Price Cap Plan 2008

• Jurisdiction: Barbados
• Court: Fair Trading Commission (Barbados)
• Judgment Date: 23 June 2008
• Docket Number: Document No. FTC/UR/2008-02

Price Cap Plan 2008

Document No. FTC/UR/2008-02

Fair Trading Commission

Second Decision

TABLE OF CONTENTS

Summary	3
SECTION 1 BACKGROUND	8
Introduction	8
Legislative Framework	10
Duty to Consult	11
Review Process	12
SECTION 2 PRINCIPLES OF THE PRICE CAP PLAN 2008	14
Objectives	14
Duration of Price Cap	15
Baskets	16
Inflation Factor	25
Determination of Productivity X-Factor	26
Exogenous (Z) – Factor	27
SECTION 3 PRICE CAP MODEL	28
Design Of Price Cap Model	28
Framework	29
RoMCE Targets	30
Total Factor Productivity Study	30
Review of C&W Financials	31
Findings	32
Cost Allocation	33
Review of Telecommunications Market	33
Prices	34
Policy and Competition	36
SECTION 4 — PRICE CAP ADMINISTRATION	38
Compliance Filing	38
Notification	38
Rate Increases	38
Rate Reductions	39
Regulatory Reporting	39

Summary

The Fair Trading Commission has determined that the current structure of the price cap mechanism which was implemented in April 2005 will be modified. A new Price Cap Plan 2008 (PCP2008) as detailed within this Decision will govern the adjustments of rates of regulated telecommunications services of Cable & Wireless (Barbados) Limited from August 1, 2008 to March 31, 2012.

The Commission has reduced the number of baskets to three and some services have been reallocated to a different basket as described below.

Basket 1—Residential Access

This basket will include domestic residential line access and the residential installation service. Pricing in Basket 1 will be implemented in two phases:

• Phase I – first 17 months of second price cap plan (August 1, 2008 to December 31, 2009)

There will be a rate freeze from August 1, 2008 until December 31, 2009 for the productivity X-factor will be set to equal the Inflation I—factor. This will effectively mean that prices for residential line rental would have been unchanged since August 2007.

• Phase II – for the remaining 27 months of the second price cap plan (January 1, 2010 to March 31, 2012)

The Company will be allowed to adjust rates in line with the Inflation factor up to a maximum of 4.5%. This means that when the I-factor is less than 4.5%, the X-factor will equal 0% but if the I-factor is greater than or equal to 4.5%, the rate increase is capped at 4.5% and thus the rate can only be increased to a maximum of 4.5%.

Inflation I-Factor — The Commission has determined that the Retail Price Index (RPI) will continue to be used as a measure of the inflation I – factor for the price cap formula.

Basket 2 — Domestic Voice Telecommunication Services

The Commission has determined that the productivity X-factor for Basket 2 is 7.12% which is an increase over the last price cap plan.

The Commission has determined that Domestic Private Leased Circuits (DPLC) and Voicemail will be added to this basket. The other services include business access, business installation, payphone access, domestic private leased circuits and value added services. The reason for moving DPLC is that there appears to be insufficient competition to constrain the pricing of these services at this time. With regard to Voicemail the Commission considers that this product should be treated similarly to other value added services such as call waiting and call forwarding.

The PCP2008 therefore now applies a common but not necessarily similar price cap index (PCI) constraint to all price-capped service baskets to allow flexibility in pricing. However the value of the constraint in Basket 1 is different to that in Basket 2. The constraint is such that the average change in prices charged by the Company, measured by the Actual Price Index (API), does not exceed the Price Cap Index (PCI).

The price cap formula is given by the equation:

API ≤ PCI

The PCI for this basket will be reset by the Commission on February 1 ^st of each year of the Price Cap Plan.

Basket 3 — International Telecommunications Services and Other Retail Telecommunications Services

The Commission has determined that international services will be placed in the same basket as those services which were previously uncapped. International private leased circuits (“IPLCs”) will also be included in the “uncapped” services basket. So this basket now includes fixed international outgoing, international calling cards, payphone international, international operator assistance and international leased circuits and all other retail domestic services not accounted for in the other two baskets.

