Price Cap Plan 2016

• Jurisdiction: Barbados
• Court: Fair Trading Commission (Barbados)
• Judgment Date: 31 March 2016
• Docket Number: Document No:: FTC/UR/DEC/2016-01

Price Cap Plan 2016

Document No:: FTC/UR/DEC/2016-01

FAIR TRADING COMMISSION

DECISION

TABLE OF CONTENTS

INTERPRETATION SECTION	4
EXECUTIVE SUMMARY	5
Price Cap Structure and Price Controls	5
Price Cap Formula	6
Price Cap Model	7
Consultation Process	8
SECTION 1 BACKGROUND	9
Introduction	9
Legislative Framework	10
review process	10
SECTION 2 THE PRICE CAP PLAN 2016	12
objectives	12
Duration of the PCP 2016	14
scope and structure of the pcp 2016	14
Service scope	14
Basket structure	15
Basket composition	17
price cap formula	20
Inflation I-Factor	21
X-Factor	21
Exogenous Z-Factor	21
price control applied to each basket	23
Basket 1 – ‘Competitive’ regulated services	23
Basket 2 – ‘Non-competitive’ regulated services	23
SECTION 3 PRICE CAP MODEL	29
objectives and applications of the Price Cap Model	29
Approach	29
Main inputs and modelling parameters	30
Main calculations	30
Cost of Capital	31
Main Outputs	32
Total Factor Productivity Study	32
SECTION 4 PRICE CAP ADMINISTRATION	34

INTERPRETATION SECTION

Actual Price Index (API) – means the actual level of prices in a service basket and should not exceed the price cap index.

Columbus Telecommunications – means Columbus Telecommunications (Barbados) Ltd. and the Barbados subsidiary of Columbus International Inc.

(the) Company – means Cable & Wireless (Barbados) Limited, the regulated service provider of domestic and international telecommunications services, pursuant to Utilities Regulation Order S.I. 2014 No. 65 and the Barbados subsidiary of Cable & Wireless Communications Plc

Exogenous Factor (Z-Factor) – means a component of the price cap formula incorporating a change, specific to the telecommunications industry, having a material impact on the regulated telecommunications provider, resulting from actions which are beyond the control of the provider.

Inflation Factor (I-Factor) – means the percentage change in the average retail price index (RPI) between two periods.

Legacy Customers – means customers of the pre-merger entity.

Legacy Fixed Telephony Services means the telephony services in existence pre-merger.

Merged Entity – means the company in existence as a result of the merger between Cable & Wireless Communications plc and Columbus International Inc.

Price Cap Index (PCI) – means the constraint that specifies the maximum level of aggregate price change for a service basket. The PCI consists of an inflation factor (I) a productivity offset (X) and an exogenous factor (Z).

Productivity Offset (X-Factor) – means the target productivity to offset the inflation rate in the price cap formula.

Regulated Services — means the utility services designated by the Minister pursuant to the Telecommunications (Regulated Services) Order S.I. 2006 No. 5.

Service Baskets – means a group of services subject to pricing constraints in the Price Cap Plan.

EXECUTIVE SUMMARY

The Fair Trading Commission has determined that the new Price Cap Plan 2016 (PCP 2016), as detailed within this Decision, will govern the adjustments of rates of regulated telecommunications services of Cable & Wireless (Barbados) Limited (hereinafter referred to as the Company) from April 1, 2016 to March 31, 2019 (i.e. a three year price control period). This will supersede the current Price Cap Plan which was introduced in April 2012 and which will expire at the end of March 2016.

For the avoidance of doubt, the PCP 2016 will apply to all customers of the Company, including those acquired as part of the acquisition of Columbus Telecommunications.

Price Cap Structure and Price Controls

The PCP 2016 will be based on two service baskets, one for ‘competitive’ services and the second basket for ‘non-competitive’ services. In addition there will be a sub-cap on residential fixed line services (access and installation).

Basket 1 — ‘Competitive’ Services

This basket will include all regulated services for which the level of competition is deemed to be sufficient to prevent excessive pricing by the Company. These services will not be subject to an overall price cap; however the advance notification requirements as set out in the forthcoming Compliance Rules and Procedures will be in place.

Basket 2 — ‘Non-competitive’ Services

This basket will include all remaining, regulated services (i.e., all regulated domestic voice, fixed access, associated value added services and domestic private leased circuits). This includes access and call services previously offered by Columbus Telecommunications.

During the PCP 2016, prices across these services will be restricted such that any price increases across the Basket will be below or equal to the level of inflation or 3% per year in case inflation exceeds 3% during that year. In case of when the inflation rate is less than zero (i.e. negative), then the allowable price increase in that year will be set to zero for that year.

Sub-cap on residential access services

Residential fixed line access services are included in Basket 2 and will therefore be subject to the price control applied across all of these services. Further to this price cap, the Commission has determined that an additional pricing constraint, a sub-cap, should be applied to residential access services, taking account of the importance of these services to consumers.

In each year, the Company's ability to raise the prices of these services will be restricted, such that annual price increases will be below or equal to the level of inflation or 3% a year in case inflation exceeds 3% during that year (i.e. the same price cap as applied to the overall Basket 2). In case of a negative inflation rate in any given year, the allowable price increase in that year will be set to zero. Applying this additional pricing constraint ensures that prices for residential access service cannot increase beyond inflation during the PCP 2016, irrespective of the price changes applied to the remaining price capped services. It is considered reasonable to set the overall cap at the level of inflation (i.e. RPI-0) which implies an X factor equal to zero based on expected merger efficiencies during the PCP 2016.

Price Cap Formula

The price cap formula sets the maximum allowable average annual price change across the capped services (i.e. those contained in Basket 2).

The formula applied under the PCP 2016 remains unchanged relative to the price cap formula, underlying the previous price cap plan. The price cap formula allows the Company to only change its retail prices on average within each basket (i.e., the Actual Price Index, API) by less than the predetermined Price Cap Index (PCI).

The PCI for each year (t) is 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

Whilst the PCP 2016 applies to the overall merged Company (i.e. including the relevant services from Columbus Telecommunications), the price cap has been set on the basis of a “hypothetical operator”, reflective of the Company before the merger. Any estimates of efficiency and cost of capital used to inform the level of the price cap also only considered data relating to the Company before the merger.

The PCP 2016 utilises a price cap financial model for determining what X factor would allow the hypothetical operator to realise a reasonable return on its investment across its capped services at the end of the price control period. This requires, amongst others, forecasting the expected volume of demand for the controlled services and the expected costs of the hypothetical operator to deliver these services. The level of costs for the price capped services is determined by taking into account the demand forecasts, expected inflation and expected efficiency gains over the PCP 2016, based on the pre-merger Company only. The expected efficiency gains are informed by, amongst others, historic trends in the pre-merger Company's total factor productivity, international benchmarking of efficiency and the review of financial information provided by 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. The Commission also had an extensive discussion of the various issues with the Company.

SECTION 1 BACKGROUND

INTRODUCTION

1 The price cap regime is designed to ensure that customers continue to have access to telecommunications services at “just and reasonable” rates, while providing Cable & Wireless (Barbados) Limited (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.

2 The Commission established a price cap framework to replace the rate of return as a system for the economic regulation of the Company's regulated services in 2005. The Commission's Decision at the time FTC/UR/2005-01 included provisions for a review of the Price Cap Plan prior to its conclusion....