Telcos nix change in service pricing scheme

Telecommunications companies continue to express their reservations over a proposal to change the current service pricing regime to one that will fully reflect cost.

The National Telecommunications Commission (NTC) held a briefing last week on the proposed implementing rules and regulations for the transition from the current revenue-sharing or unit charge arrangements to uniform, cost-based interconnection charges.

Based on the government’s timetable, telcos should be implementing the cost-based interconnect pricing scheme by 2006.

The specific cost methodology will be in the form of wholesale pricing principles and guidelines for public telecommunication entities (PTEs) to provide telecoms services at cost-based prices that are transparent, reasonable and economically feasible.

Upon implementation of the new regime, all existing interconnection agreements among PTEs will have to be amended to reflect cost-based interconnect charges.

In developing their cost-based access and interconnect charges, all PTEs should implement a long-run incremental cost (LRIC) standard.

LRIC is defined as the cost of an additional defined increment of output using forward-looking cost estimates on forecast traffic volumes using a long-run time horizon.

According to the NTC, the use of LRIC is more practical than marginal cost for telcos and other capital-intensive industries because capital costs are included.

LRIC is also the lowest price at which a PTE would be prepared to offer the access service to a potential competitor. If a service is priced below LRIC, it needs to be cross-subsidized by another service to cover the long-run costs, and thus, is a "cost floor" for predatory pricing.

The telcos, however, are questioning the use of the LRIC standard. In a position paper, the Philippine Long Distance Telephone Co. (PLDT) noted that LRIC is not appropriate in a situation where economies of scale exist, as in the local telecoms industry.

PLDT representatives said LRIC covers direct cost of resources actually used but does not cover costs that are common among services within the company.

PLDT recommended that the revenue deficit approach be used as an interconnection model until sufficient rate rebalancing is made. After this is done, cost-based interconnect charges can then be introduced using the fully distributed cost model. It is only after these two conditions are met that a modified LRIC that includes a certain mark-up can be implemented, PLDT said.

"LRIC is a recipe for bankruptcy since it applies only to perfect competition that does not exist here. It is also costly to implement and will eventually have to be passed on to the consumers," the company said.

For its part, Globe Telecom representatives said the Philippines may not have the right conditions for a cost-based interconnect regime using LRIC as a basis.

The company expressed its concern over the practicality of LRIC. "In other countries, those that have adopted this have suffered from both financial and manpower resources drain and the benefits were not clear. One company in Malaysia even had to hire 300 employees just to segregate the accounts," it said.

The Ayala-owned company also noted that now may not be the right time to implement the new pricing regime, especially since many telcos are suffering from financial problems.

The NTC though agrees that there will be difficulties as far as calculating interconnect charges.