• Prerequisite for the development of a competitive telecom enviroment.
• Terms of interconnection are a critical determinant of breadth and viability of competition.
  "Establishing the right arrangements for setting interconnection charges is probably the most important element in the competitive framework in telecoms."
• Interconnection charges represent a significant proportion of competitive carriers' total costs

Objectives of Interconnect Policy

• Ensure full network connectivity interoperability.
• Provide conditions for fair competition.
• Create condition for attracting investment in order to stimulate infrastructure growth and service innovation.
• Create conditions for good faith commercial negociations between interconnecting parties.
• Minimize ongoing regulatory intervention.

Main Interconnect Services

1. Call origination and termination.
   (Local, Long distance, Internationa)
2. Acquisition of leased circuts.
3. Unbundled network element.
   (Local loops, Switches, Signalling)
4. Ancillary services.
   (Directory service, Operator service)
5. Shared infrstrcture.
   (Ducts, Poles, Building space)

Basic Interconnect Priciples

• Interconnection charges should be 'Cost-Oriented'
  Each carrier should recover its relevant costs (including any joint and common costs) of providing interconnect services and related functions.
  Key issues include: definition of and methodology for calculating or proxying 'cost-oriented' rates.
• Commercial terms of interconnection should maximize economic efficiency.
  Interconnect arrangements should be efficient and sustainable; should not lead to market distortions.
  Costs related to USO should be identified seperately.
• To the greatest extent practicable, terms of interconnection should be simple to implement and administer.
• Terms of interconnection should be consistent with WTO regulatory commitments.

WTO Reference Paper- Interconnection Principles

• Interconnection to be ensured:
  At any technically feasible point in the network
  Under non-discriminatory terms, conditions and rates, and of a quality no less favourable than provided by incumbent to its own services.
  In a timely fashion on terms, conditions and cost-oriented rates that are transparent and reasonable.
  On a sufficiently unbundled basis
  Upon request, at points in addition to network termination points offered to majority of users, subject to additional charges.

Approaches to Interconnection Settlements

• Cost based pricing.
• Revenue Share in Proportion to Costs.
• Discounted Retail Prices.
• Bill and Keep.
• International Benchmarks.

Cost - Based Pricing

• Each operator sets its interconnect price to recover its direct cost (including a return on capital) and any joint and common costs.
• If calculated and implemented appropriately, cost - based pricing provides an economically efficient basis for competition.
• Cost - based pricing is used extensively throughout the developed world.

Cost - Based Pricing

Disadvantages

• Detailed cost information may not be readily available.
• Development of cost-based rates often complex and time consuming to implement.
• Requires assumptions to be made regarding allocation of costs (based on cost drivers) and appropriate level of mark-ups.

Revenue Sharing

• Interconnect carriers agree on the proportion of revenue from a call that each will retain (in proportion to their costs).
• Retained revenue serves as proxy for costs.
• Simple to understand and administer.
• May provide operators with a reasonable return when retail are out of balance with costs.

Revenue Sharing

Disadvantages

• May reduce incentives for rebalancing of retail prices.
• Ties interconnect regime (input market) to retail prices (output market).
• In many countries, retail tariffs are very out of balance with costs.
• Revenue sharing may therefore result in interconnect charges that are not 'cost-oriented'.

Discounted Retail Prices

• Interconnect prices based on retail rates less a discount to reflect any avoided costs.
• Relatively simple and expedient to implement.
• Variant of this approach adopted by the FCC in the USA for local resale regime.
• "Without resale discount" based on incumbent's retail rates minus proportion of marketing, billing, collection and other costs the incumbent will avoid as a result of it not serving the end-customer directly.

Discounted Retail Prices

Disadvantages

• Where rebalancing has not been completed, retail prices may not approximate costs.
• Retail prices subject to ongoing pressures.
• Retail prices more applicable to customers than to carriers.
• Cost information required to quantify 'avoided' costs.
• Unequal bargaining power may lead to unsustainable results.

Bill and Keep

• Each operator keeps all the revenue from its customers and terminates calls on its network at no explicit charge.
• Very simple and cost-effective to implement and administer.
• Generally considered appropriate when:
  Operators offering eqyivalent terminating services.
  Operators' network terminatiopn costs are similar.
  Volume of traffic exchanged is in balabce.

Bill and Keep

Disadvantages

• If all three conditions are not met, bill and keep may create arbitrage opportunities and lead to market distortions.
• Lack of an explicit interconnect charge may create incentives for carriers to target certain business customers with large outbound traffic profiles (e.g., ISPs).

International Benchmarks

• Where cost information is not available or reliable, interconnection charges may be established by reference to benchmark cost data from other countries.
• International benchmarks may be used as a proxy for carriers or industry costs until specific costing data is available.
• Simple to implement and administer.

International Benchmarks

Disadvantages

• Use of benchmarks may not reflect cost structure of domestic operators.
• Few countries have developed cost-based interconnection charges that can be used as international benchmarks.
• EU 'best practice' interconnection charges based on lowest prevailing interconnect prices, not based on costs.