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WTO Telecommunications Reference Paper

Prof Franco Papandrea

Director

Communication and Media Policy Institute

University of Canberra

Email: franco.papandrea@canberra.edu.au

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GATS: TelecommunicationsRequirements

All WTO member countries are bound by GATS obligations and disciplines such as:

Non-discriminatory market access provided to operators from member countries (Most Favoured Nation Treatment)

Licensing must not be used as a barrier to tradeAll requirements for entry of foreign operators in

telecommunications market must be published (Telecommunications Annex to GATS)

Comply with additional commitments made as part of WTO Agreement on Basic Telecommunications (ABT)

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WTO Reference PaperAnnex to commitments of most WTO members under Agreement on Basic Telecommunications

Developed as part of the GATS negotiations on basic telecommunication services

Applies to basic telecom services (not value added) Establishes legally binding principles for government regulation of ‘major

suppliers’ A major supplier is one that can affect the terms of participation in the market

(price and supply) because: it has control over ‘essential facilities’ It possess substantial market power

Essential facilities are elements of a public network necessary for the delivery of a service:

• that are exclusively provided by one operator; and• whose substitution is not economically or technically feasible

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Purpose of Reference Paper Provides for special treatment of basic telecommunications

services within GATS trade regime Allows domestic regulation that may constrain free trade for

social policy reasons But sets limits to the extent and form of the regulation

Ensures that permissible regulation is Transparent Objective; and Non-discriminatory

Restrain major suppliers from anti-competitive use of their market power

Promote outcomes likely to prevail in a fully competitive market

Ensure equity and transparency in regulatory policy and procedures

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Coverage

The WTO Telecommunications Reference Paper covers six areas:

1. Safeguards to Prevent Anti-competitive Practices by Major Suppliers

2. Interconnection with Major Suppliers

3. Universal Service

4. Transparency in Licensing

5. Independent Regulator

6. Allocation and Use of Scarce Resources

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Anti-Competitive Safeguards Major suppliers have market power that can be used to

frustrate competition Ample opportunity to abuse market power particularly in the

supply of services to other operators that compete with them General approach is to ensure fair competition in the

supply of services WTO requires appropriate regulation to prevent major

suppliers from engaging in or continuing anti-competitive practices, such as

Engaging in anti-competitive cross-subsidization; Using information obtained from competitors with anti-

competitive results; Withholding timely technical information about essential facilities

and commercially relevant information needed by competitors to supply services (in competition with major supplier).

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Interconnection Interconnection is extremely important to the competitive

supply of telecommunication services An established operator can frustrate competition in a

variety of ways including: Charging excessive rates for interconnection Unnecessarily delay provision of equipment and facilities needed

for interconnection Misuse of customer and competitive information Impose limits on the number of points of interconnection Impose unnecessarily stringent technical standards for

interconnection Supply a lower grade of network services to interconnecting

parties

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Regulation of Interconnection

Effective and efficient interconnection arrangements backed by regulator needed

WTO requires regulation to establish the right of competitors to interconnect with major suppliers

The rates and procedures for interconnection must be enforceable

The rates and procedures for interconnection must be available publicly

Public procedures must be established for the resolution of interconnection disputes

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Reasons for Public Procedures Publicly available principles and procedures for

interconnection are required because: Established suppliers have little or no incentive to facilitate

competitors connections to their facilities Publication of principles and procedures will facilitate

negotiations and reduce disputes Avoids special or anti-competitive deals not available to all

operators Major suppliers should be required to either publish their

interconnection agreements or a reference interconnection Regulator may publish a reference agreement applicable to all

parties setting out minimum requirements for interconnection Dispute settlement should be on the same basis as the

published principles and procedures for interconnection Dispute settlement must be timely

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WTO Interconnection Requirements Interconnection must be provided on transparent non-

discriminatory terms, conditions and rates Rates must be transparent, cost-oriented and reasonable

having regard to economic feasibility The interconnecting service must be sufficiently unbundled

to exclude payment for components or facilities not required for the supply of the service

Interconnection must be ensured at any technically feasible point

On request, at other than network termination points on charges reflecting the cost of construction of necessary additional facilities

Interconnection must be supplied in a timely fashion Quality must be no less favourable than that provided to

the own production of similar services.

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Interconnection Charges

Charges should approximate those likely to prevail in a competitive market.

