Brazil’s Tariff System for the Fixed Switched Telephony Service (FSTS)

This presentation discusses the tariff system model for Brazil’s fixed switched telephony service (FSTS)–now regulated via price cap–and the model to be implemented as of 2008 based on long run costs, merging the “top-down” and “bottom-up” methods.

In terms of supply, new rules for dominant operators new operators will apply to the market as of January 1, 2006, stemming from the licensing process based on the bids accepted in July 2003.

B. Characteristics

Two systems approved by the National Telecommunication Agency (ANATEL) are now in force. Tariffs are divided into end user tariffs and network usage tariffs. End user plans are divided into basic plans established by ANATEL–which include price caps–and alternative (optional) plans established by the concessionaire. The basic service plan includes local telephony and LDN and LDI.

C. User tariffs

The new concession contracts introduced a series of changes to the existing system. The new contracts also contain certain changes with regard to price caps. The calculation basket currently includes the monthly service fee, minutes of usage, and installation costs.

Under the new system, the basket will no longer include installation costs. In addition, rather than using the general inflation index, a new index, the “Telecommunication Sector Index (IST)” will be utilized. The IST is a composite index that associates existing economic indices with items from the will include specific measurements of the sector in connection with its breakdown of operator costs. This index will be constructed and managed by an independent institution.

The new contracts also include certain changes regarding determination of the productivity factor. Productivity will be calculated based on the Total Factor Productivity (TFP) method. With the aim of promoting productivity, average national productivity will be the minimum productivity required of all operators. Half the productivity achieved will be transferred to users.

In addition, it was established that operators would absorb atypical macroeconomic disruptions. To that end, inflation variation margins were established that would impact how the productivity factor was determined:

• 0 to 10% increase in the IPC does not imply any reduction in the productivity factor.
• A 10% to 20% increase implies a 1% reduction in the productivity factor.
• An increase of over 20% in the IPC implies a 2% reduction. The proposed target–constituting a challenge–is that the level of productivity will never fall below zero.

D. Interconnection tariffs

The model change process includes a period of transition from price caps to a long-run incremental costs (LRIC) model. To that end, for 2006 and 2007, it is expected to implement a transitional mechanism of cost determination. During that transition period, a price cap model will be implemented based on end price (“Price Cap + Retail Price”), in which cost will be calculated as a percentage of end user price.

In 2006, this cost will be 50% of the end user price, whereas for 2007, it is set at 40%. As of 2008, the tariff will be cost-based. This method and various regulations are now available on Anatel’s web site for public consultation on (www.anatel.gov.br).

E. Conclusions

The new contracts with Brazil’s dominant operators were designed to take account of internationally used methods and with a view to promoting competition in the interconnection market and reasonableness of tariffs to end users.

Marcos Bafutto
Supervisor Public Services
ANATEL, Brazil