Ecuador experiences in the application of the cost models applicable to the interconnection of telecommunication public networks

In Ecuador, in compliance with the legal and regulatory basis, there exist two mechanisms through which the interconnection of telecommunication public networks is implemented.

a)             Through Agreement executed between the Telecommunication services licensees.

The legal, technical, economic and commercial conditions of interconnection are fixed through free negotiation between the parties by means of an Interconnection Agreement that is submitted to the SENATEL for its approval and registration before the Public Telecommunications Registry.

Regarding charges, in the Interconnection Agreements, these are mutually agreed upon and must be based upon costs plus profitability, and must be true and reasonable, must take into account economic feasibility, and must be disaggregated, so that the provider requesting interconnection is not forced to pay for network elements or installations he does not need for service provision.  The methodology to determine the interconnection charges and their payment terms are freely negotiated by the parties taking into account the principles contained in the Interconnection Regulations.  

b)             Through Resolution issued by the National Telecommunications Secretariat.

If 60 days after negotiating, the providers have not been able to execute an Interconnection Agreement, SENATEL, based upon the agreements achieved by the providers during the negotiation period, shall duly establish the legal, technical, economic and commercial terms and conditions which the interconnection shall be subject to, within 45 days counted from the date its participation has been requested.

In case of SENATEL’s intervention, interconnection charges are established based on the following principles:

·               According to the expenses on account of establishment, operation and maintenance of installations that may allow the physical and logical interconnection of networks.

·               According to usage charges that shall be determined based on the long term incremental costs with an unbundling of the elements for interconnection pointed out in Section 7 of the Interconnection Regulation in compliance with the model prepared by SENATEL for this purpose and approved by CONATEL. The long-term incremental cost will consider a reasonable payment of capital associated to the network elements used for interconnection.

Regulations of Ecuador in the issue of Interconnection give priority to free negotiation between the parties, having eventually considered the participation of the Regulator.  However, in the country, negotiations to renew Interconnection Agreements between the fixed telephone companies (ANDINATEL and PACIFICTEL S.A.) and the mobile phone companies (CONECEL and OTECEL S.A.) which ended in the year 2004, did not achieve the expected success, specially because they did not come to an agreement as to the charge the companies should pay each other, for which reason SENATEL’s intervention was imminent.

In order to comply with its duty, SENATEL adopted two mathematical models.

1.          Model to determine the call termination charge in a wired fixed network (INTEROFFICE).

The Interoffice model used to assess the price of the termination in the fixed network forms part of the Hybrid Cost Price Model, HCPM. It is a bottom up model that combines the engineering design of a fixed network with the economic analysis of cost optimization, thus introducing economic efficiency principles to determine network costs.  It is capable of estimating interconnection costs using two different approaches: TELRIC (Total Element Long Run Incremental Cost) and TSLRIC (Total Service Long Run Incremental Cost).

Since SENATEL’s purpose is to assess the interconnection price of an efficient model, the cost inputs used correspond to international market prices of network elements that make interconnection possible.

The model builds and assesses the price of a fixed telecommunication network according to its main elements for interconnection: Switching, Transmission and Signaling. With the demand information (traffic and lines) and the georeferenced location of the switching center, which is entered as input data, the model sizes the capacity required to cover the demand from the switching exchanges and the transmission links.  The model input data is:      

Annual costs are estimated for each network element using the annualization factors that are multiplied by the previously determined investment amounts.  The annualization factors include the following items:  (i) Cost of capital or reasonable capital profitability rate; (ii) Cost of operation and maintenance of the equipment and the infrastructure used, and (iii) Years of economic life of the equipment and infrastructure used.

Total interconnection costs are the result of adding the switching costs, transmission costs and signaling costs.

2.             Model to determine the call termination charge in a mobile network (WICOM).

The model used to assess the cost of the termination in the WICOM (Wireless Cost Optimization Model) is a bottom up model which combines the engineering design of a mobile network with the economic analysis of cost optimization, thus introducing principles of economic efficiency to determine network costs.

Due to its nature, WICOM belongs to the so-called TELRIC models: Total Element Long Run Incremental Cost.

