Commission Communication on interconnection pricing in a liberalised telecommunications market
Date: 1998-03-19
Institutions: European Commission
Subjects: competition, liberalisation of the market, systems interconnection, telecommunications, telephone charges

19.3.98

EN

Official  Journal  of  the  European  Communities

C  84/3

Commission  Communication  on  interconnection  pricing  in  a  liberalised  telecommunications
market

(98/C  84/03)

(Text  with  EEA  relevance)

1.  BACKGROUND

for 

telecommunications 

The  Community  has  developed  a  regulatory  framework
for 
that  provides  for  open  and
competitive  markets  from  1st  January  1998,  with  tran(cid:220)
certain  Member  States.  The
sition  periods 
Community  market  of  190  million  fixed  telephone  lines
presents  opportunities  for  market  entry  into  one  of  the
fastest  growing  sectors  of  the  economy.  The  market  for
telecommunications  services  in  Europe  has  been  growing
at  a  rate  of  about  8(cid:216)%  per  annum  (in  nominal  terms)
since  1990,  and  OECD  comparisons  of  competitive  and
non(cid:220)competitive  markets  indicate  that  growth  rates  can
be  expected  to  increase  significantly  following  liberali(cid:220)
in  the
sation.  Current  telecommunications 
Community  is  running  at  about  ECU  40  billion  per  year.

investment 

subject  of 

Interconnection 

telecommunications. 

is  of  particular
interconnection 
The 
importance  to  the  development  of  a  competitive  market
in 
the
incumbent’s  network  is  essential  for  most  new  entrants  in
order  to  access  the  existing  base  of  telecommunications
users 
regulatory
framework  for  telecommunications  sets  out  principles  for
interconnection  to  be 
level
under  the  supervision  of  the  national  regulatory  auth(cid:220)
orities  for  telecommunications  (NRAs).

in  a  national  market.  The  EU 

implemented  at  national 

to 

Publication  by  the  Commission  of  Recommendations  on
Interconnection  is  foreseen  in  the  European  Parliament
and  Council  Directive  97/33/EC  on  Interconnection  in
Telecommunications(cid:216)(˛).  The  aim  of  such  Recommen(cid:220)
dations  is  to  assist  the  national  regulatory  authorities  in
carrying  out  their  obligations  under  the  Directive  and
the  development  of  a  genuine
"facilitate 
thereby 
European  home  market’(cid:216)(ˇ).

2.(cid:217)THE  REGULATORY  FRAMEWORK  FOR 

INTER(cid:220)

CONNECTION

The  EU  Regulatory  Framework  for  interconnection  is
set  out  in  Commission  Directive  96/19/EC(cid:216)(—)  (the  "Full
the  EP  and  Council
Competition’  Directive)  and 

(˛)(cid:217)OJ  L  199,  26.7.1997,  p.  32.
(ˇ)(cid:217)Directive  97/33/EC,  recital  12.
(—)(cid:217)OJ  L  74,  22.3.1996,  p.  13.

Directive  97/33/EC  on  Interconnection 
in  Telecom(cid:220)
munications  (the  Interconnection  Directive).  In  addition
to  the  ex  ante  rules  contained  in  these  two  Directives,  the
competition  rules  of  the  Treaty  apply.

Under  the  "Full  Competition’  Directive,  Member  States
have  to  ensure  that  telecommunications  organisations
publish,  by  1  July  1997,  the  terms  and  conditions  for
interconnection  to  the  basic  functional  components  of
their  voice  telephone  service  and  their  public  switched
telecommunications  networks, 
intercon(cid:220)
nection  points  and  the  interfaces  offered  according  to
market  needs.  Terms  and  conditions  for  interconnection,
which 
lists,  must  be
interconnect  price 
non(cid:220)discriminatory,  proportional  and  transparent,  and
based  on  objective  criteria.

including  the 

include 

that 

Furthermore,  by  1st  January  1998,  Member  States  must
ensure 
telecommunications  organisations  provide
interconnection  on  these  terms  and  conditions  to  under(cid:220)
takings  authorised  to  provide  such  services  or  networks.
The  deadline  for  implementation  of  this  Directive  into
national  law  was  January  1997.

"Full  Competition’  Directive  provides  minimum
The 
requirements  concerning  interconnection.  The  Intercon(cid:220)
nection  Directive,  which  came  into  force  in  August  1997
and  is  to  be  implemented  into  Member  States’  national
laws  by  31  December  1997,  goes  further  than  the  full
competition  Directive  by  laying  down  a  harmonised  set
of  principles  for  interconnection.  In  addition  to  the  obli(cid:220)
gation  for  fixed  network  operators  with  significant
market  power 
their
networks  at  cost  oriented  prices,  it  sets  out  the  super(cid:220)
visory  role  of  the  national  regulatory  authorities  who
must,  among  other 
things,  ensure  publication  of  a
"reference  interconnection  offer’  describing  the  terms  and
conditions  for  interconnection.

interconnection 

to  provide 

to 

Interconnection  Directive 

The 
that
agreements  involving  interconnection  to  fixed  network
operators  with  significant  market  power  are  made
publicly  available.

requires 

also 

Certain  Member  States  have  been  granted  transition
periods  for  liberalisation  of  voice  telephone  services  and
public  telecommunications  networks,  with  corresponding
deferments  for  the  publication  deadlines  referred  to

