Authority for Info-communications Technology Industry of Brunei Darussalam

Transcription

1 Authority for Info-communications Technology Industry of Brunei Darussalam CONSULTATION PAPER ISSUED BY THE AUTHORITY FOR INFO- COMMUNICATIONS TECHNOLOGY INDUSTRY OF BRUNEI DARUSSALAM Tariff Regulation Framework for Telecommunications and Broadcasting Sectors in Brunei Darussalam 30 September 2013 Page 1 of 68

2 Table of Contents 1 Introduction Background of the Tariff Regulation Framework The Tariff Regulation Framework under the Draft Competition Code Approach to the Tariff Regulation Framework Retail Services that may be subject to Ex Ante Regulation Retail Domestic Fixed Line Voice Services Retail Domestic Mobile Voice Services Retail International Voice Services Retail Managed Network Services Retail Domestic Leased Lines Retail Mobile Broadband Retail Fixed Broadband Retail Broadcasting Services Wholesale Services that may be Subject to Ex Ante Regulation Interconnection Wholesale Leased Lines Wholesale Local Loop Unbundled Access Wholesale Access to the FTTH Infrastructure Sharing / Duct / Network Co-location Service Wholesale Broadcast Signal Distribution Summary of ex ante measures Tariff Filing and Review Circumstances for Tariff Filing Information to be Included in Tariff Filing by Market Players Information to be Included in Tariff Filing by a Market Player with SMP Tariff Review Process Invitation to Comment Submissions Consultations Page 2 of 68

3 Appendix A Tariff Regulation Methodologies Appendix B Telecommunication Prices in Brunei Appendix C Broadcasting Services Page 3 of 68

4 Glossary 1 TERM 2 DEFINITION ADSL AITI B-Mobile CPP DST DSTCom DTT Ex ante Ex post FDC FTTH GPS HSBB IDD InTi licenses IPTV LLU Mbps MItA MPLS OECD OTT RPP SeTi licenses SKA SMP SMS STD TelBru TV VoIP VPN VSAT Asymmetric Digital Subscriber Line Authority for Info-communications Technology Industry of Brunei Darussalam B-Mobile Communications Sdn Bhd Calling Party (only) Pays Datastream Technology Sdn Bhd DST Communications Sdn Bhd Digital Terrestrial Television This means before the event. In relation to regulation under the Competition Code (currently in draft stage), this means that any law or regulation imposed to deter or prevent certain conduct from happening. This means after the event. In relation to regulation under the Competition Code (currently in draft stage), this means that any law or regulation imposed after certain conduct has occurred. Fully Distributed Cost Fibre to the Home Global Positioning System High Speed Broadband over fibre optic cable to deliver telephone and broadband services International Direct Dialling An InTi licensee owns and provides infrastructure, systems, networks, facilities and other equipment (excluding customer premises equipment [CPE]) for the purposes of enabling telecommunication services Internet Protocol Television Local Loop Unbundling Megabits per second Model Interconnection Agreement Multiprotocol Label Switching Organisation for Economic Cooperation and Development Over the Top providers Receiving Party Pays (as well) (RPP) A SeTi licensee does not own its own infrastructure outside of its own premises, but uses the infrastructure provided by InTi licensees Sender Keeps All Significant Market Power Short Message Service Subscriber Trunk Dialling Telekom Brunei Bhd Television Voice over Internet Protocol Virtual Private Network Very Small Aperture Terminal Page 4 of 68

5 Consultation on a Tariff Regulation Framework for Telecommunications and Broadcasting Sectors in Brunei Darussalam 1 Introduction The aim of this Consultation Paper is to seek views from the public as well as the telecommunications and broadcasting sectors on the proposed Tariff Regulation Framework to be adopted by the Authority for Info-communications Technology Industry of Brunei Darussalam ( AITI ) for the telecommunications and broadcasting sectors. In line with the objective of ensuring efficient, effective and co-ordinated regulation of a converging communications sector, it is the intention of AITI to adopt a tariff regulation regime that ensures affordable costs to communicate for the Brunei consumer, promotes the competitive provision of info-communications services to the Brunei consumer, provides regulatory certainty and is consistent with the policy of light regulation that is pursued by the AITI. This Consultation Paper provides an opportunity for stakeholders to provide their feedback and partake in the process of Brunei Darussalam s Tariff Regulation Framework for Telecommunications and Broadcasting Sectors. The document structure is as follows: Chapter 2 gives a background to the Tariff Regulation Framework Chapter 3 links tariff regulation to the draft Competition Code which will be the overarching document for the Tariff Regulation Framework. Chapter 4 summarises the overall approach taken towards the development of the Tariff Regulation Framework. Chapters 5 discusses the need for ex ante tariff regulation, the options for ex ante regulation and AITI s proposals with regard to retail services; Chapter 6 does the same with regard to wholesale. Stakeholders are invited to comment according to the questions outlined in this chapter. Chapter 7 summarises the ex ante measures proposed. Chapter 8 covers filing of tariffs and the tariff filing process. Appendix A outlines the methodologies applicable to ex ante and ex post tariff regulation. Appendix B summarises the analysis of telecommunications tariffs in Brunei. Appendix C summarises the analysis of broadcasting service in Brunei. In line with the role of the AITI as the converged regulator for both telecommunications and broadcast services, the development of a Tariff Regulation Framework encompasses broadcasting as well as telecommunications. Page 5 of 68

6 2 Background of the Tariff Regulation Framework The Tariff Regulation Framework is one of several regulatory measures being introduced by the AITI to create a converged regulatory framework for Brunei including the development of a competition code: a) The consultation paper Developing a Converged Telecommunications and Media Regulatory Framework on Brunei Darussalam for the Implementation of New Licensing Regime 18 th April 2012 touched on general issues of convergence including the need for an appropriate licensing regime. Reference should be made to this consultation on the AITI website as it deals with sector trends that demand changes in the regulatory approach. b) A parallel consultation process has been taking place with respect to a competition code that addresses the converged environment. The consultation paper Developing a Converged Telecommunications and Broadcasting Regulatory Framework for Brunei Darussalam on the Introduction of a Telecommunications and Broadcasting Competition Code 4 th June 2012 has led to the development of a Competition Code that is being finalised. These developments are being carried in parallel. The draft Competition Code will fundamentally guide the Tariff Regulation Framework in that tariff regulation is essentially seen as being required due to issues of competition, as explained in more detail in the following chapter. The Tariff Regulation Framework is being introduced at a time when there are fundamental changes taking place in telecommunications and broadcasting sector resulting in a very different set of priorities for tariff regulation than would be the case several years ago. a) In terms of retail services, traditional fixed line voice services have been substituted by voice services over mobile networks and these in turn have are being replaced by voice (and messaging services) by so called Over The Top (OTT) providers that are accessed over the internet via application software, these include such services as Skype, WhatsApp and Facetime. In Brunei, the availability of low cost smartphones is allowing even lower income migrant workers to communicate with their home countries through such applications, bypassing not only the main operators but also the Voice over Internet Protocol (VoIP) payphone providers operating under SeTi licences. b) In terms of retail access, the most important service is broadband access allowing high speed internet. The means of providing high speed broadband on a long term sustainable basis is largely via fibre, namely Fibre to the Home (FTTH). The challenge for Brunei is a pricing structure for FTTH that makes the provision economically viable, while being low enough to attract demand. c) In the long term, efficient retail tariffs need to be achieved through competition and the main focus of tariff regulation is not in fact on retail tariffs but on the wholesale tariffs charged by operators to other operators for either interconnecting to their networks or for using their network infrastructure. The powers of the AITI to regulate tariffs and demand information are clearly laid out in the Telecommunications Order 2001 and the AITI Order The Broadcasting Act gives the Page 6 of 68

7 Minister wide ranging powers to regulate broadcasting and these powers will be transferred to the AITI. 3 The Tariff Regulation Framework under the Draft Competition Code The draft Competition Code identifies the regulatory obligations of all market players and the more specific obligations of market players who have Significant Market Power (SMP) in a particular market. The principle of SMP is an important one in regulation and it is based on the idea that where a market player (i.e. operator) dominates a market and is able to influence a market, then he would be defined as having SMP and would be subject to regulatory measures such as tariff regulation. The draft Competition Code will not specify markets but will specify the procedures for market investigation and the criteria under which a market player may be designated as having SMP. It should be noted that a market player may well have SMP in some markets but not necessarily all the telecommunications / broadcasting markets in which it is involved. As noted, the draft Competition Code fundamentally directs the Tariff Regulation Framework and with respect to tariffs there are two fundamental procedures that will be identified in the draft Competition Code: a) The first principle is that all tariffs must to be filed with AITI. If the tariffs that are being filed by a market player are not SMP the AITI has the power to request an amendment but otherwise does not have to formally approve the tariffs and in the absence of any objection from the AITI within the specified timeline the tariffs can be implemented. However, if there is the need to investigate the tariffs for anti-competitive behaviour at a later stage, then AITI may do this. This process is ex post regulation and the approaches to be followed for analysing these tariffs on an ex post basis are described in Appendix A. b) Tariffs for a service where the operator filing the tariffs does have SMP have to be approved by the AITI and the intention is that the whole process is done according to a pre-defined methodology, a process of ex ante regulation. The methodology for the determination of the tariffs, and the procedure to be followed for the filing and approval of such ex ante tariffs will be specified in the Tariff Regulation Framework. 4 Approach to the Tariff Regulation Framework The AITI carried out a comprehensive study on the telecommunications and broadcasting sector in Brunei, objectively analysing the different services and tariffs with the objective of determining whether ex ante tariff regulation would be likely to be required. The two criteria used were: a) Performance Gap: - is there any evidence that the tariffs are out of line with what could be expected. b) Regulatory Gap: - are there gaps in terms of both applicable regulatory control and competition. Page 7 of 68

8 Below is a list of the services that have been assessed in detail regarding whether or not they should be subject to ex ante regulation A. Retail Services 1. Voice a) Retail Domestic Fixed Voice Services b) Retail Domestic Mobile Voice Services c) International Voice Services 2. Retail Managed Network Services 3. Retail Domestic Leased Lines 4. Retail Broadband a) Retail Mobile Broadband b) Retail High Speed Fixed Broadband 5. Retail Broadcasting Services B. Wholesale Services 1. Interconnection (Voice and SMS) 2. Wholesale Leased Lines 3. Wholesale Local Loop Unbundling (LLU) 4. Fixed Broadband Access (FTTH) 5. Infrastructure Sharing 6. Duct Sharing 7. Co-location Service Table 1: List of services that may or may not be subject to ex ante regulation For each of the above services, the following assessment was made. a) The need for regulation assessing the degree to which ex ante tariff regulation is required (if at all). b) The feasible options for ex ante regulation that have been identified. c) AITI s initial opinion regarding the appropriate ex ante regulation method. All services are in principle subject to ex post regulation including services that are not listed here. Methodologies for ex post tariff regulation are described in the Appendix A. Q1. Refer to Table 1, do you think that there are other services that should also be Page 8 of 68

9 considered as subject to ex ante regulation? If yes, what are the service(s) and why? Page 9 of 68

10 5 Retail Services that may be subject to Ex Ante Regulation In this section AITI assesses all the retail services that may be potentially subject to ex ante regulation. Where ex ante regulation is judged to be required, the feasible options for ex ante regulation are outlined and AITI makes a proposal regarding the appropriate option. 5.1 Retail Domestic Fixed Line Voice Services Need for Regulation For the purposes of analysis, a separate assessment has been made of domestic fixed and mobile voice. The analysis was made comparing Brunei with not only its neighbours but all the member countries of the club of high income countries the Organization for Economic Cooperation and Development (OECD), using the method of baskets to compare like with like. The analysis for fixed voice has indicated that the costs of domestic fixed line telephony are comparatively low for low usage baskets, but become comparatively high for high usage baskets when compared with the OECD basket of services. This is primarily due to the fact that while the fixed rental costs in Brunei are low, the usage costs, especially the tariffs for domestic long distance (i.e STD calls to other districts) are fairly high. The OECD country analysis is appropriate because the OECD member countries have similar levels of income to Brunei and the methodology deployed is rigorous and well tested. This analysis and the methodology is explained in Appendix B Ex Ante Regulatory Options The following options for ex ante regulations have been considered: a. Benchmark based (maximum and minimum determined rates). b. Impose a price cap model on TelBru (if designated as SMP). c. Come to an agreement with TelBru concerning rebalancing. Of these three options, a full price cap model based on productivity is considered as being too heavy, and disproportionate given the fact that the low usage baskets are not high and the first concern for a regulator should be entry level low users AITI Initial Proposal regarding Ex Ante Regulation AITI proposes to come to an agreement with TelBru concerning rebalancing, possibly combined with (a.) a productivity based price cap is considered unnecessary. The ex ante regulation depends on the fixed line domestic voice market being defined as a separate market from the overall domestic voice market. Page 10 of 68