The Commission will only require notification of adjustment in the prices of these services, consistent with the principles outlined in the Decision. The Company will not be allowed to increase the prices of any of the uncapped services in Basket 3 during the price cap term beyond their October 2007 price.

Residential International Direct Dialling (IDD) — Additionally it has been recognised that residential IDD rates are higher than Business IDD rates and the Company shall reduce these rates over the term of this price cap plan as follows:

• (i) An initial 20% reduction on residential IDD to be implemented on or before August 1, 2008. Any residential IDD reductions made in excess of the requirement for API compliance in the final period of the Price Cap Mechanism 2005 shall count towards compliance of the requirement. The Company shall verify this by submitting to the Commission the Annual Compliance filing for Basket 3 (under the Price Cap Mechanism 2005) on or before the date of making this reduction.

• (ii) An additional 5% reduction in residential IDD to be implemented on or before March 31, 2009.

• (iii) An additional 5% reduction in residential IDD to be implemented on or before March 31, 2010

• (iv) A final 5% reduction in residential IDD to be implemented on or before March 31, 2011.

Exogenous Z-factor — The Commission has determined that an Exogenous Z-factor adjustment for an event outside the control of the Company that negatively affects its net income will be considered for inclusion in the price cap formula where any one of the following conditions is satisfied:

• a. The event is a legislative, judicial or administrative action which is beyond the control of the company; or

• b. The event relates specifically to the telecommunications industry; or

• c. The event has a material impact on the regulated segment of the Company which is subject to the price cap Mechanism.

Notification

Rate Increases — During the Price Cap Plan 2008, the Company is required to inform the Commission in writing at least 25 business days and the general public through the printed media at least 20 business days before the effective date of any proposed rate increase of a regulated service.

Rate Reductions — The Company is required to advise the Commission at least 3 business days and the public at least 1 business day before the effective date of a decrease.

Compliance Filing

Annual Compliance Filing — The Company is required to file by July 1 ^st of each year of the PCP2008, information showing that they have complied with the rules of the Plan by maintaining API at or below the PCI.

Rate Increase Compliance Filing-For each proposed rate increase the Company is required to make a rate increase compliance filing that demonstrates that the API will not exceed the PCI.

Price Cap Model

The PCP2008 utilises a price cap financial model which has been designed to take into account the Company's forecasted year-over-year earnings as well as an earnings constraint on price capped services. The price cap model was designed with the assistance of the Commission's consultants and input from the Company and is designed to provide the Company with a reasonable opportunity to achieve a fair rate of return on its price-capped services over the course of the second price cap period. The model also takes into account actual Company data and the forecast of market developments. The model aims to capture all the factors that will impact the company's earning capacity during its term. These include output price trends, quantity trends, own price elasticity, costs efficiency, input price trends, and the RPI.

Consultation Process

The Commission utilised the public consultative process as the means of ensuring full participation in the development of the Price Cap Plan. This involved written and oral consultations with interested parties as well as extensive discussion of the various issues with the Company.

SECTION 1 BACKGROUND

Introduction

1 Effective August 01, 2008, the Fair Trading Commission (the Commission) shall implement a new Price Cap Plan 2008 (hereinafter referred to as PCP2008) to govern the tariff adjustments of regulated telecommunications services provided by Cable & Wireless (Barbados) Limited (hereinafter referred to as the Company).

2 The price cap regime is designed to ensure that customers continue to have access to telecommunications services at just and reasonable rates while at the same time providing the Company with incentives to operate more efficiently and to be more innovative in the provision of services. Price cap regulation also allows flexibility in pricing, provided that the average change in prices charged by the Company does not exceed the Price Cap Index.

3 In April 2005 the Commission, in its Decision FTC/UR/2005/01, established a Price Cap Mechanism (herein after referred to as PCM2005) which detailed the principles of the price cap plan including the duration, number of service baskets, productivity factors, inflation factors, exogenous factors and related administrative procedures.

4 In accordance with that Decision and the Price Cap Mechanism...