C  84/4

EN

Official  Journal  of  the  European  Communities

19.3.98

the 

above(cid:216)((cid:209)).  However, 
Interconnection  Directive
requires  all  Member  States  to  ensure  publication  of  a
"reference  interconnection  offer’  by  1  January  1998.  ln
the  case  of 
this
reference  interconnection  offer  is  limited  to  the  terms
and  conditions  for  interconnection  of  already  liberalised
services,  i.e.  mobile  networks  and  cross(cid:220)border  intercon(cid:220)
nection  of  fixed  and  mobile(cid:216)((cid:210))  networks.

transition  countries, 

the  scope  of 

The  application  of  the  principles  set  out  in  Commission
recommendations  is  without  prejudice  to  the  duty  of  the
Member  States  and  of  undertakings  to  comply  fully  with
the  EU  competition  rules,  taking  account  of  the  specific
positions  set  out 
the
Commission  on  the  application  of  the  competition  rules
to 
telecommunications
in 
sector(cid:216)((cid:211)).

the  Communication 

agreements 

access 

from 

the 

in 

3.  (cid:217)COMMISSION  RECOMMENDATION  ON  INTER(cid:220)

CONNECTION  PRICING ((cid:212))

3.1. Scope  of  the  recommendation

When  two  networks  interconnect,  each  operator  seeks  to
charge  the  other  for  resources  provided.  In  the  telecom(cid:220)
munications  sector,  interconnection  charges  paid  to  the
incumbent  operator  represent  one  of  the  largest  costs
incurred  by  new  market  entrants  -  often  amounting  to
about  40(cid:216)%  of  expenditure.  The  most  basic  intercon(cid:220)
nection  service  provided  is  that  of  call  termination  (i.e.
delivering  a  call  which  originates  on  one  network  to  its
destination  on  another  network),  and  the  recommen(cid:220)
dation  concentrates  on  pricing  principles  for  call  termi(cid:220)
nation.

The  cost  of  call  termination  is  only  one  part  -  albeit  a
interconnection
very 

important  part  -  of  the  total 

((cid:209))(cid:217)Later  dates  agreed  for  certain  Member  States:

Ireland:

Portugal:

publication  -  1.7.1999,
full  competition  -  1.1.2000

publication  -  1.7.1999,
full  competition  -  1.1.2000

Luxembourg:

publication  -  1.1.1998,
full  competition  -  1.7.1998

Greece:

Spain:

publication  -  30.6.2000,
full  competition  -  31.12.2000

publication  -  1.5.1998,
full  competition  -  30.11.1998.

((cid:210))(cid:217)Under  the  Interconnection  Directive,  some  Member  States
may  be  granted  a  transition  period  for  cross(cid:220)border  inter(cid:220)
connection  of  fixed  and  mobile  networks.

((cid:211))(cid:217)OJ  C  76,  11.3.1997,  p.  9.
((cid:212))(cid:217)OJ  L  .(cid:216).(cid:216).,  .(cid:216).(cid:216).  1998.

charges  faced  by  a  new  entrant.  It  is  important  to  stress
that  the  comparative  data  in  this  document  should  not  be
taken  as  a  comparison  of  the  full  interconnection  charges
facing  a  new  entrant  in  each  Member  State.

3.2. Cost  orientation

Interconnection  Directive 

The 
imposes  cost(cid:220)oriented
interconnection  charges  on  certain  network  operators
with  significant  market  power.  The  principle  of  cost
orientation  implies  that  the  price  charged  for  provision
of  a  service  should  reflect  the  underlying  costs  incurred
in  providing  that  service.  Thus  in  arriving  at  principles
for  interconnection  pricing,  it  is  necessary  to  analyse  the
way  in  which  the  act  of  interconnection  imposes  costs  on
a  network.

involved 

in  a  telecommunication
Most  of  the  costs 
incurred,  for
network  are  one(cid:220)off  costs,  which  are 
trenches  are  dug,  ducts  and  cable
example,  when 
installed,  and  when 
switches  are  purchased  and
programmed.  Other  on(cid:220)going  costs  also  occur,  such  as
for  maintenance,  switch  reprogramming,  and  adminis(cid:220)
tration  costs.

A  fixed  network  has  to  be  dimensioned  according  to  the
quality  of  service  required  during  the  period  of  peak
traffic  load  which  it  will  be  required  to  handle.  If  a
network  has  to  handle  peak  hour  traffic  from  other
interconnected  networks,  additional  capacity  will  be
necessary  to  maintain  the  desired  quality  of  service(cid:216)((cid:213)).
An  analysis  of  the  capacity  costs  required  to  provide  that
service  quality  (given  demand,  or  subsequently,  actual
interconnect  traffic  figures)  will  enable  costs  to  be  appor(cid:220)
tioned  among  interconnecting  parties.

In  an  ideal  situation,  where  an  industry  comprised  estab(cid:220)
lished  market  players  with  relatively  stable  market  shares,
capacity  based  charging  would  be  the  most  efficient
interconnect  pricing  rule.  However  these  conditions  do
not  apply 
telecommunications
markets,  and  the  usual  basis  for  interconnect  pricing  is
traffic  based  pricing  -  with  adjustments  as  appropriate

in  newly 

liberalised 

((cid:213))(cid:217)At  times  of  the  day  when  few  calls  are  being  made,  little  or
no  reconfiguration  or  investment  in  capacity  will  be  required
to  handle  additional  traffic  from  interconnected  networks,
and  so  the  costs  incurred  by  the  terminating  network  will  be
relatively  small.  At  the  peak  period,  however,  an  additional
increment  of  traffic  will  require  a  corresponding  addition  in
network  capacity  if  the  terminating  network  is  to  maintain
the  same  service  quality.  Capacity  investment  represents  the
bulk  of  the  additional  costs  incurred  in  a  network  when
terminating  interconnected  traffic.