Detailed cost information on the network elements is an input of the model. Since SENATEL’s purpose is to assess the interconnection price of an efficient model company, the cost inputs used correspond to international market prices of the network elements that make interconnection possible.

The model designs the essential elements of a wireless network that makes connectivity of users possible with the exchange and of users between themselves.  To achieve this, the network must connect the network client base station to a switch, ensure that there is an adequate capacity in these switching facilities to process all expected calls in the peak demand hours, and interconnect that switch with other base stations and others switches to route the calls to their addressees.  Peak demand traffic is a very important input of the model that allows determining the capacity of the switches.

To connect base stations with other base stations and the exchange, the model mainly builds a series of links, the capacity of which is optimized based on cost and distance.  For each link, the model decides between using optical fiber, microwave or satellite, compares the cost of using each of these three technologies, and makes the decision selecting the least expensive technology.

Once the model builds the network, sizing the capacity of the switch exchanges and links, the model estimates the total investment required to build that network, as well as that investment associated annual cost.  Annual costs are estimated for each network element using the annualization factors that are multiplied by the previously determined investment amounts.  The annualization factors include the following items:  (i) Cost of capital or reasonable capital profitability rate; (ii) Cost of operation and maintenance of the equipment and the infrastructure used, and (iii) Years of economic life of the equipment and the infrastructure used.

The report on results classifies costs as follows: costs sensitive to traffic and costs not sensitive to traffic.  Costs sensitive to traffic are the result of the difference between the total network cost at peak demand hour (busy hour) and the total network cost outside busy hours, i.e. they are incremental costs due to traffic.

The information required to feed the model is the following:

Results obtained by applying the INTEROFFICE model to the ANDINATEL Fixed Telephone Network

In general, the Regulator did not have the necessary information for the model available, being it necessary to estimate certain parameters, such as:

Traffic during the peak demand hours was estimated using a factor derived from Peruvian data.  The ratio of the number of hundreds of seconds of traffic in peak hours to the total annual traffic for a given year in Peru was determined and applied to the traffic information in Ecuador.

Information on unit costs used in the estimation of interconnection cost was found in several international sources. 

Reasonable Capital Profitability Rate:  This rate is determined using the WACC or Weighted Average Cost of Capital Methodology:

The Secretariat assumed a conservative structure of neutral equity and debt for companies, assuming that:

This assumption is reasonable specially if the result or reasonable capital profitability rate is applied to different companies and if there is uncertainty as to how each of them shall be financed in the future.

With the above mentioned equity and debt structure, the results obtained were as follows:

Total cost per minute, including all network components used to provide the interconnection service is approximately two cents of US dollars. If we only consider the part of those components economically attributable to traffic on busy hours, the cost per minute is estimated at 1.66 cents of US dollars per minute, assuming capital cost at 23.87%, and at 1.70 cents of US dollars, assuming capital cost at 25.82%.

Applying the concept of capacity charge, the model reports a cost of $172 and $176 per month for Erlang during peak hour, depending on the capital cost.  It is important to recognize that this estimation needs to be refined, because the model assumes that the hour of maximum demand is common to all installations, and that raises the capacity assumed by the model. Real capacity will probably be less than the capacity reported by the model, thus the actual cost will be higher.  To make that estimation more accurate, it would be necessary to obtain detailed information on all the nodes of Andinatel’s network and peak usage.

The results also suggest a way of charging the interconnection with a rate in two parts, allocating the NTS cost per line to the number of fixed lines the company assigns for each company that requests the interconnection.  The TS cost will be added later to the minutes of traffic.

Results obtained when applying the WICOM model to OTECEL and CONECEL Mobile Telephone Service networks

The application of the model for mobile telephone service networks resulted in a value of 11.31 cents of US dollars for the capital cost of 25.82%, value to be applied on the Interconnection Provisions of such mobile carriers.

Current state of the interconnection in Ecuador

The interconnection charges determined by SENATEL applying both models of charges have been accepted by Ecuador market with the logical concerns of the companies.

The WICOM model has also been applied to TELECSA S.A., the third carrier of mobile telephone service, and to the two WLL networks that are about to enter the market. The following document shows the country’s current interconnection situation: