TR 608 ADVANCED SERVICE PRICING QUESTION 1: what do you mean by price regulation?

Explain the objectives of Price Regulation by telecommunication companies Answer: PR is Government control of prices, normally for utilities and other essential services. Price regulation is direct government control over the price changed in a market, especially by a firm with market control There are two main common method of Price regulation: 1. Marginanal Cost pricng and 2. Average cost Pricing Objectives of Price Regulation by Telecommunication Companies. 1. Financial Objectives : Ensure that regulated operator have the revenue toi ensure ongoing operations and futures investment 2. Efficiency Objectives : irimo Productive , allocative and dynamic efficience 3. Equity objectives : Cosumer-operator na consumer-consumer sharing gain

What should be regulated

(1) Price regulation of end-user prices and tariffs of services offered to other players in the market; (2) Conduct regulation defining how different players (and in particular the ones with monopoly power) in the market show behave in relation to other players and the customers; (3) Structure regulation giving guidelines how the dominant players should organize their operations; and (4) Market entry/exit regulation defining under what kind of terms new players can enter the market or old players can exit the market or cease to offer certain product and service categories
QUESTION 2: Present a critical assessment of approaches to price regulations by the telecommunications. And which approach is suitable to Rwanda and why ?

Current approaches to price regulation There are basically four different types of price regulation involving different degrees of regulatory interference:

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Discretionary Price setting (Discretionary price setting is a heavy hand type of price
regulation, and usually implies that tariffs are determined on the basis of political factors by the telecom authorities or even the minister. Discretionary price setting has in particular been used in countries where telecom operators have been partly or fully publicly owned. Discretionary prices have often been set below costs in order to serve social objectives or political interests) Rate of return (Rate of return regulation (ROR) limits the return an operator can earn on its investment in providing services. The principle is that operators should be allowed to earn revenue covering the total operating costs, plus a return on their investment. ROR can be applied either for each service or for the entire operations of the operator.)

Price Cap (Price cap is today perhaps the most common type of regulation. Price cap sets a maximum for how prices may develop over the next few years, usually 3 or 4 years. Operators are allowed to increase prices with inflation, but at the same time they are required to decrease prices with a certain percentage every year, as productivity is expected to increase. The allowed maximum price is thus:

Pt = Pt-1*(I X) where Pt-1 is the price for the previous year, I is the rate of inflation and X is the productivity factor. Price caps can be set either for individual services or for a combination of services.

Cost-based price setting (A number of approaches for cost-based price setting have been
developed, particularly as it has been necessary for regulators to approve or establish reasonable interconnection prices for competitors to obtain access to network capacity. These are often based on detailed modeling of network costs, and are mainly used for determination of interconnection charges.) Which approach is best for Rwanda

Optimal regulation depends on market conditions (that is, the nature of demand) and there are three possible outcomes: (i) price regulation does not improve welfare; (ii) regulated prices include an option to delay value and provide a positive payoff to the firm; and (iii) regulated prices yield a zero payoff to the firm. The Price Cap is the best one because it

can prevent exercise the market power Produce efficiency Allocative efficiency Dynamic Efficiency Promote competition Minimize regulatory costs

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QUESTION 3: Explain the concept of service pricing and its functions in telecommunication sector within the background of privatization and liberalization. And present a critical analysis of pricing model of major telecommunication company of your country. Pricing is the process of determining what a company will receive in exchange for its products. Pricing factors are manufacturing cost, market place, competition, market condition, and quality of product. Pricing is also a key variable in microeconomic price allocation theory. Pricing is a fundamental aspect of financial modeling Pricing is the manual or automatic process of applying prices to purchase and sales orders, based on factors such as: a fixed amount, quantity break, promotion or sales campaign, specific vendor quote, price prevailing on entry, shipment or invoice date, combination of multiple orders or lines, and many others. Price is the amount of money charged for a product or service. In other words it is the value, in money terms, that a consumer exchanges for the benefits or satisfaction of having, or using, a product or service. In the marketing context, price is said to be one of the constituents of the 'marketing mix', which also includes quality, design, advertising, marketing and distribution as well as price. However, one critical difference between price and other ingredients of the marketing mix is that price produces revenue while the other elements produce costs, so that the setting of an appropriate price is critical for a company's success.

