Interconnection System

Ir. Muhamad Asvial, MSc., PhD

Center for Information and Communication Engineering Research (CICER)
Electrical Engineering Department - University of Indonesia
E-mail: asvial@ee.ui.ac.id
http://www.ee.ui.ac.id/cicer

Slide 1

Why is interconnection important?

• Enables communications – public interest,

right to communications, consumer choice
• Enables competitive entry – fair
competition and provides for more, high-
quality services
• … which lead to telecommunications
access/universal service

Slide 2

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Interconnection is Necessary for both:

• Facilities-Based and
• Services- Based Competition

Slide 3

Interconnection and competition

“Regulators around the globe consider

interconnection to be the single most
important issue in the development of a
competitive market place for
telecommunication services.”

Slide 4

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 WTO Reference Paper

• Interconnection to be ensured
• Public availability of the procedures for
interconnection negotiations
• Transparency of interconnection
arrangements
• Interconnection: dispute settlement

Slide 5

Reference Paper 2.2 (a)

Interconnection with a major supplier will be
ensured at any technically feasible point in the
network. Such interconnection is provided:
(a) under non-discriminatory terms, conditions
(including technical standards and specifications)
and rates and of a quality no less favourable than
that provided for its own like services or for like
services of non-affiliated service suppliers or for its
subsidiaries or other affiliates;

Slide 6

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 Who must interconnect in practice

• Reference Paper requires interconnection by

major suppliers
• Different countries may require interconnection
from incumbents or dominant operators or
operators with SMP
• Increasingly, countries take a technology neutral
approach and impose interconnection
obligations on all network operators
• Still asymmetric regulation places heavier
interconnection obligations placed on major
suppliers

Slide 7

Reference Paper Terms and Conditions,

Para 2.2 (b)

Such interconnection is provided:

(b) in a timely fashion, on terms, conditions

(including technical standards and specifications)
and cost--oriented
cost rates that are
transparent, reasonable, having regard to
transparent
economic feasibility, and sufficiently unbundled
so that the supplier need not pay for network
components or facilities that it does not require
for the service to be provided; and

Slide 8

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 Why cost-oriented, transparent
interconnection prices?

• Interconnection charges make up 40 to

50% of the new entrants' total costs.
• Interconnection charges are a critical
factor for the survival of new entrants.
• Incumbents view interconnection as
running counter to their interests
• Incumbents often inflate interconnection
charges to a level that deters new market
entrants

Slide 9

How are Interconnection Rates

Calculated?

• Different Methods of calculation

– Percentage off retail rates
– Fully allocated costs
– LRIC
• Benchmarking
• Not all are cost-based!
• What costs are included is a key issue!
Slide 10

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 Percentage of retail rates

• Not a cost-based approach

• Advantages – ensures new entrants will be at
least as efficient as incumbents
• Disadvantages – preserves the inefficiencies
of incumbents and hinders the reduction of
retail prices towards costs
– This disadvantage was noted by Botswana in its
2003 interconnection dispute settlement case

Slide 11 11

Fully allocated costs

• Total cost for providing service, including
historical and depreciated investment costs
is divided by volume of service provided
• Advantages – information is readily available
in the right form from the incumbent
• Disadvantages – includes common costs,
preserves the inefficiencies of the
incumbent, allows the control over pricing to
be controlled solely by the incumbent

Slide 12

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 Long Run Incremental Costs LRIC
• Cost of providing an additional unit of service over the long
run
• Advantages -
– It looks like cost calculations to make business
decisions
– The costs will be substantially the same for any
operator of a similar network, thus benchmarking can
be utilized
– It is forward looking - it does not relate to old
equipment or old inefficiencies
– There is more or less a balance between under and
over recovery
– It incorporates a reasonable rate of return

Slide 13

LRIC

• Disadvantages
– The calculation requires
preparation of correct input figures
– which takes time
– The concept is relatively new and
requires cost models to be
developed

Slide 14

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 Per-Minute, Per-Second or Capacity
Based Prices?