11 Q2. Do you consider that retail fixed voice should be subject to ex ante regulation in the current era where voice is declining and do you consider that the current structure with low fixed costs and high usage costs (especially STD calls to other districts) is a problem? 5.2 Retail Domestic Mobile Voice Services Need for Regulation As noted, for the purposes of analysis, a separate assessment has been made of domestic fixed and mobile voice. An analysis was made comparing Brunei with not only its neighbours but all the member countries of the club of high income countries the Organization for Economic Cooperation and Development (OECD), using the method of baskets to compare like with like as explained above. This analysis and the methodology is explained in Appendix B. The analysis for mobile voice has indicated that the costs of domestic mobile service telephony are reasonably close to average when compared with the OECD basket of services, high usage makes the service comparatively expensive but this is less evident than is the case with the fixed line service. Therefore, from a tariff performance point of view, it is debatable whether retail domestic mobile voice service tariffs need to be regulated. From the regulatory point of view however, there may be an issue of competition because, DSTCom has the overwhelming market share of the mobile voice market and indeed the overall domestic voice market. This gives DSTCom considerable leverage because in the existing tariff framework, on-net calls (within the same operator network) are cheaper than off-net calls (to other operator network). Therefore, since most subscribers are on the DSTCom network, it makes economic sense for people to join the DSTCom network to enjoy the cheapest calls to the majority of other subscribers. There is no suggestion that DSTCom has abused its market power in either setting high rates or engaging in predatory pricing, but it is clearly able to control the market because of its size. The options for ex ante retail tariff regulation are however limited as any regulatory intervention will not necessarily help competition. The only manner in which the market dominance of DSTCom can be mitigated as dominance in terms of tariffs is by imposing the principle that the price for all calls should be the same whether on-net or off-net. This would require the establishment of a proper interconnection regime and to make a proper cost based balance between the fee for incoming calls and the mobile termination rate Ex Ante Regulatory Options AITI does not consider the imposition of a price cap, while this could force prices down, but would obviously not boost competition. Therefore the following options are considered: Page 11 of 68

12 a. Benchmark based (maximum and minimum determined rates). b. Dictate that calls should be the same price whether on-net or off-net. Option (b.) depends on the interconnection regime and it is therefore suggested that a cost model for interconnection is imposed before any retail tariff regulation takes place. Q3. The AITI finding is that retail mobile tariffs although higher than the neighbouring countries are not excessive in view of Brunei s particular circumstances (E.g. small market size or no economy of scale). Do you agree that the appropriate approach is to foster competition rather than directly manage retail tariffs? AITI Initial Proposal regarding Ex Ante Regulation AITI is open to suggestion as to which of the 2 options would be appropriate. 5.3 Retail International Voice Services Need for Regulation Retail international voice services are treated as a distinct market because there is a higher level of effective competition. The analysis found that while the IDD service tariffs that are applied to all operators are relatively high, there is competition in the international voice market from the following: a. The VoIP services provided by the three main operators. b. Services offered by Public Phone and VoIP operators. c. So called OTT services such as those offered by Skype and Viber. Consequently there is no need for any specific regulatory measures regarding international tariffs Ex Ante Regulatory Options In view of this, the following ex ante regulatory options can be considered: a. No ex ante regulation at all. b. The operators should continue to submit the IDD tariffs for approval on a joint basis as required and this is assessed against regional benchmarks. 1 In fact the situation in Brunei can be regarded as satisfactory as there is a clear choice in quality level that is transparent to the buyer and this is evidenced by the fact that half the calls still use the high quality IDD service. Page 12 of 68

13 c. As an option the operators may be allowed to have their own individual IDD tariffs which can be assessed against benchmarks. d. International tariffs being included in a price cap model for all the tariffs offered by a SMP operator AITI Initial Proposal regarding Ex Ante Regulation AITI would initially consider (c), but invites comments. Q4. Do you agree with the suggestions regarding international voice service? 5.4 Retail Managed Network Services Need for Regulation These include IP MPLS and VPN services. The provision of these services to corporate and government clients is based on commercial negotiations; ex ante regulation of tariffs is not appropriate AITI Initial Proposal regarding Ex Ante Regulation AITI is of the opinion that ex ante regulation of this retail service is not appropriate. However, the providers of such a service may require to obtain wholesale leased lines from another operator and this is where the regulatory attention should be paid. 5.5 Retail Domestic Leased Lines Need for Regulation Retail leased lines were typically regulated where there is only one provider, but regulation of retail leased lines is now rare as the emphasis is on wholesale leased lines to ensure that there is a competitive market that makes regulating leased lines unnecessary. Both DST and TelBru are providing retail leased lines. An analysis was carried out comparing Brunei leased line tariffs with those for OECD countries. This analysis and the methodology is explained in Appendix B. The analysis indicates that lower capacity leased line tariffs below the OECD average for the 2 Mbps line and above average for the 34 Mbps Ex Ante Regulatory Options There are two alternative options for ex ante regulation: a. None emphasis should be on regulating wholesale leased lines. b. Require that leased lines tariffs fall between a floor and a ceiling price defined via benchmarks. Page 13 of 68

14 It is not at all clear whether there is a dominant market player for retail leased lines. In this case a prerequisite for ex ante regulation is that a market analysis takes place in order to determine whether there is a dominant market player who would then be declared to have SMP AITI Initial Proposal regarding Ex Ante Regulation AITI s initial proposal is not to regulate retail leased lines on an ex ante basis at this stage. If a market analysis indicates an operator has SMP in this market then the position may be reassessed in order to determine whether ex ante tariff regulation is a necessary measure. Q5. Do you agree that there is competition in the provision of domestic retail leased lines and that tariff regulation is not necessary? 5.6 Retail Mobile Broadband Need for Regulation Retail mobile broadband is provided by both existing mobile operators (DSTCom and B- Mobile). Although DSTCom has the largest market share, this does not equate necessarily to market dominance in the provision of purely broadband services. The reason for this is that a subscriber who is using a network for internet access is not necessarily affected by how many other subscribers there are on the same network (unlike voice for the reasons outlined above). However, if it is apparent that mobile broadband users are using devices with which they also make calls, then the effect of dominance in mobile voice service would also extend to mobile broadband AITI Initial Proposal regarding Ex Ante Regulation AITI s initial proposal is not to regulate retail mobile broadband on an ex ante basis at this stage. If a market analysis indicates an operator has SMP in this market then the position may be reassessed in order to determine whether ex ante tariff regulation is a necessary measure. Q6. Do you agree that there is competition in the provision of retail mobile broadband and should be subject to ex ante regulation? 5.7 Retail Fixed Broadband Need for Regulation There are basically two fixed broadband services offered: a. Broadband services over ADSL (Asymmetric digital subscriber line) branded as espeed and offered by TelBru. Page 14 of 68

15 b. Broadband services over FTTH branded as HSBB (High Speed BroadBand) and offered by TelBru. The gap analysis showed that the retail broadband prices are very high. The espeed service is regarded as being no more than comparable to the current 3G and 3.5G mobile broadband services and it is subject to effective competition as a result. Therefore it is recommended that the ADSL based espeed service is not subject to retail tariff regulation 2 but that the emphasis should shift to the HSBB. The FTTH based HSBB will effectively be delivered by TelBru who will most probably control at least the passive network elements. In these circumstances, the provision of the FTTH service will require regulatory oversight both with respect to the retail (HSBB) and the wholesale service. The HSBB service will be used to provide a full set of converged services including telephony (IP), high speed internet access and IPTV (television over internet protocol). Eventually, the HSBB may well be the only fixed service, with the traditional copper based telephone service taken out of service and voice telephony just one of a range of bundled products available over broadband Ex Ante Regulatory Options The options regarding retail fixed broadband tariff regulation are: a. Benchmark based (maximum and minimum determined rates). b. Impose a price cap for the future development of prices. c. Impose a top down cost model AITI Initial Proposal regarding Ex Ante Regulation AITI considers that imposing a rigorous model at this stage of development of FTTH is not appropriate. It is recommended to impose a price cap to start off with and only consider a top down cost model if the regulatory framework for both retail and wholesale is not working within a 3-5 year time frame. It is further recommended that a soft price cap would be appropriate rather than a full productivity based price cap. In the event of a top down cost model, it is proposed that this should be based on Fully Distributed Costs (FDC). Q7. Do you agree with the approach regarding retail fixed broadband? 2 Any shortcomings in operational performance by the operator should be addressed through wholesale access to the local loop regulation. Page 15 of 68

16 5.8 Retail Broadcasting Services Need for Regulation Generally speaking, retail regulatory measures are not applied to broadcasting and in the case of Brunei, the national channels are all free to air over the DTT (Digital Terrestrial Television) network and by definition no price regulation is required. The subscription television services via satellite provided by Kristal Astro Sdn Bhd were found in general to be not excessively expensive when compared with Malaysia and Singapore (although perceived to be more expensive than Malaysia) and therefore there is no need to impose ex ante tariff regulation. The only appropriate mechanism for establishing competitive pricing in broadcasting is competition which will most probably be provided via IPTV and DTT. Q8. Do you agree that tariffs for retail broadcasting services are not subject to ex ante regulation? 6 Wholesale Services that may be Subject to Ex Ante Regulation In this section AITI assesses all the wholesale services that may be subject to ex ante regulation and where ex ante regulation is required, outlines any feasible options for ex ante regulation and makes a proposal. 6.1 Interconnection Need for Regulation The interconnection services that are relevant in the case of Brunei tariff regulation are those for termination of calls / SMS / on a fixed or mobile network. As can be seen from the benchmark, many countries have imposed interconnection price controls at some stage and this is often applied to all operators because all fixed and mobile services have a monopoly in the call termination service on their own network. In Brunei, the situation as it has developed with respect to interconnection and call termination is as such:- a. For calls that either originate or terminate in the fixed network of TelBru, a sender keeps all regime is maintained and there are no interconnection charges. b. For calls or SMS s between the mobile networks an interconnection termination charge is applied. Page 16 of 68

17 c. For all incoming calls on mobile networks except on-net post-paid calls, an incoming call charge is levied. There is no incoming call charge on the fixed network. Although the incoming call charge is not an interconnection charge per se, it is in principle covering costs associated with the termination of a call 3. d. There does not appear to be a special interconnection charge for call origination on either the fixed and mobile network. In practice, the VoIP providers who may need their customers to originate calls on the (usually) the fixed network either require their customers to pay the standard local call charge or they themselves pay the 1800 toll free service charge. However, these VoIP services are almost invariably for international calls and this area of business is rapidly being eclipsed by calls made using smartphone applications. Because the system is mixed with both termination charges and incoming call charges (Receiving Party Pays), the cost basis for interconnection is not clear. Another issue with regards to interconnection exists with regard to independent VoIP providers whose calls originate as a switched call on the fixed (usually) or mobile networks. There do not appear to be proper wholesale arrangements in place here and industry feedback is welcome on this point. Q9. AITI invites VoIP providers whether the main operators should have a standard and fair Interconnect Arrangement made readily available? Proposed Consultation on Process It is recommended that a consultation be made with the industry to determine the frame for future regulation, options could include: a. A pure SKA regime (with an incoming call charge (RPP) for mobile 4 ). b. A standard interconnection regime where (in most cases) the operator network on which the call is terminating receives a interconnection payment from the originating operator and does not charge the receiving subscriber a incoming call charge. c. Maintaining the present mixed system. 3 There has been a long debate about the relative merits of the Calling Party (only) Pays (CPP) versus the Receiving Party Pays (as well) (RPP), especially as the latter can be associated with a Sender Keeps All (SKA) principle. An RPP with SKA approach has the benefits of simplicity and is feasible in Brunei because end users are already used to it, however it puts the onus on the call recipient as much as the caller initiator to control the length of a call. 4 Fixed is omitted because in principle the customer pays for his own access through the monthly rental and because it will not be possible to impose a RPP on fixed customers when none has existed in the past. Page 17 of 68