General factors determining price

Are internal: one of the most is the marketing objectives of a firm for example maximize current market share or maximize current profits because they have product or service which consumers are prepared to pay other for product quality leadership. External factor: image of a firm, taxes, political issues, economic inflation,
Pricing Model used in telecommunication companies in Rwanda Experts believe the company may come out with :

a fixed pricing model based on subscription fee initially and then moved to variable pricing model based on the usage to capitalise on value added services (VAS) and data plans to improve its currently low average revenue per user.

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QUESTION 4:In Rwanda the competion among the telecommunication companies has become very fierce and eventually turned into a price war. In your perceptive what are its implications and how they affect the efficiency of the service to the customers ?

Price war: Term used in economic sector to indicate a state of intense, competitive rivalry accompagned by a multi-lateral services of price reduction - One competitor will lower its prices then other will lowers theirs too much

Umwe naza kongera kugabanya na banabanadi nabo baragabanya cyane consumner abyumgukiremo ariko operators ananirwe abe yareka gucopmetinga,bahombe Investorrf babe looser babae bava muri competition. Consumer azbyungukiramo kuko azaprofita ako kavuyo amafaranga make make akoreshe io services in short time. In long time consumer nawe azaloosinga with fewer firms in industry prices tend to increase before pice war. Many reason why prices war ni : o o Absence ya brand abantu bagakoresha ikintu kitagira izina Penetraition pricing: for new entrants kugira ngo binjire baoffre prices ziri hasi cyane muri integration Predatory pricing: Incumbent kuko ifite menshi igashyra kuri make cyane

o Regulatory role:

1. Structure regulation: functional influence market structure ex number of license 2. Canduct behavior: change behavior of the firm combat anti competitive behavious ex: refusal to deal, interconnection, price predatory, price discrimation,.. Case of Rwanda: RuRa set up a coercive conduct behavior regulation: 1. Minimum standards and requirement for promotion 2. Obligation to submit to the regulatory the promotion tarrifs with details explanation 3. The limitation of duration and number of promotion per year 4. Restriction on comparative advertsising 4|P a ge

5. Clearly define the service to be promoted and 6. sanction

QUESTION 5:Price cup Regulation is most preferred regulation around today. Why is so ? Explain it with the help of a basic cap formula. A price cap regulation places a ceiling on the amount companies in a given industry (typically utilities and telecommunications providers) can charge for services.

QUESTION 6:Explain the rational of the discretionary price regulation in the telecommunication industry in Africa and discuss the concept and utility of using high-powered incentives and low powered incentives with reference to Rwanda. Discrenatory Price regulation is the regulation characterized by : - Below cost price for connection, subscription and local call - The shortfall is made up by higher than cost international prices and sometime - High long distance prices Objectives of discretionary Price Setting : - To promote affordability of base telephone services - Value of service (pay what needed, or necessary and not what asked) - In some country traditional discretionary price regulation fails to generate enough revenue to pay cost of the incumbet operator and to support upgrades and expansion QUESTION 7 : Common practices of anti-competitive conduct and Remedial measures Anti competitive behavior:

Barrier to Entry: ni nka naturel constant that protect firm. Is easy iyo hari nka exclusivity right to fim. Natural barrier arise when a market is best supported by one firm, possible because the size of the market is limited and the entry of one of two more firms will reduce cost further. Example: EWASA Anti competitive behavior by companies: o Bundling/Tying agreement: Iyo umunu aguze ikintu from the companie ari oblige no kugua ikindi in the same compagnie. Iyo ikintu kigurishwa muri package imwe kandi cyashoboraga kuba separated ex modem uri oblige kugura na sim card Predatory pricing:Igihe behavior of operator ashobora sell good or service below the cost in the short term to eliminate competition hanyuma aka increasing above normal later. Consumer bakabenefitinga the short term aho price ari dropped but punished later whern price are increased 5|P a ge