• Most pricing schemes currently based on

time units
• New pricing method is based on network
capacity purchased
• Capacity-based interconnection in use in
Colombia and Spain
• Capacity-based interconnection expected
to grow in use with growth in VoIP and
broadband

Slide 15

Prices-Bundled or Unbundled
• Bundled interconnection charges
--the interconnection seeker pays a single price for
a standard set of interconnection functions
whether used or not.
• Unbundled charges
--the new entrant pays only for the component(s) of
the interconnection package it needs for
interconnection services.
– No need to pay for components and functions not used
to provide services to its customers.

Slide 16

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 Unbundling

ensuring that the network elements that may

be used by an interconnecting party are
unbundled to their smallest degree so that
the costs being paid are for only those
elements required or desired and none
others bundled into the service/facility

Slide 17
17

Unbundling the network elements

• Local switching
• Signaling networks
• Interoffice transport
• Back office functions

Slide 18

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 Local Loop Unbundling—Promoting
Broadband

• Different kinds of local loop unbundling

– Full unbundling –raw copper
– Shared Access or Line Sharing
– Bit Stream Access
• LLU requirements and WTO principles on unbundling
can be distinguished from each other. Countries that
have not opted for LLU can still apply the WTO
principle requiring operators to sell only those
components of the network required by competitor!

Slide 19
19

Fixed-Mobile Interconnection

• Often Represents a Market Failure in Mobile

Termination Rates
• Big Problem for Developing Countries where
56% of the world’s mobile subscribers reside.
• Calling a Mobile Subscriber often costs more
than calling a Fixed line subscriber

Slide 20

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 Should mobile termination rates be
regulated?
• High mobile termination rates are not cost-
based
• Demonstrates how markets evolve.
• Incumbent fixed line operators once held
competitive advantage in negotiating
interconnection rates against new mobile
entrants
• Now rates once agreed by incumbents are
hurting their business
• But are high mobile rates financing much-
needed network rollout in developing
countries?
Slide 21

Procedures and Transparency Under

Reference Paper

• Public availability of the procedures for

interconnection negotiations. The procedures
applicable for interconnection to a major supplier
will be made publicly available

• Transparency of interconnection arrangements. It

is ensured that a major supplier will make publicly
available either its interconnection agreements or
a reference interconnection offer

Slide 22

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Why are publicly available procedures
required?

• Incumbents may have incentives to withhold

important information from their competitors
• To avoid delays in negotiations . . . which means
delayed competition
• To give parties a framework to facilitate
agreement
• To level the playing field—helps those with less
market power from potential abuse of those with
greater market power

Slide 23

Why are transparent interconnection

arrangements necessary?

• All parties operating on same terms

• Avoids discrimination in favor of
incumbent’s affiliates or subsidiaries
• Avoids discrimination between new market
entrants

Slide 24

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 Finding Interconnection Procedure
Models: Annexes of ITU-
ITU-D Study
Group Question 6-1/1 Report
Annex I: Contents of a typical interconnection
agreement
Annex II: Outline on Reference Interconnect Offer
(Indian Model)
Annex III: Outline on Planning and Operations of an
Interconnection (Belgium Model)
Annex VIII: Interconnect Billing in British Telecom
Annex X: Methodology for recovery of costs
incurred by Service Providers in setting up Carrier
Pre-selection Best International Practice
Slide 25

Selected Procedures
• Parties negotiate, subject only to general
commercial and competition law (New Zealand
before 2002)
• Parties negotiate, but if they fail to agree, the
regulator can intervene (UK and Botswana)
• Parties negotiate, but the regulator must
approve (Australia, Jordan)
• The regulator decides interconnection terms
and rates
• The regulator establishes a reference
interconnection offer (RIO) to ensure entry, but
parties are free to negotiate beyond the RIO
(Singapore)
Slide 26

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 Regulator’s Role

• Must decide disputes quickly

• Set out clear sanctions imposed on parties
not interconnecting or delaying
interconnection
• Reviews and approve/disapprove
interconnection agreements
• Monitor interconnection to ensure
compliance with regulations and
agreements

Slide 27

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