Telecommunications Regulation Handbook: Interconnection

Telecommunications
Regulation
Handbook
Module 3
Interconnection
edited by
Hank Intven
Telecommunications Regulation Handbook
Summary of Contents
Note: Detailed Tables of Contents appear at the beginning of each Module
Module 1 Overview of Telecommunications Regulation 1-1

Module 2 Licensing Telecommunications Services 2-1
Module 3 Interconnection 3-1
Module 4 Price Regulation 4-1
Module 5 Competition Policy 5-1
Module 6 Universal Service 6-1
Appendices
A WTO Regulation Reference Paper A-1

B The Economics of Telecommunications Prices and Costs B-1
C Glossary C-1
D Selected Sources D-1
© 2000 The World Bank

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The modules of this book are distributed on the understanding that if legal or other expert assistance is required in any particular
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necessary advice from competent professionals, on legal or other matters that require expert advice.
First printing November 2000

ISBN 0-9697178-7-3
Table of Contents
Module 3 - Interconnection
3.1 Interconnection Principles 1
3.1.1 The Importance of Interconnection 1
3.1.2 Scope of Interconnection Issues 2
3.1.3 Interconnection Issues 3
3.1.4 Regional Interconnection Rules 3
3.1.5 Multilateral Interconnection Rules 5
3.1.6 Interconnection Principles 6
3.1.7 Contents of Interconnection Agreements 10
3.2 Interconnection Procedures 17

3.2.1 Establishing Interconnection Arrangements 17
3.2.2 Negotiation of Interconnection Arrangements 17
3.2.3 The Regulators Role in Interconnection Negotiations 18
3.2.4 Dispute Resolution 21
3.2.5 Ex Ante Regulatory Guidance 22
3.3 Financial Terms of Interconnection 23

3.3.1 Interconnection Charges 23
3.3.2 Approaches to Setting Interconnection Charges 23
3.3.3 Comments on Different Approaches 25
3.3.4 Specific Interconnection Costs 27
3.3.5 Structure of Interconnection Charges 29
3.3.6 Internet Interconnection Charges 31
3.3.7 Interconnection with Mobile Networks 33
3.4 Technical and Operational Conditions 35

3.4.1 Provision of Information by Incumbents 35
3.4.2 Treatment of Competitor Information 36
3.4.3 Treatment of Customer Information 37
3.4.4 Points of Interconnection 37
3.4.5 Access to Unbundled Network Components 38
3.4.6 Local Loop Unbundling 42
3.4.7 Sharing of Infrastructure and Collocation 48
3.4.8 Equal Access 49
3.4.9 Quality of Service to Interconnecting Operators 52
3.4.10 Quality of Interconnected Services 53
Boxes, Figures and Tables
Boxes
Box 3-1: Some Key Interconnection Issues 4
Box 3-2: Interconnection Rules of WTO Regulation Reference Paper 5
Box 3-3: Summary of Widely Accepted Interconnection Principles 9
Box 3-4: Principles for Efficient Interconnection Price Structures 29
Box 3-5: Examples of Technically Feasible Interconnection Points 38
Box 3-6: Compulsory National Roaming in the UK 39
Box 3-7: Some Possible Unbundled Network Components and Services 40
Figures
Figure 3-1:Full Unbundling Local Loop 43
Figure 3-2:Full Unbundling Two Local Loops 44
Figure 3-3:Shared Use of Copper Loop Using Splitter 45
Figure 3-4:Provision of High-Speed Bit Stream Access 46
Tables
Table 3-1: Contents of a Typical Interconnection Agreement 10
Table 3-2: Approaches to Resolving Interconnection Disputes 22
Table 3-3: Main Approaches to Interconnection Charges 23
Table 3-4: Advantages and Disadvantages of Unbundling 41
Table 3-5: Arguments For and Against Local Loop Unbundling 47
Table 3-6: Steps to Promote Infrastructure Sharing and Collocation 50
Table 3-7: Some Key Interconnection Quality of Service Measures 53
Telecommunications
Regulation
Handbook
Principal authors:
Hank Intven
Jeremy Oliver
Edgardo Sepúlveda
Funding for the preparation of this Handbook was provided

by the infoDev Program of The World Bank
Additional funding was provided by
Telecommunications Lawyers and Consultants

www.mccarthy.ca
The authors gratefully acknowledge the support and assistance provided

in the preparation of this Handbook
by the International Telecommunication Union (ITU)
The modules of this Handbook are available electronically at

www.infodev.org/projects/314regulationhandbook
MODULE 3
INTERCONNECTION
3.1 Interconnection Principles competition. For most of the history of

telecommunications, operators and government
3.1.1 The Importance of Interconnection administrations negotiated with each other to set the
terms of interconnection without regulatory interven-
Interconnection of telecommunications networks has tion. The emergence of competition has changed
been important for a century, but never more so than this. Incumbent operators have little incentive to
today. Originally, operators, such as PTTs and the make things easy for their new competitors, and
North American Bell companies, interconnected with most of the bargaining power in negotiations lies
neighbouring operators. However, these operators with the incumbents.
retained monopolies over all networks and
equipment in their geographic serving areas. For Strategic anti-competitive behaviour on interconnec-
decades, few other types of interconnection tion matters by incumbents has retarded or
occurred. prevented competition in many telecommunications
markets around the world. Incumbents can engage
Beginning in the 1970s, customers began to in a wide range of behaviour to frustrate effective
interconnect a growing range of terminal equipment competition. For example, they can charge exces-
and private network facilities to the incumbent sive rates for interconnection, refuse to build or
operator’s facilities. With the liberalization of make available adequate interconnection capacity,
telecommunications markets over the last few and refuse to unbundle network elements or
decades, effective interconnection arrangements services necessary for efficient interconnection. New
have become key to the operations of an entrants in telecommunications markets have little to
increasingly wide range of services. These services offer in negotiations to remove these barriers to
include local, long distance and international fixed, competition. Today, there is a consensus among
mobile and satellite services, providing everything telecommunications experts and policy makers that
from basic voice telephony to high speed Internet decisive and informed guidance by regulators is re-
connectivity to Internet multimedia services. quired to pave the way for effective interconnection
arrangements.
Competition is the key to the growth and innovation
of today’s telecommunications markets. Intercon- Interconnection is an important consumer issue.
nection is a critical factor for the viability of Telecommunications users cannot communicate
3-1
with each other or connect with services they “interconnection” means the physical and logical
demand unless necessary interconnection arrange- linking of public electronic communications
ments are in place. Interconnection of a multitude of networks used by the same or a different
different types of networks has brought tremendous undertaking in order to allow the users of one
benefits to consumers and businesses around the undertaking to communicate with the users of the
world in the last decade. Without efficient intercon- same or another undertaking, or to access
nection arrangements, services such as direct services provided by another undertaking.
international dialing, all Internet-delivered services, Services may be provided by the parties involved
automated teller machines and e-commerce would or other parties who have access to the network.
not be possible. (Article 2 – CEC(2000d))
Increasing network interconnection will continue to This definition differs from others in that it includes
improve the convenience and utility of telecommuni- interconnection of networks used by the same
cations service for users around the world in the undertaking and not just networks of different
next decade. Inadequate interconnection arrange- operators. The proposed Directive also differs from
ments not only impose unnecessary costs and some other regulatory interconnection regimes in
technical problems on operators - they also result in that it includes a separate concept of “access”,
delays, inconvenience and additional costs for defined differently from interconnection:
businesses, consumers and, ultimately, for national
economies. “access” means the making available of facilities
and/or services, to another undertaking, under
According to ITU’ surveys, Interconnection-related defined conditions, on either an exclusive or non-
issues are ranked by many countries as the single exclusive basis, for the purpose of providing
most important problem in the development of a electronic communications services. It covers
competitive marketplace for telecommunications inter alia:
services, interconnection has been a highly
contentious issue in Europe. Almost half of all ➢ access to network elements and associated
countries in the Asia-Pacific region indicated that facilities and services, which may involve the
interconnection issues were a top regulatory priority. connection of equipment by wire or wireless
While fewer countries in the Arab states (20%) and means;
the Americas (30%) pointed to interconnection as a
regulatory priority, the general level of network ➢ access to physical infrastructure including
competition was still low in those regions. That is buildings, ducts and masts;
changing. The importance of interconnection issues
will increase in all regions as network competition ➢ access to software systems, including opera-
develops. tional support systems;
This Module examines the arrangements that must ➢ access to number translation or systems
be put in place between operators, and the steps offering equivalent functionality;
that can be taken by regulators, to facilitate effective
interconnection. ➢ access to mobile networks, in particular for
roaming; and
3.1.2 Scope of Interconnection Issues
➢ access to conditional access systems for
Interconnection is defined in different ways in the digital television services.
different regulatory and policy regimes that deal with
it. A good recent definition is included in the 12 July Interconnection is a specific type of access
2000 proposed European Commission Directive on implemented between public network operators.
access and interconnection: Access in this Directive does not refer to access
by end-users.
3-2
The last sentence of the definition is important. It Interconnection costs are certainly not the only
distinguishes the Commission’s use of the term major issue. Various technical and operational
“access” from its normal meaning, which relates to issues are also critical to both incumbent and new
end-user access, for example in the terms “access operators. Box 3-1 lists some of the most important
lines” or “network access service”. Despite this po- interconnection issues encountered in many
tential confusion, the types of inter-operator “access” countries.
listed in the Commission’s definition are very impor-
tant in the context of interconnection. 3.1.4 Regional Interconnection Rules
The types of “inter-operator access” listed in the In recent years, the development of regional trading
Commission’s definition are treated as an integral areas and the implementation of multilateral trade
part of “full” or “efficient” interconnection in other agreements has accelerated the liberalization of
jurisdictions. They may also be considered as interconnection policies.
“supplemental” or “ancillary” forms of interconnec-
tion. These types of access arrangements are A leading example is the 1997 European Intercon-
typically addressed in interconnection agreements nection Directive (97/33/EC). It contains rules
entered into between experienced operators. specifically aimed at liberalizing national
interconnection regimes. The Directive requires
Whatever the regional or local definition of intercon- interconnection arrangements to be public and non-
Interconnection
nection, the matters included in the Commission’s discriminatory. It also requires interconnection
proposed definition of “access” must be dealt with as charges to be cost-based. Related EU Directives
part of a comprehensive approach to interconnec- supplement and amend the European interconnec-
tion. In this Handbook, therefore, we will deal with tion regulatory framework. These Directives include
this type of “inter-operator access” in detail, as an obligations on special access (98/10/EC) and
integral part of full interconnection. provision of leased transmission capacity
(92/44/EC).
3.1.3 Interconnection Issues
The provisions of the European Directives related to
Commercial, technical and operational arrange- interconnection are fairly general in nature. This
ments must be made to facilitate interconnection approach permits adaptation to the EU’s different
between network operators. A number of issues national legal regimes and regulatory frameworks.
must be agreed upon by the operators, or deter- The European Commission has taken additional
mined by the regulator, in order to finalize these steps, beyond the Directives, to improve intercon-
arrangements. nection arrangements. One such step is the
publication of “best current practice” interconnection
The major commercial issues of concern to new rates. These interconnection rates are significantly
entrants are generally related to the cost of intercon- lower than those of some member countries, sug-
nection. In North America and Europe, for example, gesting that these countries should take action to
up to 50% or more of the total costs of some long- meet international cost benchmarks. Another major
distance operators have been paid out in intercon- step was the recent adoption of rules and a
nection charges to local operators. Such proposed regulation to require unbundling of the
interconnection charges are particularly significant local loop. These rules are discussed later in this
for operators that rely heavily on resale or that must Module.
pay a subsidy or contribution component as part of
interconnection charges. The practice of combining The European Commission has also reviewed its
subsidies and cost-based charges is widely interconnection-related Directives. As previously
discouraged, for the reasons set out in Section. indicated, on 12 July 2000, the Commission
3.3.5.4. Even without a subsidy component, the level published a proposed new Directive on access to,
of interconnection charges is often an important and interconnection of, electronic communications
factor in determining the financial viability of a new networks and associated facilities (COM(2000) 384).
telecommunications service provider. The proposed new Directive seeks to respond to the
3-3
convergence phenomenon by covering a broader Other multilateral organizations have also developed
range of electronic communications networks and interconnection guidelines. For example, the Asia-
services. It also contains some new and different Pacific Economic Co-ordination (APEC) Telecom-
principles. However, under the proposed new munications Working Group has developed a
Directive, the key provisions of the three previous Framework for Interconnection. Unlike the EU
(above-noted) Directives will continue to be legally
binding on European Union Member States,
pending further reviews.
Box 3-1: Some Key Interconnection Issues
Framework and Procedural Issues

➢ Adequacy of regulatory guidance for interconnection negotiations
➢ Availability of interconnection with incumbent operators for various types of services
➢ Access to standard interconnection terms with incumbent operator
➢ Independent and timely dispute resolution
➢ Non-discriminatory access to interconnection facilities and services
➢ Access to PSTN network specifications (including planned network changes)
➢ Treatment of Universal Service, Universal Access or Access Deficit Charges
Commercial Issues
➢ Level and structure of interconnection charges; basis for calculation (i.e. type of costs used to
calculate charges, revenue sharing, bill and keep, etc.)
➢ Unbundling of interconnection charges for different network components and related services
➢ Resale of network facilities and services
➢ Payment for network modifications to facilitate interconnection
➢ Confidential treatment of competitive and customer information
Technical and Operational Issues