WTO requires ‘cost-oriented’ rates but does not specify the use of a particular methodology

The basis of calculating appropriate rates, therefore, requires judicious consideration and careful choice

A major feature of competitive markets is that prices of products or services naturally tend towards marginal cost

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Economic Cost Models

FDC(Fully distributed

cost)

LRIC*(Long run

incremental cost)

SRMC(Short run

marginal cost)

SAC(Stand alone

cost)

Cost of producing extra unit

Cost of producing extra unit

Specifically related

fixed costs

Cost of producing extra unit

Cost of producing extra unit

Specifically related

fixed costs

Specifically related

fixed costs

Allocate part of common

costs

Allocate part of common

costs

All fixed and common

costs

=

=

=

=

+

+

+ +

+

+

*variations include LRAIC, TSLRIC, TELRIC

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Universal Service

Most countries consider access to telecommunications services to be important for social and economic development

The primary objective of universal service is policies is to provide basic telecommunication services at affordable prices to everyone

Without such a policy, access to services in many areas, including rural and remote, would reflect the high cost of serving those areas

Traditionally, cross-subsidies were used by monopolist operators to fund the provision of access in high cost areas

In a liberalized environment, competitive operators will not supply uneconomic areas without some form of universal service obligation (USO)

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WTO USO Provisions

A country has the right to define the kind of universal service obligation it wishes to maintain.

Any such USO obligation will not be regarded as anticompetitive per se, provided it is:

Transparent Non-discriminatory Competitively neutral No more burdensome than necessary to achieve the defined

universal service. Important to define a practical and realistic universal

service goal ‘No more burdensome’ usually means that levies are cost-

based and relate only to provision of USO services

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Purposes of Licensing

Licensing is used for a variety of reasons, including: Attract investment Promote an orderly industry structure and development for the

provision and extension of services Provide regulatory certainty by defining rights and obligations of

licence holder (important for investment) Define competitive framework (particularly where there is no

strong competition legislation in place) Establish basic rights (protection) of consumers Establish enforcement procedures Allocate scarce resources Generate revenue

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WTO Requirements for Licensing The use of licensing for promotion orderly industry

development and regulatory administration is recognised Licensing must not be used for anti-competitive purposes Must be transparent and fair

Specifically, the following are to be publicly available: All the licensing criteria The period of time normally to reach a decision on the allocation

of a licence The terms and conditions of individual licences In addition, the reasons for the denial of a licence are to be made

known to an applicant upon request

Licence revocation and suspension procedures must be equally transparent and based on objective criteria

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Independent Regulator WTO reference paper requires the establishment of an

‘independent’ regulator. An independent regulator is separate from and not

accountable to any supplier of basic telecommunications does not mean independence from the laws and policies

established by the government Regulator is accountable to government or legislature for

the performance of its mandate The decisions and procedures of the regulator must be

impartial with respect to all market participants important to market confidence and promotion of investment

Need to avoid conflict of interest between the regulator and operators (including government-owned operators)

Regulators must not be appointed to the Board of directors or any other office in an operator or hold a financial or other interest

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Regulatory Process

The regulatory process must be: Objective Independent Transparent; and Efficient

All decisions, rules procedures and notices should be publicly available

Operators should not have doubt on what their rights and obligations are

Desirable to consult publicly with interested parties on all proposed rules or major changes to existing rules

Independent appeal and dispute resolution arrangements

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Regulatory Decisions Principles Decisions are consistent with the regulator’s mandate Government policy is properly applied Must not be made at the direction of others Decisions are made in good faith and for proper purposes Decisions are reasonable Only relevant matters are considered Decisions are based on factual evidence The reasons for a decision are made public Affected parties are given the right to respond to evidence

before a decision is made Affected parties have the right to appeal regulatory

decisions to a court or tribunal

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Allocation of Scarce Resources

Each country may define its own policies for the allocation of scarce resources (e.g., spectrum, numbers and rights of way)

Procedures for the allocation of scarce resources must be:

Objective; Timely; Transparent Non-discriminatory.

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Spectrum Licensing The current spectrum allocation plan is to be made

publicly available Detailed identification of frequencies for specific

government use is not required Establish procedures for the allocation of

frequencies to telecommunications operators Terms and conditions of licences must be publicly

available, objective and non-discriminatory All rights and obligations of users must be clearly

established Terms and conditions of use of spectrum must be

transparent

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Telephone Numbers

Telephone numbers are a scarce resource A numbering plan is to be made publicly available Establish procedures for the allocation of numbers

to operators Terms and conditions of allocation must be publicly

available, objective and non-discriminatory Ensure equitable allocation of desirable numbers and

access codes among operators

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Conclusion

Regulation of telecommunications is directed at: Prevention of anti-competitive practices by major suppliers Ensuring interconnection Establishing a USO policy

Licensing may be used for orderly industry development and allocate scarce resources

All regulation (and Licensing) must be: Transparent Objective, and Non-discriminatory

Regulated charges must be cost-based Independent regulator required to administer regulation