Cost-Based Interconnect Is Best Telecom Option - Report 07/27/99

LONDON, ENGLAND, 1999 JUL 27 (NB) - A report out today from Ovum, the telecommunications research firm, suggests that cost-based interconnections are the most effective in which the telecommunications industry can remain competitive.

As a result of its research, Ovum has teamed with Arthur Andersen to call for clear and consistent national interconnect frameworks around the world.

In its report, which was co-authored by Arthur Andersen, Ovum notes that telecommunications competition is a global phenomenon. Yet, the report says, equally global is the realization that the industry is not yet fully and effectively competitive.

The report, entitled "Implementing Cost-Based Interconnect," argues that pure market principles cannot yet be left to determine interconnection charges.

In addition, the report says, there is still a need for regulation - both to prevent anti-competitive practices and to compensate for the advantages of historical incumbency.

"Between the safe haven of monopoly practice and the promised land of effective competition lie the rough seas of regulation," said David Rogerson, Ovum's principal analyst and an expert in policy and regulation issues.

Rogerson went on to say that cost-based interconnection is the only sure guide over these troubled waters. He noted that, as competition gathers pace in global telecoms markets, deviation from the regulatory rulebook may be necessary and desirable.

"But for now, and for several years to come, some form of cost-based interconnection must be imposed on incumbents or operators with substantial market power," he said.

Over at Arthur Andersen, meanwhile, Mark Donnelly, the firm's director of regulation and costing services, said that the two firms have come together to produce the definitive "how-to" guide to implementing cost-based interconnect.

"The report takes the reader step by step through the practical difficulties of implementing interconnection systems - and contains many case studies and worked examples that provide the reader with practical insights," he said.

Donnelly said that the 2,995 pound ($5,495) report offers practical guidelines for top-down, bottom-up, and benchmark approaches to calculating cost-based interconnects.

According to the report, the importance of a clear and consistent national framework for interconnection has never been greater. The 1997 World Trade Organization agreement, the report notes, means that there is now a near-global market in investment capital for telecoms.

Ovum's Rogerson said that countries are competing for a large - but limited - pool of investment capital. The focus of investment will be on the most lucrative parts of the market.

"It's not enough to open a national market to competition and expect investment in telecoms networks to follow," he said, adding that a stable and rational competitive framework must be established in advance of liberalization in order to create the regulatory certainty necessary to attract inward investment.

"Interconnection forms a key part of this framework. The interconnect framework also needs to ensure that the prospective returns on investment are at least as good as those available in other liberalizing national markets," he said.

Newsbytes notes that the report also warns that regulators must be aware of the limits of cost-based interconnect, which are two-fold: firstly, there are situations that require no regulation of interconnect; and secondly, there are situations where regulation is required but should not be cost-based.

The report concludes that regulation is necessary only where there is a need to compensate for a perceived or anticipated market failure.

"In the absence of market failure, there should be no regulation," said Rogerson. "Regulation should only be introduced to counteract anti-competitive behavior, and should recede to give precedence to the disciplines of effective competition as soon as possible."

The report says that, in the most liberalized markets, three main issues are of key importance: defining market power, and the extent of regulation on the few key players; defining bottleneck facilities, and ensuring that regulation for these facilities applies to all operators; and extending the cost-based interconnection framework to cover mobile and broadband Internet access services.

Rogerson argues that there is a growing expectation that sector- specific, ex-ante regulation will soon disappear in liberalized markets.

"In its place will come a reliance on general competition law to deal with the anti-competitive practices of dominant operators," he said.

"However, to counterbalance this increasing market freedom, all operators are likely to experience the disciplines of cost-based interconnection for their bottleneck facilities. In particular, mobile operators and alternative access providers will be affected by the transition," he added.

Arthur Andersen's Web site is at http://www.arthuransdersen.com .

Ovum's Web site is at http://www.ovum.com

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