➢ Open network standards and technical compatibility
➢ Location of Points of Interconnection (POI)
➢ Access to signaling systems, advanced digital features, billing system, operations support systems
(OSS), call-related databases and other software to provide advanced services
➢ Access to unbundled network components, including local loops
➢ Equal ease of customer access to competitive networks (e.g. customer dialing parity)
➢ Access to numbers and implementation of number portability
➢ Collocation and sharing of infrastructure (e.g. buildings, poles, conduits, ducts, towers)
➢ Quality of interconnection, including availability of sufficient interconnection capacity to avoid
congestion, and to ensure the timely provisioning of interconnection services and facilities
3-4
approach, this framework is not binding on APEC summarized in Box 3-2. The full text of the
members. The APEC framework is intended to Reference Paper provides more detail than the box.
provide principles, examples of interconnection
approaches in APEC economies, and other useful The paper’s central principles are non-discrimina-
information to assist in the development of national tion, transparency, and the availability of reasonable
interconnection policies. Similarly non-binding interconnection terms, including cost-oriented rates
approaches have been taken in interconnection and unbundled access, from "major suppliers". The
principles published by other regional organizations, concept of "major suppliers" in the Reference Paper
such as CITEL in Latin America. can generally be assumed to refer to operators with
a dominant position vis-à-vis essential infrastructure
3.1.5 Multilateral Interconnection Rules or market share. Thus, at present, the Paper’s
interconnection disciplines would most commonly
The 1997 WTO Agreement on Basic apply to monopoly or former monopoly fixed-line
Telecommunications (formally known as the Fourth operators.
Protocol of the General Agreement on Trade in
Services or GATS) was the first widely accepted The Reference Paper was designed as a set of
multilateral trade agreement to include binding general rules or principles to be observed, rather
interconnection rules. These rules were included in than as detailed prescriptive guidelines on how the
the so-called Reference Paper, an informal text principles are to be implemented. This approach
Interconnection
containing regulatory principles negotiated among makes the paper adaptable as telecommunications
WTO Members. The Reference Paper became markets evolve, and provides flexibility for applica-
legally binding on WTO Members that attached it as tion to different legal systems and regulatory inter-
part of their “additional commitments" in their GATS connection frameworks.
Schedule of Commitments on telecommunications
market access. The Reference Paper was attached
in whole or with minor modifications by 57 of the 69 Box 3-2: Interconnection Rules of WTO
signatories to the Fourth Protocol. Six additional Regulation Reference Paper
signatories elected to list some of the principles in
their Schedules, but not the entire document. Interconnection With “Major Suppliers” must be
assured:
All WTO Members have the option of undertaking
the obligations of the Reference Paper in their ➢ At any technically feasible point in the
networks
GATS Schedules on interconnection or other
matters, whether or not they participated in the ➢ In a timely fashion
Fourth Protocol. As of late 1999, a total of 64 WTO ➢ On non-discriminatory and transparent
Member governments had committed to the terms (including quality and rates)
interconnection obligations of the Reference Paper.
This increase from 57 was due to the submission of ➢ Sufficiently unbundled to avoid charges for
commitments by seven more countries since the unnecessary components
Fourth Protocol. Of these, four WTO Members ➢ At non-traditional interconnection points if
attached the Reference Paper to telecommunica- requestor pays charges
tions commitments they made after the Protocol Procedures
negotiations ended and three countries attached it to
the GATS Schedules they filed upon accession to ➢ Procedures for interconnection to major
the WTO. Most of the nearly 30 additional countries suppliers must be made public
seeking accession to WTO are expected to also Transparency
commit to the Reference Paper and its interconnec-
➢ Agreements or model interconnection offer
tion obligations.
of major supplier must be made public
The most important interconnection-related rules set

out in the WTO Regulation Reference Paper are
3-5
As a practical matter, therefore, more detailed For these reasons, a large number of regulators and
guidance is essential to turn the general Reference telecommunications experts promoted industry
Paper principles into workable interconnection negotiation as the main approach for developing
arrangements, agreements, national regulations or interconnection arrangements. Ex ante regulatory
regulatory directives. The experience of other coun- intervention was discouraged. The focus of regula-
tries can provide valuable precedents in this regard. tory attention was on dispute resolution, in the event
industry negotiations broke down.
When the GATS Agreement on Basic
Telecommunications came into effect on 15 In recent years, there have been increasing doubts
February 1998, many signatory countries did not yet about the effectiveness of the ex post approach.
have detailed interconnection rules in place. Some There appears to be a growing consensus that
still do not. Given the general nature of the advance regulatory guidelines, or even specific inter-
Reference Paper principles, it will be a challenge for connection rules, are necessary to facilitate
many countries to develop sufficiently detailed successful negotiations. This view has been
interconnection regimes to put “flesh on the bones” expressed recently by the European Commission, in
of their GATS obligations. its 12 July 2000 proposed Directive on access and
interconnection. The Commission stated:
Before examining the details of interconnection
arrangements, the following sections of this Module “…there is a consensus that ex-ante sector
will review the basic principles underlying most inter- specific rules will continue to be needed
connection rules. alongside competition rules to regulate access
and interconnection, until such time as there is
3.1.6 Interconnection Principles full and effective competition in all segments of
the market.” (CEC (2000c))
3.1.6.1 Providing Advance Regulatory
Guidelines This view has long been held by regulators and
policy-makers on the other side of the Atlantic.
There continues to be a regulatory debate about the During the 1980s and 1990s, US and Canadian
relative advantages of providing ex ante or advance regulators issued a series of detailed guidelines and
interconnection guidelines versus ex post regulation. decisions on most aspects of interconnection with
Proponents of the ex post approach generally favour dominant operators, including interconnection rates
negotiation of interconnection agreements between and technical terms and conditions. The more inter-
operators, with recourse to regulatory dispute reso- ventionist approach of the North American
lution or competition law remedies, if negotiations regulators appears to have led to more unbundling
fail. of network services, more competition, and arguably
more service innovation and growth.
Several years ago, there were more advocates of
the ex post approach, particularly outside of North The issues of negotiating interconnection arrange-
America, than there are today. This approach was ments and approaches to regulatory intervention are
based on the belief that regulation should be mini- discussed in detail in Section 3.2.2 of this Module.
mized in competitive markets. Many regulators
recognized that the financial, technical and 3.1.6.2 Focus Interconnection Obligations
operational details of interconnection arrangements on the Incumbent Operator
could be complex. They considered that incumbent
operators and new entrants would generally have a One generally accepted means of minimizing regu-
much better understanding of these arrangements latory intervention is to limit imposition of
than regulators. They were also concerned that interconnection obligations to dominant incumbents.
inappropriate regulatory intervention in interconnec- In practice, this is the most effective and efficient
tion matters could impose high costs on the sector. means of utilizing limited regulatory resources.
3-6
This approach is sometimes subject to criticism by 3.1.6.3 Transparency

incumbent operators. They argue that this approach
amounts to regulatory “handicapping” and construc- Transparency is a major policy objective of multilat-
tion of “non-level playing fields”. Others suggest that eral trade agreements as well as the national
universal imposition of interconnection obligations telecommunications policies of many countries.
would provide more interconnection opportunities for While there is a lot to be said for protecting the
all operators. confidentiality of business agreements in a competi-
tive marketplace, interconnection with dominant
However, this is a minority view. The consensus incumbents is generally considered an exception.
view is that universal imposition of interconnection
obligations on all operators, large and small, Confidential treatment of interconnection arrange-
generally amounts to over-regulation. In principle, ments would provide incumbents with an opportunity
only firms with a dominant market position have the to act strategically to thwart competitors. For
ability to establish interconnection terms example, such operators could enter into confiden-
independently of competition. Non-dominant com- tial interconnection agreements that provide
petitors would find it difficult to independently unfavourable interconnection arrangements with
maintain excessive interconnection rates, or competitors, and more favourable ones with
discriminatory conditions. Other service providers affiliates. Dominant operators could also limit the
wishing to interconnect could avoid such unfavour- functionality of the types of interconnection offered,
Interconnection
able interconnection arrangements by interconnect- levy excessively high charges, and otherwise act
ing with a competitor, including the dominant strategically to limit competition.
supplier. Over time, as markets become increasingly
competitive, it may be possible to deregulate more Transparency of interconnection arrangements is an
interconnection arrangements, including those of effective means of discouraging anti-competitive
once-dominant operators. However, in the transition strategic behaviour by dominant operators. It is
period to full competition, a degree of asymmetric easier for regulators to detect and remedy such
regulation is required in order to level a playing field behaviour if interconnection arrangements are made
that is tilted in favour of incumbents. public. Publication of agreements also makes it
easier for regulators and all industry participants to
For these reasons, the regulatory approach to inter- compare interconnection rates, terms and condi-
connection in this Module focuses on interconnections. Transparency also assists in developing
tion arrangements with dominant incumbent industry standards and benchmarks, as well as best
operators. practices on operational and administrative issues.
This approach is consistent with the Reference Many countries require publication of reference
Paper of the WTO Agreement on Basic interconnection offers or model interconnection
Telecommunications, which only imposes agreements. To further promote transparency, some
interconnection obligations on dominant operators regulators maintain public registries of interconnec-
(i.e. “major suppliers”). It is also consistent with the tion agreements, or require publication of agree-
European Commission’s 12 July 2000 proposed ments by operators. In some cases, interconnection
Directive on access and interconnection. The agreements are available over the Internet.
proposed Directive aims to expand the scope of its
interconnection framework to a wider range of Where interconnection agreements are made public,
electronic communications networks. However, only various mechanisms can be used to protect
dominant operators will be subject to the ex ante confidential commercial information. For example,
regulatory obligations proposed by the Commission, Indian legislation requires the regulator to maintain a
such as mandatory interconnection, resale, registry of interconnection agreements. However, at
collocation, etc. the request of parties, the regulator may direct that
parts of an agreement be placed in a confidential
portion of the registry. In such cases, a summary of
3-7
the confidential parts must be made publicly avail- or “co-carriers”. This approach often leads to higher
able. prices and inferior interconnection arrangements.
Regulators should generally insist that intercon-
3.1.6.4 Non-Discrimination necting carriers should be treated on an equal and
reciprocal basis, as peers and not customers.
Avoidance of discrimination is a central objective of
most interconnection policies. Discrimination in One type of discrimination can be fatal to the
interconnection arrangements can take several prospects of competition. It involves providing
forms. One form involves discrimination by a domi- insufficient network capacity to interconnecting
nant operator in interconnection arrangements operators, as compared to an incumbent’s own
entered into with several different new competitors. services. Network congestion can be a deadly anti-
For example, new entrant B may obtain better competitive barrier. Regulators must sometimes
arrangements than new entrant C. Such discrimina- intervene to ensure non-discriminatory rationing of
tion is relatively easy to detect if interconnection network access and transport facilities. They must
agreements are public. often also ensure that established PSTN operators
construct sufficient capacity to handle growing
It should be noted that interconnection arrange- demand that can be expected in a competitive tele-
ments may vary from one competitor to another communications market.
without being “unduly” or “unjustly” discriminatory.
The two competitors may have voluntarily agreed to One regulatory approach to reduce, or at least assist
different arrangements, for example, to suit their in the identification of, discrimination between a
different operating conditions. The real test, there- dominant firm and its competitors involves the es-
fore, should not be “discrimination” in the sense of tablishment of structural or accounting separations
“differences” in interconnection arrangements. The or divestiture. Under structural separation
test should be “unjust”, “undue” or “unfair” discrimi- approaches, a dominant firm is required to move its
nation, in the sense that an interconnecting competitive operations into a separate affiliated
competitor is placed at a significant disadvantage as company, with separate management, accounting
a result of less favourable interconnection arrange- records, etc. Divestiture involves selling all or part of
ments. the separate affiliate to other persons. Accounting
separations involve setting up separate accounting
The other major form of discrimination is often records only, and not actually requiring the estab-
harder to identify. It involves the provision of more lishment of a separate legal entity for the competitive
favourable interconnection arrangements by a business. These approaches are discussed in
dominant firm to its own operations or its affiliates Section 5.3.3 of Module 5 – Competition Policy.
than to competitors. Disputes or complaints about
this form of discrimination are often difficult for Another less interventionist approach that is
regulators to resolve. For example, it is sometimes commonly used by regulators and competition
impossible to grant a competitor exactly the same authorities to prevent undue price discrimination by
type of interconnection arrangements as it is possi- a dominant firm is an “imputation approach”. Such
ble to provide to an internal operation. an approach is applied to vertically integrated
suppliers. Such suppliers include operators that pro-
Various approaches have been developed to identify vide a retail service, like local telephone access
and resolve cases of discrimination of the second service, on a competitive basis, and also provide a
type. Since interconnection arrangements need not wholesale service, like international telephone
be identical, the objective of preventing undue dis- service, on a monopoly basis to itself and other
crimination has been described as one of competitors.
developing “comparably efficient” interconnection
arrangements. Under an imputation test, a vertically integrated
supplier would be required to include the same
Some incumbents discriminate against competitors amount it charges to its competitors for international
by treating them as “customers” rather than “peers” service in its own retail rates, and to add an amount
3-8
sufficient to cover its additional costs of providing originating on the dominant operator’s network. In
local services. Imputation tests are discussed under the absence of regulatory intervention, some new
the heading Vertical Price Squeezing in Section competitors might have little choice but to accept
5.3.4. of Module 5. such a deal or remain unable to interconnect.
3.1.6.5 Cost Orientation Serious problems can result from a dominant firm
charging competitors interconnection prices that are
Interconnection principles, such as those set out in significantly above cost. First, it deters market entry
the Reference Paper for the WTO’s Agreement on and the development of competition. Second,
Basic Telecommunications and the European customers of the competitors will ultimately have to
Union’s Interconnection Directive, require intercon- pay for these excessive charges. Third, the exces-
nection charges to be “cost-oriented”. sive prices can provide a pool of revenues that the
dominant firm can use to subsidize losses, for
There are various reasons for specifying that inter- example losses incurred as a result of predatory
connection charges should approximate costs. pricing action taken by the dominant firm to drive
Without a cost-based standard for setting intercon- competitors out of a market.
nection charges, an established monopolist or
dominant operator would have an incentive to The approaches used by telecommunications
demand a high price for terminating calls that economists and regulators to calculate interconnec-
Interconnection
originate on a new competitor’s network. Similarly, a tion costs, and telecommunications costs generally,
dominant operator would have an incentive to pay are discussed in Section 3.3 of this Module, in
little or nothing to the competitor to terminate calls Module 4 and in Appendix B of the Handbook.
Box 3-3: Summary of Widely Accepted Interconnection Principles
➢ Terms of interconnection should not discriminate unduly between operators or between a dominant
firm’s own operations and those of interconnecting competitors
➢ Interconnection should be permitted at any technically feasible point, but the requesting operator
should pay any additional costs of non-standard interconnection
➢ Interconnection charges should generally be cost-based (i.e. the evolving best practice specifies
that the cost standard should be forward-looking long-run incremental costs; there is normally a
mark-up to cover forward-looking joint and common costs)
➢ Cost inefficiencies of incumbent operators should not be passed on through charges to
interconnecting operators
➢ Where reciprocal interconnection and costs can be expected to be reasonably balanced, bill and
keep arrangements are an efficient alternative to cost-based interconnection
➢ Regulatory guidelines and procedures should be prescribed in advance, to facilitate interconnection
negotiations between operators
➢ Standard terms and procedures should be published for interconnection to dominant operators
➢ Interconnection procedures and arrangements should be transparent
➢ Interconnection arrangements should encourage efficient and sustainable competition
➢ Network elements should be unbundled, and charged separately
➢ Charges related to universal service obligations should be identified separately, and not bundled
with interconnection charges
➢ An independent regulator (or other third party) should resolve interconnection disputes quickly and
fairly
3-9
3.1.6.6 Other Interconnection Principles framework. If the existing regulatory framework

provides sufficient detail on the terms and conditions
A number of other interconnection principles have of interconnection, then interconnection agreements
been proposed and adopted by regulators, policy can be shorter. The same is true if an incumbent
makers and trade organizations. In many cases, operator, or an industry group, has published
these are variations on the same themes. Box 3-3 detailed interconnection tariffs, technical standards,
summarizes widely accepted interconnection princi- procedures, etc. which can be incorporated into an
ples. agreement. In other cases, interconnection agree-
ments must be more comprehensive.
3.1.7 Contents of Interconnection
Agreements Bearing these variations in mind, Table 3-1 provides
a list of the possible contents of a “typical” intercon-
The contents of interconnection agreements vary nection agreement.
considerably. Much depends on the regulatory
Table 3-1: Contents of a Typical Interconnection Agreement
Contents Detail and Comments
Interpretation
Recitals ➢ “Whereas” clauses add historical and legal context to assist
understanding by future readers of agreements
Definition of Key Terms ➢ Terminology varies significantly among different countries and
operators
➢ It is important to ensure compatibility of terminology to the local
environment when adapting interconnection agreements from other
countries
➢ Definitions in other documents may be referenced, e.g. definitions in
laws or regulations, regulatory guidelines, ITU definitions
Scope of Interconnection
Description of Scope and ➢ Different types of interconnection agreements have different
Purpose of Interconnection purposes (e.g. two local networks, local to long
distance/international, fixed-to-mobile, mobile-to-mobile, local ISP to
ISP backbone)
➢ The purpose of some interconnection agreements is to provide
termination services or transit services; others involve provision of
unbundled facilities, etc.
➢ Interconnection architecture (annotated diagrams)
Points of Interconnection and Interconnection Facilities
Points of Interconnection ➢ POI locations (e.g. exchanges, meet points) usually listed in an
(POI) and Related Facility appendix; may be modified from time to time. Typically includes
Specifications exchange types and street addresses
➢ Specific POI facility locations (e.g. digital distribution frame; manhole
splice box)
3 - 10
Table 3-1: Contents of a Typical Interconnection Agreement (cont’d)
➢ Description of network facilities to be interconnected (e.g. OC-3 fibre

optic terminals with interconnecting single-mode optical fibres)
➢ Specify capacity and/or traffic volume requirements
➢ Indicate which party is to provide which facilities (include diagram of
POIs and interconnected facilities)
➢ Technical specifications, for example:
➢ Calling Line Identification (CLI) specs
➢ Other advanced digital feature specs, e.g. call forwarding, caller
name ID, etc.
➢ Basic and ISDN call control interface specs
➢ Local Number Portability (LNP) query-response network specs
Signaling Interconnection ➢ Specify type of signaling networks/standards (e.g. CCS7)
Interconnection
➢ Signaling POIs locations to be specified (i.e. Signal Transfer Points
or STPs)
➢ Point Codes to be specified
➢ Technical interface specifications (e.g. signaling links to be dedicated
E-1 or DS-1 transmission facilities; operating at 56 kbps)
➢ Diagram of signaling interconnection architecture
Network and Facility Changes