19.3.98

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C  84/5

for  time  of  day,  day  of  week  variations  -  such  that  the
total 
interconnection
costs  of  an  efficient  operator  are  recovered.

traffic(cid:220)related 

forward 

looking 

3.3. Costing  methodologies

shown  in  the  table  below.  Indeed,  the  Interconnection
Directive  recognises  that 
interconnection
based  on  a  price  level  closely  linked  to  the  long  run
incremental  cost  for  providing  access  to  interconnection
are  appropriate  for  encouraging  the  rapid  development
of  an  open  and  competitive  market’  (Recital  10).

"charges  for 

The  issue  of  setting  fair  and  efficient  cost(cid:220)oriented  inter(cid:220)
connection  prices  is  being  faced  in  liberalised  markets  all
around  the  world.  There  is  a  clear  trend  towards  the  use
of  a  forward(cid:220)looking  long  run  average  incremental  cost
interconnection  pricing,  as
(FL(cid:220)LRAIC)  approach  for 

The  forward  looking  long  run  incremental  cost  provides
an  analytical  framework  which  can  be  used  to  obtain  an
estimate  of  the  cost  that  would  be  found  in  a  fully
competitive  market.

Table  1  -  Current  and  planned  cost  methodologies  for  calculating  interconnection  charges  in  already  liberalised  markets

Country  and  name  of
National  Regulatory
Authority  (NRA)

Regulatory  involvement  in
determining  Interconnection
charges  of  incumbent

Cost  basis  which  NRA
currently  work  with  to
calculate  IC  prices

Costing  standards
to  be  used  in  future
IC  price  calculations

Australia
AUSTEL

Denmark
Telestyrelsen

New  Zealand
Competition  Law

Sweden
Post(cid:216)&(cid:216)Telestyrelsen

Negotiations  between
the  parties  under  the
threat  of  arbitration  by
the  NRA

FL  LRIC(cid:216)(*)
(Directly  attributable
incremental  cost
DAIC)

FL  LRIC(cid:216)(*)
(DAIC)

NRA  approved
reference  price  list.
Negotiations  between
parties  and  dispute
resolution  with  NRA

Negotiations  between
the  parties,  where
failure  could  give  rise
to  direct  regulation

Negotiations  between
the  parties,  with  future
dispute  resolution  by
NRA

Fully  Distributed
Historic  Costs

FL  LRIC(cid:216)(*)
(from  1999)

Apparently  not  based
on  explicit  "top(cid:220)down’
or  "bottom(cid:220)up’

No  costing  principles
stated

Fully  Distributed
Historic  Costs  (FDC)

Modified  FDC
(likely  to  be  transformed
to  modified  LRIC)

United  Kingdom
OFTEL

Interconnection
charges  determined  by
the  NRA

Fully  Distributed
Historic  Costs  +
Current  Cost  accounts

FL  LRIC(cid:216)(*)
(from  October  1997)

USA
FCC  +  State
Commissions

Negotiation,  with  right
to  arbitration.  Proxy
interconnect  charges
published  by  FCC

Fully  Distributed
Historic  Costs
(may  differ  between
the  states)

FL  LRIC(cid:216)(*)
(TELRIC)

(*)(cid:217)FL(cid:218)(cid:218)Forward  Looking

LRIC Long  run  incremental  costs

C  84/6

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19.3.98

In  a  competitive  market,  the  price  a  firm  pays  for  an
asset  or  investment  is  not  what  governs  its  return.  From
the  moment  the  investment  is  made  (i.e.  the  time  when
the  investment  cannot  be  reversed  without  significant
cost),  the  asset’s  value  to  the  firm  depends  on  what  the
firm  can  do  with  that  asset.  It  can  either  sell  the  asset  to
the  highest  bidder  or  it  can  use  the  asset  to  produce  a
good  or  service  which  the  firm  sells  to  generate  an
income.

The  goods  or  services  produced  with  the  help  of  that
asset  usually  face  competition  from  close  substitutes
produced  by  competitors.  If  any  of  those  competitors  has
superior  efficiency  -  such  that  it  is  able  to  supply  a
superior  quality/price  package  to  consumers  -  other
less  efficient  market  players  will  need 
to  respond
accordingly,  rather  than  continue  pricing  on  the  basis  of
their  embedded  or  historic  costs.  In  other  words,  firms
are  compelled  to  look  forward  to  survive,  rather  than
backward  to  their  original  investments(cid:216)((cid:214)).

