Long Run Incremental Cost (LRIC) Guidelines for Implementation by Cable & Wireless (Barbados) Ltd

• Jurisdiction: Barbados
• Court: Fair Trading Commission (Barbados)
• Judgment Date: 12 December 2011
• Docket Number: Document No. FTC /UR/2011-01

Long Run Incremental Cost (LRIC) Guidelines for Implementation by Cable & Wireless (Barbados) Limited

Document No. FTC /UR/2011-01

Fair Trading Commission

Final Decision

TABLE OF CONTENTS

PART ONE – BACKGROUND	3
PART TWO – LEGISLATIVE FRAMEWORK	5
Consultation Process	6
PART THREE – RESPONSE TO CONSULTATION	7
Model Specification	7
Transparency	7
Weighted Average Cost of Capital (WACC) Assumptions	11
Responses to Specific Consultation QUestions	11
PART FOUR – LRIC GUIDELINES DECISION	21
Overall Process	21
Issues in Network Modelling	23
Network Costing	30
Reporting Requirments	34

PART ONE – BACKGROUND

1 The Fair Trading Commission (Commission) in its decision on Cable & Wireless (Barbados) Limited's (C&W) Consolidated Reference Interconnection Offer (RIO) dated February 22, 2010, determined that C&W should undertake a Long Run Incremental Cost (LRIC) study to determine interconnection costs and tariffs. The Commission also indicated that it would design guidelines which C&W would be required to follow when developing the LRIC study.

2 This Decision sets out the LRIC guidelines which will be used by C&W to develop the LRIC Model. The Commission was assisted by external consultants who are experienced in similar regulatory processes.

3 The LRIC guidelines will cover the principles used within the model, the specific assumptions and processes required by the Commission.

4 The provision of interconnection facilities on fair and efficient terms is widely recognised as an essential requirement for the creation of a competitive telecommunications market. This is because operators in a competitive market need to terminate calls on other operators' networks and similarly to receive calls originated on other operators' networks.

5 Furthermore it makes sense economically, especially as competition develops, for competing operators to use each other's core networks for transit purposes and often this will be the most efficient way that a new entrant can provide some services. Interconnection charges can account for a substantial portion of an operator's costs. It is therefore important that interconnection rates be derived from appropriate costs which provide proper economic signals to operators to guide their investment decisions.

6 To determine interconnection charges from a LRIC study requires a modelling exercise that utilises an efficient operator's cost and demand estimates. The objective of the model is to estimate the cost that C&W when operating efficiently would incur in providing interconnection services in a competitive market. The modelling exercise involves:-

• • Estimating the direct costs of providing the interconnection service over the long run (this allows for inclusion of all associated capital investments which would not be incurred annually);

• • Including a capital cost component that reimburses the operator for the cost of financing network equipment associated with interconnection services;

• • Taking into consideration a reasonable attribution of costs that are not directly caused by interconnection services but are incurred by C&W in connection with its interconnection facilities and services, for example, salaries. These are referred to as joint and common costs.

7 There are various LRIC approaches and the Commission will be using the Total Service Long Run Incremental Cost (TSLRIC) approach. Such an approach measures the total costs of all services for the associated network elements and then attributes a proportion of these costs to the relevant interconnection services.

8 Some of the benefits of having interconnection rates based on LRIC are that they:

• (a) encourage efficient competition in the wholesale market which leads to competition in the retail market;

• (b) send economic signals that promote efficient forward-looking investment decisions;

• (c) facilitate effective means of interconnection; and

• (d) are non-discriminatory and non-preferential.

PART TWO – LEGISLATIVE FRAMEWORK

9 The Commission is a statutory body established by the Fair Trading Commission Act CAP. 326B of the Laws of Barbados with responsibility for, inter alia, regulating utility services, safeguarding the interests of consumers and promoting and maintaining effective competition in the Barbados economy. The Commission currently regulates the domestic and international telecommunications services of C&W and the country's sole provider of electricity the Barbados Light & Power Company Limited.

10 Section 4 (3) (a) of the Fair Trading Commission Act allows the Commission to:

“ Establish principles for arriving at the rates to be charged by service providers.”

11 A similar provision exists under Section 3 (1) (a) of the Utilities Regulation Act, CAP. 282 of the Laws of Barbados while Section 6 (1) (d) of the Telecommunications Act CAP. 282B of the Laws of Barbados states that the Commission shall:-

“Establish and administer mechanisms for the regulation of prices in accordance with this act, the Fair Trading Commission Act and the Utilities Regulation Act;”

12 Further, the provisions of the Telecommunications Act, CAP. 282B “TA” Section 27 (3) also state, inter alia, that the Commission shall:-

“ (a) consult with the carrier providing the RIO and any other carriers likely to seek interconnection to that carrier's network.”

13 The Commission is of the view that this provision also supports the Commission's decision to consult on the development of the interconnection rates. Notwithstanding that the provision deals primarily with consulting on the RIO and that the Commission has already completed its consultation on the C&W Consolidated RIO, the Commission is of the view that interconnection rates form a critical part of the RIO and as such it is appropriate that there should be consultations on Guidelines that will be used to develop interconnection rates.

14 In carrying out its duties as a regulator, the Commission must operate in a transparent, accountable and non-discriminatory manner. Consultative documents and the public consultation process are the main ways in which the Commission discharges its responsibilities relating to transparency and accountability.

15 Section 4 (4) of the Fair Trading Commission Act, CAP. 326B states:

“The Commission shall, in performing its functions under subsection (3) (a), (b), (d) and (f), consult with the service providers, representatives of consumer interest groups and other parties that have an interest in the matter before it.”

Consultation Process

16 The consultation related specifically to LRIC Guidelines for C&W, which are to be followed by C&W when developing the LRIC model.

17 Service providers, representatives of consumer groups and other interested parties were invited to comment on the consultation paper. The consultation period concluded on July 8, 2011 at 4:00p.m.

18 The Commission received responses to the LRIC Consultation document from C&W, Digicel (Barbados) Limited (Digicel) and CARITEL.

19 In addition, to responding to the ten (10) specific questions that were set out in the consultation document, stakeholders made more general comments on the overall process.

20 The Commission thanks C&W, Digicel and CARITEL for responding.

PART THREE – RESPONSE TO CONSULTATION

21 Having considered all responses, the Commission summarises below the general comments made by stakeholders in their submissions, followed by the Commission's position on the LRIC Guidelines.

Model Specification

22 C&W sought clarification on when the Company would need to provide the Commission with the detailed model specifications. It also asked the Commission to clarify whether the model specifications to be supplied are the same as those required to be submitted as part of the model documentation once the LRIC model has been developed.

The Commission's Position

23 The Commission is of the view that as a first step after the LRIC guidelines have been published, C&W must provide the Commission with proposed model specifications consistent with the guidelines. The Commission will then review the proposed model specifications and provide feedback to C&W on any required amendments. C&W will then need to develop the LRIC model based on these agreed model specifications.

24 During the model development process the model specifications may require modification with the agreement of the Commission. The final model specification, including any modifications, will then form part of the general reporting and documentation requirements for the LRIC model which is submitted to the Commission, along with the LRIC model itself.

Transparency

25 Digicel raised its concern about the overall level of transparency within the LRIC modelling process, as the model will be developed by C&W and then reviewed by the Commission. This concern particularly relates to the mobile network model, as this model could be used to also set interconnection rates for Digicel. In this context, Digicel made the following comments and suggestions:-

• • To prevent potential misallocation of costs between C&W's fixed and mobile networks, the development of separate LRIC models for each network.

• • The co-existence of a Calling Party Pays (CPP) regime and a Receiving Party Pays (RPP) regime in Barbados needs to be considered in the LRIC modelling process.

• • Any LRIC model template should contain ‘real’ information for key modelling parameters rather than ‘dummy’ numbers to allow interested parties to review the model.

• • The LRIC model template should allow for a range of sensitivity analyses to allow stakeholders' to review the model.

The Commission's Position

26 The Commission notes Digicel's concern on the degree of transparency within the overall LRIC modelling process. However, prior to addressing the...