Planning and Forecasts ➢ Requirement for mutual notification of network changes and capacity
forecasts, for example:
➢ traffic forecasts for each POI
➢ local number and portability requirements
➢ area code saturation and changes to increased digit phone
numbers
➢ default and redundant routing arrangements
➢ Periodic network planning reports may be specified
Facility Ordering Procedures ➢ Specify rights and obligations of each party with respect to ordering
and provisioning of interconnection facilities (including unbundled
network elements – see below).
➢ Confidentiality requirements and procedures to ensure same
➢ Ensure no anti-competitive use of order information (e.g. no contacts
with end users; competitive service divisions of operator receiving
orders)
➢ Specify points of contact (e.g. Interconnection Service Groups; E-
mail addresses, etc.)
➢ Specify order format and procedures (e.g. standard order forms may
be utilized in paper or electronic (EDI) format)
3 - 11
➢ Procedures to expedite specific orders

➢ Co-ordination process for migration of customers between operators
(e.g. coordination of cut-overs to prevent or minimize service
interruptions to end users)
➢ Procedures for ordering operator to arrange for all equipment
installations and changes at end-user premises
➢ Order confirmation and order rejection procedures, timely
notification, notification of additional charges, etc.
➢ Order completion notification and reporting requirements
Traffic Measurement and Routing

Traffic Measurement ➢ Describe party responsible; measurement and reporting procedures
Responsibilities and (see billing procedures below):
Procedures
➢ Rules for routing of different types of traffic, if any (e.g. Bill and Keep
local traffic that is to be terminated reciprocally without charge may
be carried on “Bill and Keep” trunks; traffic to which termination
charges apply may be carried on other trunks, e.g. transit trunks,
national traffic trunks, etc.)
Infrastructure Sharing and Collocation

Sharing of Infrastructure, ➢ Availability of poles, conduits, towers, rights of way, etc.
Procedures and Costs
➢ Procedures, if any, for determining available capacity; procedures for
allocating capacity among requesting operators (e.g. first come/first
served)
➢ Prices and/or costing method
➢ Provision and pricing of supplementary services (electrical power,
security systems, maintenance and repairs, etc.)
➢ Sub-licences on property of third parties (e.g. right of way owners,
municipal and other public and private property owners, where
infrastructure is located), insurance and indemnification for damages
Collocation ➢ Availability of actual or virtual collocation (e.g. for transmission
facilities on exchange premises); list of addresses where collocation
is available; procedures for determining available space; reservation
of expansion space
➢ Prices and/or costing method for collocated space
➢ Provision and pricing of supplementary services (e.g. electrical
power and emergency backup power, lighting, heating and air
conditioning, security and alarm systems, maintenance and janitorial
services, etc.)
➢ Procedures for ensuring access to and security of collocated
facilities (notification; supervised repair and provisioning work and/or
separated premises, etc.)
3 - 12
➢ Negotiation of other lease and/or licence arrangements, including

issues of sub-licences on property of third parties (e.g. building
owners, right of way owners, municipal and other public property
owners), insurance and indemnification for damages
Billing
Scope of Billing ➢ May include different arrangements, for example:
Arrangements and
Responsibilities ➢ Operators billing each other for interconnection services (e.g.
termination) and facilities (e.g. unbundled loops and other network
elements)
➢ Performance of billing functions by some operators for others (e.g.
local operators billing end-users for long distance or international
operators, ISPs, etc.)
Billing Procedures ➢ Interconnection billing media – discs, tapes, paper and/or electronic
(EDI) transfers; format and software specifications
Interconnection
➢ Guidelines for production of interconnection billing outputs, including:
➢ Applicable industry standards (e.g. CABS, BOS, SECABS, used
with or without modifications)
➢ Billing data format and data elements
➢ Standardized codes and phrases
➢ Billing schedule
➢ Customer Service Record (CSR) provision, including:
➢ details to be supplied by provisioning local operator (e.g. record of
interconnection elements used, including circuit and other (e.g.
DSLAM) equipment identification numbers)
➢ media (e.g. tape, paper, etc.) and schedule for delivery
➢ other requirements to facilitate efficient verification and billing of
end-user by non-provisioning operator
➢ Retention periods for billing data
Payment Terms and ➢ Billing fees and related charges.
Conditions
➢ Payment terms and conditions, including late payment penalties;
service disruption credits, etc.
Billing Disputes and ➢ Contact details for reconciliation and billing queries
Reconciliation Procedures
➢ Responsibilities to provide back-up records
➢ Notification of billing disputes
➢ Initial resolution procedures (e.g. escalation to more senior
management)
➢ Final resolution (referral to arbitration, regulator or courts)
3 - 13
Quality of Service/Performance and Trouble Reports

Quality of Service ➢ Service performance standards may be specified in appendix, for
example:
➢ Average time for provisioning interconnection circuits
➢ Percentage of interconnection cut-overs made on scheduled
dates
➢ Comparative provisioning performance for competitors and self
(or affiliates)
➢ Switching and transmission quality measures on interconnected
circuits (e.g. probability of blockage at peak hours, transmission
delay and loss – consider referencing ITU-T recommendations
Testing and Maintenance ➢ Right to make reasonable tests, and to schedule service
interruptions; procedures to minimize disruption
Trouble Reports ➢ Procedure for trouble reports; notice periods; response time
standards
➢ Duty to investigate own network before reporting faults to
interconnecting operator
➢ Responsibility for costs incurred to second operator in investigating
faults subsequently found to exist in first operator’s network.
Calculation of charges (labour, etc.) for investigating trouble reports
System Protection and ➢ Responsibilities of parties to take necessary precautions to prevent
Safety Measures interference with, or interruptions of, other parties’ networks or
customers
Interchange and Treatment Information

Data Interchange Format ➢ Method and format of data interchange between carriers, including
data interfaces, software, forms, etc.
Data to be Exchanged ➢ Specify all data types and systems for which data is to be
interchanged, for example:
➢ New facilities and service orders, network changes and forecasts,
billing, etc. (see above)
➢ Number allocations and other data required for call routing and
local number portability (where applicable, e.g. where LNP system
is operated by incumbent operator rather than an independent
party)
➢ Customer listings in directories and databases
➢ Access to network databases, for provision of advanced services
3 - 14
Access to and use of ➢ Confidentiality procedures for customer information, including:

Customer Information
➢ Establishment of separate interconnection services group with
secure data (password protection for electronic files; locks for
data rooms and filing cabinets, etc.)
➢ Confidentiality forms to be completed by all relevant employees
(penalties and bonding optional)
➢ Procedures to ensure protection of customer privacy
Access to and use of ➢ Confidentiality procedures (see customer information procedures –
Operator Information above)
➢ Intellectual property rights
Equal Access and Customer Transfer

Equal Access Procedures ➢ Procedures depend on equal access approach, e.g. carrier pre-
selection; casual selection. Detailed procedures normally incumbent
Interconnection
for carrier pre-selection, including:
➢ Customer authorization requirements (signature on prescribed
form, clear choice requirements)
➢ Authentication and measures to prevent unauthorized customer
transfers (slamming)
➢ Penalties for unauthorized customer transfers
➢ Methods of reporting customer transfers (contact points and data to
be provided)
➢ Order confirmation procedure (format, medium, etc.)
➢ Schedule to implement transfers
➢ Procedures to implement transfers
➢ Dispute resolution process (e.g. escalation through senior
management, arbitrator and regulator); information to be provided in
dispute resolution process
➢ Procedures for dealing with disputed customers (which operator may
contact customer, information to be provided to and/or obtained from
disputed customers)
Ancillary Services
Operator Assistance ➢ Types of operator assistance services to be provided, including
directory assistance, translation services, fault report routing, etc.
➢ Call handling and operations procedures
➢ Fees and billing procedures
3 - 15
Other Ancillary Services ➢ Subscriber listings in telephone directories