The  forward(cid:220)looking  approach  is  implicit  when  ident(cid:220)
ifying  and  measuring  the  economic  or  "real’  costs  (i.e.
LRIC)  associated  with  the  increment  in  output.  In  the
particular  case  where  the  increment  is  a  single  unit,
incremental  costs  will  be  the  same  as  marginal  costs.  In
the  short  run,  the  size  of  any  increment  is  limited  by  the
capacity  of  the  firm’s  existing  productive  assets.  The  long
run  however,  is  the  time  horizon  in  which  the  firm  can
undertake  capital  investment  to  increase  this  capacity.  In
this  regard,  the  long  run  is  the  time  horizon  in  which  the
firm  could  adjust  (downwards  or  upwards)  all  of  its
its
inputs, 
production  plants,  to  meet  a  decrement  or  increment  in
the  volume  of  production.  Thus,  the  entire  investment
cost  entailed  in  any  point  of  interconnection,  and  any
investment  in  network  and  switching  capacity  required  to
handle  interconnected  traffic,  would  be  avoidable,  and
thus 
cost
long 
measure(cid:216)(˛˝).  The  total  of  all  such  measures,  including

including  the  size  of  each  and  any  of 

captured  by  a 

incremental 

run 

((cid:214)) This  is  a  major  source  of  risk  in  market  economies,  and  is
one  of  the  reasons  that  a  firm’s  value,  as  measured  by  the
value  of  its  shares,  can  change  significantly  in  a  short
period.  Only  when  a  firm  has  substantial  market  power  is  it
possible  for  it  to  demand  from  customers  (or  competitors  in
the  case  of  interconnection)  a  price  calculated  to  provide  it
with  a  required  rate  return  on  its  past  investments.  Inter(cid:220)
connection  charges  that  are  based  on  historic  costs  serve  to
protect  an 
real  pressure  of  a
competitive  market.
the 

telecommunications
characteristics  of 
networks  are  rather  different  than  is  found  in  unregulated
competitive  markets, 
in  a
the  corollary  of  LRAIC 
competitive  market  is  known  as  the  competitive  price.

incumbent 

from 

cost 

the 

(˛˝)(cid:217)While 

the  incumbent  operator’s  own  increment  in  traffic,  would
then  form  the  total  of  all  incremental  interconnection
costs.  This  figure  would  then  be  divided  up  in  a  fair  and
transparent  manner  between  the  notified  operator  and
those  interconnecting,  with  the  result  that  the  cost  of
interconnection  to  any  party  is  the  long  run  average
incremental  cost  (LRAIC).

Costs  calculated  in  this  way  do  not  include  an  operator’s
joint  and  common  costs.  In  order  to  allow  an  operator  to
recover  all  its  legitimate  costs,  the  interconnection  charge
also  needs  to  take  account  of  the  forward  looking  joint
and  common  costs  of  an  efficient  operator,  for  example
by  means  of  "mark(cid:220)ups’  applied  to  the  LRAIC  of  each
service(cid:216)(˛˛).

3.4. Cost  accounting  systems

for 

cost(cid:220)oriented 

The  Interconnection  Directive  requires  that  organisations
with  obligations 
interconnection
charges  must  implement  cost  accounting  systems  which
interconnection
are  capable  of  demonstrating 
charges  do  indeed  follow  the  principles  of  cost  orien(cid:220)
tation  and  transparency.  The  Directive  does  not  specify  a
particular  cost  accounting  system,  but  does  require  trans(cid:220)
parency  of  the  system  used.

that 

Currently  most 
incumbent  operators  have  accounting
systems  based  on  fully  distributed  historic  costs  which
were  developed  in  monopoly  environments.  However,  it
is  clear  from  the  above  discussion  that  the  use  of  historic
costs 
is  not
consistent  with  a  competitive  market,  and  will  tend  to
lead  to  an  over(cid:220)statement  of  the  interconnection  costs.

interconnection  charges 

for  calculating 

to 

the 

response 

information  which 

In 
the  new  competitive  environment,
operators  need  to  develop  new  accounting  systems  to
provide 
is  needed  both  for
internal  management  purposes  and  for  external  regu(cid:220)
latory  purposes.  The  Commission  is  therefore  recom(cid:220)
mending  that  NRAs  should  set  deadlines  for  implemen(cid:220)
tation  by  incumbent  operators  of  new  cost  accounting
systems  based  on  current  costs  and  activity(cid:220)based
accounts.  National  regulatory  authorities  will  want  to  be
assured  that  costs  which  appear  to  be  common  are
into
distributed  to  the  fullest  extent  possible,  taking 

(˛˛)(cid:217)Mark(cid:220)ups  may  be  uniformly  applied  to  the  LRAIC  of  each
service.  Alternatively,  NRAs  could  require  that  common
costs  be  recovered  on  call  origination,  but  not  call  termi(cid:220)
nation.  The  underlying  aim  should  be  to  ensure  that
common  costs  are  not  allocated  in  a  disproportionate  way
to  less  competitive  services.

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account  the  relevant  direct  and  indirect  cost  drivers.
Activity  based  accounts  which  use  current  costs  provide  a
"top(cid:220)down’  check  through  reconciliation  with  intercon(cid:220)
nection  costs  calculated  according 
"bottom(cid:220)up’
forward  looking  long  run  average  incremental  costs.

to 

practice’  approach  provide  a  check  that  interconnection
charges  proposed  by  an  incumbent  are  consistent  with  an
efficient  competitive  market.

Experience  suggests  that  it  can  take  about  2  years  for  an
incumbent  operator  to 
implement  a  new  accounting
system,  although  this  period  could  decrease  as  cumu(cid:220)
lative  experience  is  gained  in  the  sector.

If  the  operators’  proposed  interconnection  charges  lie
outside  the  range  of  "best  current  practice’  charges  given
here,  national  regulatory  authorities  may  use  their  rights
under  the  Interconnection  Directive  to  request  justifi(cid:220)
cation  of  the  proposed  charges.  Where  appropriate,
NRAs  can  require  retrospective  changes  to  intercon(cid:220)
nection  charges.