Price discriminatory:Aho ibiciro bishobora kba hejuru cyane aho incumbent ashobora kumvikana na competitor ashaka gucoveringa the price predatory kandi ubundi igiciro cya unit cyari constant Refusal to deal: Aho utilities ziba zigomba kuba shared hanyuma 1 firm ika refusa to deal hakabaho investissemet iri hejuru kuri new entry, gukica integer no kuva muri competition Misuse of market Power: Iba aho market power/ firms enjoying the significant market power competition in market

Anti competitive agreement between companies o Merge: Consolidation of 2 or more independent firms into a single unit Horizontal merge: Merging of 2 competitors in the same market example: coca Cola & Pespi Vertical merge: 2 company that may not compete each other but exist in the same supply chain. Ex: Automobile joining a spare parts supplier Market Extension Merge: The main benefit to help 2 organizations that may be provided similar products and services grows into market where they are currently week. Gufata brand ihari ugasuccessinga Product extension merge: 2 compagnies may merge when they sell products into different niches of the same market. Conglomelate Merges: Occurs when 2 organizations sells products incompeletly different market. Aho market idashobora kuba down muri byose.

QUESTION 8: Role of regulatory accounting for service in telecommunication and the best practices cost models

The objectives of the regulatory accounting system are: - To gain in-depth knowledge of the characteristics of the operation and exploitation of different licensed public telecommunication services, analyze the profitability of public telecommunication network licensees, and formulate in a timely manner, with the assistance of the information generated in this area, development policies consistent with the corresponding sector program. - To monitor strict compliance with the legal provisions, licenses and other applicable legal,

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Regulatory, and administrative provisions, such as prohibitions from adopting discriminatory practices in applying tariffs and cross-subsidies in services provided under competition. To monitor the fulfilment of interconnection obligations, and to ensure that public telecommunication network licensees providing this public service assign disaggregated and non-discriminatory

Objectives of regulatory cost accounting Effective regulatory cost accounting can be divided into the following six main objectives: Objective 1: Cost accounting as a mechanism of price control Indeed, cost accounting allows NRAs to set cost based prices of wholesale services in such a way that they are not so high as to prevent the entrance of new operators but also not so low as to invite the entrance of inefficient operators. In addition, cost accounting can be defined as a barometer of the success in the implementation of regulatory policies. For instance, if the NRA is implementing a regulatory policy to reduce high margins and the cost accounting figures show that the margin of that specific service is increasing or just keeping constant, it will be a measure of the ineffectiveness of the associated regulatory policy. Objective 2: Cost accounting as a legal guarantee Whenever wholesale prices are cost based, alternative operators can be sure that there is a clear relationship between the prices charged by the owner of the infrastructure and costs of providing the wholesale services that they offer. Objective 3: Cost accounting as a tool to prevent anticompetitive behaviour As shown in section 8, a cost accounting model gives NRAs the necessary inputs to determine the existence of anticompetitive behaviour which are undermining the existing competition. Objective 4: Cost accounting as a tool for guaranteeing transparency Cost accounting information is a key instrument for NRAs to form an opinion of the level of competition and identify anticompetitive behaviour. Objective 5: Cost accounting as a tool for estimating the Universal Services Cost Cost accounting models are crucial not only to estimate Universal Service Obligations (USO) but also in the process of assigning contributions to the Universal Service Fund (USF). Objective 6: Cost accounting as a tool for policy makers NRAs as well as National Competition Authorities (NCAs) might use cost accounting in cases of disputes and to encourage competition.

Key parameters to define a cost accounting model (Step 3)

As can be seen from Figure 2, prior to the approval of the cost accounting model, NRAs should define the accounting principles that must guide the model. 4.1 Phase 1: Accounting principles The accounting principles defined by the NRAs as guidelines for the correct allocation of costs to the different services must include, at least, the following: Principle 1: Causality
The income and costs allocation to the different activities and services must be done based on causal drivers.