18 With (a) an interconnection model would not be required. Q10. What is your opinion concerning a SKA only model, standard interconnection model or retaining the present mixed model and could it apply equally to mobile, standard fixed and VoIP calls? Ex Ante Regulatory Options The options regarding interconnection are dependent on the outcome of the consultation on the fundamental model AITI Initial Proposal regarding Ex Ante Regulation If a SKA approach with RPP is decided on, then no ex ante regulation of interconnection termination rates is required. If interconnection rates continue to be applied, then AITI considers that the only feasible means of determining interconnection rates on an ex ante basis is by the imposition of a cost model because this is the only means of identifying the costs involved. The proposed model is a top down cost model at this stage using the operators own data and carried out on the basis of Fully Distributed Costs (FDC). Note that the interconnection tariffs will be part of the MItA. 6.2 Wholesale Leased Lines Need for Regulation Wholesale leased lines are normally the means by which new market players can enter the telecommunications market. In the case of Brunei, the evidence suggests that DST is already self-providing the infrastructure for its own retail services in which case there is potential competition to provide leased lines. As noted, the retail tariffs for 2 Mbps lines are in line with international benchmarks, while those for higher speeds (notably 34 Mbps) are rather high. It is unclear as to whether there is a demand for higher speeds on a wholesale basis Ex Ante Regulatory Options The options regarding wholesale leased lines are: a. Retail minus AITI Initial Proposal regarding Ex Ante Regulation AITI proposes that the appropriate mechanism for wholesale leased line regulation is: a. Retail minus meaning that the operator must offer unbundled leased line elements at a price that excludes elements of the retail service that are not needed by the wholesale customer. Page 18 of 68

19 Retail minus is the most straightforward approach to wholesale leased line regulation because it means that the costs of retail and wholesale leased lines are equitable. Q11. Do you consider that ex ante tariff regulation is necessary for wholesale leased lines and if so, do you agree that retail minus is the appropriate option? 6.3 Wholesale Local Loop Unbundled Access Need for Regulation By the local loop is meant the copper based access network. Currently there is no mechanism for unbundled access to the local loop and there is no clear demand for this, partly because there is no second licensed operator and partly because the technical characteristics of the secondary network are not ideal for higher broadband speeds. Consequently, unless there is a demand for unbundled access to the local loop and the complete regulatory mechanism for Local Loop Unbundling is put in place, there is no requirement for tariff regulation at this stage AITI Initial Proposal regarding Ex Ante Regulation It is not proposed to introduce ex ante regulation at this stage. If it is decided that there should be ex ante regulation, the most appropriate mechanism would be a top down cost model with fully distributed costs (FDC). However it should be emphasised that this needs to be just part of a process for developing a reference access offer for LLU. Q12. Do you agree that tariff regulation of local loop unbundling is not necessary? 6.4 Wholesale Access to the FTTH Need for Regulation The FTTH network roll out is of key strategic importance as it will enable high internet access speeds and the means for the provision of IPTV, providing the most likely means of competition in the broadcast sphere. It is of utmost importance to ensure that there is access for other providers to the FTTH access for the following reasons: a. Competition in general leads to greater efficiencies and lower retail prices. b. Having a choice of provider is generally found to boost demand. c. Different providers are going to be offering alternative TV packages, generating further competition in the broadcast sector without the need for any further regulatory stimulus. Page 19 of 68

20 This access will have to be regulated and one of the requirements will be a regulated MItA Ex Ante Regulatory Options The options regarding wholesale access to the FTTH are: a. Retail minus. b. Top down cost model AITI Initial Proposal regarding Ex Ante Regulation Because the HSBB programme is going to be subject to government financial support in order to achieve an affordable retail price by TelBru, the only practical mechanism for determining the wholesale price in the short term is: a. Retail minus meaning that the operator must offer unbundled leased line elements at a price that excludes elements of the retail service that are not needed by the wholesale customer. If the retail minus approach is not proving effective, AITI proposes to consider: b. Imposing a top down cost model (using FDC) within a one to two year time frame. A one to two year time frame is in any case required for the top down model to be developed and implemented. Q13. Do you consider that ex ante tariff regulation is necessary for wholesale access to the FTTH and that the retail minus approach would facilitate competition? 6.5 Infrastructure Sharing / Duct / Network Co-location Service Need for Regulation Infrastructure sharing includes such elements as the provision of space on towers and may extend to sharing equipment as has been listed in the interconnection handbook 5. Physical co-location refers to the provision of space at operator s premises 6 to enable the wholesale customer to install and maintain equipment 7. 5 The services offered for physical access include power, environmental services (such as heat, light, ventilation and airconditioning), security, site maintenance and access for the personnel of the access seeker. 6 Network premises at which co-location is to be provided includes switching sites, submarine cable landing centres, earth stations, exchange buildings, other customer access modules (including roadside cabinets) and such other network facilities locations associated with the provision of a facility or service on the access list and includes co-location provided at any location where main distribution frame is housed. Page 20 of 68

21 The obligations exist in principle for all market players, but have never been actively regulated. The general principle is that the pricing should be negotiated on commercial basis first; if these negotiations do not work then AITI can intervene and impose a cost based price. As with other wholesale services, regulation of tariffs is just one part of a regulated package of services usually included within a MItA Ex Ante Regulatory Options Ex ante regulation is imposed when commercial negotiation between the market players has broken down. Where this is the case, it is proposed that the appropriate tariff regulation mechanism is: a. Cost calculation provided by operators on a project basis AITI Initial Proposal regarding Ex Ante Regulation a. Cost calculation provided by operators on a project basis. 6.6 Wholesale Broadcast Signal Distribution Need for Regulation In many countries, the distribution of the TV (and in some cases radio) signals from the studios to the transmitters is carried out by a separate company. The need for a separate signal distributer is often greater with DTT because of the multiplexing of channels. In Brunei there are no plans currently to have other broadcasting providers on the DTT network and hence there is no requirement for tariff regulation Ex Ante Regulatory Options If the necessity arose and it is determined that tariff regulation is required, then a relevant market of Wholesale Broadcast Transmission service would be defined and tariffs calculated via a top down cost model. Q14. Do you agree that Wholesale Broadcast Signal Distribution is not subject to ex ante regulation? 7 Co-Location includes physical space, power, environmental services (such as heat, light, ventilation and air-conditioning), security, site maintenance and access for personnel. 8 Project basis means that the market player providing the service must demonstrate all the costs associated with providing an infrastructure and these costs are calculated by treating the investment in infrastructure like a project. Page 21 of 68

22 7 Summary of ex ante measures Service Priority Ex ante Measures Retail minus upon implementation of Tariff Wholesale access to the FTTH 1 Regulation Framework giving 1 to 2 years time frame to conduct a top down cost model (FDC) Retail Fixed Broadband 2 Soft price cap initially, if price cap fails a top down cost model (FDC) is to be applied Interconnection 3 Top down interconnection cost model Wholesale Leased Lines 4 Retail minus Retail Domestic Fixed Line Voice Services 5 Agreement with TelBru concerning rebalancing Retail International Voice Services 6 Operators allowed to have their own IDD tariffs Top down cost model, needs to be deferred until a Wholesale Broadcast Signal 7 policy and process for access to the DTT network is Distribution defined Infrastructure Sharing 8 Cost calculation provided by operators on a project basis (when negotiation fails) Duct Sharing 8 Cost calculation provided by operators on a project basis (when negotiation fails) Network Co-location Service 8 Cost calculation provided by operators on a project basis (when negotiation fails) Retail Domestic Leased Lines 9 Market dominance needs to be established before any action is carried out Retail Broadcast Services 10 None at the moment Retail Domestic Mobile Voice Services No NONE but consider that calls should be the same price whether on-net or off-net Table 2: Summary of ex ante measures proposed Page 22 of 68

23 8 Tariff Filing and Review 8.1 Circumstances for Tariff Filing A Market Player will file tariffs with the AITI in accordance with the draft Competition Code when: a. The Market Player is proposing new tariffs for Infrastructure, Services or Applications. b. The Market Player is instructed by the AITI to file new (including modified) tariffs based on a methodology specified in the Tariff Regulation Framework for Infrastructure, Services or Applications in which it has Significant Market Power. This applies to the tariffs described as subject to ex ante regulation in the Tariff regulation Framework. 8.2 Information to be Included in Tariff Filing by Market Players These provisions apply to all tariffs. Any proposed tariff filed by a Market Player must: a. Fully and clearly describe the Infrastructure, Services or Applications to be offered; b. Contain a clear statement of the prices, terms and conditions (including any eligibility requirements) on which the Market Player offers to provide the Infrastructure, Services or Applications; c. List any discounts or special considerations that the Market Player will offer and the requirements that must be satisfied (such as minimum volume or term requirements) to obtain those discounts; d. List the minimum period of time during which the Infrastructure, Services or Applications will be available and the minimum period of time, if any, during which the Market Player will not increase the filed rates; e. Be self-contained and must include charges for any Infrastructure, Services or Applications not generally subject to tariff regulation when offered as part of a package. 8.3 Information to be Included in Tariff Filing by a Market Player with SMP These provisions apply to market players with Significant Market Power. In addition to the information specified in sub-section 8.2 of the Tariff Regulation Framework, a market player with Significant Market Power must also: a. Comply with the requirements of any methodology specified pursuant to this Tariff Regulation Framework by the AITI with respect to tariffs for Infrastructure, Services or Applications offered in markets for which the market player has Significant Market Power. b. Clearly demonstrate in the filing that any requirements have been met. Page 23 of 68

24 8.4 Tariff Review Process a. For tariffs filed by market players for Infrastructure, Services or Applications in markets where the market player does not have significant market power, AITI may review the tariffs and consequently request amendments. These tariffs may also be subject to investigation at a later date whether or not the AITI has given approval. The principle here is that AITI will check the tariffs to establish whether there are any obvious problems such as misleading information and may request changes accordingly. However, AITI will not be checking these non-smp tariffs in detail for anti-competitive behaviour. b. Tariffs filed by market players for Infrastructure, Services or Applications in markets where the market player has Significant Market Power will be reviewed to ensure that the tariffs have been determined in line with the methodology specified by the AITI pursuant to the Tariff Regulation Framework. c. Once AITI allows a tariff to go into effect, AITI will presume that the prices, terms and conditions are reasonable, competitive and non-discriminatory. AITI may review the effective tariff periodically in accordance with the Tariff Regulation Framework to determine whether the prices, terms and conditions remain reasonable, competitive and non-discriminatory, and may direct a Market Player with Significant Market Power to make appropriate modifications. In addition, any person that believes that the prices, terms and conditions on which a Market Player is providing Infrastructure, Services or Applications pursuant to an effective tariff are unreasonable or discriminatory may petition AITI to review those provisions. The petitioner must provide the basis for its belief by providing such objective information, documentation and data as evidence. AITI may also take enforcement action if it concludes that an effective tariff, or the Market Player s implementation of an effective tariff, contravenes any provision of the draft Competition Code. Page 24 of 68

25 9 Invitation to Comment In order for AITI to have a better understanding of the various requirements of the relevant stakeholders, AITI hereby invites views and comments from the industry and members of the public on AITI s findings and initial proposals regarding the Tariff Regulation Framework for Telecommunications and Broadcasting Sectors in Brunei Darussalam. Respondents are also invited to present views and comments on any other issues not covered in this Consultation Paper but which respondents consider are relevant to the proposed Tariff Regulation Framework. AITI is aware that the Tariff Regulation Framework is dependent on the finalisation of other elements of regulation including the draft Competition Code and stakeholders are therefore not required to comment on this. 10 Submissions Hard copy submission to be addressed by mail or facsimile to: The Chief Executive Authority for Info-communications Technology Industry of Brunei Darussalam Block B14, Simpang 32-5, Kampung Anggerek Desa, Jalan Berakas BB3713 Brunei Darussalam Fax (673) Soft copy submissions are to be sent by to [email protected] & [email protected]. AITI assumes that all submissions to this Consultation Paper are not made in confidence unless otherwise specified. AITI reserves the right to reproduce and publish the submissions in whole or in part in any form (including disclosing the identity of the respondent) and to use, adapt, or develop any proposals put forward without seeking permission or providing acknowledgement of the party making the proposal. Any part of the submission, which is considered by a respondent to be commercially sensitive or confidential should be clearly marked and set out in a separate annexure, which AITI will take into account when disclosing the submission. The closing date for this public consultation is 1530 hours, 11 October Consultations Stakeholders are invited to a public consultation at 0845 hours, 03 October 2013 at Dewan Seri Kerna, AITI. Page 25 of 68

