98/195/EC: Commission Recommendation of 8 January 1998 on interconnection in a liberalised telecommunications market (Part 1 - Interconnection pricing) (Text with EEA relevance)
Date: 1998-01-08
Institutions: European Commission
Subjects: liberalisation of the market, single market, systems interconnection, telephone charges, trans-European network, transmission network

L 73/42

‹

EN

‹

Official Journal of the European Communities

12. 3. 98

COMMISSION RECOMMENDATION

of 8 January 1998

on interconnection in a liberalised telecommunications market

(Part 1 — Interconnection pricing)

(Text with EEA relevance)

(98/195/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

Having regard to the Treaty establishing the European
Community,

Having regard to Directive 97/33/EC of the European
Parliament and of the Council of 30 June 1997 on inter-
connection in telecommunications with regard to en-
suring universal service and interoperability through the
application of the principles of open network provision
(ONP) (1), and in particular Article 7(5) thereof,

Whereas Commission Directive 96/19/EC of 13 March
1996 amending Directive 90/388/EEC with regard to the
implementation of full competition in telecommunica-
tions markets (2), abolishes special and exclusive rights as
telecommunications networks
regards the provision of
and services;

Whereas it is Community policy to create an open and
competitive market
in the telecommunications sector;
whereas for new entrants in the telecommunications
market seeking to compete with the incumbent operators,
interconnection to the existing public switched telecom-
munications networks is essential, and interconnection
charges represent one of the biggest items of expenditure
for new market entrants; whereas the Community has
agreed a regulatory framework for interconnection as set
out in Directive 97/33/EC;

Whereas Directive 97/33/EC gives national regulatory
authorities for telecommunications (NRAs) an important
role in securing adequate interconnection of networks, in
accordance with Community law,
taking into account
recommendations defined by the Commission so as to
facilitate the development of a genuine European home
market (recital 12); whereas, in particular, Article 7(5) of
Directive 97/33/EC calls upon the Commission to draw
up recommendations on cost accounting systems and
accounting separation; whereas, in accordance with the
principle of subsidiarity, the setting of tariffs for intercon-
nection is a responsibility of the Member States;

(1) OJ L 199, 26. 7. 1997, p. 32.
(2) OJ L 74, 22. 3. 1996, p. 13.

Whereas Article 7(2) of Directive 97/33/EC requires that
certain organisations notified by their NRA as having
significant market power (hereinafter referred to as ‘noti-
fied operators’) follow the principles of transparency and
cost orientation for interconnection charges, and states
that the burden of proof that charges are cost-oriented lies
with the organisation providing interconnection to its
network;

Whereas the Commission considers that that most appro-
priate approach to interconnection pricing is one based
on forward-looking long-run average incremental costs,
since this is most compatible with a competitive market;
whereas this approach does not preclude the use of justi-
fied ‘mark-ups’ as a means of recovering the forward-
looking joint and common costs of an efficient operator
as would arise under competitive conditions;

Whereas until interconnection charges based on forward-
looking long-run average incremental costs are put in
place, it is appropriate to publish international compari-
sons of interconnection charges as a means of assisting
national regulatory authorities in ensuring the implemen-
tation of cost-oriented interconnection to the networks of
notified operators;

Whereas Article 7(5) of Directive 97/33/EC calls for
NRAs to ensure that the cost accounting systems used by
the organisations concerned are suitable to ensure trans-
parency and cost orientation, but does not specify a par-
ticular cost accounting system; whereas an approach to
interconnection pricing based on forward-looking long-
run average incremental costs implies an accounting
system based on current costs rather than historic costs;
whereas activity based accounts can be used to build a
‘top-down’ model of the long-run average incremental
cost of interconnection;

Whereas the cost of terminating a call from an intercon-
nected network should not depend on the type of
network on which the call originated; whereas the prin-
ciple of non-discrimination means that the interconnec-
tion tariffs for call termination services provided by noti-
fied operators should not in general discriminate between
calls originating from fixed networks and calls originating

12. 3. 98

‹

EN

‹

Official Journal of the European Communities

L 73/43

from mobile networks, nor between calls originating from
networks in the same Member State and calls originating
from networks in other Member States;