3.5. The  use  of  "best  current  practice’  prices  during  the

PRICES

transition  to  LRAIC  based  systems

4.(cid:217)DERIVATION  OF 

"CURRENT  BEST  PRACTICE’

involves  building 

Recent  years  have  seen  considerable  research  carried  out
by  regulatory  institutions,  consultancies,  and  academics
into  identifying  the  long  run  average  incremental  cost
(LRAIC)  of  telephone  networks,  or  parts  of  telephone
networks.  This 
"bottom(cid:220)up’  models
whereby  an  economic/engineering  model  of  an  efficient
network  is  developed,  from  which  interconnection  costs
can  be  calculated  by  aggregating  the  costs  of  individual
network  elements.  Reconciliation  of  the  results  of  these
models  with  the  results  obtained  from  "top(cid:220)down’  models
(which  take  as  their  starting  point  the  current  cost
accounts  of  an  operator,  and  seeks  to  arrive  at  an  inter(cid:220)
connection  cost  by  a  process  of  allocation  and  elimi(cid:220)
nation  of  cost  elements)  serve  to  demonstrate  that  the
calculated 
interconnection  costs  are  broadly  accurate.
These  models  have  been  subject  to  intense  debate  and
analysis  by  regulators,  market  players,  and  academics
alike.

incorporated 

However,  in  most  cases  the  results  of  this  work  have  not
yet  been 
interconnection
prices.  At  the  present  time,  very  few  countries  appear  to
be  in  a  position  to  calculate  per  minute  interconnection
charges  based  on  actual  estimates  of  long(cid:220)run  average
incremental  costs.

into  regulated 

4.1. Comparison  of 

interconnection  charges 

for  call

termination  in  Member  States

The  interconnection  charge  per  call  minute  (for  call
termination)  varies  with  the  path  taken  by  the  call.
Depending  on  the  locations  of  the  point  of  intercon(cid:220)
nection  and  the  called  user,  there  may  be  a  different
number  of  switching  stages  and 
links
involved  in  delivering  a  call,  and  this  can  give  rise  to  a
complex  tariff  structure  for  interconnection.

inter(cid:220)exchange 

In  order  to  simplify  comparisons,  the  approach  taken  in
the  recommendation  is  to  examine  the  interconnection
charges  to  the  incumbent’s  fixed  public  network  under
three  different  scenarios:

(i)  "Local’  level  interconnection

A  call  handed  over  for  termination  at  the  local  level
interconnection  at  (or  nearest  to)  the
represents 
local  exchange  to  which  the  destination  user 
is
connected,  and  represent  the  lowest  level  of  inter(cid:220)
in  a  given
connection  charge  which 
country.

is  available 

Therefore,  as  an  interim  measure,  to  be  used  until  the
information  required  to  complete  the  calculation  of
"bottom(cid:220)up’  LRAIC(cid:220)based  costs 
(cross(cid:220)
checked  where  appropriate  by  top(cid:220)down  models  based
on  current  cost  accounts),  and  national  regulatory  auth(cid:220)
orities  have  the  experience,  regulatory  and  economic
resources  to  complete  such  a  costing  exercise,  intercon(cid:220)
nection  charges  obtained  by  employing  a  "best  current

is  available, 

(ii) "Single  transit’  interconnection  (metropolitan  level)

Single  transit  interconnection  allows  access  to  all
customers  in  a  metropolitan  region,  such  as  a  large
city.  This  is  likely  to  be  the  level  of  interconnection
most  often  demanded  by  new  entrants  in  a  national
market.

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(iii) "Double  transit’  interconnection  ("national’  level)

Double  transit  interconnection  allows  access  to  all
customers  on  the  incumbent’s  network  ("national’
level’  interconnection).  A  call  handed  over  at  this
level  normally  incurs  the  highest  level  of  intercon(cid:220)
nection  charge.

tariffs, 

interconnection 

Like  retail 
tariffs  may  also
include  time(cid:220)of(cid:220)day  variations  for  peak,  off(cid:220)peak  and
intermediate  periods,  reflecting  the  network  operator’s
need  to  manage  demand  and  network  capacity  jointly.
To  simplify  comparison,  the  approach  in  the  recommen(cid:220)
dation  is  to  examine  only  the  highest  peak  rate  intercon(cid:220)
nection  charges(cid:216)(˛ˇ).  Only  call(cid:220)related  costs  are  included
in  the  comparison;  non  traffic  related  costs,  for  example
costs  related  to  the  provision  of  interconnection  links  or
the  number  of  interconnection  ports  utilised,  are  not
included.

Current  charges  for  international  call  termination  are  not
taken  into  account  in  the  "best  practice’  comparisons,
because  at  present  these  charges  are  based  on  the
accounting  rate  system  and  are  not  cost(cid:220)oriented.  (There
is  increasing  pressure  to  bring  down  the  prices  currently
charged  under  the  international  accounting  rate  system,
and  this  will  be  reinforced  when  the  WTO  agreement  on
basic  telecommunications  services  becomes  effective  in
1998.  From  1  January  1998,  within  the  EU,  the  impli(cid:220)
cations  of  Community  law  are  that  charges  for  cross(cid:220)
border  interconnection  between  Member  States  should
be  based  on  the  cost  of  call  termination  at  the  national
level.)

interconnection  charges  around 

the
Comparison  of 
world  reveals  very  significant  differences,  not  only  in  the
actual  charges  but  also  in  the  relative  charges  for  inter(cid:220)
connection  at  these  three  different  levels.  This  is  not
unexpected  given  that  many  of  these  charges  are  a  result
of  negotiation  and  do  not  necessarily  reflect  an  obli(cid:220)
gation 
for  cost(cid:220)orientation.  Comparisons  based  on
non(cid:220)EU  countries  are  thus  often  of  limited  value  at
present.