26 Appendix A Tariff Regulation Methodologies FOR INFORMATION PURPOSE ONLY Page 26 of 68

27 TARIFF REGULATION METHODOLOGIES A.1 Ex Ante Tariff Regulation Ex ante regulation is a type of regulatory approach that enforces terms and conditions as a preventive measure against an expected outcome from occurring (in the case that no regulations are placed) i.e. explicit market intervention by the regulator. This type of regulatory approach is commonly enforced in markets where there is dominance i.e. unequal level of competition e.g. interconnection markets, unbundling/infrastructure sharing markets, and for price regulations. The price cap, cost modelling, rate of return, cost plus, retail minus, and benchmarking are the six types of ex ante tariff regulations that will be described. A.1.1 Rate of Return Rate of return is a cost-based form of price regulation designed to balance an operator s total revenues against its total costs. It allows the operators to reasonably price services to recover their costs. Although this may give investors the confidence to invest, it lacks the incentives for operators to operate efficiently. Rate of Return Regulation Formula As the rate of return gives operators the opportunity to recover their costs, it is essential to first determine the revenue requirement. This indicates the amount of revenue needed to recover prudent investment and reasonable costs as well as to earn a fair profit. It is basically the sum of expenses and return on investment which can be elaborated in a formula as follows: RR B(r) +E + d +T where: RR is the revenue requirement of the operator in offering the regulated services. B is the rate base. Basically, it is the amount of capital or assets dedicated to providing the regulated services. To determine rate base, it is necessary to first identify the method and the time period the rate base is measured. r is the allowed rate of return. In other words, it is the costs incurred to finance its rate base which includes both debt and equity. E is operating expenses which are the costs of items such as supplies, labour and items for resale that are consumed by the business in a short period of time, defined as less than one year. D stands for annual depreciation expense which is the annual accounting charge for wear, tear and obsolescence of assets. T means all of taxes that are not counted as operating expenses and are not directly charged to customers such as income tax. Thus, it is necessary to include these expenses in the calculation of the revenue requirement. Page 27 of 68

28 The pros and cons of the rate of return approach are summarized in the figure below. Rate of Return Advantages and Disadvantages Pros Sustainable method if there is no competition as prices can be adjusted to company s changing conditions Lower investor risk Cons No incentives for companies to operate efficiently Averch-Johnson effect, tendency of companies to engage in excessive amounts of capital accumulation in order to expand the volume of their profits Rate cases may be costly to perform Figure 1: Rate of Return advantages and disadvantages A.1.2 Price Cap The price cap regulation is the de facto standard for price regulation. A price cap is an upper limit of tariff increases or lower limit for tariff decreases for a bundle of regulated services. It takes into account productivity gains and also ensures a rate of return for the operator. A formula is developed to determine the change of prices for a basket of services. The advantages of the price cap model are specifically: Provision of incentives for greater efficiency: The formula contains a factor (the x-factor) that may be deployed for productivity increases. The operator has to meet these targets but is also free to exceed the target. If he exceeds the targets the benefit is up to his own disposal to further decrease tariffs below the price cap or to generate higher margins to be used for further investments or to be distributed to shareholders. Greater transparency of regulation and reduced possibility of micro-management by the regulator: The price cap formula provides the operator with information to which extent he can increase or decrease tariffs over the next years. This makes planning much easier for the operator. Greater price flexibility: Tariffs are generally not determined for single services, although special sub-caps can be defined for services where different development patterns for productivity increases can be expected. The operator is therefore free to elaborate tariff models that fit specifically the need of a defined customer segment. Consumer protection: Tariff increases or decreases have to be in line with productivity development. Therefore, the operator cannot arbitrarily increase or decrease tariffs. Due to declining per unit costs in telecommunications, tariffs are expected to decrease over time. Consumers will automatically share the expected productivity gains. In most countries the telephone service has been run by a (government) monopoly in the past and there was no competitive pressure on tariffs. With the liberalization of telecom markets in recent Page 28 of 68

29 years governments have introduced price cap regulation as a means of controlling and reducing tariffs. The price cap is intended to substitute the effect of competition on prices. The Price Cap Formula In countries where a price cap regime is in place for tariff regulation of telecom services, the most common price cap formula is: Percentage change in the weighted Price of the Basket (ΔP) = CPI X where: CPI (Consumer Price Index) is a measure of the rate of inflation based on a basket of consumer goods. The basic premise is that prices would normally (i.e. under competition) increase at the same rate as inflation (here represented by CPI), i.e. remain constant in real terms. X-factor is the adjustment to the CPI and the result is the maximum by which tariffs are allowed to increase in a year. In the basic formula, the X factor is the deduction/addition to the CPI. The X factor consists of two elements: The value of the growth in telecommunications operators/sectors Total Factor Productivity (TFP) in relation to the productivity gains of the economy as a whole. This is calculated by deducting the Growth of TFP of the economy as a whole from the Growth Rate of TFP of the operator/sector. Exogenous factors out of the control of the telecommunications operator, such as currency fluctuation, government decrees, strikes etc. This is regarded as a second integral element of the X-Factor, captured in the so-called Z-factor. Exogenous factors refer to circumstances that affect the Rate of Return of the telecommunications operator, but which are beyond the control of the management and are not reflected in the CPI. These factors are very much a feature of price controls due to universal service obligation (USO) and are referred to as Z factors - one of the adjustments of X. The exogenous factor due to USO measures how input prices of the operator increase relative to the input prices of the overall economy. That is: (1) Z = Input P country Input P incumbent Page 29 of 68

30 Integrating the Z-Factor into the model the basic formula for calculating tariff adjustments can be written as follows 9 : (2) P = CPI (X + Z) or (3) P = CPI ((T incumbent TFP country ) + (Input P country - Input P incumbent )) A positive value for Z means that the operator is facing lower input price increases as the overall economy; a negative Z-Factor means that input prices of the operator are increasing faster than for the rest of the economy. In emerging markets the Z-Factor mainly captures the effect of currency depreciation which affects telecommunications operators because of their high expenditure on imported equipment. However, depreciation will also affect the rest of the economy and also manifests itself in the CPI. To account for this, the growth rate of operators input prices should be subtracted from the input price growth of the overall economy. Although the price cap has replaced Rate of Return regulation, the operators Rate of Return is often taken into consideration when reviewing the price cap. Total Factor Productivity Total Factor Productivity (TFP) is a measure of the outputs of an organisation or country measured against the Inputs required to produce those outputs. Traditionally, the analysis of productivity was confined to labour productivity. However, labour productivity rises with capital inputs and in many industries (especially in telecommunications) there is a tendency to replace labour with capital. Therefore, the Total Factor Productivity (TFP) approach tries to include Capital Input and Materials in the measure of productivity. The various outputs of the regulated company have to be aggregated to a single output measure, the same with inputs. In all TFP models inputs and outputs of different dimensions are aggregated through indexation using different methods of weighing inputs and outputs. The labour input is almost always interpreted in terms of physical units, e.g. number of employees or man hours. Other inputs have to be calculated based on expenditure. The outputs can also usually be expressed in terms of physical objects, but in some models they are also revenue based. When values are used, these have to be converted into real values by price indexes. 9 Note that by defining the Z Factor as Input P country Input P incumbent the basic formula becomes Price Cap = CPI-Z+X. Page 30 of 68

31 As weighting and indexation methods vary and the process is usually complicated, it should not be assumed that the correct results will somehow emerge automatically. The results are determined by the weighing and deflation methodology used for inputs and outputs and also by the definition of the outputs. As implied, the productivity gains in telecommunications have been higher than for other economic sectors. However, although TFP will measure how a telecommunications operator is enjoying higher productivity, it does not mean that the operator is being fully efficient and is achieving the unit productivity gains that it should be capable of. Although the TFP is the recognised method by which to measure a company s productivity, it is essential to realise that this may not necessarily give a true picture. The data on which the estimate is made may be faulty and subject to limitation. The best policy is therefore to accept that TFP is a useful measure, but also to be aware of its shortcomings and to adopt a pragmatic approach to determining the price cap. No telecommunications regulator has ever based the price cap on the TFP calculation alone. Services Subject to Price Cap Regulation As a general rule, price regulation should apply to all services for which adequate or effective competition has not yet developed. Therefore price cap regulation may only apply when SMP determination leads to the conclusion that specific retail services should be subject to tariff regulation. There are specific tests for determining whether or not existing competition (if any) is effective. Some of those tests pertain to the structure and conduct of the telecom industry and, in particular, whether operators are able to exert market power (i.e. control or influence market prices) over services of interest. Designing Baskets and Determining the X-Factor If retail services are subject to tariff regulation and a price cap is applied there might be a benefit of grouping services to different baskets to which similar or different X-Factors are applied. When deciding on the grouping of services into different baskets the following principles need to be taken into account: 1. Separate Baskets should be defined if the level of competition in the service subject to the price cap Regime differs. In general baskets should be designed according to the level of competition, i.e. distinguish local from national and international services. 2. Different X-Factor values for baskets are reasonable if rebalancing is desired. Therefore, different X-Factors might be set subject to the condition that the revenue-weighted average of these X-Factor values equals the overall X factor. Another form of capping can sometimes be seen within a basket. The price of a "sensitive" service may be limited to only small changes within a year (or, at least, smaller than those allowed for the other services). It is not unusual for the price of basic local service sold to residential customers to be frozen for a number of years. On the other hand, other price-capped services may be allowed to Page 31 of 68

32 change within more liberal bounds. Sub-caps are, therefore, used to isolate services that vary by their degree of importance or sensitivity within a basket. In general, the price cap is determined by the X-Factor which can be determined in two ways: Two ways to determine the X-factor Calculating Total Factor Productivity Based on historic input and output data X = TFP Telecom - TFP National TFP Telecom : % change in operators total factor productivity TFP Telecom : % change in national total factor productivity Expected Productivity Gain Calculating Total Factor Productivity Based on adjusted benchmarks from other countries Country X-Factor Argentina 5.5 Australia 7.5 Canada 4.5 Chile 1.1 Columbia 2.0 Denmark 4.0 France 4.5 Ireland 6.0 Mexico 3.0 Portugal 4.0 UK 4.5 US 6.5 ± Adjustments Figure 2: Determination of the X-factor While an individual calculation is always desirable there might be situations in which international benchmarks are more appropriate. This is the case when the calculation does not lead to applicable results. Soft Price Cap The price cap based on productivity involves considerable data collection and modelling. It also possible to impose a very simple price cap in which it is assumed that the telecommunications operator is going to experience the same productivity gains as the overall economy in which case the price cap can be set such that the X factor is set to 0, in other words the tariffs cannot increase higher than inflation. It is also possible to add an incentive to force the operator to make greater productivity gains to a soft price cap, e.g. making the X factor -1 or -2 as in practice this would be no less arbitrary than applying a incentive to a X factor calculated on the basis of productivity. The value of a soft price cap is that it can be applied immediately. A.1.3 Cost Models As most of telecommunication services are seen as monopolies of the respective network owner, tariff regulations are imposed as observed from benchmark countries. The implementation of cost models for tariff regulation is commonly utilized by regulators to determine cost-based pricing for telecommunication services. In the case for interconnection services for example, regulators regularly conclude that especially mobile termination rates are set at excessively high levels due to Page 32 of 68

