement

national administrations

international leased

itu framework3

threethe fcc methodology

itu framework2

itu framework1