➢ Information and billing inserts
➢ Repair and maintenance services
➢ Other services provided by one or other operators to increase
mutual operating efficiencies
Termination
Grounds for Termination and ➢ Termination may only be permitted subject to certain restrictions (e.g.
Restrictions regulatory approval for termination of interconnection by incumbent
operator)
➢ Grounds for termination by incumbent may include:
➢ Regulatory or court orders
➢ Bankruptcy, insolvency, receivership, etc.
➢ Cessation of business
➢ Fewer, if any, termination restrictions in competitive markets, and by
non-dominant operators
Termination Procedures ➢ Advanced notice requirements
➢ Payment of non-recoverable interconnection costs incurred by
disconnected operator
➢ Computation and payment schedule for disconnection costs
➢ Dealings with end-users, communications restrictions, etc.
➢ Disconnection cutover procedures.
Other Provisions
Force Majeure ➢ List of conditions for which non-performance of interconnection
agreement obligations will be excused
Assignment ➢ Rights of assignment and restrictions on same (e.g. consent or
regulatory approval requirements)
Applicable Laws ➢ Agreement to be governed by, and interpreted in accordance with,
the laws of relevant jurisdiction
Regulatory Approvals ➢ Specify regulatory approvals required for effectiveness and/or
renewal, amendment, termination, etc. of agreement
Breach of Agreement ➢ Remedies and penalties
➢ Liabilities, indemnification and limitation of liabilities
Legal Interpretation ➢ Standard provisions for legal interpretation and enforcement of
agreement (e.g. entire agreement clause, effect of unenforceable
terms, cumulative rights and remedies, etc.)
3 - 16
Dispute Resolution ➢ Procedures for resolution of disputes under agreement that are not
specifically dealt with elsewhere. For example:
➢ Good faith negotiations, time schedule for same, escalation
through management levels
➢ Referral to regulator, arbitrator or court (e.g. of different types of
issues)
➢ Selection of, and procedures for, arbitration
Term ➢ Duration of term
➢ Renewal rights and procedures
Amendment ➢ Review and re-negotiation procedures
➢ Impact of regulatory changes
Interconnection
3.2 Interconnection Procedures ➢ Independent arbitration or mediation of inter-
connection disputes.
3.2.1 Establishing Interconnection
Arrangements ➢ Regulatory review, variation and approval of
negotiated arrangements.
A variety of different approaches have been used to
establish interconnection arrangements. The main Active industry participation is necessary to develop
approaches are listed below. Combinations of these practical interconnection arrangements However,
approaches have been used in different countries at there has also been a growing consensus that it is
different times. necessary to have regulatory involvement to provide
advance guidelines for operator negotiations and to
➢ Regulatory prescription (ex ante) of intercon- resolve disputes. Different approaches to balancing
nection arrangements. industry participation and regulatory intervention are
discussed in the following sections.
➢ Negotiation between operators.
3.2.2 Negotiation of Interconnection
➢ Establishment of general regulatory guidelines Arrangements
for operators to negotiate.
In many countries, industry negotiation has been the
➢ Regulatory mediation to facilitate operator- main approach to establishing interconnection
negotiated agreements. arrangements. As previously discussed, there are
good reasons for this. Operators understand their
➢ Regulatory prescription (ex ante) of default networks and operational requirements better than
interconnection arrangements, for example, regulators, and they have the technical information
based on other jurisdictions, that will apply if required to implement effective interconnection
negotiations fail. arrangements.
➢ Regulatory decisions to resolve interconnection However, without regulatory intervention and direc-
disputes. tion, interconnection negotiations do not usually
proceed successfully. Incumbent operators are
3 - 17
generally suspicious that interconnecting operators entrants, without adequate regulatory guidance. Ex
will seek subsidized access to their extensive ante regulatory direction and ongoing supervision or
existing networks. Indeed, interconnection at almost mediation are generally required for operators to
any price is less expensive for a new entrant than negotiate reasonable interconnection agreements
duplicating major parts of the PSTN. However, the on a timely basis.
purposes of interconnection include minimization of
total network costs, and speedy introduction of com- 3.2.3 The Regulator’s Role in
petition and rollout of new services, such as Interconnection Negotiations
broadband access services. Interconnection
obligations must often be imposed on incumbents, Once it is decided that regulators should play a role
whether or not they agree with them, in order to in promoting the successful conclusion of intercon-
promote sector development. nection negotiations, the next question is: how can
the regulator intervene most effectively? Regulators
Some incumbents may also act strategically during have a variety of tools available to expedite negotia-
the course of negotiations to implement arrange- tions and to assist in the successful completion of
ments that can effectively prevent or hinder interconnection agreements. Some proven
competitive entry. Consequently, regulators must regulatory approaches are described below.
find ways to overcome incumbents’ reluctance to Variations and combinations of these approaches
interconnect their network to new competitors’ can be used in some cases:
networks on efficient, cost-based terms and
conditions. ➢ Establishing guidelines in advance of
negotiations – As indicated in Section
Despite encouragement from governments and 3.1.6.1, there is a consensus that ex ante
regulators, the reality is that dominant incumbents interconnection guidelines are a necessary
have little incentive to enter into agreements that and effective means to promoting good in-
expedite competitive entry by interconnecting terconnection agreements. The task of
operators. Incumbent operators hold all the developing such guidelines has been made
bargaining power in negotiations. New entrants have easier for newer regulators due to the
little to offer in exchange for favourable interconnec- growing number of published interconnection
tion terms. They can promise market expansion, principles and guidelines established by
which should benefit all operators. However, most other regulators. The increasing availability
incumbents see this benefit as being outweighed by of precedent interconnection agreements
the loss of existing markets to new entrants. and the development of “best practices” and
benchmark interconnection charges in other
Delays and failure have characterized many inter- countries also make it easier for regulators to
connection negotiations. In some of these situations, establish such guidelines. The remaining
regulators subsequently realized that delays and sections of this Handbook also discuss
disputes could have been resolved by appropriate approaches that can be used in establishing
regulatory intervention. For example, regulators ex ante guidelines.
could have applied benchmarks or best practices
from other countries. In other cases, while negotia- ➢ Setting default interconnection arrange-
tions did produce interconnection agreements, these ments in advance of negotiations –
were sometimes one-sided, costly and inefficient. Regulatory interconnection guidelines are
Sometimes, new entrants accepted one-sided usually fairly general. As a result, there are
agreements as the only means available to start up often disputes among operators about how
business and avoid bankruptcy. best to apply guidelines. This can cause
delays and impasses, and the need for
As a result of this experience, many regulators and further regulatory intervention. One approach
interconnection experts have concluded that it is to deal with this issue, is for the regulator to
generally impractical to direct dominant incumbents publish default interconnection arrangements
to negotiate interconnection agreements with new together with guidelines. If the negotiations
3 - 18
fail, the default arrangements will apply. Another option that is sometimes proposed
Such an approach was adopted for some is final offer arbitration. In final offer arbitra-
interconnection issues by the US regulator in tion, an independent arbitrator must select
its landmark 1996 interconnection order. one of the final offers put forward by two
disputing parties. In theory, this provides an
In the case of a first interconnection agree- incentive for the parties to make reasonable
ment with an incumbent, it may be difficult for offers. In practice, this approach is generally
a regulator to establish appropriate default inappropriate for interconnection negotia-
arrangements. The regulator may need to tions, due to the number of issues involved,
review the issues in depth, obtain informa- their complexity, and to the regulatory goal of
tion and submissions from the operators, etc. developing efficient and non-discriminatory
before it is in a position to establish default arrangements. The regulatory goal is not
arrangements. However, default simply to establish an interconnection
arrangements will usually be easier to arrangement, but to establish a good one.
establish for subsequent agreements.
➢ Establish Industry Technical Committees
As with guidelines, published interconnection – Bilateral or multilateral industry committees
agreements and the development of “best are often the best forum for establishing the
practices” and “benchmark” interconnection details of interconnection arrangements. If
Interconnection
charges in other countries is making it easier negotiations are proceeding smoothly,
for regulators to establish default incumbents and new entrants may take the
arrangements. Benchmarking has been initiative to delegate the details of technical
used extensively by the European interconnection arrangements to working
Commission, and at the international level, groups or committees. However, in some
such as in the US-Japan bilateral telecom- cases, it may be necessary for the regulator
munications negotiations. to take the initiative to ensure appropriate
technical committees are established. In
Finally, if there is a concern about the appro- either case, it is usually good practice to set
priateness of the default arrangements, the deadlines for reports by such committees.
regulator can provide a “sunset” clause for
their applicability. In other words, the Depending on the degree of co-operation
regulator can indicate that the default between operators, representatives of the
arrangements will cease to have effect after, regulator may also be able to play a useful
for example, one year. That will provide time role on the committees. They can often fa-
for a more detailed review between the time cilitate agreement on interconnection
negotiations fail and the sunset of the default arrangements, suggest alternative
arrangements. approaches when there is an impasse, and
otherwise mediate the discussions. In some
➢ Establish deadlines for various stages of cases, it will be necessary or useful for the
the negotiations – Deadlines should be set regulator to retain expert consultants to
at the outset of negotiations for completion of assist in this role, and particularly in
various steps or deliverables. For example, assessing the merits of conflicting positions
the incumbent might be asked to produce a of operators.
proposed interconnection agreement in 30
days. Alternatively, deadlines can be Sometimes industry technical committee
proposed as soon as it appears delays will work can drag on for months or years. In
occur. Consequences of the failure to meet such cases, the committees actually slow
the deadlines can include regulatory inter- down the process of reaching interconnec-
vention to impose an agreement and tion agreements. Delays can result from the
independent mediation or arbitration. establishment of committees with rigid work
schedules, lack of familiarity with intercon-
3 - 19
nection technologies on the part of the with the new entrant. The arrangements that
regulatory participants, unnecessary process applied to the new entrant would also apply
concerns, and other factors. The regulator to the incumbents’ own cellular operations.
should be flexible and willing to adopt This “no head start” rule proved to be
alternative approaches to ensure that the effective. Mutually acceptable agreements
industry technical committee process were quickly concluded. The incumbent op-
produces results on a timely basis. erators did not want to delay the introduction
Alternatively, in some cases, the process of their own cellular services.
should be abandoned, and other
approaches adopted. In developing positive incentives for incum-
bents to complete interconnection
The industry technical committees estab- agreements, regulators must take care to
lished under regulatory supervision in ensure that they do not create incentives for
Canada have generally been considered new entrants to stall or frustrate the negotia-
very successful. The Canadian tions. In the Canadian example discussed
Interconnection Steering Committee (CISC) above, for instance, if the new entrants had
and its sub-committees included participation not been ready to start up service, they
from interested industry firms, as well as rep- might have delayed start up by the
resentatives of the regulator. CISC was incumbents by stalling completion of
established after a regulatory decision that agreements. Regulators must provide
provided ex ante guidance on the terms and incentives for both sides to complete
conditions of interconnection. However much negotiations.
detail remained to be determined by CISC. It
took about 2 years to reach agreement on Finally, the prospect of receiving compen-
major issues, and regulatory intervention satory interconnection charges can provide
was required from time to time. However, an incentive for incumbents to conclude
CISC managed to achieve consensus on interconnection agreements. Most
many important interconnection issues. The incumbents focus on short-term loss of
CISC committees continue to deal with market share to competitors. However, those
ongoing issues that arise, for example, in that take the longer view, and build appropri-
connection with new types of ate network facilities, can earn significant
interconnection. interconnection revenues as a result of the
new traffic stimulated by their competitors.
➢ Incentives to complete interconnection
arrangements – A carrot can be more ➢ Appoint mediators or arbitrators – Where
effective than a stick. Various incentives can negotiations fail, or where they are likely to
often be provided to conclude interconnec- fail, success can often be achieved by
tion agreements. Incumbents depend on appointment of a mediator or arbitrator. The
regulators for approvals or actions that can two are different in that arbitrators are
sometimes be linked to the successful con- empowered to make binding decisions
clusion of interconnection arrangements. where an agreement cannot be reached.
Mediators can provide additional information,
An example of this approach can be found in develop compromises, propose alternatives,
Canada. In 1984, the incumbent operators and persuade. However, they cannot impose
(the “wireline operators”) were licensed to their own decision on the negotiations.
provide new cellular telephone services. At
the same time, licences were issued to a It is possible for regulators or regulatory staff
new entrant cellular operator. As an incen- to act as mediators and arbitrators. However,
tive, the incumbents were prohibited from this in not always the best approach,
starting up their cellular services until they particularly in the case of inexperienced
had completed interconnection agreements regulators and staff. Interconnection is a
3 - 20
complex area, and the costs of delays and marks can be applied. Other practices applied in
improper regulatory intervention can be high. foreign jurisdictions can provide useful precedents.
There is a growing body of international Discussions with other regulators and assistance
interconnection “know-how”. Experienced from expert advisors can facilitate the regulators’
independent interconnection experts can task.
often add valuable experience. They can
recognize issues from other countries, If interconnection negotiations fail, an operator,
suggest options for unresolved issues, and usually the new entrant, may apply to the regulator
otherwise save time. In addition, the use of to resolve the interconnection dispute. There is no
outside experts maintains the independence single best approach to resolving a complex inter-
and credibility of the regulators. The regula- connection dispute, but some approaches are better
tors can act as a final decision-maker in the than others. Table 3-2 suggests some approaches
event the mediation process fails. They can regulators may use in resolving interconnection
also review the final decision of an arbitrator, disputes.
if necessary.
The WTO Regulation Reference Paper defines an
One or more of the foregoing regulatory approaches independent regulator as follows:
is usually required to promote the successful con-
clusion of interconnection negotiations. Whatever “Independent Regulator” - The regulatory body is
Interconnection
the approach, it is important for regulators to be separate from, and not accountable to, any
proactive in establishing interconnection procedures supplier of basic telecommunications services.
and guidelines that will promote the negotiation of The decisions of and the procedures used by
effective interconnection agreements. Further, regulators shall be impartial with respect to all
where negotiations fail, regulators must be prepared market participants.
to take steps to bring them to a successful conclu-
sion. As discussed in Module 1, the degree of independ-
ence of regulators varies in different countries. In
3.2.4 Dispute Resolution some countries, the regulator is a government
ministry, or a government agency that also has
In most countries, it is the regulator’s role to resolve responsibility for the operations of a state-owned
interconnection disputes. The WTO Regulation incumbent. Many observers would not consider such
Reference Paper requires signatories to the a regulator independent for the purpose of resolving
Agreement on Basic Telecommunications to interconnection disputes. While such a regulator
establish an independent dispute resolution may technically be in a separate organization from
mechanism. The Paper requires recourse to an the incumbent, it has similar interests. Both are part
independent domestic body to resolve of the government telecommunications bureaucracy.
interconnection disputes within a reasonable time. Both may consider the financial and operating
This may be the regulator or another independent interests of the incumbent as their prime concern.
body.
In such cases, other independent dispute resolution
In practice, regulatory dispute resolution can be a bodies should be considered, possibly using some
difficult task. Most regulators will normally be less of the approaches set out in Table 3-3. These might
informed than the operators on the details of inter- include an independent arbitrator or mediator
connection. The risk of making an unsatisfactory acceptable to both parties. One option is to have an
decision deters many regulators from wading into independent dispute resolution body established by
interconnection disputes. a senior branch of government (the executive or
legislature). This body need not be set up as a
However, regulators must resolve disputes in a costly, permanent bureaucracy. It can be staffed on
decisive and timely manner, or competition and a temporary basis with independent domestic and
sector development will be retarded. If information international telecommunications experts. Another
on local costs is insufficient, international bench- option is to request an international agency with re-
3 - 21
sponsibility in the telecommunications sector, such countries, lengthy regulatory interconnection

as the ITU or The World Bank, to appoint or proceedings were held before the rulings were
recommend an independent dispute resolution made. Input was obtained from incumbents, new
expert or panel to assist in the domestic dispute entrants and other interested members of the public.
resolution process. In the end, detailed decisions were issued,
specifying many of the approaches and specific
3.2.5 Ex Ante Regulatory Guidance rates, terms and conditions on which interconnection
should occur.
In some countries, regulators have prescribed
detailed interconnection conditions before intercon- This experience produced a wealth of information,
nection arrangements are made. Examples are the analyses and insights into interconnection issues.
1996 US and the 1997 Canadian interconnection However, the work effort required to produce a de-
orders for competitive local operators. In these tailed set of interconnection rules should not be
Table 3-2: Approaches to Resolving Interconnection Disputes
Improving the information ➢ Require parties to clearly define areas of agreement and dispute
base for decision-making
➢ Send written information requests to operators to clarify disputed issues
and provide information for interconnection decisions
➢ Require written argument (with supporting facts and research, if
necessary) to assist in clarifying the issues in dispute
➢ To increase transparency, consider making the arguments (but not
confidential business data) available for comment by other interested
parties and the public
➢ Consider inviting other interested parties (e.g. other interconnecting
operators, service providers, or user groups) to comment on the issues
Obtaining expert assistance ➢ Hire an experienced interconnection expert to assist in clarifying the
issues, formulating information requests, and providing general advice
to the decision-makers
➢ Consider appointing a mediator (or, if the parties agree, an arbitrator)
➢ Use outside parties for informal mediation, arbitration, information
gathering or other participation in the negotiations. This approach is
particularly useful in countries where direct regulatory involvement
would “taint” the legality or politically prevent it from making an unbiased
final decision.
Improving accuracy and ➢ Consult with other regulators on their experience in similar cases
credibility
➢ Review decisions and interconnection agreements approved by other
regulators
➢ Consider circulating a draft of the decision to resolve the dispute to the
disputing operators and other interested parties. Their comments should
be made public. Comments and corrections can improve the accuracy
of the final decision.
3 - 22
underestimated. Moreover, these lengthy are, therefore, major determinants of the viability of
interconnection proceedings did not produce the operators in a competitive telecommunications
“final word” on interconnection arrangements. In market.
both Canada and the US, there have been lengthy
follow-up proceedings before the regulators and in Over the years, a variety of approaches have been
the courts. In Canada, much of the detail of used to calculate interconnection charges and
interconnection arrangements was left to a number generally to determine the financial terms of inter-
of industry technical committees led by regulatory connection. In this Section, we first consider the
staff. This CISC process (which is referred to above) general approaches that have been used to
produced very useful results, but it took about 2 determine interconnection charges. Later in the
years to resolve most of the issues. Section, we review specific types of interconnection-
related costs that are often treated in specific ways.
It should be recognized that interconnection is a Examples are start-up costs, costs of interconnec-
dynamic issue. The types of telecommunications tion links and collocation and infrastructure sharing
infrastructure and services are constantly changing. costs.
As a result, interconnection requirements continue to
change as well. Where regulators prescribe inter- 3.3.2 Approaches to Setting Interconnection
connection arrangements, they should be viewed as Charges
flexible rules that should evolve with telecommuni-
Interconnection
cations networks and markets. This Section reviews the general approaches that
have been used to determine interconnection
3.3 Financial Terms of charges. While there is no single correct approach,
Interconnection there is a consensus among telecommunications
and trade experts that the best approaches are cost-
based. However, other approaches have their merits
3.3.1 Interconnection Charges
in some circumstances. Table 3-3 provides an
overview of the main approaches used to determine
Interconnection charges often account for a very
interconnection charges. Readers interested in more
significant part of the costs of new telecommuni-
detail on the costing concepts and economic
cations operators. This is particularly the case with
theories underlying them should refer to Appendix B
new entrants that do not own end-to-end networks.
of the Handbook.
The level and structure of interconnection charges
Table 3-3: Main Approaches to Interconnection Charges
Approach Description and Examples Comments
Forward ➢ Charges based on forward-looking ➢ Generally accepted as best practice

Looking costs of facilities and services provided
Incremental to interconnecting operator (usually ➢ Approach sends most efficient price
Costs estimated over the long run, i.e. Long signals; based on current technology
Run Incremental Costs or “LRIC”) rather than existing book assets
➢ Examples: Australia, Canada, the ➢ Closest approximation of costs in a