33 the monopolistic nature of the service. Therefore regulators seek to overcome this market failure in by simulating competition. It is argued that in a competitive market long-term prices would be set at a level of costs plus a reasonable rate of return. Therefore regulation authorities intend to elaborate the costs of relevant services by means of costing models and to set prices on the basis of these costs. In summary: Market failures (e.g. excessively high termination rates) are avoided if operators are obliged to set their rates on the basis of costs. Costing models seek to elaborate the (different) costs of critical services like mobile termination, roaming, fixed termination, origination, access services etc. The main properties of cost models are listed as follows: 1. Cost models provide a picture of costing reality they reflect the world to the extent that it is necessary to do so to calculate costs of network elements or network services. 2. Cost models enable different scenarios and cost / network design relationships to be calculated and examined. 3. Telecoms networks are capital intensive and involve shared platforms and systems that support multiple services. Cost models enable shared and overhead costs to be isolated and to be allocated between services in accordance with allocation rules. In the particular case of interconnection cost models, the costs of call interconnection services such as origination, termination or transit are calculated on the basis of core network costing models. Interconnection rates are usually based on the different network elements used leading to a tradeoff between interconnection charges and investments of new entrants. Cost-oriented price regulation for telecommunication services relies on the implementation of cost models. General requirements concerning this type of price control are understood as follows: 1. Social pricing may be in order but cannot simply ignore costs. With uniform national prices some prices in some location will be below cost, but the regulator still needs to take into account how the operator will recover costs overall. 2. Efficiency of investment: This implies that opportunity costs are taken into consideration, i.e. investment costs and usual rates of return on capital employed. 3. Efficiency of resource use: The price for an additional unit must not be lower than the marginal costs (i.e. costs for an additional unit). 4. Efficiency of market entry: The entry of efficient firms should be encouraged and the entry of inefficient firms should be prevented. Page 33 of 68

34 5. Practicability: It must be possible to apply the system to determine conditions for the provision of services in practice. Data has to be available, transparent and reproducible. Not all prices need detailed costing. There are two generally applied cost modelling methods each with their own characteristics. Fully Distributed Costs (FDC): An accounting method to distribute all costs among a firm's various products and services; hence, the Fully Distributed Costs method (FDC) may include costs not directly associated with a particular product or service. All costs have to be taken into account. All costs have to be allocated to the products and services of a company. The concept is neutral with regard to valuation principles, depreciation and cost of capital calculation methods. The art of fully Distributed costs (FDC) is to identify direct cost, joint (service family) cost and common cost and to find ways to properly allocate the latter two categories to services. Incremental Cost (IC): An accounting method to calculate the costs caused by the provisioning of a considerable number of additional units or by an extension of the service portfolio. IC measures the costs of adding another service or a significant amount of units of an existing product/service to the production portfolio. Again questions of allocation of joint and common costs may arise, but they are solved in a completely different way than with FDC. In addition, there are two main costing approaches when implementing a cost model. Top-Down Costing Approach: The top-down approach bases the cost calculation on existing financial and accounting documents/reports. It is often adopted by operators and regulations when the costing data are not available or lacking in granularity. The process involves the breaking down of three main cost groups namely Operational Expenditures (OPEX), Costs of Capital (CoC), and Depreciation charges into cost pools. Further cost allocations are performed in proceeding steps until all relevant cost pools are broken down into the service cost. The top-down modelling approach processes are summarized in the figure below. Page 34 of 68

35 Top-Down Modeling Approach Operational Costs Capital Costs Depreciation Allocation 1 1. Breakdown of Costs to basic Cost Pools Services Network Components Related Functions Other Functions 2 2. Allocating Costs of Other Functions Services Services Services 5 Network Components Network Components Related Functions All relevant costs are allocated on the defined services! Allocating Costs of Related Functions 4. Allocating Costs of Network Components 5. Common Costs and Revenue Sharing Expenses Figure 3: The top-down modelling approach An advantage of the top-down approach is its simplicity. Input cost data are based on actual cost data from financial and accounting reports which also facilitates the reconciliation processes to ensure that cost allocation are performed correctly. It is easier to implement for regulators and less of a burden for operators when compared to its alternative, the bottom-up costing approach. A disadvantage of such approach is that the actual costs used may incorporate inefficiencies, which may affect the levels of service unit costs. This approach is also less transparent than the bottom-up approach, as outside parties and stakeholders may not have access to the information used in the model. In addition, the method used in performing cost allocation processes may be questioned and disputed by various parties, which could cause complications. Bottom-Up Costing Approach: A bottom-up modelling approach can be described as modelling a theoretically efficient network to meet a determined demand profile based on engineering design rules. It starts with the demand for the service/product included in the increment and builds an efficient network that can address this demand. It then assesses the use of each network element and processes the costs to the different services of the increment. The diagram below shows the main stages used in the bottom-up costing models. The essential structure and principles remain the same regardless of what market is being modelled but the actual products and network elements will vary. Cost would be from the actual expenses involved in building up the network and providing the service, this approach would require detailed technical inputs as well as financial and accounting skills, thus making it a much more complex model than the top-down model. In order to effectively construct a bottom-up model, underlying technical costing data would be required as inputs and this demands the operator or regulator to have a detailed cost database. Page 35 of 68

36 Determine demand and asset prices Generic Bottom-up Approach Design network model and calculate costs for all network assets Network element costing Service costing Elaborate relevant technologie s and asset prices Common costs of capital Common operating costs Mark-up factors Collection of cost drivers and demand (coverage, traffic, subs) Design/ equipping of hypothetical or actual network Investment calculation: network CAPEX Annualized capital costs for each network asset Operating costs for each network asset Total cost per network element Network cost allocation per service Mark-up for common costs per service Planning rules Efficiency assumptions Asset prices WACC, lifetimes Technical OPEX Routing factors Figure 4: The bottom-up modelling approach This approach would result in an efficient cost result as in the process of building up the network, inefficient cost items can be identified and excluded from the model. The bottom-up approach is a much more transparent approach as compared to the top-down approach, as stakeholders can easily backtrack cost results and values to its underlying origins and assumptions. The main drawback of such approach is its high level of complexity. Technical and financial expertises are required, resulting in a time consuming and costly process. Some argue that cost results from such approach are over optimized, reflecting service costs that are below realistic values which would result in possible under compensation for operators. Page 36 of 68

37 Cost Models Standards LRIC Incremental cost TSLRIC/LRAIC Incremental cost + Service-specific Fixed Cost TELRIC Incremental cost + Service-specific + Fixed Cost + Allocation of Part of Joint & Common Cost TELRIC + uniform mark-up* Incremental cost + Service-specific Fixed Cost + Allocation of Part of Joint & Common Cost + Allocation of Residual of Joint & Common Cost TSLRIC/LRAIC + uniform mark-up* Incremental cost + Service-specific Fixed Cost + Allocation of all Joint & Common Cost FDC/FAC* Incremental cost + Service-specific Fixed Cost + FAC-based allocation of all Joint & Common Cost Stand alone Costs Incremental cost + Service-specific Fixed Cost + All Joint and Common Cost Notes: 1. For TSLRIC/LRAIC the increment is defined as the total service. Hence, indirect cost elements are shaded while direct cost elements are not shaded. 2. In this example, FDC/FAC is assumed to be calculated based on forward-looking economic cost methodology. 3. The total costs of the 3 cost concepts identified by an asterisk, *, do not necessarily have to be equal, as shown in this example. 4. Note the relative sizes of the costing concepts are indicative only and should not be taken as an approximation of actual costs. Source: ITU Figure 5: Cost model standards Normally, bottom-up approaches are associated with long-run incremental costs models (LRIC) and fully distributed cost models (FDC) with top-down models; however it is also possible to implement top-down LRIC models. Long-run incremental costing (LRIC) models imply that the long run is defined as the period in which all production factors are variable. The 'long run is the theoretical planning horizon where most inputs are variable, including the type of technology and the scale of deployment. A cost which is considered fixed in the short run may be regarded as variable under a long-run planning horizon. Example 1: There might be the need to further invest in PDH technology, since some legacy systems exist. In the long-run this condition will become irrelevant. Example 2: Necessity to upgrade an existing billing system although more efficient systems are available. In the long-run the investment decision could be undertaken without the constraints of existing systems. Long-run incremental costs are usually lower than short term costs. The long run concept reflects the situation of a competitor considering whether or not to enter a particular market. The increment is usually defined as the total volume of a service that is to be cost. Page 37 of 68

38 Incremental costs Change in total cost associated with a specified increase or decrease in output. Reported on a per unit basis: change in total cost divided by number of units. Example: Costs of Mobile Operator with IC - Costs of Mobile Operator without IC Total IC Minutes Figure 6: Incremental costs definition A whole variety of different cost standards is discussed among regulators and economists. Generally, pure LRIC will result in the lowest service costs and FDC in the highest costs. In realworld costing procedures these idealistic approaches are frequently modified. The inclusion of fixed and common costs is usually heavily discussed among market players. LRIC versus FDC Cost Models Pure Long-run Incremental Costs (LRIC) Total Service Long-run Incremental Costs (TS-LRIC) Fully Distributed Costs (FDC) Costs Costs Costs LRIC B CVR TS-LRIC CVR FDC CVR LRIC LRIC B FDC B LRIC A LRIC A Fixed costs Fixed costs FDC A V A V B Volume V A V B Volume V A V B Volume Figure 7: LRIC versus FDC cost models Fully distributed costs (FDC) are normally based on historical costs and do not consider economies of scale. Service-related fixed, joint and common costs are fully distributed. Usually are associated with financial records (and top-down models). Inefficiencies are fully or to a certain degree reflected (adjustments are possible). In case of interconnection rates setting, a danger of passing through inefficiencies to interconnection partners exists. FDC models can serve as an upper ceiling for service costs in regulatory procedures. Page 38 of 68

39 LRIC are usually favoured by regulators to simulate a competitive environment based on assumptions concerning possible efficiency in the long-run and the service increment result in costs as they would occur in competitive markets. Long Run Incremental Cost Models Advantages and Disadvantages Pros Most suitable to simulate competition Inefficiencies are excluded LRIC-based rates foster regulated operator to increase efficiency Accepted approach, favored by regulators and public organizations (WTO, ITU, IRG, etc.) Cons Entrepreneurial risk of making investment decisions neglected No consideration of the costs of shifting to (modern) technologies Complex set of efficiency assumptions to be elaborated Difficult to calculate Time-consuming and costly Results hard to compare with real world business Figure 8: Long run incremental cost models advantages and disadvantages In FDC models all costs are allocated to services, including common and fixed costs. Fully distributed cost models are usually undertaken in a top-down manner and therefore based on accounting records. Fully Distributed Costs Models Advantages and Disadvantages Pros Total business costs (cost of capital, depreciation, operating costs) are fully included and recovered Reconciliation with published accounts possible Relatively low costs of application Transparent Forms a good starting point for discussions with regulator Cons Can result in misleading allocation Uses usually historic book value of capital assets (Historical) costs (taken out of accounts) may not be representative Includes all operator inefficiencies Inappropriate method for business decisions which should be based on future costs and not on past investments Figure 9: Fully distributed cost models advantages and disadvantages A.1.4 Retail Minus Retail minus is an approach in setting prices in relation to the retail price, rather than calculating the price based on cost. Therefore this approach is not a cost-based pricing scheme. The main factor is the minus, which must be determined by the regulator. This factor is subtracted from the retail price; the result is the wholesale price. This concept is illustrated in the figure below, Page 39 of 68

40 Retail Minus Concept Retail Price (P R ) The minus (c) Wholesale Price (P W ) Figure 10: The retail minus concept The retail minus formula is therefore represented as follow, P W = P r c Retail minus can be used by regulators to reduce the ability of notified operators to pursue anticompetitive behaviours, including market foreclosure by vertically integrated notified operators through the implementation of a margin squeeze. Retail minus can also be used by regulators to help to promote a sustainable competitive environment in the relevant retail markets as it may be used to facilitate efficient entry into those retail markets. However, the success or otherwise of retail minus in helping to achieve a regulator s specific regulatory objectives will be dependent on a number of factors. Retail minus can be used ex-ante, before the launch of a new service, and/or ex-post, as a margin-squeeze test, where the test is applied usually following a complaint lodged with the NRA. In evaluating the relative merits of ex-ante and ex-post application, consideration needs to be given to the overall regulatory objectives of the NRA. Methods to Express and Derive the Minus: 1. The minus is an absolute fixed monetary value: this means that the gap between retail prices and wholesale prices is a fixed amount. While a price control of this form has the advantage of preventing any decrease in the margins, it may not always be appropriate in order to promote competition within the market, particularly in a context of decreasing retail prices and increasing volumes. 2. The discount is a fixed percentage of the retail price. This option has the potential advantage of increased flexibility in terms of product pricing. However, in the event of decreasing retail prices, there may be the risk that the corresponding wholesale prices will be reduced in absolute monetary terms to such a degree that there could in fact be a margin squeeze. Page 40 of 68