Commission on the application of the competition rules
to access agreements in the telecommunications sector (4);

operation

services,
of

telecommunications

Whereas Member State may make the provision of tele-
including the establishment
communications
and/or
networks
required for the provision of such services, subject to
authorisations in accordance with Directive 97/13/EC of
the European Parliament and of the Council of 10 April
1997 on a common framework for general authorisations
and individual licences in the field of telecommunications
services (1); whereas the general principles of the Treaty
and the particular
the Directive
requirements
97/33/EC, mean thal all points of interconnection open
to national operators should also be open to autorised
operators in other Member States who wish to deliver
cross-border traffic; whereas the established practice that
existing network operators can deliver traffic to other
Member States without needing authorisations in the
destination Member State, or needing to be established in
the destination Member State, is consistent with the prin-
ciple that delivery of traffic to a Member State does not
constitute the offering of a service in that Member State;

of

Whereas the advisory committee set up by Article 9(1) of
the
Directive 90/387/EEC on the establishment of
internal market for telecommunications services through
the implementation of open network provision (5)
(‘the
ONP Committee’) has given broad support to the prin-
and the
recommendation,
ciples
Commission has taken utmost account of
the views
expressed,

contained in this

MAKES THE FOLLOWING RECOMMENDATION:

1. This recommendation concerns the interconnection
of
telecommunications networks, and in particular
the pricing of call termination on the networks of
operators designated by their national
regulatory
authority as having significant market power (here-
inafter
in ac-
cordance with Directive 97/33/EC.

‘notified operators’)

referred to as

Whereas Directive 97/33/EC allows Member States to
establish mechanisms for sharing the net cost of universal
service obligations between organisations operating public
telecommunications networks and/or pubicly available
voice telephony services;

Whereas Article 12(1) of Directive 95/62/EC of the Euro-
pean Parliament and the Council of 13 December 1995
on the application of open network provision to voice
telephony (2) requires tariffs for use of the fixed public
telephone network and the voice telephony service to
follow the basic principles of cost orientation and trans-
parency; whereas contributions by interconnected parties
to ‘access deficit’ type schemes are only permissible when
tariff constraints are imposed by NRAs on the grounds of
affordability and accessibility of
telephone service in
accordance with Article 12(2) of Directive 95/62/EC;
whereas the Commission has indicated that it believes
such schemes should disappear by 1 January 2000 (3);

Whereas the application of the principles set out in this
recommendation is without prejudice to the duty of the
Member States and of undertakings to fully comply with
the EU competition rules, taking account of the specific
in the communication from the
positions

set out

(1) OJ L 117, 7. 5. 1997, p. 15.
(2) OJ L 321, 30. 12. 1995, p. 6.
(3) COM(96) 608, 27.11.1996, Commission communication on as-
sessment criteria for national schemes for the costing and
financing of universal service in telecommunications and
guidelines for the Member States on operation of such sche-
mes.

2. Article 7(2) of Directive 97/33/EC requires the inter-
connection charges of notified operators to follow the
principles of cost orientation and transparency. The
principle of cost orientation when applied to inter-
connection means
interconnection charges
should reflect the way in which the costs of intercon-
nection are actually incurred. Notified operators
should be able to recover the one-off incremental cost
required to connect
the networks, and the incre-
mental capacity costs imposed by the interconnecting
traffic.

that

Annex I of
this recommendation provides further
details on the type of costs associated with call ter-
mination.

3. Interconnection costs should be calculated on the
basis of forward-looking long run average incremental
costs, since these costs closely approximate those of
an efficient operator employing modern technology.
Interconnection charges which are based on such
costs may include justified ‘mark-ups’
to cover a
portion of the forward-looking joint and common
costs of an efficient operator, as would arise under
competitive conditions.

4. The interconnection charges based on ‘best current
practice’ given below provide guidance to NRAs
when assessing the interconnection charges for call
termination proposed by notified operators, until
calculated costs for interconnection based on forward-
looking, long-run average incremental costs are av-
ailable.

(4) OJ C 76, 11. 3. 1997, p. 9.
(5) OJ L 192, 24. 7. 1990, p. 1.

L 73/44

‹

EN

‹

Official Journal of the European Communities

12. 3. 98

Based on the data given in Annex II of this recommendation, the following ‘best current
practice’ charges are recommended maximum interconnection charges for the period
starting 1 January 1998.

