Interview with Mr David ROGERSON, ITU Expert.

LTE Magazine took part in the workshop on « The Costs and Pricing of Access to Infrastructure for the Arab Region », organized by INPT in Rabat in collaboration with the ITU from 09 to 12 July 2018 and in the presence of several delegations of Regulatory Authorities as well as Telecom Operators.

The seminar was characterized by the richness of the content as well as the relevance and quality of the case studies.

The participants also showed great interactivity during the working groups by exchanging and sharing their feedback in their respective environments.

LTE Magazine also seized this opportunity to conduct an interview with Mr David ROGERSON, ITU Expert, following his excellent and remarkable animation of the various workshops.

Lte magazine (Q1) :  With the convergence achieved via « quadplay » offers, new business models are increasingly focused on bundling. As a result, tariff schedules are becoming increasingly complex and pose a challenge for regulators in their price competition framework.

What would be the most optimal accounting approach in ex-ante or ex-post?

This is indeed a regulatory challenge. It is also a challenge for customers working out which bundle is best suited to their needs, but for regulators the question is whether any of the bundles constitute anti-competitive practices. The relevant issues are: excessive pricing (i.e. prices that result in supranormal profits); predatory pricing (i.e. prices that are below cost and thus have the intention or effect of casuing competitors to leave the market); and margin squeezes (i.e. prices set so that there is insufficient margin between retail and wholesale offers for an independent service provider to compete).  None of these behaviours can be assessed until the tariffs are proposed, so ex-post regulation is likely to be the best way to proceed – this means that the regulator will respond to complaints and investigate where appropriate.  Another option is that the operator notifies the regulator of tariff proposals before they are launched, thus giving some time to investigate in advance of launch. This may be useful, but often the regulator has not the necessary information available to make a quick decision, so ex-post regulation is almost certainly going to be the main form of price regulation for bundles.

Lte magazine(Q2) :  In the current context of openness to competition and dominance management, what would be the preferred method of « pure LRIC or LRIC +, or even a hybrid solution of top down and bottom up approaches in force »?

 There is no single preferred costing approach.  For example, if testing for predatory pricing the regulator would be looking for prices set below “pure LRIC”, whereas if testing for excessive pricing the relevant cost standard would be TSLRIC+ (in a bottom-up modle) or FAC (in a top-down model).  So you can see that flexibility is important and, for that reason, I recommend that a bottom-up model is used as this design has more in-built flexibility making it suitable for use in a wider range of potential regulatory challenges.

Lte magazine (Q3) : How to make a accounting regulatory model especially at the level of the main cost drivers and design architectures and configuration of FTTx and 5G networks? 

The cost modelling principles remain the same whether using 2G or 5G mobile, copper or fibre access networks.  The challenge in an accounting model (i.e. a top-down model) is to allocate costs based on the activities that cause costs to be incurred. This demands that each network element is analysed for costs that vary with subscriber numbers or traffic volumes and costs that are fixed, independent of these variables.  Empirical studies have made these calculations quite robust for older technologies, but it will be some time before 5G is sufficiently stable and standardised to enable this to occur.  This points to a particular problem with top-down models – they are always backward-looking, constructed after-the-fact using the technologies and cost structures of one or two years previously.

Lte magazine(Q4) : What specific technical clauses and accounting arrangements are needed to have an audit of operators’ costs and revenues?

A clear set of rules needs to be established: how to allocate costs, which service categories to use, the forms of depreciation, the asset lifetimes, the allowable cost of capital etc.  There is no need to re-invent the wheel, however, as guidelines have been drawn up and used throughout the European Union[1].  These would provide a good basis for work in Morocco or elswehere.

Lte magazine(Q5) : Moving the value of networks to content that benefits OTTs has a negative impact on the profitability of operators. To what extent could this risk be taken into account in determining the rate of return on capital?

I don’t see these two issues as being directly related.  Yes, the profitability of network operators is threatened to some extent by OTTs but that is as a result of competition for retail revenues, whereas the regulated rate of return on capital (WACC) is a matter that addresses the cost of network services. OTTs are part of a fundamental shift towards networks designed for data traffic with all user services, including voice, now being carried across the network as packets of data. Significant investment is required by operators to ensure that sufficient network capacity is available for these data services, and the WACC is part of the calculation that converts this investment into an annual cost or an annual revenue requirement.  The challenge for operators is to find appropriate new ways to obtain that revenue given that users don’t generally pay usage-based charges for their OTT applications – in part it will be through user monthly subscription fees, but arguably some OTT service providers should also make a payment, particularly for bandwidth-hungry applications.  That’s all part of the “net neutrality” debate – and no definitive answers have yet emerged.

Lte magazine(Q6) : What are the levers of non-tariff regulation to help regulators to ensure the provision of the universal service, guarantee the coverage of the territory, safeguard the principles of loyalty and transparency and respect the rules of fairness and free competition?

This is another big question.  In large part I think this can be addressed through an appropriate overall regulatory framework – e.g. a telecommunications law that embeds strong competition rules and gives the national regulatory authority sufficient powers to act on anti-competitive behaviours, and licences that require operators individually or collectively to meet universal service requirements.  However, as the network investments required for FTTx and 5G are so very large, serious thought needs to be given to having a single national operator with regulatory-enforced open access conditions, so that effective and efficient competition in digital applications can sit on top of the network layer.

(*) The original interview was conducted in English

[1] COMMISSION RECOMMENDATION of 19 September 2005 on accounting separation and cost accounting systems under the regulatory framework for electronic communications (2005/698/EC)