41 As a general principle, the best option for expressing the minus will in general be the option which best reflects the underlying cost structures of the services being considered. E.g. to the extent that the costs included in calculating the minus are expected to remain constant over the period in which the retail minus is in place, the first option may be most appropriate. However, if it is the case that the costs included in calculating the minus would be expected to decrease as retail prices fall, the second option may be more appropriate. A.1.5 Cost Plus This approach is the opposite of the retail minus; the cost plus method rely on the use of cost models to determine the unit cost of providing the service and adding on a target margin. It is a cost based approach with a mark-up pricing. This concept is illustrated in the figure below. Cost Plus Concept Retail Price (P R ) The plus (P) Wholesale Cost (C W ) Figure 11: The cost plus concept The cost plus formula is therefore represented as follow, P R = C W P The plus is set so that it covers the cost of production and provide enough profit margin to meet the target rate of return. Cost plus pricing is adopted because it is easy to calculate and requires little information as this approach relies on arbitrary costs and mark-ups. It also gives an impression that profit is always guaranteed, as the mark-up would cover all costs of service production. However the disadvantage of this method is that it does not always maximise the revenue from a service. Page 41 of 68

42 A.1.6 Benchmarking This type of pricing is the simplest pricing approach. Comparable countries offering the same services are used as benchmark. Prices of these services are then analyzed, compared, and a final service price is determined. Main criterion in selecting benchmark countries would include economic, demographic, and market factors. A.2 Ex Post Regulation Ex post regulation is an alternative type of regulatory approach where the there is no explicit market intervention in advance by the regulator, but where the regulator takes action at a later stage when issues arise. This approach is usually adopted in regulating a market where competition is presumed to be present but where is may be necessary to address anti-competitive behaviour. A.2.1 Price Squeeze/Margin Squeeze Test The European Commission has this definition of a margin squeeze (or price squeeze): A price squeeze/margin squeeze could be demonstrated by showing that the dominant company's own downstream operations could not trade profitably on the basis of the upstream price charged to its competitors by the upstream operating arm of the dominant company. In appropriate circumstances, a price squeeze could also be demonstrated by showing that the margin between the price charged to competitors on the downstream market (including the dominant company's own downstream operations, if any) for access and the price which the network operator charges in the downstream market is insufficient to allow a reasonably efficient service provider in the downstream market to obtain a normal profit (unless the dominant company can show that its downstream operation is exceptionally efficient) In summary, price squeezes/margin squeeze occurs when a wholesaler sells services to a retailer at a price too high for the retailer to make any significant profit. The retailer is forced to purchase the wholesale services in order to be able to operate their business. In practice there are two tests to determine price squeeze/margin squeeze. It can be shown by comparing the wholesale and retail prices on the upstream and downstream markets, respectively, and seeing whether the incumbent s own downstream concern could operate competitively with a similar margin. Alternatively the price squeeze formula based on an equally efficient operator (EEO) can provide an indication whether an operator is experiencing a price squeeze/margin squeeze. The formula is defined as follows, Where, P r usmp dsmp P = retail price of the SMP s downstream service; Page 42 of 68

43 r = regulated price of the regulated wholesale service needed by alternative operators to provide such downstream service; usmp = SMP operator s other upstream cost dsmp = SMP operator s downstream cost if the equation above proves true, the operator may be profitable and may not be facing a price squeeze or margin squeeze. The results and data from the Accounting Separation Reports may be used to determine for each service whether any operators are facing price squeeze or margin squeeze. The Pre-Conditions for a Price Squeeze / Margin Squeeze: The first condition for an operator to establish a price squeeze/margin squeeze is that it must be vertically integrated i.e. a provider of the necessary input in the upstream market as well as a competitor in the downstream market. The second condition would be to determine the operators level of control over service input and how essential/vital is that input for entry into the relevant market. A price squeeze assumes that the operator in question has an upstream monopoly over an essential input i.e. downstream operators would need to purchase wholesale service from only the operator in question in order to provide retail services. A.2.2 Predatory Pricing Predatory pricing is a commercial strategy by which a dominant firm first lowers it price to a level which will ultimately force its rivals out of the market 10. In cases of predatory pricing, the incumbent makes a loss with regards to that specific product. However it may be recovered through profits from other products; but it is able to sustain that loss for the period of time it takes to exclude the competitor from the market. In price squeeze the operator in question might not be making a loss because in all probability its wholesale charges on the upstream market ensure that it makes an overall profit. For predatory pricing g it is not essential that the operator in question be present in the upstream market as well as the downstream market. For a price to be predatory, A plaintiff must prove (1) that the prices in question are below an appropriate measure of its rival costs and (2) that the competitor had a reasonable prospect of recouping its investment in below-cost prices Faull & Nikpay, The EC Law of Competition, 2n Ed., Oxford University Press at Telecommunications: Law, Regulation, and Policy; Walter Sapronov, William H. Page 43 of 68

44 A.2.3 Cross Subsidization An operator that is cross subsidizing in markets are selling services at a high price to a group of customers and another at a lower price to another group of customers. By doing this, the operator would be about to support losses by making profit from another service. This is usually done to attract customers to a newly introduced service by giving them a lower price. The low price is sustained by the earnings of another service sold. In theory, there are two methods in testing for cross subsidization. These tests are to test whether prices are subsidy-free : 1. The incremental cost test: If there are no diseconomies of scope, then subsidy-free prices also have the property that revenues for any subset of services are never below the incremental costs of producing this subset. 2. The stand-alone cost test: Revenues from a service (or group of services) cannot exceed the stand-alone cost of this service (or group of services) Ibid. Page 44 of 68

45 Appendix B Telecommunication Prices in Brunei FOR INFORMATION PURPOSE ONLY Page 45 of 68

46 TELECOMMUNICATION PRICES IN BRUNEI B.1 Introduction In order to evaluate price levels in an international context as well as to assess the substitutability of specific telecommunication products, a detailed price comparison of different products to comparable baskets of services of OECD countries has been carried out. This Appendix encompasses a price analysis of the telecommunication sector for voice telephony and leased lines. Page 46 of 68

47 B.2 International Comparison of Telecommunication Costs In order to draw conclusions about price levels for voice telephony in Brunei Darussalam the analyzed prices have to be compared with prices offered in peer countries. Thus, current 2013 telecommunication prices in Brunei Darussalam are compared to current 2013 prices in Singapore and Malaysia. The close geographic distance and the similarity in the telecommunication usage make Singapore and Malaysia important peers for Brunei Darussalam. Price data required for this comparison were taken from websites of Singaporean and Malaysian providers and converted into Brunei Dollar (BND). However, to compare retail prices for telecommunication services in Brunei Darussalam exclusively with those in Singapore and Malaysia might produce misleading conclusions. The purpose of an international tariff comparison should be to assess whether prices charged for particular products can be detected as excessive in an international context and hence regulatory intervention are required. However, whether retail tariffs are excessive largely depends on costs national providers have to face. Costs for provision of telecommunication services, however, are expected to differ significantly between Brunei and its two regional peers. For instance, with 5.5 million inhabitants the Singaporean market is almost fourteen times larger than the Bruneian. The exceptional high population density in Singapore (7,890 inhabitants per km² vs. 67 in Brunei Darussalam) greatly facilitates infrastructure provisions and allows for economies of scale. With 29 million inhabitants the Malaysian market is 72-times larger than the Bruneian market allowing national providers to allocate fixed costs such as administrative or marketing expenses to a wider number of customers. Furthermore, despite its large territory, Malaysia is still more densely populated than Brunei Darussalam both with respect to the whole territory (88 inhabitants per km² vs. 67 in Brunei Darussalam) and with respect to major urban areas (667 inhabitants per km² in the Klang valley vs. 500 in Brunei Muara). An overview on differing market conditions which most probably affect provision costs in the telecommunication sector are given in the following figure. Singapore Malaysia Brunei Population and density Population 5.5 million Pop density 7,890 per km3 From point of view of telecoms provision Uniformly high densities. Large proportion of population in HDB flats High economies of scale for both fixed and mobile provision million people per GSM/3G mobile operator Population and density Population 29 million Pop. density 88 per km2 KL & Selangor (Klang valley) has a population density of 667 per km2 From point of view of telecoms provision Klang valley and other major cities have high proportion in high rise and link houses. Rural areas are dispersed. 7 million people per GSM/3G mobile operator. Population and density Population 400 thousand Pop. density 67 per km2 Brunei Muara district has a population density of 500 per km2. From point of view of telecoms provision Even in Brunei Muara district high proportion of detached houses. 200,000 people per GSM/3G mobile operator. Figure 12: Differing market conditions in Singapore, Malaysia and Brunei Darussalam Different provision costs arising from such differing market conditions naturally affect retail prices. Thus, a tariff comparison with a small group of countries is solely applicable if cost structures are Page 47 of 68

48 largely similar. If this is not the case, the peer group should be augmented as a larger and more heterogeneous group of countries can provide a better picture of retail price performance. We thus augment our peer group by including 34 OECD countries into our analysis. Price levels for OECD countries are taken from the most recent OECD report on telecommunication 13. Most recent data (provided in current US-Dollar) are available for As a consequence, 2013 prices for Brunei Darussalam, Singapore and Malaysia will be matched with 2012 prices for OECD countries a fact which should always be considered when drawing conclusions from the results presented. As in technology based industries such as the ICT sector price levels tend to decrease over time the relative performance of Brunei Darussalam, Singapore and Malaysia is expected to be slightly overvalued. B.3 Fixed Line Voice Telephony Brunei Darussalam Compared to OECD Countries In order to provide a broader international comparison, the following paragraph deals with the cost assessment of OECD fixed line consumption basket in Brunei Darussalam and in OECD member states. To enable international comparability, prices are depicted in current USD. 14 The following figures show the expenses of the different profiles per country in USD. Before interpreting the results, one has to take into consideration that current prices in Brunei, Singapore and Malaysia are compared to OECD prices of As price levels in ICT markets tend to decrease over time due to technological progress the comparison will tend to slightly advantage Brunei Darussalam, Singapore and Malaysia. The analysis shows that for low usage consumers such as represented by baskets Residential 1 and Business 1 expenses in Brunei Darussalam are relatively low in a broader international comparison. For consumption profile Residential 1, expenses in Brunei Darussalam lie between price levels measured 2012 in Chile and Mexico - significantly below the OECD average. For consumption profile Business 1, Brunei aligns itself between UK and Luxembourg with expenses close to the OECD-average. But also for consumer profile Residential 2 price levels in Brunei Darussalam seem to be rather in line with international standards. Expenses are slightly above OECD average roughly equalling those measured 2012 for Denmark. In 11 OECD member states, such as the UK, Switzerland or Australia, tariffs are higher for this consumption profile. All rankings were determined by considering VOIP-prices for international calls in Brunei Darussalam. 15 When considering the more expensive IDD-prices, Brunei Darussalam would fall back in the ranking although not severely for the lowest consumption baskets as consumption of international calls are low in these consumer patterns. 13 OECD (2013), OECD Communications Outlook 2013, OECD Publishing Exchange rates for 2012 were taken from 15 Since international calls strongly depend on the country of destination we assess average costs for international connections by considering median prices per minute for the 13 most important trading partners of Brunei Darussalam. Page 48 of 68

49 Chile Brunei 2013 Mexico Slovenia Italy Greece France Portugal OECD average Netherlands Czech Republic Finland Luxembourg Germany Austria Sweden United States Denmark Belgium Spain Switzerland United Kingdom Ireland Japan Canada New Zealand Australia Norway Hungary Israel Poland Slovak Republic Turkey Malaysia 2013 Estonia Korea Singapore 2013 Iceland Public Consultation Paper However, with regard to profiles representing frequent callers such as Residential 3, Residential 4 or Business 2 another picture emerges. In contrast to previous results, expenses in Brunei are high. This holds true even more when considering the higher prices for high quality IDD calls offered in Brunei Darussalam. OECD Residential 1 - Fixed Line Basket in Prices of 2012 (USD) $50 $45 $40 $35 International high quality IDD costs (BN)** International VoIP costs (BN, MY, SG) Usage costs* Fixed costs *for OECD international calls included **additional costs occurring for high quality IDD calls $30 $25 Ø 25 $20 $15 $10 $5 $0 Source: OECD 2013, DIW Econ 2013 Figure 13: OECD Residential 1 Fixed Line basket in prices of 2012 (USD) Page 49 of 68