Principle 2: Objectivity
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The cost drivers must be objective, quantifiable and based on allocation criteria and statistical samples which could be contrasted and verified by NRAs within the auditory process. Principle 3: Transparency The costs allocated to the different services must be decomposed according to its nature and by applying Activity Based Costing (ABC) methodologies or justified cost volume relationship. To guarantee transparency, the SMP operators should provide the technical documents that support the proposed costs allocation. Principle 4: Auditability The accounting system must be easily reconciled with the financial accounting and be based in specific systems and internal reports which support the results. Principle 5: Consistency The criteria used to value assets must be maintained annually to make the results comparable. Principle 6: Disagreeability All the costs allocated to the different services must have their own activity cost centre as shown in Principle 7: Neutrality The cost accounting must show the internal transfer costs in separate accounts to allow NRAs to distinguish and compare the margins obtained when the operator sells to other companies with the margins obtained when the sale is with intragroup companies. Principle 8: Sufficiency The information contained in the cost accounting system must be sufficient for NRA purposes. Principle 9: No compensation (Avoid cross-subsidization) The income and costs of one service cannot be compensated with those from another service. Principle 10: Reconciliation The cost accounting system must be based on financial accountancy. 4.1.1. Best practice in accounting principles The ten accounting principles above can be summarised in the following three key principles (keeping the other seven in mind) that cost accounting systems must follow: Causality: Revenue (including transfer charges), costs (including transfer charges), assets and liabilities should be allocated to cost components, services and businesses or disaggregated businesses in accordance with the activities which cause the revenues or the costs. Objectivity: The allocation of revenues and costs shall be objective and not intended to benefit the SMP operator or any other operator, product, service, component, business or disaggregated business. Transparency: The allocation methods used should be transparent. Costs and revenues, which are allocated to businesses or activities, shall be separately distinguished from those that are apportioned.

QUESTION 9: Infrastructure sharing and its investments on pricing of ICT services. QUESTION 10: Price Cap Regulation- The Basic Price Cap Formula, bases, process, methods, variation,
strengths and weekness. QUESTION 11: ROR-Incentive Regulation , bases ,process, methods, variations , strengths and weaknesses QUESTION 12: Discretionary Price Setting variations strengths and weaknesses QUESTION 13: Rate-Of-Return Regulation bases, process, methods, variations, strengths and weakness QUESTION 14: Interconnection pricing and regulation policies and methods.

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Infrastructure sharing is particularly important to the building of broadband networks where the cost of civil works (eg digging trenches) is significant. The Fibre-to-the-Home Council identifies four business models used in the FTTH market [2]: 1. Vertically integrated one major player covering passive, active and service layers, who offers services directly to their customers, conveys traffic on their networking equipment and uses their own passive infrastructure (exclusively or with wholesale to other communications providers). 2. Passive sharing in this model, the infrastructure owner deploys the passive infrastructure and provides passive access to other players, who concentrate on the active and service layers. 3. Active sharing the vertical infrastructure provider deploys both active and passive infrastructure, and opens it up to service providers, with each service provider taking care of its base of subscribers. 4. Fully separated in some countries the fully separated model has emerged, featuring an infrastructure owner, a network operator and a series of service providers.

QUESTION 15: OECD Rate Rebalancing, bases ,process, methods, variations , strengths and weaknesses

Question 16: The Definition of Incentive Regulation

Incentive regulation can be defined as a set of innovative regulatory approaches designed to provide utilities with incentives to achieve specified goals, or to meet specified standards or benchmarks, or to operate in a more efficient manner. Most of the newer incentive mechanisms that have been implemented have occurred in the telecommunications, electricity, and natural gas sectors. In some cases, the incentive mechanisms have been implemented in a partially deregulated environment

Incentive regulation is aimed at addressing the problem of the weak cost control incentives in traditional rate base/rate-of-return regulation.

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