Hong Kong SAR of China, Chile, and fully competitive market
US local operators ➢ Requires study and some cost and
➢ Variations of LRIC include LRAIC, demand estimates.
TSLRIC and TELRIC. These ➢ Usually leads to lower interconnection
approaches include different elements rates; this stimulates competition but
of fixed and common costs (e.g. provides lower revenues to incumbent
3 - 23
Table 3-3: Main Approaches to Interconnection Charges (cont’d)
overheads, and fixed-service operator

costs).that are excluded from
traditional LRIC analyses. These ➢ May be substantially out of line with
variations are growing in acceptance actual book costs of inefficient
as “best practices”. They are described incumbents
in Appendix B of the Handbook Can be inappropriate if end-user prices are
seriously unbalanced (e.g. set well below
costs and below interconnection charges
Historical ➢ Charges based on the accounting ➢ Common practice; less favoured by
Accounting records of the operator supplying the regulators and experts today
Costs interconnection facilities or services
➢ Less efficient since historical costs
➢ Generally includes an assignment of were often incurred less efficiently than
direct costs and an allocation of those based on current technology and
common costs booked in the operational circumstances (e.g.
accounting records privatization)
➢ Examples: UK, 1995 Japanese ➢ Accounting records often misstate real
system, and Sweden value of assets: based on subjective
accounting policies and political
decisions regarding investments
➢ Usually requires study to as-
sign/allocate booked cost to
interconnection facilities and services
Sender ➢ No charges payable between ➢ Works best where the two operators
Keep All interconnecting operators for are similarly situated and exchange
(SKA) termination of each other’s traffic approximately the same amount of
traffic (e.g. for interconnecting local
(Bill and ➢ Typically, each operator pays for its operators)
Keep) own facilities up to the point of
interconnection, plus charges for any ➢ Charges can apply to compensate for
unusual costs incurred by the other traffic imbalances
operators to accommodate its traffic
➢ Without such charges, SKA can retard
➢ Examples: Indian, US and Canadian financing and development of rural or
local operators, and Indonesian other services, where there is an
regional operators imbalance of traffic (i.e. more
incoming)
➢ Was the main model for interconnec-
tion of ISPs in many markets.
However, this is changing as larger
ISPs, with substantial backbone
facilities and reach, increasingly treat
smaller ISPs as customers rather than
peers
Revenue ➢ Typically, new entrants pay the ➢ This approach is simple – no need for
Sharing incumbent operator a share of their cost studies to determine
revenues from interconnected services interconnection charges
(or all services)
➢ Generally considered non-transparent
➢ In some revenue-sharing arrange-
ments, no additional charges are ➢ Potentially inefficient and anti-
3 - 24
Table 3-3: Main Approaches to Interconnection Charges (cont’d)
payable between interconnecting competitive (i.e. when excessive

operators for termination of each revenue shares are paid)
other’s traffic; in others, additional
charges do apply for direct intercon- ➢ Sometimes prescribed by governments
nection costs (e.g. transmission links, or PTTs as the only basis on which
interconnection interfaces) interconnection will be permitted in an
otherwise closed market; sometimes
➢ Examples: Thailand, Indonesia, and treated as a “tax” for doing business in
China a country. May be a transitional step to
a more efficient approach
Interconnect ➢ Interconnection charges based on ➢ Difficult to estimate appropriate
Charges prices to end users discount – may lead to inefficiency (i.e.
based on high discount discourages construction
Retail Prices ➢ A discount is sometimes applied for of competitive facilities; low discount
inter-operator charges. This can be undermines financial viability of
estimated based on the avoided costs competition)
of the supplying operator (e.g. retail
Interconnection
billing and marketing costs). ➢ Specifically rejected in some jurisdic-
tions (e.g. Hong Kong, China which
➢ Examples: US local resale prices, pre- differentiate “carrier-to-carrier” charges
1995 Japanese approach from retail rates)
Other ➢ Interconnection charges have been ➢ Efficiency of charges depends on how
Negotiated negotiated between operators based closely they approximate efficient
Interconnect on a wide range of other approaches; costs; many negotiated charges
Charges some principled, many arbitrary include implicit subsidies between
operators and customers
➢ Example: International accounting
rates, and some reseller agreements ➢ Level of negotiated charges often
depends on the bargaining power of
the operators
3.3.3 Comments on Different Approaches interconnection costs in different circumstances.

However, today most regulators and experts
Internationally accepted interconnection principles generally agree that the ideal approach for calculat-
generally require interconnection charges to be costing the level of interconnection charges would be
based or “cost-oriented”. This is the case with the one based on forward-looking costs of supplying the
interconnection principles of the WTO’s Agreement relevant facilities and services. This ideal is usually
on Basic Telecommunications and the European implemented by means of some variant on the long-
Union’s Interconnection Directive. Cost-based run incremental cost (LRIC) approach. This
pricing of interconnection services is consistent with approach has been entrenched in the regulations of
best practices adopted by regulators in most some countries (e.g. India) and the laws of others
countries. This issue is discussed further in Section (e.g. the US).
3.1.6.5.
The major variations of the LRIC approach that have
Forward-Looking Costing Approaches been most widely accepted by regulators and
experts are:
There remains a fair amount of debate in regulatory
circles about the best approaches to use to calculate
3 - 25
Long Run Average Incremental Costs (LRAIC) - As can be seen from the preceding descriptions, the
A long-run costing approach that defines the most widely accepted LRIC-type approaches
increment as the total service. It differs from generally include a reasonable allocation of joint and
traditional marginal and incremental cost common costs. Such costs can also be calculated
measures by including allowance for the fixed on a forward-looking basis, to approximate the costs
costs specific to the service concerned: “service- of an efficient operator. Joint and common costs are,
specific fixed costs”. The European Commission by definition, not directly caused by the interconnec-
has adopted this approach. tion services, but are nevertheless incurred by an
operator in connection with its interconnection
Total Service Long Run Incremental Costs facilities and services. Common examples of such
(TSLRIC) - This approach, developed by the costs are the salaries of the president, managing
Federal Communications Commission (FCC) in director or legal counsel of the operator. By including
the USA, measures the difference in cost capital, joint and common costs, a LRIC approach
between producing a service and not producing can approximate costs in a competitive market,
it. TSLRIC is LRIC in which the increment is the while providing reasonably full compensation to the
total service. operator supplying the interconnection – assuming it
operates efficiently.
Total Element Long Run Incremental Costs
(TELRIC) -This approach, also developed by the Further descriptions of the methods used to
FCC, includes the incremental cost resulting from calculate long-run incremental costs, including
adding or subtracting a specific network element LRAIC, TELRIC and TSLRIC are included in
in the long run, plus an allocated portion of joint Appendix B and in Module 4.
and common costs.
While variations on the LRIC approach are
Other variations - There are other variations on considered the best practices by most experts, there
the LRIC approach. In Canada, for example, the are practical limitations on their applicability. Some
regulator uses an incremental cost approach of these are listed in Table 3-3. Some of these limi-
(Phase II Costing) and adds a mark-up to tations are particularly significant in countries with
approximate forward-looking fixed and common less developed telecommunications sectors. For
costs. Other regulators have developed different example, if local retail telecommunications rates are
approaches. set well below costs, setting interconnection prices
at LRIC may not permit a new, local services entrant
A well-designed LRIC-type approach provides an to run a viable business. The new entrant’s inter-
estimate of the costs of an operator to provide interconnection costs may exceed its retail prices. While
connection in a fully competitive market. An LRIC- rate rebalancing is the long-term solution to this
type calculation generally starts by estimating the problem, in the short term interconnection rates may
direct costs incurred by an operator in providing the need to be discounted in order to permit competition
interconnection services in question. These costs to emerge. There are other practical problems with
are calculated over the “long run”, usually at least the application of LRIC-type approaches in some
ten years, in order to average out the inherently environments.
“lumpy” nature of the investment costs of intercon-
nection facilities in the year they are introduced. Other Approaches
In addition to the directly attributable costs, LRIC- The applicability of the non-LRIC-type approaches
type calculations generally include a capital cost listed in Table 3-3 depends on the circumstances of
component. This component is intended to different countries. The comments in the Table
reimburse the operators for the costs of financing describe strengths, weaknesses and other consid-
the interconnection facilities, since these costs are erations. Several other comments follow.
necessarily incurred by the operator providing the
facilities. Modifications are often made to the various
approaches to attempt to compensate each operator
3 - 26
more closely for costs resulting from its interconnec- should be dealt with by means of a separate charge,
tion. An example is the Sender Keep All (Bill and not a revenue-sharing formula. Issues related to
Keep) approach. As indicated in Table 3-3, this universal service and universal access charges are
approach is appropriate where the two operators are discussed in detail in Module 6.
similarly situated and exchange approximately the
same amount of traffic. Thus, it is often used for in- Table 3-3 does not provide an exhaustive list of the
terconnection of local operators in the same city or approaches to calculating interconnection charges.
neighbouring regional operators. Other approaches exist. One example is the Efficient
Component Pricing Rule (ECPR), which bases
The Sender Keep All approach may be modified to interconnection charges on the net incremental
add charges to compensate for traffic imbalances. costs of interconnection, plus the “opportunity costs”
For example, operator no. 1 may receive and termi- or margin lost by the incumbent as a result of traffic
nate more traffic from operator no. 2 than it sends to “taken” by the new entrant. This approach has been
that operator. Operator no. 1 will then usually incur discussed among academics and consultants, but
higher costs as a result of the interconnection than has generally not been accepted by regulators as a
operator no. 2. To compensate for this imbalance, reasonable option.
operator no. 2 may pay a cost-based interconnec-
tion charge to operator no. 1 for every minute of Finally, interconnection charges are sometimes
traffic it sends that exceeds the traffic it receives. indexed or “price capped” to determine future
Interconnection
increases (e.g. for a five or ten year period). Such
A word or two about revenue sharing approaches. approaches provide certainty to interconnecting
An element of revenue sharing may be appropriate parties regarding their level of future costs or
in some cases to distribute surplus revenues after revenues.
payment of cost-based interconnection charges.
However, in some cases, revenue shares paid to 3.3.4 Specific Interconnection Costs
incumbents have included a wide range of compo-
nents, ranging from interconnection costs to a 3.3.4.1 Start-up Costs
“licence fee” for operating in a jurisdiction or
“compensation” to an incumbent for loss of business The network infrastructure of most incumbent
to new entrants, or fulfilment of universal service operators was designed to function on a monopoly
obligations. basis. In the transition to a competitive telecommu-
nications market, some modifications are usually
The latter three components are typically not cost required to the operator’s switching and transmis-
based. They are usually not transparent and are not sion facilities and related software to permit efficient
recommended in any jurisdiction where the regulator interconnection among multiple operators. For
wishes to improve efficiency in the telecommunica- example, switches must be programmed to
tions sector. These approaches can be subject to recognize and route traffic to telephone numbers on
abuse. For example, excessively high revenue- the network of interconnection operators. Additional
sharing arrangements have been imposed in some numbers must often be allocated and equipment
jurisdictions in a short-sighted attempt to earn addi- modified to deal with them. These modifications are
tional operator or government revenues. The effect often referred to as “start-up costs”, since they are
is to prevent efficient competition. required at the outset to permit interconnection.
If revenue-sharing schemes must be used, then Regulators in different countries have treated start-
regulators should consider identifying each compo- up costs in different ways. Some take the view that
nent of the revenue share separately. This includes, new operators are the beneficiaries of interconnec-
for example, shares to pay for cost-based intercon- tion, so they should pay all start-up costs. In the
nection charges, for concession or licence fees, etc. extreme, this approach is applied not only to
This approach adds transparency and allows for the interconnecting transmission circuits, but to all
gradual elimination of revenue-sharing components modifications and upgrades to an incumbent’s
that are not cost-based. Universal service charges network required to facilitate interconnection. Some
3 - 27
new operators accept this approach as the only one and distribution frames) in order to accommodate
that will provide them with interconnection, the interconnected circuits.
particularly in countries with state-owned PTTs.
However, this approach has disadvantages. It can One approach is to require the new operator to pay
impose a heavy financial burden on a new entrant, the entire cost of the transmission links and related
shift costs of network upgrades from incumbents to facilities. This approach is based on the theory that
competitors, and ultimately lessen the chances of transmission facilities are being added and the
viable competitive entry. modifications made solely for the benefit of the new
operator and its customers. If this approach is
A different approach that is more pro-competitive in adopted, incumbents should not be able to recover
nature has been adopted by a number of countries any more than the actual costs of the transmission
such as Canada. The approach is based on the links and related facilities. Sophisticated costing
assumption that competition is introduced to benefit approaches are not required. Normally, these costs
all telecommunications users and the economy in are easily tracked through expense invoices, related
general. Interconnection start-up costs are seen as a labour costs and overhead. As a general principle,
direct result of the policy decision to open a market the costs should not exceed fair market costs for
to competition. It is also recognized that the costs installing the links. Incumbents may have an
incurred by all operators will, market conditions incentive to inflate charges for such links, and regu-
permitting, generally be borne by telecommunica- latory oversight may be required to ensure charges
tions users. are based on market costs.
Therefore, some basis is developed to apportion One method of ensuring charges for interconnection
costs among established and new operators on the links are not inflated is to give the new operator the
assumption that they will generally pass these on option of installing the links itself, including work on
through user rates. A specific surcharge may be the premises of the incumbent. Specifications for
considered, but may not be adopted for political such work can be subject to discussion at a joint
reasons. One method of apportioning costs is on the technical committee with a dispute resolution
basis of the projected use of telecommunications mechanism. Work on its premises can be monitored
services (including interconnected services) in the by the incumbent to avoid arguments about
future. A formula can be established to adjust improper work or sabotage.
compensation between operators in case actual use
differs from projected use of telecommunications or As with start-up costs (see discussion in previous
interconnected services. Section), interconnection links are a necessary
prerequisite for the development of a competitive
Under this approach, the incumbent will generally market. Taking this view, regulators may consider it
bear a large share of start-up costs. Some appropriate to apportion the costs of such links
regulators regard this approach as necessary or between incumbents and new entrants, based on
appropriate to facilitate competition. Understandably, the assumption that end users of all operators will
this approach is generally opposed by incumbents. ultimately benefit.
3.3.4.2 Interconnection Links The simplest, and probably most common method
of apportioning costs of interconnection links is to
Different approaches have been adopted to have each operator pay the costs of its interconnec-
apportion the costs of the physical links between tion links up to the Point of Interconnection (POI).
interconnecting operators. Such links include Since POIs are often located in or near the
transmission lines or radio links that carry the inter- exchange of the incumbent, this method can impose
connecting circuits. They also include the ducts, significant costs on a new operator. However, under
towers, manholes and other support infrastructure, this approach, the new operator can decide how to
as well as the modifications that are required to the configure its network to limit its costs.
transmission-related facilities (e.g. cross-connects
3 - 28
3.3.5 Structure of Interconnection Charges ture of interconnection charges. Several examples