50 Singapore 2013 Iceland Malaysia 2013 Hungary Israel Turkey Poland Estonia Slovenia Norway Slovak Republic Chile Mexico Greece Korea United Kingdom Czech Republic Sweden Netherlands France Canada Germany Luxembourg OECD average United States Belgium Denmark Switzerland Austria Portugal Italy Ireland Spain New Zealand Brunei 2013 Finland Japan Australia Portugal Austria Brunei 2013 Denmark Netherlands United Kingdom Switzerland Spain Finland Canada Ireland New Zealand Japan Australia Singapore 2013 Iceland Malaysia 2013 Hungary Turkey Estonia Korea Israel Norway Chile Poland Slovak Republic Slovenia Mexico Greece France Germany Luxembourg OECD average Belgium United States Sweden Italy Czech Republic Public Consultation Paper OECD Residential 2 - Fixed Line Basket in Prices of 2012 (USD) $75 $70 $65 $60 $55 $50 $45 $40 $35 $30 $25 $20 $15 $10 $5 $0 International high quality IDD costs (BN)** International VoIP costs (BN, MY, SG) Usage costs* Fixed costs *for OECD international calls included **additional costs occurring for high quality IDD calls Ø 36 Source: OECD 2013, DIW Econ 2013 Figure 14: OECD Residential 2 Fixed Line basket in prices of 2012 (USD) $130 OECD Residential 3 - Fixed Line Basket in Prices of 2012 (USD) $120 $110 $100 $90 $80 International high quality IDD costs (BN)** International VoIP costs (BN, MY, SG) Usage costs* Fixed costs *for OECD international calls included **additional costs occurring for high quality IDD calls $70 $60 $50 Ø 53 $40 $30 $20 $10 $0 Source: OECD 2013, DIW Econ 2013 Figure 15: OECD Residential 3 Fixed Line basket in prices of 2012 (USD) Page 50 of 68

51 Slovenia Hungary Austria United States France Germany United Kingdom Brunei 2013 Luxembourg Greece OECD average Canada Slovak Rep. Belgium Netherlands Portugal Spain Sweden Ireland Switzerland Norway Czech Rep. Finland Italy Denmark New Zealand Japan Australia Singapore 2013 Malaysia 2013 Iceland Turkey Israel Korea Poland Mexico Estonia Singapore 2013 Malaysia 2013 Hungary Slovenia Greece Norway Poland Turkey United Kingdom France Netherlands Iceland Slovak Republic Israel Germany Luxembourg Estonia Belgium Denmark Spain Ireland Portugal Italy Canada United States OECD average Sweden Mexico Switzerland Korea Chile Czech Republic New Zealand Austria Australia Brunei 2013 Japan Finland Public Consultation Paper OECD Residential 4 - Fixed Line Basket in Prices of 2012 (USD) $250 $200 International high quality IDD costs (BN)** International VoIP costs (BN, MY, SG) Usage costs* Fixed costs *for OECD international calls included **additional costs occurring for high quality IDD calls $150 $100 Ø 80 $50 $0 Source: OECD 2013, DIW Econ 2013 Figure 16: OECD Residential 4 Fixed Line basket in prices of 2012 (USD) OECD Business 1 - Fixed Line Basket in Prices of 2012 (USD) 110 $100 $90 $80 $70 International high quality IDD costs (BN)** International VoIP costs (BN, MY, SG) Usage costs* Fixed costs *for OECD international calls included **additional costs occurring for high quality IDD calls $60 $50 $40 Ø 46 $30 $20 $10 $0 Source: OECD 2013, DIW Econ 2013 Figure 17: OECD Business 1 Fixed Line basket in prices of 2012 (USD) Page 51 of 68

52 Singapore 2013 Malaysia 2013 Poland Turkey Iceland United Kingdom Israel Slovenia Germany United States France Greece Hungary Luxembourg Estonia Austria Canada Ireland Mexico Korea Belgium OECD average Slovak Republic Netherlands Sweden Norway Spain Switzerland Czech Republic New Zealand Portugal Italy Denmark Brunei 2013 Finland Australia Japan Public Consultation Paper OECD Business 2 - Fixed Line Basket in Prices of 2012 (USD) $250 $200 International high quality IDD costs (BN)** International VoIP costs (BN, MY, SG) Usage costs* Fixed costs *for OECD international calls included **additional costs occurring for high quality IDD calls $150 $100 Ø 97 $50 $0 Source: OECD 2013, DIW Econ 2013 Figure 18: OECD Business 2 Fixed Line basket in prices of 2012 (USD) B.4 Mobile Telephony In order to provide an international price comparison for mobile telephony services, prices in Brunei Darussalam will be compared to those in Singapore and Malaysia by comparing both additional costs and expenses for OECD consumer baskets. The last approach will also be applied to provide a price comparison between Brunei Darussalam and the OECD member states. Additional prices: Brunei Darussalam compared to Singapore and Malaysia The following table depicts a comparison of the additional costs for mobile telephony in Brunei Darussalam, Singapore and Malaysia depending on prepaid and postpaid offers. As mentioned before, in Brunei Darussalam the market for mobile telephony is divided between DSTCom and B- Mobile. In Singapore, the mobile telephone sector is divided between three central providers, namely SingTel, StarHub and M1. In Malaysia, five main providers are included into the investigation: Telecom Malaysia 16, Celcom 17, Maxis 18, DiGi 19 and U-Mobile 20. The figure below Page 52 of 68

53 displays additional costs for mobile telephony services for Bruneian provider DSTCom and B- Mobile and the best offer among the different providers in Malaysia. In Singapore, the additional costs are the same for all providers. Additional Cost Mobile Comparison Brunei Darussalam, Singapore and Malaysia in BND $ $ $ $ $0.0 DST B-Mobile Singapore Malaysia DST B-Mobile Singapore Malaysia DST B-Mobile Singapore Malaysia On- net Off- net To Fixed Line To Mobile Prepaid Postpaid Source: DIW Econ 2013 Figure 19: Additional cost mobile comparison Brunei Darussalam, Singapore and Malaysia in BND 21 On the one hand, this comparison shows that additional costs for prepaid offers in Brunei Darussalam are higher than for post-paid offers. On the other hand it displays the difference between the additional costs between Brunei Darussalam, Singapore and Malaysia. Prepaid prices in Brunei Darussalam are significantly higher than those in Singapore, whereas post-paid prices are quite similar in both countries. Malaysian prepaid and post-paid prices are the lowest. In order to consider the complex tariff structure of mobile providers more appropriately and take for instance promotional prices through packages into account, the following paragraph encompasses an international comparison on the basis of the OECD basket approach Since additional costs in Malaysia depend on specific providers, the illustration depicts Malaysian least cost plans. Page 53 of 68

54 OECD basket costs without data: Brunei Darussalam compared to Singapore and Malaysia The figure below shows the cheapest offer for each OECD profile in Brunei Darussalam, Singapore and Malaysia (not including data volume); for all three countries all prepaid and post-paid offers by mentioned providers are included into the calculation. The results show that the mobile offers from the Singaporean and Malaysian providers are generally cheaper than those provided in Brunei Darussalam. This hold particularly true for frequent user profiles Residential 3 and 4. While in Singapore, prepaid offers dominate in all consumer profiles, prepaid offers in Brunei Darussalam only constitute the cheapest option for consumer profiles with a low number of calls and messages. Mobile Telephony: Total Costs per OECD Profile and Country in BND* $ $150 $125 $100 $ $ $25 $ Residential Residential Residential 3 Residential Prepaid Message Brunei Singapore Malaysia *not including data volume Source: DIW Econ 2013 Figure 20: Mobile Telephony: Total costs per OECD profile and country in BND (not including data volume) Before drawing final conclusions, one has to take into consideration that previous analysis does not include mobile data volume in terms of internet usage. As most mobile telephony contracts include free mobile data volume, it is crucial to take these additional benefits into consideration. OECD basket costs including data: Brunei Darussalam compared to Singapore and Malaysia Although prices for mobile telephony in Brunei Darussalam are still higher than those in Malaysia when including data consumption proposed by OECD profiles, the analysis shows that the relative cost difference has been reduced. For consumption profile Residential 4 the Bruneian market does even provide cheaper offers than the Singaporean while for other profiles price levels of both countries are similar. The reason for this convergence can be found in the features of the packages which are usually offered in the analyzed countries. Most of the cheaper post-paid offers in Brunei Darussalam include large free data packages and therefore the inclusion of data volume does not lead to higher costs making these offers more attractive. However, this comparison does not consider quality of service. Brunei Darussalam mobile providers DSTCom and B-Mobile promise Page 54 of 68

55 bandwidth of up to 7.2 Mbps, an appropriate bandwidth for 3G networks technology while providers in Singapore and Malaysia offer much higher bandwidths on the basis of 4G technology. Total Costs per OECD Profile and Country in BND* $225 $ $ $150 $125 $ $75 71 $ $ $0 Residential MB Residential MB Residential MB Residential MB Brunei Singapore Malaysia * including data volume Source: DIW Econ 2013 Figure 21: Total costs per OECD profile and country in BND (including data volume) Page 55 of 68

56 Italy Canada Switzerland Australia Japan Israel New Zealands Portugal Ireland Hungary Germany Brunei 2013 Spain Chile Belgium Czech Rep. OECD average Sweden Slovenia Netherlands Slovak Rep. United States Luxembourg France Turkey United Kingdom Finland Denmark Singapore 2013 Greece Iceland Norway Korea Malaysia 2013 Poland Estonia Austria Mexico Public Consultation Paper OECD basket costs without data: Brunei Darussalam compared to OECD countries The following paragraph deals with the comparison of total costs per OECD basket of Brunei Darussalam and OECD member states 22. As basket prices for OECD countries are only available without data volumes the comparison is restricted to the consumption of telephony and text messaging services. Except for the Prepaid profile, the costs consumers have to face in Brunei Darussalam are above the OECD average for all OECD mobile consumer profiles. For low usage profiles, such as Residential 1 (30 calls per month) and Residential 2 (100 calls per month), the gap is much smaller than for high usage profiles. For the former ones, there remains still a large group of OECD countries, including Germany, Switzerland or New Zealand, exhibiting higher cost levels (Figure 20 and 21). OECD Residential 1 - Mobile Basket in Prices of 2012 in USD $30 $25 Messages Usage Fixed $20 $15 Ø 14 $10 $5 $0 Source: OECD 2013, DIW Econ 2013 Figure 22: OECD Residential 1 - Mobile basket in prices of For the mobile baskets, the OECD cost calculation covers two or more operators in order to reach at least 50% of market share in every OECD country, while non-recurring charges are distributed over three years. The OECD calculates the expenses by selecting the least-cost plan, given the demand profile among all surveyed service plans. Page 56 of 68

57 Germany Italy United States Switzerland Belgium New Zealands Chile Canada Czech Rep. Portugal Hungary Spain Brunei 2013 Japan Ireland Slovak Rep. Australia OECD average Netherlands Greece Austria Estonia United Kingdom Turkey Singapore 2013 France Finland Slovenia Malaysia 2013 Poland Israel Denmark Norway Sweden Korea Luxembourg Mexico Iceland Greece Estonia Malaysia 2013 Austria Poland Turkey Singapore 2013 United Kingdom Netherlands Norway Denmark Korea Iceland Finland Mexico Ireland Slovenia France Sweden OECD average Slovak Rep. United States Luxembourg Belgium Israel Portugal Australia Czech Rep. Hungary Brunei 2013 Germany Chile Japan Spain Italy Canada New Zealands Switzerland Public Consultation Paper OECD Residential 2 - Mobile Basket in Prices of 2012 in USD 65 $60 55 $50 45 $40 35 $30 25 $20 15 $10 5 $0 Messages Usage Fixed Ø 26 Source: OECD 2013, DIW Econ 2013 Figure 23: OECD Residential 2 - Mobile basket in prices of 2012 OECD Residential 3 - Mobile Basket in Prices of 2012 in USD 95 $90 85 $80 75 $70 65 $60 55 $50 45 $40 35 $30 25 $20 15 $10 5 $0 Messages Usage Fixed Ø 44 Source: OECD 2013, DIW Econ 2013 Figure 24: OECD Residential 3 - Mobile basket in prices of 2012 Page 57 of 68