Since  July  1997,  most  fixed  network  operators  in  EU
Member  States  have  published 
interconnection
charges  in  line  with  Directive  96/19/EC.  Current  inter(cid:220)
connection  charges  for  call  termination  in  EU  Member

their 

(˛ˇ)(cid:217)The  duration  of  peak  and  off  tariff  periods,  and  their
levels,  varies  considerably  between
it  difficult  to  compare

comparative  price 
Member  States  and  this  makes 
"average’  prices.

States  are  shown  in  Annex  II  of  the  recommendation  (as
of  1  September  1997).  In  some  cases  these  are  the
charges  proposed  by  incumbent  operators  and  as  such
are  still  subject  to  approval  and  possible  adjustment  by
national  regulatory  authorities.

4.2. Calculation  of  "best  current  practice’  prices

The  "best  current  practice’  prices  given  in  the  recommen(cid:220)
dation  are  based  on  the  interconnection  charges  in  the
three  lowest  priced  Member  States.  The  precise  calcu(cid:220)
lations  are  explained  in  Annex  II  of  the  recommendation.
The 
so  derived  are
expressed  as  a  range  which  is  considered  to  be  wide
enough  to  take  account  of  recognised  cost  differences
between  Member  States.

"best  current  practice  prices’ 

Insufficient  empirical  evidence 

Cost  differences  between  EU  Member  States  may  occur
as  a  result  of  factors  such  as  average  density  of
connections,  labour  costs,  or  permitted  rate  of  return  on
capital  employed. 
is
currently  available  to  make  a  full  evaluation  of  the  effect
of  each  of  these  factors,  but  the  evidence  that  does  exist
indicates  that  such  differences  are  unlikely  to  be  large
enough  to  invalidate  the  "best  current  practice’  charges
recommended  here.  The  difference  between  the  top  and
bottom  bands  of  the  recommended  "best  current  practice’
charges  varies  from  60(cid:216)%  (local  level  interconnection)  to
100(cid:216)%  (metropolitan  level  interconnection).

5.(cid:217)OTHER  ISSUES  RELATED  TO  INTERCONNECTION

PRICING

5.1. Categories  of  interconnecting  organisation

The  Interconnection  Directive  grants  certain  categories
of  organisation  the  right  and  obligation  to  negotiate
interconnection  with  each  other.  The  organisations
concerned  may  be  in  the  same  Member  State  or  in
different  Member  States.  There  are  four  such  categories
of  organisation,  identified  in  Annex  II  of  the  Directive.

tariffs, 

The  Directive  allows  different 
terms  and
conditions  for  interconnection  to  be  set  for  different
categories  of  organisations  which  are  authorised 
to
provide  networks  and  services,  where  such  differences
can  be  objectively  justified  on  the  basis  of  the  type  of
interconnection  provided  and/or  the  relevant  national
licensing  conditions.

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link 

in  both 

Different  charges  based  on  the  relevant  national  licensing
conditions  must  be  objectively  justified.  Some  Member
States  have  indicated  that  in  order  to  achieve  strong
competition 
infrastructure  and  services,  their
intercon(cid:220)
licensing/authorisation  framework  may 
nection  conditions  for  an  organisation  to  its  level  of
investment  in  infrastructure.  Such  a  policy  has  to  be
applied  in  a  way  that  is  consistent  with  other  provisions,
in  the  Directive,  concerning  non(cid:220)discrimi(cid:220)
inter  alia 
nation,  and  should  not 
to  any  restriction  or
distortion  of  competition.  In  particular,  fixed  and  mobile
operators  with  significant  market  power  must  apply
similar  conditions  in  similar  circumstances  to  intercon(cid:220)
nected  organisations  providing  similar  services,  and  must
provide 
information  to
others  under  the  same  conditions  and  of  the  same  quality
as  they  provide  for  their  own  services,  or  those  of  their
subsidiaries  or  partners.

interconnectlion  facilities  and 

lead 

5.1.1. Interconnection  with  Mobile  operators

fixed  and  mobile
Interconnection  charges  between 
networks  have  tended  to  be  considerably  higher  than
networks.
interconnection 
Differences  between  Member  States 
intercon(cid:220)
nection  charges  for  mobile  operators  have  in  turn  been  a
contributing  factor  to  the  differing  rates  of  growth  in
mobile  telephony  between  Member  States.

fixed 
in  the 

between 

charges 

The  cost  of  call  termination  on  a  mobile  network  is  in
most  cases  not  subject  to  price  regulation  under  the
Interconnection  Directive.  The  one  exception  occurs  if
the  mobile  operator  is  designated  by  its  NRA  as  having
significant  market  power  on  the  national  market  for
interconnection  (i.e.  the  fixed  market  for  interconnection
and  the  mobile  market  for  interconnection  combined).  In
this  connection,  the  Commission  has  made  the  following
statement  to  the  European  Parliament(cid:216)(˛—):

the  public 

"The  Commission  confirms  that  Article  7(1)  of  the  Inter(cid:220)
connection  Directive  is  to  be  applied  to  all  organisations
operating 
telecommunications  networks
and/or  publicly  available  telecommunications  services  as
set  out  in  Parts  1  and  2  of  Annex  I  [i.e.  fixed  network
operators(cid:129),  which  have  been  notified  by  national  regu(cid:220)
latory  authorities  as  having  significant  market  power,
and  only  to  those  organisations.’

this 

that 

statement  are 

implications  of 

The 
the
Commission  does  not  support  on  the  basis  of  the  Inter(cid:220)
connection  Directive  a  general  obligation 
for  cost
oriented  interconnection  tariffs  on  mobile  operators  that
do  not  have  significant  market  power  on  the  national
market  for  interconnection.  This  is  without  prejudice  to
the  duty  of  Member  States  and  of  undertakings  to  fully
comply  with  the  EU  competition  rules,  taking  account  of
the  specific  positions  set  out  in  the  Communication  from
the  Commission  on  the  application  of  the  competition
rules  to  access  agreements  in  the  telecommunications
sector.

However,  the  cost  of  conveying  a  particular  call  from  a
point  of  interconnection  to  its  destination  on  the  termi(cid:220)
nating  fixed  network  is  basically  the  same  whether  the
call  originates  on  a  mobile  network  or  another  fixed
network,  and  therefore  there  is  no  justification  for  the
large  differences  in  interconnection  charges  imposed  by
fixed  network  operators  depending  on  the  type  of
network  on  which  the  call  originated.  The  "best  practice’
interconnection  charges  set  out  in  the  recommendation
are  applicable  for  interconnection  by  mobile  networks
operators  as  well  as  by  other  fixed  network  operators  on
a  non(cid:220)discriminatory  basis.  The  fact  that  a  mobile
operator  may  have  a  different  licence  or  authorisation
does  not  justify  differentiation  in  interconnection  tariffs
for  the  same  call  termination  services  provided  by  a  fixed
network  operator  with  significant  market  power.

5.1.2. Interconnection  with  organisations  in  other  Member

States

today’s  (pre(cid:220)1998) 

A  characteristic  of 
telecommuni(cid:220)
cations  market  is  that  an  operator  in  one  Member  State
inter(cid:220)
that  originates  traffic  and  bills  customers  can 
connect  with  the  national  operator  in  a  second  Member
State  in  order  to  deliver  traffic,  without  needing  to  be
authorised  in  the  second  Member  State(cid:216)(˛(cid:209)).  The  Inter(cid:220)
connecting  operator  neither  owns  nor  operates  infra(cid:220)
structure  in  the  destination  Member  State,  and  in  the
case  of  transit  via  third  countries  or  use  of  satellite  links
or  submarine  cables,  may  lease  rather  than  own  some
parts  of  the  infrastructure  used  for  delivery  of  traffic  to
the  destination  Member  State.

The  average  interconnection  charges  paid  by  a  mobile
operator  may  of  course  differ  from  those  paid  by
another  fixed  network  operator  as  a  result  of  variations
in  the  distribution  of  point  of  interconnection,  call  desti(cid:220)
nations,  call  durations,  and  differences  in  the  "time  of
day’  calling  pattern.

(˛—)(cid:217)EP  Proc(cid:127)s  verbal,  para.  2(cid:220)122,  10.6.1997,  p.  48.
(˛(cid:209))(cid:217)Under  the  international  accounting  rate  system,  this  usually
happens  at  a  virtual  point  of  interconnection  approximately
in  the  middle  of  the  international  half  circuit.

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19.3.98

authorised 

"cross(cid:220)border 

This  practice  of 
interconnection’  will
remain  a  feature  of  the  post(cid:220)1998  liberalised  EU  market,
and  the  principle  of  non(cid:220)discrimination  requires  that  all
operators 
(ie
equivalent
incumbents 
treatment  when  delivering  traffic  to  another  Member
State.  This  has  implications  for  both  the  authorisation
procedures  in  the  Member  States  and  the  reference  inter(cid:220)
connection  offer.

in  one  Member  State 

and  new 

entrants) 

receive 

public 

providing 

cost  of  universal  service  obligations  can  be  shared  among
organisations 
telecommunications
networks  and/or  voice  telephony  services.  The  Directive
requires  charges  for 
interconnection  to  be  separated
from  charges  related  to  universal  service  contribution;
this  includes  any  supplementary  charges  resulting  from
temporary 
type
charges).

("access  deficit’ 

imbalances 

tariff 

Firstly,  it  means  that  all  points  of  interconnection  open
to  national  operators  should  also  be  open  to  authorised
operators  in  other  Member  States  who  wish  to  deliver
cross(cid:220)border  traffic.  Secondly  it  means  that  an  operator
that  merely  interconnects  to  deliver  traffic,  and  that  is
not  offering  services  or  providing  infrastructure  in  the
destination  Member  State,  should  not  have  to  be  auth(cid:220)
orised  or  established  in  the  destination  Member  State.

The  ONP  Voice  Telephony  Directive  95/62/EC
requires  telephone  tariffs  to  be  cost  oriented.  Thus
compensation  for  tariff  imbalances  ("access  deficit’  type
charges)  are  only  permissible  where  a  national  regulatory
authority 
tariff  constraints  on  an  operator
relating  to  the  speed  of  tariff  re(cid:220)balancing,  in  accordance
with  Article  12(2)  of  Directive  95/62/EC.  An  operator
that  does  not  have  regulatory  constraints  on  its  retail
tariffs  cannot  claim  access  deficit  type  contributions.

imposes 

Thirdly  it  is  proposed  that  the  reference  interconnection
offer  should  include  -  as  a  discrete  unbundled  element
of  the  interconnection  offer  -  terms  and  conditions  and
tariffs  for  the  transmission  link  between  the  actual  point
of  interconnection  and  the  border(cid:216)(˛(cid:210)).  This  will  alleviate
the  administrative  problems  which  could  otherwise
hamper  the  development  of  competition  for  telecom(cid:220)
munications  services  between  Member  States,  and  will
avoid  discrimination 
and
between 
incumbent  operators  providing  cross(cid:220)border  services.

entrants 

new 

the  point  of 

For  competitive  equality,  it  should  also  be  possible  for  an
operator 
from  another  Member  State  who  merely
terminates  traffic  to  rent  such  a  transmission  link  (i.e.  the
link  between 
the
border)  from  an  alternative  infrastructure  provider  where
available,  without  needing  to  be  authorised  or  established
in  the  destination  Member  State,  and  without  affecting
the  status  of  the  operator  with  regard  to  the  terms  and
conditions  for  interconnection(cid:216)(˛(cid:211)).

interconnection  and 

5.2. Universal  service  and  other  supplementary  charges

The  Interconnection  Directive  allows  Member  States  to
the  net
set  up  universal  service  schemes,  whereby 

The  purpose  of  a  universal  service  charge  is  to  ensure
that  the  social  cost  of  universal  service  in  a  Member
State  is  shared  by  the  players  on  that  market.  It  is  not
appropriate  for  the  social  costs  in  one  Member  State  to
be  subsidised  by  telephone  users  in  all  other  Member
States.  Thus,  contributions  to  universal  service  should
not  be  imposed  either  directly  or  indirectly  on  organi(cid:220)
sations  which  merely  interconnect  to  deliver  traffic  to  a
Member  State  and  do  not  actually  offer  telecommuni(cid:220)
cations  services  in  that  Member  State.

rate 

system, 

accounting 

In  the  same  way,  an  "access  deficit’  implies  that  profits
from  national  and  international  services  provide  a  cross(cid:220)
subsidy  to  the  "local  access’  business.  Presently,  under  the
international 
incumbent
operators  are  earning  significant  revenues  when  termi(cid:220)
nating  calls  from  other  countries.  The  "excess  profits’
earned  from 
incoming  calls  from  other
Member  States  represent  a  cross(cid:220)subsidy  to  consumers  in
one  Member  State  from  callers  in  all  the  other  Member
States.  Thus  when  operators  in  other  Member  States
interconnect  to  deliver  traffic  to  a  Member  State,  it  is
inappropriate  that  they  should  contribute  either  directly
or  indirectly  to  any  access  deficit  type  scheme  in  that
Member  State.

terminating 

(˛(cid:210))(cid:217)The  "border’  needs  to  be  interpreted  in  an  appropriate
manner  taking  into  account  the  type  of  infrastructure  used
eg  satellite,  submarine  cable  or  terrestrial  circuit.
(˛(cid:211))(cid:217)Some  Member  States  may  have  different 

terms  and
conditions  for  interconnection  depending  on  whether  or  not
the  interconnecting  party  owns  and  operates  telecommuni(cid:220)
cations  infrastructure.

In  accordance  with  the  principle  of  non(cid:220)discrimination,  it
follows  that  when  calculating  the  contributions  to  be
made  by  operators  in  a  Member  State  to  universal  service
costs  or  access  deficits,  the  traffic  of  these  operators
which  is  incoming  from  other  Member  States  should  not
be  taken 
level  of
into  account  when  assessing  the 
contributions.

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6.  CONSULTATION

The  key  points  covered  by  the  recommendation  were  set
out  in  a  working  document  prepared  by  the  Commission
Services  (DGXIII).  Following  an  initial  presentation  to
the  ONP  Committee(cid:216)(˛(cid:212))  at  its  meeting  on  10  July  1997,
the  working  document  was  discussed 
in  detail  at  a
second  meeting  of  the  ONP  Committee  on  10  September
1997.  In  accordance  with  the  inter(cid:220)institutional  modus
vivendi  on  advisory  committee  procedures,  the  agenda
for  the  ONP  Committee  meeting  of  10  September  1997

(˛(cid:212))(cid:217)An  advisory  committee  comprising 

representatives  of
Member  States,  set  up  under  Article  9(1)  of  Directive
90/387/ECC.

and  a  copy  of  the  working  document  were  sent  to  the
European  Parliament.

Further  consultation  on 
the  working
document  was  held  with  market  players  at  a  public
workshop  held  in  Brussels  on  9  September  and  attended
by  approximately  200  people.

the  basis  of 

Comments  received  as  a  result  of  this  consultation  have
been  taken  into  accouant.  There  is  general  support  for
the  Commission  to  provide  guidance  in  the  areas  covered
by  the  recommendation,  but  incumbent  operators  and
new  entrants  hold  different  views  concerning  the  recom(cid:220)
mended  "best  current  practice’  prices.