are given below.
The structure of charges for interconnection often
varies from country to country. These variations 3.3.5.1 Fixed and Variable Charges
reflect a number of factors, including differences in
the telecommunications infrastructure, policy As a general principle, interconnection charges
differences and varying levels of effort on developing should reflect the difference between fixed and
cost and price structures. Price structures need not variable costs of interconnection. For example, the
be complex to be efficient and fair. In many cases, fixed costs of providing a dedicated network access
simplicity is best. However, with some effort, a price line (loop) are best recovered through a fixed
structure can be developed that levels the playing charge. On the other hand, where the costs of
field for all operators and facilitates more efficient network components, such as telecommunications
interconnection. switches, are traffic sensitive, they are best
recovered through usage charges. Usage charges
Box 3-4 sets out some basic principles for an effi- are usually based on time (minutes). In the case of
cient interconnection price structure. interconnection of Internet backbone operators and
Internet Service Providers, charges are often based
Operators, regulators and telecommunications on capacity (bits of traffic).
experts have long discussed how best to refine tele-
Interconnection
communications pricing structures to improve While it is not always practical to implement this
efficiency. Many of the principles applicable to other principle, doing so is consistent with efficient pricing
telecommunications prices also apply to the struc- theory. Distinguishing between fixed and variable
costs in the charges for interconnection components
Box 3-4: Principles for Efficient Interconnection Price Structures
➢ Interconnection charges should be cost-based (ideally based on long-run average incremental

costs, including cost of capital, plus a reasonable markup to cover forward-looking joint and
common costs)
➢ Where information is available, costs should be based on the current replacement costs of assets
(discounted to their remaining service life); in the absence of such costs, depreciated book value of
assets is sometimes used
➢ Interconnection charges should be sufficiently unbundled so that an operator seeking
interconnection need only pay for the components or services it actually requests
➢ Where the costs of a particular component vary significantly in different locations, the
interconnection charges should be disaggregated (e.g. costs of access lines may be higher in rural
areas (where they are typically longer) than in cities)
➢ Charges should not include hidden cross-subsidies, particularly of an anti-competitive nature (e.g.
charges for monopoly-supplied network components should not be inflated to a level well above
costs in order to fund below-cost provision of competitive components). This principle is adopted in
the WTO Regulation Reference Paper.
➢ The structure of interconnection charges should reflect underlying costs. Thus, fixed costs should
be covered by fixed charges, variable costs by variable charges. Peak and off-peak charges should
be set where there is a significant difference in costs.
3 - 29
will send the right price signals. For example, there that major suppliers must provide interconnection on
will be less incentive to overuse usage-sensitive a basis that is sufficiently unbundled so that a
network components if they are priced based on supplier need not pay for network components or
usage, rather than on a flat monthly charge. facilities that it does not require for the service to be
Establishing a price structure that reflects underlying provided.
fixed and variable costs should lead to a more
efficient use of those components. In keeping with their WTO commitments, or gener-
ally because it is good policy, many regulators have
3.3.5.2 Peak and Off-Peak Charges issued directives requiring unbundled charges. For
example, in India, a regulation was issued in 1999
Peak and off-peak pricing differentials have been by the Telecommunications Regulatory Authority of
used for retail pricing of telecommunications India (TRAI) that states that “No service provider
services for many decades. Charging higher rates shall be charged for any interconnection facility it
for usage in peak hours provides users with an does not seek or require”. (TRAI (1998a))
incentive to call in off-peak hours. Advantages of a
peak/off peak pricing structure include: 3.3.5.4 Universal Service and ADC Charges
➢ reduced peak-hour congestion; In many countries, incumbent operators incur

deficits in carrying out uneconomic universal service
➢ reduced demand to build new infrastructure to obligations (USO) or universal access obligations.
meet peak traffic loads; Beneficiaries of these social obligations generally
include high-cost service areas, such as remote
➢ increased overall network utilization; and villages or low-income customers. In some
countries, however, deficits are not incurred by the
➢ improved quality of service. incumbents to perform specific universality. Rather,
the deficits are incurred as part of a policy of
The same principles of peak and off-peak pricing are maintaining low access charges for all customers.
often incorporated in interconnection charges. If they These are usually referred to as Access Deficit
are not, then interconnecting operators will have no Contributions (ADCs) to distinguish them from
incentive to charge higher rates to their end-users Universal Services Obligation (USO) payments that
during peak hours. The result can be a migration of generate revenues for more targeted social
peak-hour traffic to new entrants, who will then purposes.
impose higher costs on incumbent’s that must build
the infrastructure to support the higher peak-hour In a monopoly environment, ADCs are often paid
loads. from services priced above costs (e.g. international
rates or business services) to access costs that are
Good regulatory policies, such as those adopted in priced below cost. In the case of the incumbent,
Hong Kong, China specifically provide that the ADCs may be explicit, or implicit in unbalanced
structure of interconnection charges must reflect the rates. Traditional telecommunications policies often
behaviour of underlying costs. Thus, the “carrier-to- prevent “rebalancing” of the prices to more closely
carrier” charging principles in Hong Kong encourage reflect their costs. New interconnecting operators
interconnection charges to reflect both fixed/variable often do not have similar universal service obliga-
and peak/off peak cost differences. tions or access deficits. Accordingly, they are often
asked to contribute to USO payments or ADCs of
3.3.5.3 Unbundled Charges the incumbent.
In an increasing number of countries, telecommuni- There are a number of ways of dealing with this
cations policies require incumbent operators to issue. These are discussed in detail in Module 6. As
provide competitors with access to unbundled indicated in that Module, the best practice for regu-
network components. This approach is supported by lators is to levy any USO or ADC charges separately
the WTO Regulation Reference Paper, which states from interconnection charges. As demonstrated in
3 - 30
this Module, the underlying concepts and calcula- services may or may not provide any Internet
tions for interconnection charges are very different content or access services themselves. Some ISPs
from those underlying USO and ADC charges. with larger networks also provide transit services, in
addition to standard Internet interconnection
If USO or ADC charges are established, it is clearly arrangements.
a good practice to identify them as separate from
interconnection charges. Blending the two charges ISPs generally interconnect with each other and with
removes transparency from the interconnection Internet backbone providers at Internet Exchange
process. Separate charges permit regulators to Points (IXPs). These are sometimes referred to as
comply with the requirement of the WTO Regulation Network Access Points (NAPs), although that term
Reference Paper that USO charges be is becoming less common. IXPs have switching
administered in a transparent, non-discriminatory equipment and routers that permit interconnection of
and competitively neutral manner. Please see the various Internet networks using the IXP. As with
Module 6 for a more comprehensive discussion of the Internet generally, IXPs are evolving into
USO and ADC issues. increasingly multifunctional, and commercial opera-
tions, that charge fees for an increasingly wide
3.3.6 Internet Interconnection Charges range of services, rather than just facilitating ‘free’
interconnection of ISPs. Many IXPs now provide
Over the past decade, the Internet has changed collocation services, providing space as well as
Interconnection
from a co-operative to a commercial communica- equipment for Internet routing, transmission, web-
tions medium. It has also changed from a relatively hosting and other services. Separate, market-based
small education and research-based data network to charges are usually levied for such services. As with
a network that accounts for more traffic than voice most Internet-related services, these charges are
telephony in several countries today. This generally unregulated, except where they are
transformation of the Internet has changed the basis provided by a dominant incumbent operator.
for interconnection charges among ISPs and be-
tween ISPs and the operators of the large capacity The transition of the Internet to a more commercial
backbone telecommunications networks that carry medium, with large disparities between the sizes
Internet traffic. and functions of Internet networks, has changed the
structure of Internet interconnection charges. In
Originally, many ISPs regarded themselves as some cases, interconnecting ISPs still exchange
equals or “peers”. They generally entered into Bill traffic with each other as ‘peers’ on a Bill and Keep
and Keep interconnection arrangements. Under basis. Under this arrangement, each ISP typically
these ‘peering’ arrangements Internet networks pays its own costs of transmission, routing and other
exchanged traffic without levying charges or paying equipment, or shares the costs on a negotiated
fees to each other. The underlying premise for basis.
peering arrangements was that Internet networks of
substantially similar size and traffic volumes However, such peering arrangements are becoming
benefited more-or-less equally from interconnection, less common, particularly where different types or
and incurred generally similar costs. sizes of Internet operators interconnect. There,
asymmetrical charges have become the norm. The
Over time, some Internet Protocol (IP) networks backbone network operator, or the larger ISP,
expanded their coverage to national and global lev- usually charges the smaller ISP or local access
els. Some network operators developed into provider for interconnection and transit services. The
specialized IP backbone operators, carrying large basis for such interconnection charges is often
volumes of Internet traffic for long distances similar to those found in other parts of the telecom-
between ISPs and Internet hosting services. These munications industry. Charges are typically based
backbone network operators generally provide ‘tran- on one or more of the following variables:
sit’ services. Transit services involve the
transmission of Internet traffic between two or more
ISPs and Internet hosts. Providers of Internet transit
3 - 31
➢ traffic flow or usage, based on the increasing carrying traffic that is generated by the other
capacity of Internet routers and other equipment administration.”
to measure traffic;
The US and Canada have opposed this recommen-
➢ imbalance of traffic flows between ISPs; dation. They argue that the North American bias of
Internet routing will decrease over time, as
➢ distance or geographical coverage; competition and market developments reduce costs
and increase Internet facilities in other regions. The
➢ number of points of interconnection; and US, in particular, has long argued that the Internet
should remain unregulated in most respects. The
➢ other cost-based interconnection charges. proposed resolution was considered at the ITU’s
World Telecommunications Standardization
All of these charging variables are related to costs Assembly in Montreal in October 2000. After much
incurred by the ISP providing the service, or at least discussion, the Assembly adopted a
proxies for such costs. This trend toward cost-based recommendation that calls for arrangements to be
interconnection charges is consistent with develop- negotiated and agreed upon on a commercial basis
ments in other telecommunications services. when direct Internet links are established
internationally. The new recommendation does not
One anomaly in the trend toward cost-based Inter- prescribe any particular costing approach; thus
net charges has been related to the traditionally operators are free to determine the approach to be
heavy reliance on US-based ISPs and Internet used in implementing it. This recommendation has
backbone providers by ISPs in other countries. Due been referred to as a framework for future
to the early lead of the US-based Internet industry, discussions. The US and Greece stated that they
and the heavy concentration of attractive Internet would not apply this recommendation in their
web sites in the US, many ISPs in other countries international charging arrangements.
have paid US ISPs for transportation to and from the
US to their home country. There have often been no Local interconnection charges are also important to
reciprocal charges paid by US ISPs for traffic to the the viability of ISPs. Local Internet access providers
interconnecting ISPs in other countries. This will be principal beneficiaries of the move to unbun-
imbalance has become a hot policy issue within the dling of local loops, which is discussed in Section
ITU and other international organizations. Within 3.4.6 of this Module. Unbundled local loops can be
APEC, for example, Australia and various Asian used by ISPs to provide DSL-based high speed
countries have complained that current costs of Internet services on more favourable terms than
interconnecting with North America are too high and those currently available in most markets.
that it is inequitable that Asian networks are not
compensated for their costs in carrying traffic In a number of countries, cable television networks
generated by North Americans. provide an efficient and highly successful form of
high-speed local Internet access. These ‘cable
In April 2000, ITU Study Group 3 adopted Recom- modem’ services have generally been provided only
mendation D.iii on International Internet by the serving cable TV operator. This has given the
Interconnections: cable operator a strong position in ISP markets
compared to other ISPs without high-speed capabili-
“Noting the rapid growth of Internet and Internet ties. Several countries have considered whether to
protocol-based international services: It is rec- require cable operators to interconnect with other
ommended that administrations involved in the ISPs to provide them access to high-speed cable
provision of international Internet connection networks.
negotiate and agree bilateral commercial ar-
rangements applying to direct international In Canada, the CRTC has ordered major cable
Internet connections where each administration operators to grant other ISPs access to their high
will be compensated for the cost that it incurs in speed networks at a discount from retail ISP rates.
In the US, the FCC has not, to date, taken similar
3 - 32
action. Some US cable operators have entered into implementing mobile infrastructure can be
agreements with ISPs to access their high-speed quicker and less capital intensive than building
networks on an exclusive basis, thus making access the type of ubiquitous wireline networks that are
unavailable to competitors. This appropriateness of found in most developed countries.
such exclusive arrangements is under consideration
by the FCC. ➢ All countries have come to appreciate the
revenues that can be realized by auctioning
3.3.7 Interconnection with Mobile Networks mobile wireless spectrum. Bidders will take the
design of the regulatory environment into
As indicated in various places in this Module, mobile account as they assess how much to bid.
operators must obtain interconnection with incum-
bent operators of the PSTN in order to ensure the When mobile service was first introduced, most
viability of their services. In general the interconnec- countries adopted Calling Party Pays (CPP)
tion principles and practices described in this arrangements. Under CPP, the person that origi-
Module apply to interconnection by mobile operators nates a call is the one that pays for it, whether it
to the PSTN. However, certain differences apply to originates on a mobile or fixed-line telephone. A
interconnection with mobile operators. person who makes a mobile-to-fixed call pays the
mobile operator at the retail rate. The mobile
Historically, regulators devoted much less attention operator, in turn, pays the fixed operator an
Interconnection
to mobile services than fixed services. Mobile interconnection charge that is relatively small when
service was priced at a substantial premium to wire- compared to the retail rate. Usually, the
line service. As a result, mobile service was viewed interconnection charge is invisible to the mobile
as a discretionary or even a luxury service where caller. However, the situation is quite different for a
consumers did not need much in the way of regula- fixed-to-mobile call. Because the interconnection
tory protection. As well, mobile service was offered charge paid by the fixed operator to the mobile
competitively in many countries, with the expectation operator is relatively large, the fixed operator will
that market forces rather than regulators would be want to recover it from the caller who makes the call.
the prime force in setting prices. Mobile operators Accordingly, the fixed operator will charge a
were not perceived as possessing market power in substantial surcharge for fixed-to-mobile calls, with
the same way as fixed operators. the surcharge (less an administrative charge) being
passed on to the mobile operator. The mobile
However, the role of mobile services has changed in operator does not charge its customers for calls
recent years, leading to increased regulatory interest received from the PSTN.
and attention:
CPP has not been adopted in countries such as the
➢ The consumer rates for mobile service have US and Canada, where most local calls on the
declined in both developed and developing PSTN are not metered, but charged at a flat monthly
countries. The combination of rate decreases, rate. These are referred to as Receiving Party Pays
the fact that consumers like the flexibility of mo- (RPP) or Mobile Party Pays (MPP) environments. In
bile service, and improvements in mobile a RPP country, the mobile customer pays both for
technology (such as longer battery life) have mobile-to-fixed calls and for fixed-to-mobile calls.
contributed to an enormous increase in the However, the customer on the fixed network pays
number of mobile users. Indeed, in some coun- the same amount to call someone whether on the
tries, the number of mobile users now exceeds fixed network or on a mobile network. Interconnec-
the number of fixed users. Thus, for many, tion between the fixed and mobile operators is
mobile service is no longer a luxury – it is the generally on a reciprocal basis, either bill-and-keep
prime way in which they access the PSTN. (also referred to as sender-keep-all) or mutual com-
pensation at the same interconnection rates that are
➢ Some less developed countries have begun to found in fixed-fixed interconnection arrangements.
devote much more attention to fostering the
growth of mobile service, as they realize that
3 - 33
A number of countries that do not have CPP are sometimes arise, for example in Finland, where
considering a switch to it, or have done so. For mobile operators have reduced fixed-to-mobile
example, Mexico introduced CPP in April 1999. This rates in line with mobile-to-fixed rates. In
move is partly motivated by evidence of higher countries where there is a monopoly fixed
mobile subscriber growth rates in CPP countries. Sri operator, the fixed operator has little incentive to
Lanka has announced its intention to change to reduce fixed-to-mobile rates. Even in countries
CPP. The transition to CPP affects subscribers of all with competing fixed operators, there seems to
networks in a market, including PSTN subscribers. be little evidence of competition to reduce fixed-
Their bills will be increased since they will be to-mobile rates.
charged for calls to mobile subscribers. Accordingly,
the transition normally involves regulatory supervi- ➢ The regulatory inattention arises because, as
sion to ensure, among other things, that PSTN explained earlier, mobile service was historically
subscribers are adequately notified of increased viewed as a discretionary or even a luxury
charges that will appear on their bills. service that appealed to a narrow segment of
users. In many countries, mobile service was
Because fixed-to-mobile calls are so much more offered competitively, and rates were set by
expensive than fixed-to-fixed calls in a CPP country, market forces. Unlike the fixed networks, regu-
many countries have distinct dialling prefixes for lators did not have good cost data for mobile
fixed-to-mobile calls. In that way, consumers under- networks. Without cost data, the regulators were
stand that they will be charged a premium for fixed- not in a position to determine if fixed-to-mobile
to-mobile calls, and it is obvious when such charging rates might be higher than necessary.
takes place.
The result of these two factors is that fixed-to-mobile
In recent years, some observers have expressed rates in some countries have remained at high levels
concern about the level of CPP charges for fixed-to- even as mobile-to-fixed rates have declined sub-
mobile calls. The ITU’s Trends 2000 Report, which stantially due to reduced costs and vigourous
focuses on interconnection, points out that in competition.
Europe, where CPP arrangements prevail, the aver-
age fixed-to-mobile interconnection rate was USD An examination of the fixed-to-mobile rates that are
0.21 per minute for a three minute call. This charged to the customers of a fixed operator leads
contrasts with mobile-to-fixed interconnection rates to an examination of the interconnection charges
of USD 0.01 per minute for local interconnection, levied by the mobile operator to the fixed operator
0.014 for single transit interconnection and 0.02 for for the termination of a call on the mobile network.
double transit interconnection. The ratios of fixed-to- Few countries have examined the costs of mobile
mobile and local mobile-to-fixed rates range from a termination and applied these costs in setting inter-
low of 8.7 in Norway to a high of 34 in France. The connection charges. One country that has recently
report suggests that asymmetrical regulation of made such an attempt is the United Kingdom. In a
fixed-line and mobile operators may have resulted in 1998 report, the Competition Commission
inflated mobile termination charges under CPP. determined that fixed-to-mobile termination rates
were substantially above cost. In 1999, OFTEL
Some observers believe that the high level of CPP ordered that rates be substantially reduced to a
charges for fixed-to-mobile calls is due to a combi- ceiling of 11.7 pence per minute, and that the ceiling
nation of two factors, market failure and regulatory be further reduced by 9% per year (after inflation) for
inattention: two years thereafter. OFTEL will be considering if
further pricing action is needed following this period.
➢ The market failure arises because there is little
competition in fixed-to-mobile rates. Mobile High mobile interconnection rates may be reduced
operators often compete vigourously on by competition over time. However, as mobile serv-
subscription and mobile-to-fixed rates, service ices catch up with and overtake fixed networks,
levels and coverage, but they rarely compete on there is likely to be more regulatory scrutiny of high
fixed-to-mobile rates. Such competition does mobile termination rates, particularly where they are
3 - 34
thought to be set at levels that are significantly ➢ It facilitates comparisons of interconnection