‘Best current practice’ interconnection charges

‘Best current practice’ interconnection charge for call termination at the LOCAL
level (i. e. at a local exchange or as near a local exchange as possible)

between ECU 0,6 and 1,0/100 per minute (at peak rate)

‘Best current practice’ interconnection charge for SINGLE TRANSIT interconnec-
tion (metropolitan level)

between ECU 0,9 and 1,8/100 per minute (at peak rate)

‘Best current practice’ interconnection charge for DOUBLE TRANSIT interconnec-
tion (national level — more than 200 km)

between ECU 1,5 and 2,6/100 per minute (at peak rate)

regulatory authorities use their

5. It is recommended that where charges lie outside the
ranges of ‘best current practice’ charges given in point
4, national
rights
under Article 7(2) of
the Directive 97/33/EC to
request full justification of the proposed charges, and
if appropriate,
to require retrospective changes to
interconnection charges. The ranges of ‘best current
practice’ charges given in point 4 are considered to be
wide enough to cover recognised cost differences
between Member States.

6. The use of forward-looking, long-run average incre-
mental costs implies a cost accounting system using
activity-based allocations of current costs, rather than
historic costs. It is recommended that national regu-
latory authorities (NRAs) set deadlines for their noti-
fied operators for the implementation of new costs
accounting systems based on current costs, where
such systems are not already in place. Activity-based
costing systems, in which costs are allocated to each
product and/or service on the basis of the underlying
cost drivers and activities of an efficient operator, are
recommended in order to minimise the joint and
common costs that cannot be directly allocated.

7. In keeping with current practive for cross-border
interconnection between operators of established

networks, and the principle of non-discrimination,
operators authorised in one Member State that merely
interconnect
to deliver traffic to another Member
State, and that do not offer services or operate infra-
structure in that other Member State, should not need
to be authorised or established in that other Member
State.

It is recommended that the reference interconnection
offer of notified organisations should include — as a
discrete unbundled element of the interconnection
offer — terms and conditions and tariffs for the trans-
mission link between the actual point of interconnec-
tion and the border of the Member State.

8. Without prejudice to the principle of non-discrimina-
tion, any contributions to access deficits or universal
service paid by organisations operating public tele-
communications networks and/or voice telephony
services operators in a Member State (which in ac-
cordance with Community law must be separated
from interconnection charges),
be
imposed on organisations which merely interconnect
to deliver traffic to a Member State and do not actu-
ally
in that
Member State, nor be imposed indirectly on consu-
mers in other Member States.

telecommunications

should not

services

offer

12. 3. 98

‹

EN

‹

Official Journal of the European Communities

L 73/45

9. This recommendation, and in particular the ‘best current practice charges’ in point 4
and the data in Annex II, will be reviewed by the Commission by 31 July 1998 at the
latest, and updated where necessary.

10. This recommendation is addressed to the Member States.

Done at Brussels, 8 January 1998.

For the Commission

Martin BANGEMANN

Member of the Commission

L 73/46

‹

EN

‹

Official Journal of the European Communities

12. 3. 98

ANNEX I

COMPONENTS OF INTERCONNECTION CHARGES FOR CALL TERMINATION

Directive 97/33/EC requires the interconnection charges of notified operators to follow the principles of cost
orientation. This Annex considers the implications of this requirement for the components of an intercon-
nection charge for call termination.

1. Pricing the local loop for interconnection purposes

The local loop refers to the final links between the customer and the local exchange. In a fixed network
using wired or wireless local loops, the cost of an unswitched local loop is largely a one-off cost, with peri-
odic maintenance costs. Where call termination is being purchased, the ‘lowest’ place in the network where
this can occur is on the main network side of the local switch (1). Interconnection at this point may impose
additional switch capacity costs, but there is no additional capacity cost or investment requirement relating
to those components of the local loop which are dedicated to a particular customer (i.e. the pair of copper
wires in a traditional network).

It follows from the principle of cost orientation that since the provision of interconnection does not lead to
any increase of costs in the dedicated components of the local loop of the terminating network, the calcula-
tion of interconnection charges should not include any component relating to the direct cost of the subscri-
ber-dedicated components of the local loop. The cost of those components in the unswitched local loop that
are dedicated to a particular customer should therefore be recovered from that customer through a subscriber
line charge, or as a combination of this and revenues from other services, to the extent that competition
permits.