58 Austria Estonia France Poland Israel United Kingdom Sweden Luxembourg Turkey Malaysia 2013 Australia Slovenia Denmark Finland Netherlands Slovak Rep. Korea United States Ireland Switzerland Norway Singapore 2013 Canada OECD average Czech Rep. Mexico Germany Italy Belgium Greece Spain Chile Portugal New Zealands Brunei 2013 Iceland Hungary Japan Public Consultation Paper The same holds true for the Messaging profile (Figure 24). In contrast, for high consumption profiles such as Residential 3 (300 calls per month) and Residential 4 (900 calls per month) Brunei Darussalam aligns at the end of the distribution. For the Residential 3 profile, only customers in Japan have to face higher costs, for the case of Residential 4, price levels are higher in three countries (Japan, Hungary and Iceland). OECD Residential 4 - Mobile Basket in Prices of 2012 in USD $200 Messages Usage Fixed $ Ø $0 Source: OECD 2013, DIW Econ 2013 Figure 25: OECD Residential 4 - Mobile basket in prices of 2012 Page 58 of 68

59 Ireland New Zealands Japan Canada Malaysia 2013 Poland Denmark Iceland Greece Singapore 2013 Estonia Finland Mexico Austria Sweden Slovak Rep. Luxembourg Norway Germany Turkey United States Slovenia United Kingdom Spain Portugal Chile Hungary Korea Brunei 2013 OECD average Australia Belgium Czech Rep. Netherlands Italy Israel France Switzerland Poland Malaysia 2013 Turkey Iceland Greece Estonia Denmark Korea Norway Slovak Rep. Austria Mexico France Belgium Finland Canada United States Singapore 2013 Sweden Germany Luxembourg Australia United Kingdom OECD average Slovenia New Zealands Netherlands Japan Brunei 2013 Italy Czech Rep. Spain Portugal Ireland Chile Hungary Israel Switzerland Public Consultation Paper OECD Messages - Message Mobile Basket in Prices of 2012 in USD 35 $30 Messages Usage Fixed 25 $20 15 Ø 16 $10 5 $0 Source: OECD 2013, DIW Econ 2013 Figure 26: OECD Messages - Message mobile basket in prices of 2012 OECD Prepaid - Mobile Prepaid Basket in Prices of 2012 in USD $60 55 $50 45 $40 35 $30 25 $20 15 $10 5 $0 Messages Usage Fixed Ø 20 Source: OECD 2013, DIW Econ 2013 Figure 27: OECD Prepaid - Mobile prepaid basket in prices of 2012 Page 59 of 68

60 There is one crucial reason for Brunei s apparently weak performance, particularly with regard to the high consumption profiles, which can be revealed when considering free data volumes. These are included in almost all Bruneian postpaid offers but not get rewarded in this comparison. For instance, the Bruneian offer exhibiting the lowest costs for consumption profiles Residential 3 and Residential 4 23 includes a monthly free data volume of 5 GB. In contrast, the cheapest offer for consumer profile Residential 4 provided by Austrian provider Telekom Austria 24 does not include free data volume at all. The same holds true for most offers considered in this comparison, also for the best fitting Singaporean 25 offer. With only 100 MB, the best fitting Malaysian offer 26 also includes a significantly lower volume of free data. The same pattern can be observed for the Residential 3 profile. But also for the lower consumption profile Residential 2, Bruneian best fitting offer 27 still includes an exceptional high free data volume of 1.5 GB. Thus, one could argue that Bruneian customers get a better product for a higher price and that Brunei s weak performance for high usage consumer profiles are at least partly caused by a product portfolio which just does not perfectly fit with the profiles proposed by the OECD. This should be considered as a problem only in the case that these profiles capture the preferred consumption pattern of a significant share of Bruneian consumers. Further investigations such as consumer surveys would be necessary to answer this question. In any event, as already seen in a comparison with Singapore and Malaysia at the beginning of this chapter, an inclusion of data volumes in the OECD comparison draws a much better picture of Bruneian mobile tariff levels as shown in the following figures. 23 DST: Prima Extra. 24 A1 Telekom Austria: B-Free Smart+. 25 M1: Prepaid Super $ Celcom First: Premier. 27 DST: Prima Essential. Page 60 of 68

61 Estonia Austria Malaysia 2013 United Kingdom Poland Turkey Finland Korea France Slovenia Mexico Iceland Sweden Netherlands Israel Slovak Rep. Denmark Australia Greece Hungary Ireland Norway Portugal Singapore 2013 OECD average Germany Luxembourg Brunei 2013 Italy Czech Rep. Belgium Chile Canada New Zealand Spain United States Switzerland Japan Japan Switzerland Canada Israel United States Italy Australia Norway Chile Netherlands Portugal Greece Ireland Czech Republic Poland Estonia Malaysia 2013 Austria United Kingdom Mexico Korea Iceland Singapore 2013 Sweden Finland France Belgium Spain Turkey Denmark Luxembourg Slovak Republic Germany Slovenia Hungary New Zealand Brunei 2013 OECD average Public Consultation Paper OECD Residential MB - Mobile Basket in Prices of 2012 in USD Data Messages Voice Fixed Ø 21 Source: OECD 2013, DIW Econ 2013 Figure 28: OECD Residential MB Mobile Basket in Prices of 2012 (USD) OECD Residential MB - Mobile Basket in Prices of 2012 in USD Data Messages Voice Fixed Ø Source: OECD 2013, DIW Econ 2013 Figure 29: OECD Residential MB Mobile Basket in Prices of 2012 (USD) Page 61 of 68

62 Singapore 2013 Chile Spain Hungary Japan Iceland New Zealand Brunei 2013 Greece Portugal Italy Germany Belgium Austria Estonia France Israel Poland Turkey United Kingdom Australia Finland Sweden United States Luxembourg Slovak Rep. Malaysia 2013 Korea Switzerland Ireland Denmark Slovenia Norway Netherlands OECD average Canada Mexico Czech Rep. Japan Chile Germany Spain Brunei 2013 Singapore 2013 Canada Hungary New Zealand Portugal Belgium Czech Rep. Greece Switzerland Austria Estonia France Finland Israel Turkey United Kingdom Poland Sweden Slovenia Malaysia 2013 Slovak Rep. Korea Denmark Australia Ireland Netherlands Iceland Norway United States Luxembourg OECD average Italy Mexico Public Consultation Paper OECD Residential MB - Mobile Basket in Prices of 2012 in USD Data Messages Voice Fixed Ø 56 Source: OECD 2013, DIW Econ 2013 Figure 30: OECD Residential MB Mobile Basket in Prices of 2012 (USD) OECD Residential MB - Mobile Basket in Prices of 2012 in USD Data Messages Voice Fixed Ø 92 Source: OECD 2013, DIW Econ 2013 Figure 31: OECD Residential MB Mobile Basket in Prices of 2012 (USD) Page 62 of 68

63 Considering data consumption in the analysis, the Bruneian price level for mobile consumer profile Residential 1 is now below the OECD average. For all other profiles, Brunei Darussalam shifts more to the right end of the distribution. However, the combination of mobile telephony consumption profiles with data usage still does not perfectly match with Bruneian product portfolio. A maximum data volume of 2 GB which is proposed for high consumption type Residential 4 is still far below the volumes offered in Bruneian Postpaid offers. More precisely, the cheapest Bruneian offer for Residential 3 and Residential 4 still contains 5 GB of free data volume and thus much more than peer countries offers considered in this analysis. B.5 International Calls In Brunei Darussalam International Direct Dialling enable international voice connections with highest quality. The following figure provides a price comparison of IDD rates offered in Brunei Darussalam with high quality connections offered in Singapore and Malaysia. While IDD prices in Brunei Darussalam are similar irrespectively of the outgoing network, prices in Singapore and Malaysia differ between provider networks with each provider offering an own high quality IDD service. Thus, the least cost plan by destination country has been chosen 28. Prices are compared for 14 selected destination countries (main export partners of Brunei Darussalam). Obviously, IDD rates are significantly cheaper in Singapore and Malaysia for all analyzed destinations. 28 Considered Singaporean offers include SingTel IDD 001, StarHub IDD 008 and M1 IDD 002. Malaysian offers encompass Maxis IDD Premium and TM IDD Business. Page 63 of 68

64 IDD Prices per Minute in BND Japan South Korea China Australia Indonesia India New Zealand Malaysia Thailand Germany USA United Kingdom Brunei Singapore Median Brunei Singapore Malaysia 2.8 BND Source: DIW Econ 2013 Figure 32: IDD prices per minute in BND 29 As in the case in Brunei Darussalam, Singaporean and Malaysian providers offer cheaper international connected by the means of specific provider codes using VOIP technology. The following figure compares cheapest offers in Brunei Darussalam, Singapore and Malaysia for each selected destination irrespectively of the technology used (IDD and VOIP). 29 The comparison includes only prices for peak time and to fixed line. Page 64 of 68

65 VOIP and IDD Offers (Cheapest Offer) in BND Japan South Korea China Australia Indonesia India New Zealand Malaysia Thailand Germany USA United Kingdom Brunei Singapore Median BND Brunei Singapore Malaysia Source: DIW Econ 2013 Figure 33: VOIP and IDD offers (cheapest offer by country) in BND 30 Taking VOIP connections into consideration reduces the gap between Brunei Darussalam and its peers, particularly the gap to Singapore. For all of the analyzed destinations prices in Malaysia are still significantly lower. 30 For further details in terms of specific offers and providers, see annex. Page 65 of 68

66 Appendix C Broadcasting Services FOR INFORMATION PURPOSE ONLY Page 66 of 68

67 BROADCASTING SERVICES As free to air broadcasting services are free of charge the price analysis on broadcasting services is limited to pay TV services. Pay-TV Prices in Brunei Darussalam Kristal Astro is the sole provider of Pay TV in Brunei Darussalam. It offers a variety of channels by several packages. Packages differ in the number of channels and price. The table below displays main package offers of Kristal Astro. Package Number of Channels Subscription fee per months Family package BND Saphire package BND Ruby package BND Jade Package BND Additional sport channels BND Additional HD channels BND Source: DIW Econ 2013 Table 1: Broadcasting packages Kristal Astro Sport and HD channels can be purchased additionally to each packages depicted above. All packages of Kristal Astro include a registration fee and a subscription deposit depending on the monthly subscription fee of the respective package. International Comparison of Pay-TV Prices For an international comparison, Bruneian pay TV prices will be compared to those offered in regional peers Singapore and Malaysia. While Bruneian pay TV provider Kristal Astro provides broadcasting contents via satellite, Singaporean company StarHub provides television via its own TV-cable network accessing close to 100% of Singaporean households. Singaporean provider SingTel offers pay TV (mio-tv) contents via IPTV, relying on Singapore s well developed FTTH network. In Malaysia, Astro Malaysia offers broadcasting via satellite (same satellite as Kristal Astro) as well as via IPTV. The table below displays the different providers and their broadcasting platforms. Kristal Astro (Brunei) StarHubTV (Singapore) SingTel: mio TV (Singapore) Astro (Malaysia) Source: DIW Econ 2013 Provider Platform Satellite TV-cable IPTV Satellite (and IPTV) Table 2: Broadcasting provider by country and platform The international comparison of monthly fees for pay TV packages includes all broadcasting packages offered by the four providers mentioned above. The comparison considers only two variables of a respective offer: monthly fees (in BND) and the number of channels provided. Differences in transmission quality or the quality and composition of specific channels are not implied in the analysis. Page 67 of 68

68 The following figure displays the international comparison of Pay TV prices in Brunei Darussalam, Singapore and Malaysia. Prices in BND 70 Monthly Fees for Broadcasting Packages by Country in BND BN: Kristal Astro via Satellite SGP: SingTel via IPTV SGP: Starhub via TV-Cable MY: Astro via Satellite and IPTV Number of Channels Source: DIW Econ 2013 Figure 34: Monthly fees for broadcasting packages by country in BND As shown in the figure, prices for pay TV packages range from BND 16 to BND 65 and include up to 100 channels. Singaporean IPTV provider SingTel (mio-tv) offers particularly small packages starting with only two channels. All in all, pay TV prices of Bruneian provider Kristal Astro appear to be in line with prices offered in Singapore and Malaysia. Page 68 of 68