Price Cap Plan 2012

• Jurisdiction: Barbados
• Court: Fair Trading Commission (Barbados)
• Judgment Date: 29 March 2012
• Docket Number: Document No. FTC/UR/DEC/2012-01

Price Cap Plan 2012

Document No. FTC/UR/DEC/2012-01

Fair Trading Commission

Decision

TABLE OF CONTENTS

Summary	3
Price cap structure and price controls	3
Basket 1 — ‘Competitive’ Services	3
Basket 2 — ‘Non-competitive’ Services	4
Sub-cap on residential access services	4
Price cap formula	5
Price Cap Model	5
Consultation Process	6
SECTION 1 BACKGROUND	6
Introduction	7
Legislative Framework	8
Duty to Consult	9
Review Process	10
SECTION 2 THE PRICE CAP PLAN 2012	12
Objectives	12
Duration of the PCP 2012	14
Scope and Structure of the PCP 2012	14
Service scope	14
Basket structure	15
Price Cap Formula	17
Inflation I-Factor	18
X-Factor	19
Exogenous Z–Factor	19
Basket 1 — ‘Competitive’ regulated services	20
Basket 2 — ‘Non-competitive’ regulated services	21
SECTION 3 PRICE CAP MODEL	25
Objective and Application of the Price CAP Model	25
Approach	25
Main inputs & modelling parameters	25
Main calculations	26
Main outputs	27
Cost of capital	27
Total Factor Productivity Study	28
SECTION 4 — PRICE CAP ADMINISTRATION	29

Summary

The Fair Trading Commission (the Commission) has determined that a new Price Cap Plan 2012 (PCP2012) will govern the adjustment of rates of the regulated telecommunications services of Cable & Wireless (Barbados) Limited (the Company) from April 1, 2012 to March 31, 2015. The PCP2012 will therefore be based on the three reporting periods, which are aligned with the Company's financial year.

The Price Cap Plan 2012 will replace the current Price Cap Plan 2008 (PCP2008) which was implemented in August 2008 and which will expire on March 31, 2012.

One Year Moratorium

The Commission has sought to minimise the effect of price increases on end users and the Company will place a moratorium on price increases for all regulated prices in the first year of the price control — that is, no regulated prices will be increased in the first year of the PCP2012 from April 2012 to March 2013.

Price cap structure and price controls

The PCP2012 will be based on two service baskets, one for ‘competitive’ services and the second basket for ‘non-competitive’ services.

Basket 1 — ‘Competitive’ services

This basket will include all regulated services for which the level of competition is sufficient to ensure that prices are reflective of a competitive market outcome. As under the current price cap plan (PCP2008), these services are international telephone services and international private leased circuits (“IPLCs”).

These services will not be subject to an overall price cap. All ‘competitive’ services will remain subject to advance notification requirements to be set out in the Compliance Rules and Procedures which will be issued at a later date.

Basket 2 — ‘Non-competitive’ Services

This basket will include all remaining regulated services (i.e., all regulated domestic voice access and ancillary services including residential fixed line rental, business fixed line rental, voicemail, other value added services and domestic leased circuits).

For the years 2013–2014 and 2014–2015, an ‘RPI-X’ pricing control will be applied to these ‘non-competitive’ services, with the X-factor set at 5.25%. The RPI is the Barbados Retail Price Index which represents an inflation factor and the X represents a productivity factor. This X-factor has been set at a level which, in conjunction with the moratorium, will result in a forecasted rate of return for the services in this basket which the Commission has determined to be reasonable.

Sub-cap on residential access services

Residential access services are included in Basket 2. The Commission has determined that in addition to the general RPI-X constraint for Basket 2, there should be a specific constraint applied to residential accesses services. This additional constraint is necessary because residential services comprise a group of services contained in Basket 2, all of which can be increased or decreased once the overall cap is maintained. Placing a sub cap on residential services therefore guarantees that these services will never increase more than the capped amount in any period. Thus, following the moratorium in the first year (where there would be no price increases), the rate at which the Company will be able to raise the prices of these services will be restricted to the level of inflation or 5% a year if annual inflation exceeds this level.

Price cap formula

The price cap formula sets the allowable (weighted) average annual price change across the capped services (i.e. those contained in Basket 2 only, as Basket 1 is uncapped).

The formula applied under the PCP2012 remains unchanged from the price cap formula underlying the previous price cap plan. The price cap formula allows the Company to change its retail prices on average within Basket 2 (i.e., the Actual Price Index, API) by only less than or equal to the predetermined Price Cap Index (PCI).

The PCI for each year (t) is then calculated as

PCI t = PCI t-1 (1 + I t – X t + Z t), where

I is the inflation factor (i.e. RPI);

X is the productivity factor; and

Z is the exogenous factor

Price Cap Model

The PCP2012 utilises a price cap financial model which requires determining what X-factor would allow the Company to realise a reasonable rate of return across its capped services (Basket 2) by the end of the price control period. This requires, inter alia, forecasting the expected volume of demand for the controlled services and the expected costs to the Company to deliver these services. The level of costs for the regulated services is determined taking into account the demand forecasts, expected inflation and expected efficiency gains over the PCP 2012. The expected efficiency gains are informed in part by historic trends in the Company's total factor productivity information, international benchmarking, and the review of financial information provided by the Company.

The Price Cap Model forecasts the costs and revenues resulting from the regulated services under a range of assumptions. By varying the level of X in the price control assumptions the model forecasts how revenues and hence the forecasted return on capital employed (ROCE) will vary, thus allowing the Commission to set an appropriate X factor.

The Price Cap Model was developed with the assistance of the Commission's consultants and input from the Company.

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 a consultation with interested parties as well as extensive discussion of the various issues with the Company.

SECTION 1 BACKGROUND

Introduction

1 Effective April 01, 2012, the Fair Trading Commission (the Commission) shall implement a new Price Cap Plan 2012 (hereinafter referred to as PCP2012) 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 June 2008 the Commission, in its Decision FTC/UR/2008-02, established a Price Cap Plan (herein after referred to as PCP2008) 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 Plan 2008 Compliance Rules and Procedures FTC/UR/2008-03, the Commission is mandated to review the current Price Cap Plan before its expiration on March 31, 2012. The Commission commenced review of the said PCP2008 on October 14, 2011.

Legislative Framework

5 The Commission is responsible for, inter alia, establishing rate-setting principles, setting the maximum rates to be charged, monitoring these rates, determining and monitoring standards of service and conducting periodic reviews of the rates charged by service providers by virtue of Section 3(1) of the Utilities Regulation Act CAP. 282, the Fair Trading Commission Act CAP. 326B, and the Telecommunications Act CAP. 282B.

6 When establishing the principles to regulate service providers, the Commission must in accordance with Section 3(2) of the Utilities Regulation Act have regard to:

• “(a) the promotion of efficiency on the part of service providers;

• (b) ensuring that an efficient service provider will be able to finance its functions by earning a reasonable return on capital; and

• (c) such other matters as the Commission may consider appropriate.”

7 Under Section 3(3) of the Utilities Regulation Act, the Commission is specifically charged with the protection of the interests of consumers. Section 3(3) (a) states:

(a) “The Commission shall protect the interests of consumers by ensuring that service providers supply to the public, service that is safe, adequate, efficient and reasonable.”

8 Additional responsibility is conferred upon the Commission through the Telecommunications Act CAP. 282B. In particular, Section 6 (1) states that:

6 (1) “The Commission shall

• c) be responsible for the regulation of competition between all carriers and service providers...