A difficulty arises if the incumbent is prevented from rebalancing its tariffs by regulatory measures and thus
cannot charge an economic price to its own customers to cover the cost of the local loop. This gives rise to
the so-called ‘access deficit’. In a monopoly environment the operator compensates for the deficit in the
‘access network’ (i.e. the local loop) by charging prices in excess of economic cost for other services, such as
international calls. With cost-oriented interconnection, competitors are able to capture some of this long
distance and international traffic, and the incumbent’s ability to compensate for the access deficit is reduced.
An access deficit scheme involves contributions being imposed on other operators to compensate the incum-
bent for the loss of revenues that would have been used to fund this deficit.

Access deficit contribution schemes always provide inefficient investment signals, and raise overall industry
costs. They are also administratively cumbersome, and lack transparency. As mentioned in the ‘Guidelines on
costing and pricing of universal service’ published by the Commission in November 1996 (2) it is expected
that access deficit type schemes will only be applied on a temporary basis, up to the year 2000, by which
time a sufficient level of re-balancing should have been completed in all Member States.

In accordance with the Interconnection Directive, any contribution to ‘access deficits’ paid by interconnec-
ting parties must be clearly separated from the interconnection charges. Payment of ‘access deficit contribu-
tions’ by interconnected parties is only permissible under Community law where Member States impose
regulatory constraints on the retail tariffs of notified operators. Where an operator is not prevented by regula-
tory measures from rebalancing its tariffs, and ‘access deficit’ charge is not justified.

2. Pricing uncompleted calls for interconnection purposes

Uncompleted busy hour calls that originate from interconnected networks may impose additional capacity
costs on a terminating network. In some cases, however, the reason for call failure could be lack of per-
formance of the incumbent’s own network. The Interconnection Directive places the onus of proof regarding
costs on the network operator, so any operator seeking to include in its interconnection tariffs a fee for
uncompleted calls would have to demonstrate that lack of performance of its own network had not been a
reason for call failure.

(1) The provision of ‘unbundled’ local loop, whereby a new entrant takes over and has exclusive use of a local loop installed

by an incumbent, for an appropriate fee, is not strictly ‘interconnection’ in EU terms.

(2) COM(96) 608, 27. 11. 1996.

12. 3. 98

‹

EN

‹

Official Journal of the European Communities

L 73/47

3. Call set-up charges for interconnection purposes

In a fixed network, switch costs are mainly driven by two factors — call duration and call events (i.e. signal-
ling and call set-up). A great deal of information is required to determine the proper balance in terms of cost
causation between these two types of costs. Partly because of this, it is common for regulatory authorities to
allow recovery of switching costs only on the basis of duration of completed calls. A charge for call set-up
could only be considered to be a valid component of an interconnection tariff if the operator could demon-
strate the extent to which calls originating from interconnected networks imposed incremental costs on the
terminating network in terms of additional processing power required to handle the additional call set-up
attempts occurring during the peak period. If a call set-up charge is used, the corresponding call duration
charges should be lower than when there is no call set-up charge.

4. Interconnection charges and retail pricing

Some countries have in the past calculated interconnection charges on the basis of discounted retail tariffs.
However, current retail tariffs are not necessarily cost-oriented, and this approach would in most cases be
incompatible with the requirements of Community law.

Even if retail tariffs were cost-oriented, the approach is not desirable because it tends to lock new entrants
into the same retail tariff structure as that of the incumbent, thus preventing the development by new
entrants of innovative retail tariff schemes targeted at different types of user. The variety and choice of retail
tariff schemes currently available on mobile networks in Member States shows there is considerable scope for
innovative retail tariffing as a means of providing consumer choice and increasing the market demand for
telecommunications services.

Where interconnection charges include time of day and day of week variations, they should be applied in a
non-discriminatory manner to new entrants and to the incumbent’s own traffic.

L 73/48

‹

EN

‹

Official Journal of the European Communities

12. 3. 98

ANNEX II

‘BEST PRACTICE’ INTERCONNECT CHARGES AND THEIR DERIVATION

1. Approach

The approach taken is to use the interconnect charges in the three lowest cost Member States (for which data
was available at 1 September 1997) as the starting point for a set of ‘best current practice’ figures at which to
aim in the short term.

The figure below shows the level of interconnection charges for Member States. The costs in this figure refer
to call termination on fixed networks at peak rates. Call set-up charges are included where they exist, but
other non-traffic-related charges are in general not included. The figures do not include any ‘access deficit’
type contributions or universal service contributions. These additional contributions will not be required in
many Member States, but where they are required as part of the regulatory environment in a Member State,
they must be calculated and shown separately from the interconnection charge, in accordance with the Inter-
connection Directive.

Note that these figures concern one specific element of the cost of interconnection, i.e. the charge for call
termination. They do not represent the full interconnection charges that may be payable in a given country.

1997/1998 — Interconnection rates

0
0
1
/
U
C
E

9,00

8,00

7,00

6,00

5,00

4,00

3,00

2,00

1,00

0,00

e
g
n
a
h
c
x
e

l
a
c
o

l

m
e
d
n
a
t

e
l
g
n
i
s

m
e
d
n
a
t

e
l
b
u
o
d

K
U

n
i
a
p
S

e
c
n
a
r
F

y
n
a
m
r
e
G

d
n
a
l
n
i
F

k
r
a
m
n
e
D

y
l
a
t
I

n
e
d
e
w
S

m
u
i
g
l
e
B

a
i
r
t
s
u
A

s
d
n
a
l
r
e
h
t
e
N

Figure 1

Interconnection charges for local, single transit and double transit levels, at peak rates

(rate in ECU/100 per minute, based on a three minute call duration)

 
 
 
12. 3. 98

‹

EN

‹

Official Journal of the European Communities

L 73/49

The tables in section 3 give the data upon which this chart is based.

There are factors such as average density of connections, labour costs, geological factors, permitted rate of
return on capital employed (1), which vary between EU Member States. While such variations will to some
extent affect the cost of interconnection, the differences are not considered to be large enough to invalidate
the ‘best current practice’ charges recommended here (2).

It is intended to review the figures in this recommendation during 1998, and it is to be expected that the
‘best current practice’ interconnection charges will be progressively reduced in the future to reflect both the
downward trend in network costs and better estimation of those costs. Currently interconnection charges
worldwide are reducing at about 8 % per annum.

It must be stressed that these ‘best current practice’ charges are higher — in some cases considerably higher
— than those which would be expected using a bottom-up LRAIC calculation. Nevertheless given the situ-
ation in the EU as of January 1998, it is considered that these ‘best current practice’ charges represent a
realistic intermediate goal.

2. Derivation of ‘best current practice’ interconnection charges

The price ranges were derived from the tariffs that were available as of 1 September 1997. Changes in inter-
connection tariffs occurring after that date have not been taken into account.

The top price in each range shown above corresponds to the charge that applied at 1 September 97 in the
third lowest-cost Member State, rounded up to the nearest ECU/1 000.

The bottom price in each range corresponds to the charge that applied at 1 September 97 in the lowest cost
Member State, rounded down to the nearest ECU/1 000, and with an adjustment to the ‘double transit’ rate
to take account of the fact that in smaller Member States a distance component of less than 200 km may be
appropriate.

3. Detailed cost data for Member States

Interconnect charges per minute
based on a three-minute call duration as of 1 January 1998
basic starting values in ECU cents (ECU/100)

Member State

Local

UK

0,64

Single
transit

0,91

Double
transit (1)

Exchange
rates
to
ECU at
September
1997

Interconnection charges in local currencies
Date at which prices are effective,
other supplementary information

1,74

0,68

Prices from October 1997 (GBP/100):
— local exchange = 0,434 per min.
— single tandem = 0,618 per min.
— double tandem (; 200 km) = 1,177 per min.

Spain (2)

1,51 (3)

1,51

4,22

166

France

0,71

1,73

2,55

6,59

Germany (4)

1,00 (5)

1,71-2,16 (6)

2,61

1,97

Prices since April 1997 (ESP):
— local = not provided
— metropolitan = 2,5 per min.
— national = 7 per min.

Prices for 1 January 1998 (FRF/100):
— local exchange = 4,69 per min.
— single tandem = 11,40 per min.
— double tandem (; 200 km) = 16,77 per min.
Charges without ADC or USO contribution

Prices for 1 January 1998 (DEM/100):
— city = 1,97 per min.
— Regio50 = 3,36 par min.
— Regio200 = 4,25 per min.
— national = 5,14 per min.

(1) Historically, the real cost of capital has been higher in some countries, and some regions of the world compared with
other. Rates of return on capital employed may therefore differ between states by several percentage points per annum.
(2) The density of connections is largely reflected in access cost, a dedicated cost to the end customer, rather than imposing
great differences in interconnection rates. A similar argument can be made regarding differences in geological factors.

L 73/50

‹

EN

‹

Official Journal of the European Communities

12. 3. 98

Interconnect charges per minute
based on a three-minute call duration as of 1 January 1998
basic starting values in ECU cents (ECU/100)

Member State

Local

Single
transit

Double
transit (1)

Exchange
rates
to
ECU at
September
1997

Finland

1,81 (3)

1,81

4,20 (7)

5,88

Denmark

0,98

1,82

2,22

7,49

Netherlands

2,00 (3)

2,00

2,52

2,21

Sweden

1,68

2,15

2,98

8,51

Italy (*)

1,54 (8)

2,52

1 921

Belgium (*)

2,78 (3)

2,78

3,62

40

Austria (*)

7,61 (3)

7,61

8,41

13,79

Interconnection charges in local currencies
Date at which prices are effective,
other supplementary information

Prices since September 1997 (FIM/100):
— local = not provided
— metropolitan = 20 per call + 4 per min.
— national = 20 per call + 13,8 to 18 per min.

Prices since September 1997 (DKK/100):
— local exchange = 4 per call + 6 per min.
— single tandem = 8 per call + 11 per min.
— double tandem = 8 per call + 14 per min.

Prices since July 1997 (NLG/100):
— local exchange = not provided
— local segment = 2,5 per call + 3,6 per min.
— national = 3,2 per call + 4,5 per min.

Prices since January 1997 (SEK/100):
— local exchange = 7 per call + 12 per min.
— single segment = 7 per call + 16 per min.
— double segment = 7 per call + 23 per min.

Proposed tariffs for 1 January 1998 (ITL):
— local (only from 1 September 1998) = 29,6 per min.
— region = 48,4 per min.
— national = not provided

Proposed tariffs for 1 January 1998 (BEF):
— local = not provided
— region = 0,354 per call + 0,996 per min.
— national = 0,460 per call + 1,294 per min.

Proposed tariffs for 1 January 1998 (ATS/100):
— local = not provided
— region = 1,05 per min.
— national = 1,16 per min.

Source: OVUM and Commission services

(*) Initial tariffs proposed by the operator but not yet approved by the national regulatory authority.

(1) The ‘double transit’ rate includes a distance component for links of ; 200 km.
(2) In Spain, until full liberalisation on 1 December 1998, (in accordance with the derogation granted under Directive 96/19/EC) this offer is only available to

a limited number of authorised operators.

(3) In Spain, Finland, Netherlands, Belgium and Austria the lowest interconnection charge covers interconnection at a local or a tandem exchange. Thus the

‘local’ rate is the same as the ‘single transit’ rate.

(4) Interconnection charges in Germany were not available on 1 September 1997 and have not been used in the derivation of ‘best current practice’ price
ranges. The four zones in Germany, which are defined by distance, do not correspond on a 1:1 basis to the three bands in the table which are defined in
technical terms.

(5) In Germany the local tariff is in general identical with the so-called City-zone, which also covers large cities, but might sometimes include single transit

interconnection.

(6) In Germany the single transit segment or metropolitan area is covered by two regional zones: Regio50 = 1,71 ECU/100 per minute and Regio200 = 2,16

ECU/100 per minute (Regio200 might sometimes include double transit connection).

(7) The price range is between 3,48 and 4,20 according to traffic carried.
(8) In Italy local tariffs are only available from 1 September 1998.

In Greece, Ireland, Luxembourg, and Portugal, telecommunications organisations have not published interconnection prices, in accordance with the deroga-
tions granted under Directive 96/19/EC.