above cost. rates, terms and conditions among major op-
erators; and
3.4 Technical and Operational
➢ It assists in developing industry standards,
Conditions
benchmarks and best practices.
While financial arrangements are important to the
The disadvantage of mandatory publication of inter-
development of interconnection arrangements, the
connection agreements is that it breaches the
technical and operational conditions determine how
normal confidentiality of commercial agreements.
efficient and “seamless” interconnection is from the
However, this disadvantage can be mitigated in
users’ perspective. These conditions can also
several ways. One is to permit deletion of
determine whether competition in a particular market
commercially sensitive information from filed agree-
will succeed or fail.
ments. This can include proprietary network or
service information and related costs. In such cases,
The most important technical and operational
a confidential filing with the regulator is normally
conditions are neither complex nor difficult to under-
required. Another approach is to require only the
stand. At a minimum, regulators should develop an
filing of standard agreements or offers (“reference
overview of the key technical and operational
offers”), rather than all executed agreements.
Interconnection
conditions in order to resolve disputes that may arise
in interconnection negotiations.
For the reasons discussed in Section 3.1.5.2, the
filing of interconnection agreements between non-
3.4.1 Provision of Information by
dominant operators is not generally required. The
Incumbents
WTO Regulation Reference Paper requires
publication of agreements with major suppliers, or a
3.4.1.1 Availability of Agreements or Offers
reference interconnection offer with them. A number
of countries with well-developed regulatory regimes,
The advantages of transparent interconnection for example Denmark and the UK, only require the
arrangements are discussed in Section 3.1.5.4. The publication of interconnection agreements of
simplest way to encourage transparency is to incumbents.
require publication of interconnection agreements or
offers of incumbents. In this regard, the WTO
There is often no telecommunications regulatory
Regulation Reference Paper requires signatories to
requirement for publication of interconnection
ensure that a major supplier will make publicly
agreements between smaller operators. However,
available either its interconnection agreements or a these are increasingly being made public to comply
reference interconnection offer. with the securities laws of some countries. In these
countries, securities regulators require companies
The advantages of publication of interconnection that issue shares to the public to disclose their mate-
agreements or standard offers include: rial contracts. Examples of such agreements can be
found on the EDGAR Web Site in the US.
➢ Publication facilitates interconnection by existing Agreements between new entrants can provide
and potential new entrants. It allows them to insight into interconnection arrangements in less
obtain basic interconnection terms and regulated markets.
conditions without lengthy negotiations or
regulatory orders; 3.4.1.2 Network Specifications
➢ It discourages undue discrimination by a Interconnected networks must be technically
dominant operator (or by both parties to an compatible. A new entrant must, therefore, have
agreement) that may not be readily detectable access to technical specifications of the network of
by regulators if filed in confidence; the incumbent with which it will interconnect. Simi-
larly, the incumbent requires information on the
3 - 35
technical characteristics of an interconnecting regularly in response to technological development,

operator’s network. For example, it will be important market and budget considerations.
for both operators to know the types of switching,
routing and transmission equipment used by the Over time, as the networks are modified, it is good
other, signalling protocols, number of circuits and the practice for regulators to require that networks of
projected volume of traffic to be exchanged. dominant incumbents evolve into more open
networks.
Sufficient information is required to permit the inter-
connecting operators to design their own networks 3.4.2 Treatment of Competitor Information
to provide efficient connectivity between each
other’s customers. Regulators should ensure that Monopoly or dominant providers of local telephone
incumbents and new entrants do not withhold infor- services, and certain other monopoly services, are in
mation necessary to ensure efficient interconnection a position to collect competitively valuable informa-
arrangements for both sides. tion on their interconnecting competitors. A typical
situation might involve a local monopoly operator
Operators should not be permitted, for example, to that receives orders from a long distance competitor
withhold necessary information on the grounds that to install leased local lines to interconnect with the
their standards and specifications are proprietary. If competitor’s POP. The monopolist would know that
necessary, some technical information could be the competitor had located a relatively heavy long
exchanged under non-disclosure agreements. In distance user (probably a business or government
practice, however, this is impractical and can user) that had sufficient traffic to require a leased
frustrate interconnection of future networks. The local line. In the absence of competitive restrictions,
telecommunications sector is evolving towards more the monopoly could send a salesperson from its own
open standards, and this is a trend that regulators long distance division to offer a discount or other
should encourage. Open standards are often incentive to the customer to persuade it not to use its
developed through industry committees with regu- competitor’s services.
latory observers or mediators. In keeping with this
practice, regulators should encourage interconnec- Abuse of such competitive information is subject to
tion operators to establish technical committees to regulatory restrictions in many countries. The Refer-
develop specifications, protocols, and procedures for ence Paper on Regulation that forms part of the
the interconnection of their networks. WTO’s Agreement on Basic Telecommunications
attempts to prohibit such activities. The Reference
In many cases, incumbent operator networks have Paper requires signatories to maintain “appropriate
not been designed to anticipate interconnection with measures” for the purpose of preventing major sup-
other operators. Accordingly, some network modifi- pliers from engaging in anti-competitive practices.
cations are often required to permit interconnection. One of the practices identified is using information
Treatment of such network modifications or “start-up obtained from competitors with anti-competitive
costs” is discussed in Section 3.3.4.1. results.
3.4.1.3 Network Changes A national example of a prohibition against competi-

tive misuse of information can be found in the
Telecommunications networks are dynamic. In most General Licence issued by the Irish regulator.
countries, networks are constantly changing as new Condition 20 of that licence deals with misuse of
switching and transmission facilities are added, new data in the following terms:
software and features are installed, and new
protocols adopted. The most obvious example is the “The Licensee shall not make use of network or
current transition from circuit-switched to packet- traffic data, traffic profiles or any other data of
switched networks, such as Internet Protocol any nature, and which are not otherwise publicly
networks, to carry both data and voice traffic. available and which become available to the
However, the network plans of operators change Licensee directly or indirectly either as a result of
entering into interconnection arrangements or
3 - 36
otherwise as a result of carrying telecommunica- in long-term contracts if a competitive international

tions messages, in such a way which, in the service operator is about to be licensed.
reasonable opinion of the Director, would unduly
prefer the interests of any business carried on by In some countries, including the US and Canada,
the Licensee or an Affiliate or place persons regulatory restrictions are imposed on the use of
competing with that business at an unfair customer information. Some of these rules are
disadvantage.” (OTDR (1998)) aimed at protecting the privacy of customers. For
example, customers typically do not want the world
A good approach to preventing abuse of competitive to know what phone numbers they call.
information is the establishment of an Interconnec-
tion Services Group (ISG). This is sometimes called Another example of a regulatory restriction is found
a Carrier Services Group. The idea is to establish a in the European Union data protection directives and
separate organization within the incumbent operator, in related laws of EU Member States. These laws
whose role it is to handle interconnection-related impose specific obligations on telecommunications
dealings between that operator and interconnecting service providers regarding the use that can be
operators. For example, all orders by interconnect- made of billing and other customer data, including a
ing carriers for interconnection links, additional prohibition against using such information to market
capacity and customer access lines would be telecommunications services to customers unless
submitted to the ISG. The ISG will process the the customer has consented to that use of its data.
Interconnection
orders. Other countries have implemented, or are consider-
ing similar consumer protection rules.
Safeguards will be put in place to ensure that infor-
mation obtained by the ISG is not used for improper Other restrictions are aimed at preventing anti-
purposes. For example, where a new entrant orders competitive use of customer information gathered by
an access line from the incumbent operator to serve monopoly operators that have competitive opera-
a new customer, the ISG should not pass that tions or affiliates. Such rules may require a
information on to the marketing department of the monopoly local operator, for example, to share any
operator to try to “snare” or “win-back” the customer customer information that it provides to its
before the access line is installed. Confidentiality competitive operations or affiliates with intercon-
safeguards should include codes of conduct with necting operators or other direct competitors in the
mandatory suspension or termination of employees same business line. For example, if a local monop-
who “leak information”. Separate office space, oly operator’s long distance services division collects
locked filing cabinets, audits and other measures information to identify heavy Internet users to help its
can help ensure confidentiality of ISG information. Internet division sell services, it would be required to
provide the same information to competitive Internet
3.4.3 Treatment of Customer Information Service Providers.
Monopoly providers of local telephone services are These restrictions are based on the assumption that
in a position to collect information on their custom- the local monopoly service provider is in a position to
ers. Such information may include names, collect the information solely due to its monopoly
addresses and telephone numbers, as well as position. Distribution of this type of information can
information on monthly billing levels, calling patterns, be handled through an Interconnection Service
percentage of calls unanswered, etc. Customer Group (see Section 3.4.2).
information of this type can be very valuable in mar-
keting new services. For example, customers with 3.4.4 Points of Interconnection
very long calls may be heavy Internet users to whom
Internet services can be successfully marketed. The interconnection policies of many countries
Users with many missed calls make good customers require incumbent operators to permit interconnec-
for voice-messaging services. Customers with high tion with their networks at any technically feasible
international calling would be good targets to tie up point. This policy is reinforced by the WTO
Regulation Reference Paper, which requires
3 - 37
signatory countries to ensure interconnection at any interconnection offers” major suppliers are required
technically feasible point with their major suppliers. to make available pursuant to the WTO Regulation
Reference Paper.
Interconnection agreements and regulatory orders
have established different interconnection points in In some cases, new entrants may wish to intercon-
different countries. Box 3-5 provides examples of nect at points other than the standard points. In such
technically feasible interconnection points that have cases, the Reference Paper provides that such
been prescribed by regulators or established in in- interconnection should be made available upon
terconnection agreements. request. However, the requesting party may be
required to pay charges that reflect the cost of con-
The definition of technically feasible interconnection struction of necessary additional facilities.
points is not static. Telecommunications networks
continue to evolve. As new technologies, such as A variation on the theme of interconnection at non-
those based on the Internet Protocol and digital standard points can be found in a recent regulatory
subscriber loops, are rolled out, it is becoming tech- decision in the United Kingdom on Third Generation
nically feasible to interconnect networks at different cellular services. The UK regulators have recently
points. Therefore, interconnection agreements and ruled that new Third Generation cellular networks
regulatory directives should not prescribe limitations should have access to earlier generation cellular
on the points of interconnection that will be permit- networks at points around the country, by means of
ted. It should be open to interconnecting operators a compulsory roaming arrangement. This example is
to propose interconnection at different points as set out at Box 3-6.
networks evolve.
3.4.5 Access to Unbundled Network
The costs of interconnection incurred by both Components
operators will vary depending on the points of inter-
connection. Incumbents will sometimes propose In an increasing number of countries, telecommu-
standard points of interconnection of their networks nications policies require incumbent operators to
with other operators. These standard points of inter- provide competitors with access to unbundled
connection may be set out in the “reference
Box 3-5: Examples of Technically Feasible Interconnection Points
➢ The trunk interconnection points of local and national tandem exchanges (most common point of
interconnection or POI)
➢ The national or international circuit interconnection points of international gateway exchanges
➢ The trunk side of local exchanges
➢ The line side of local exchanges (e.g. at the main distribution frame (MDF) or Digital Distribution Frame
(DDF)
➢ Cross-connect points of any exchange
➢ “Meet points” at which operators agree to interconnect
➢ Signaling transfer points (STF) and other points outside of the communications channel or band, where
interconnection is required for CCS7 or other signaling to exchange traffic efficiently and to access call-
related databases (e.g. a Local Number Portability (LNP) database).
➢ Access points for unbundled network components
➢ Cable landing stations
3 - 38
network components. Unbundling generally refers to support the efficient provision of telecommunications
the provision of network components on a stand- services. Examples include access to directory
alone basis. Unbundling permits interconnecting information databases, operator services and
operators to access a single unbundled component subscriber listings in telephone directories.
without an obligation to buy other components as
part of an “interconnection service”. In this Module, we will use the term “network
components” to refer to both physical network
There are many possible types of unbundled facilities and these “non-physical” features, functions
network components. The policies of some countries and services. Box 3-7 lists examples of unbundled
require provision of certain features, functions and network components.
services on an unbundled basis – as well as certain
physical facilities. These features, functions and Unbundling of the local loop is a special case of
services may be associated with transmission or unbundling that is currently being addressed by
switching facilities. They may also be associated regulators in many countries. It is dealt with in more
with software facilities, such as databases that detail in the next Section.
Box 3-6: Compulsory National Roaming in the UK
Interconnection
Background:
As part of the process leading to the licensing of “Third Generation” cellular wireless networks in the UK,
Oftel and the Department of Trade and Industry ("DTI") dealt with the issue of compulsory roaming. The
regulators determined that any existing wireless network operator which participated in the auction to
obtain spectrum for Third Generation network services would be required to accept a licence modification
obligating the operator to negotiate an interconnection agreement to provide national roaming access to
new entrants. The aim was to prevent incumbent operators from using their existing wireless networks to
an unfair competitive advantage while new entrants built up their networks and territorial coverage. In
effect, DTI and Oftel determined that access to earlier generation networks was an essential facility to be
made available to new entrant competitors. (The concept of essential facilities is discussed in the next
Section.)
The Nature of Roaming:

Roaming is typically an arrangement between wireless network operators or services providers to allow
access by one service provider's customers to the network or services of another service provider located
outside the service area of the first service provider. Roaming arrangements require the implementation of
subscriber authorization and billing systems. They also require appropriate technical and spectrum
capacity arrangements to be at all points of access by customers of roaming operators.
The Requirements of National Roaming:

DTI and Oftel intend to make what was previously a system of negotiated interconnection among non-
competing wireless operators a compulsory arrangement between incumbents and a new entrant. National
roaming is to be made available on a non-discriminatory basis. Oftel will deem the incumbent to have costs
of roaming services equal to the rates for roaming services charged to competitors. Oftel will then include
such deemed costs in determining whether the service charges of incumbents are sufficient to cover costs
and make an adequate return. National roaming services will not be available to a competitor before the
competitor has achieved network roll-out covering at least 20% of the UK population, and may expire any
time after 31 December 2009. Roaming charges are to be determined on a “retail minus” rather than “cost
plus” basis (meaning that roaming charges will be derived from end user charges, less a discount
reflecting elements of cost not incurred in providing the roaming service rather than an end user service).
3 - 39
Decisions as to what components to unbundle and framework permits, competitors can then obtain
how to unbundle them are sometimes left to nego- other network components, such as switching
tiations between operators. According to the capability and access lines in other locations, from
Japanese interconnection policy, for example, the incumbent. This permits new entrants to mix
unbundling should be promoted as much as their self-built network components with those of the
possible through a process which takes into incumbent in an efficient manner.
consideration the opinions of carriers other than the
incumbent. However, the Japanese policy also The ability to mix self-built network components and
indicates that the regulator should be involved if those of the incumbent will increase the viability of
negotiations fail. In practice, for the reasons the business case for competitive entry in many
discussed below, negotiated unbundling arrange- countries. Thus, competition will emerge where it
ments are generally unsatisfactory in the long run. otherwise would not. The use of the incumbent
The incumbent has little incentive to unbundle its operator’s network components by competitors will
network sufficiently to permit competitors to operate often be transitional. Over time, the competitor will
very effectively. build more of its own facilities and become a full-
fledged facilities-based operator.
Rationale for Unbundling
Many incumbents are unwilling to provide competi-
The purpose of unbundling policies is to lower tors with access to unbundled network components
economic and technical barriers to competitive entry. unless they are required to do so by regulation.
The large capital costs of building duplicate While the issue is still controversial in some
networks raise a significant barrier to entry. countries, and among some experts, mandatory
Competitors may not be willing or able to finance the network unbundling is becoming more common.
construction of complete networks. However, they
may be willing to build parts of such networks. For Unbundling Policies
example, they may build certain switches, inter-
exchange transmission facilities, and access lines in The trend to unbundling was given a strong impetus
a limited number of locations. If the regulatory in the WTO Regulation Reference Paper. The
Box 3-7: Some Possible Unbundled Network Components and Services
➢ Network access lines (local loops and related functions)

➢ Local switching functions
➢ Tandem switching functions
➢ Inter-exchange transmission (e.g. between local and tandem switches)
➢ Access to signaling links and signal transfer points (STPs)
➢ Access to call-related databases (e.g. line information, toll-free calling and number portability databases)
➢ Central office codes (NNXs)
➢ Subscriber listings (in telephone directories and directory databases)
➢ Operator services
➢ Directory assistance functions
➢ Operations support systems (OSS) functions
3 - 40
Reference Paper states that major suppliers must pay for anything that is not strictly related to the
provide interconnection on a basis that is sufficiently service requested. Similarly, Article 7(4) of the
unbundled so that a supplier need not pay for Revised Voice Telephony Directive (Directive
network components or facilities that it does not 98/10/EC) states that:
require for the service to be provided. While this
statement is supportive of unbundling policies, it is “Tariffs for facilities additional to the provision of
quite general. It provides little guidance for the connection to the fixed public telephone network
development of national unbundling policies. and fixed public telephone services shall, in
Unbundling policies are still in the early stages of accordance with Community law, be sufficiently
development in many countries. unbundled so that the user is not required to pay
for facilities which are not necessary for the
Unbundling policies have developed in the US, service requested."
Canada, Australia, Singapore, Hong Kong and other
countries, including, more recently, the EU. The new Advantages and Disadvantages of Unbundling
regulatory framework for electronic communications
services proposed by the European Commission on There are some disadvantages to a full-scale man-
12 July 2000 provides a strong new impetus for datory unbundling policy. In particular, it can act as a
implementation of national unbundling policies. disincentive to the construction of competitive
Particularly significant in this regard, is the EU’s new network components, and the development of true
Interconnection
regulation on local loop unbundling, which will come facilities-based competition. However, the
into force on 31 December 2000. disadvantages appear to be outweighed by the
advantages. Moreover, the potential disadvantages
Unbundling has also been required in other EU can generally be avoided if the pricing and other
regulatory documents. Article 7(4) of the EU terms of the unbundling guidelines are properly set.
Interconnection Directive provides that interconnec- The main advantages and disadvantages of a
tion charges must be sufficiently unbundled so that mandatory unbundling policy are summarized in
an applicant for interconnection is not required to Table 3-4.
Table 3-4: Advantages and Disadvantages of Unbundling
Advantages Disadvantages
➢ Reduces economic barriers to entry, by ➢ Reduces incentive for construction of

allowing new entrants to construct some competitive network facilities (depending on
components of their networks and obtain other the availability and price of unbundled
components from the incumbent operator components)
➢ Encourages innovation, since new entrants can ➢ Can enrich the new entrant at the expense of
combine new technologies (e.g. ADSL and IP the incumbent operator (if unbundled
data/voice switches) with components of component prices are set below costs)
existing networks (e.g. access lines) ➢ Requires detailed regulatory intervention and
➢ Avoids unnecessary duplication of components technical co-ordination
(e.g. access lines in remote areas,
transmission tower space)
➢ Facilitates access to rights of way, towers, etc.
by new entrants (in many countries it can be
very time consuming and expensive to obtain
such rights)
3 - 41
Regulatory Approaches to Unbundling Many countries are still developing policies on

network unbundling. Unbundling policies vary from
Given the potential disadvantages of a mandatory country to country, depending on the conditions of
unbundling policy, some regulators have adopted local telecommunications markets. It is arguable that
modified approaches to such a policy. These mandatory unbundling is less desirable in countries
approaches are intended to achieve some with very limited telecommunications network
advantages and avoid some disadvantages of poli- infrastructure and large pent-up demand. In such
cies that require unbundling of all network less developed countries, mandatory unbundling
components. Some of these approaches may be may reduce the incentive to build much-needed new
summarized as follows. infrastructure. On the other hand, in some less
developed countries, the business case for new
➢ Transitional Unbundling Requirements - entry may not be viable without mandatory
Access to certain types of unbundled unbundling. Each telecommunications market
components may be required for a limited period should be carefully assessed to determine the role
of time. This approach can apply, for example, unbundling policies should play in sector develop-
to access lines (loops) in urban areas. ment.
Unbundling of access lines might be required for
the first five years after a market opening. Thus, 3.4.6 Local Loop Unbundling
competitors can use the incumbent’s access
lines to “jumpstart” competition. However, they Mandatory unbundling of local loops is increasingly
will have to construct their own access lines by being used as a regulatory tool to accelerate com-
year five, in order to maintain network petition in local access markets. Around the world,
connections with their customers. In theory, this telecommunications network competition has
approach will encourage the development of developed most rapidly in the long-distance and
competition in the short term. At the same time it international markets. Local access markets are
should promote development of complete generally less competitive. Wireless services cur-
facilities-based competition over the mid to rently provide an alternative means of local
longer term. Local loop unbundling is described narrowband access in many markets, and
further in the following Section of this Module. broadband competition is starting. However, wireline
services still provide the main means of local access
➢ Selective Unbundling Requirements - Some around the world. There, high entry costs and low
unbundling policies distinguish between network margins have discouraged competition.
components. They require unbundling of some
and not others. Unbundled access may be Competition in local access is increasingly seen as
required only for certain types of components. an important policy objective. One reason is the
For example, unbundled access may be perceived need to provide more competition in high-
required for network components in cases speed access markets in order to accelerate the roll
where construction of duplicate components out of Internet, e-commerce and video services.
would cause environmental damage or public Many regulators and policy makers see such com-
inconvenience. Thus, incumbents might be petition as necessary to maintain or increase the
required to provide access to towers, poles, competitiveness of their national economies.
conduits, ducts, aerial access lines and inside
wiring, where a proliferation of such facilities Regulators have now mandated unbundled access
would degrade the environment, disrupt public to local loops in a range of different economies. At
roads, and/or otherwise inconvenience the one end of the income spectrum, these countries
public. The same may be true of access lines or include the US, Australia, Canada, Singapore and
switching facilities in architecturally or culturally the EU members. Unbundled loop access has also
important areas. Such access might be required been mandated in a number of middle income
over the long term as well as the short term. countries, such as Mexico and the Slovak Republic,
as well as in lower income countries, such as
Albania, Guatemala, Kyrgistan and Pakistan.
3 - 42
Types of Local Loop Unbundling local loop for the competitive provision of Digital
Subscriber Loop (DSL) systems and services by
Local loop unbundling regimes typically require third parties); and
incumbent operators to provide access to their local
loops to competitors. Other third parties, such as ➢ High speed bit stream access (provision of
customers, may sometimes also obtain unbundled xDSL services by the incumbent).
access. Access to local loops is provided at a point
of interconnection somewhere between the network Although different approaches are possible, these
termination point on the customer premises and the three are the main ones in use today. Each of them
line-side of the access network operator's local is described in greater detail below.
switch. From this point of interconnection, the com-
petitor will obtain dedicated or shared access to the Full Unbundling (Copper Loop Rental)
local loop. The competitor will thus be able to use
the loop as a direct transmission medium between Full unbundling can provide new entrants with
its network and the customer's premises. access to raw copper local loops (copper terminating
at the local switch) and sub-loops (copper terminat-
Various technical options are available for local loop ing at the remote concentrator or equivalent facility).
unbundling. In its proceedings on unbundled access In the case of unbundling at the local switch, the link
to the local loop in early 2000, the European between the main distribution frame (MDF) and the
Interconnection
Commission’s DGIS focussed on three main options local switching equipment on the incumbent’s
for access to local loops: premises is re-routed and connected to the new
entrant’s switch. The new entrant takes over the
➢ Full unbundling of the local loop (unbundled operation of the local loop.
access to the copper pair for competitive
provision of advanced services by third parties); Figure 3-1 illustrates this type of full unbundling of a
local loop. The illustrated case assumes that the
➢ Shared use of the copper line (unbundled
access to the high frequency spectrum of the
Figure 3-1: Full Unbundling – Local Loop
L in k r e - ro u te d fr o m in c u m b e n t’s
s w itc h to n e w e n tr a n t’s
M
D In c u m b e n t’s
lo c a l s w itc h PSTN
F
L o c a l lo o p
To new
e n tr a n t’s PSTN
s w itc h
Source: Adapted from CEC (2000b)
3 - 43
customer has decided to change telecommunica- Full unbundling of the type illustrated in Figure 3-1
tions service suppliers. The local loop that previously and Figure 3-2 essentially involves rental of a
connected the customer to the incumbent’s switch dedicated copper loop by the incumbent to a new
has been re-routed to connect it to the new entrant’s entrant. Such copper loop rental provides the new
switch. The new entrant will then use the unbundled entrant with direct access to and use of the copper
local loop to provide an alternative local access loop. This allows new entrants to operate their own
service to that previously provided by the incumbent. end-to-end transmission systems. Such operational
control can be important to ensure the integrity and
Figure 3-2 illustrates full unbundling in a case where quality of high-speed services.
there are two local loops to a customer’s premises.
One loop is unbundled by the incumbent and re- Although Figure 3-1 and Figure 3-2 indicate that the
configured to connect the customer to the new point of interconnection is at the distribution frame
entrant’s network. The other loop continues to where the copper loop terminates, it is also possible
connect the customer to the incumbent’s network. A to locate the point of interconnection at a remote
similar approach would apply where there are three concentrator unit (remote line unit).
or more loops to a customer’s premises. In each
case, the customer could decide how many loops it Shared Use of the Copper Loop
wanted connected to different operators. The
approach illustrated in Figure 3-2 would be used An alternative means of providing access to the local
where a customer wants to retain its basic telephone loop involves shared access rather than exclusive
service with the incumbent. It can do so and, for access by a new entrant. In this form of unbundling,
example, at the same time have a dedicated con- the incumbent and the new entrant provide services
nection to a new entrant’s xDSL services to access over the same loop.
high-speed data services (e.g. Internet or video
services). Figure 3-3 illustrates one form of sharing the local
loop. In this case, the customer will continue to
Figure 3-2: Full Unbundling – Two Local Loops
F irs t lo c a l lo o p
M In c u m b e n t’s PSTN
lo c a l s w itc h
D
XDSL S econd
m odem L o c a l lo o p F
N e w e n tra n t’s
P C o r o th e r D S L access
c u s to m e r e q u ip m e n t m u ltip le x e r N e w e n tra n t
(D S L A M )
3 - 44
Figure 3-3: Shared Use of Copper Loop Using Splitter
M s p litte r
In c u m b e n t’s
D lo c a l s w itc h PSTN
L o c a l lo o p te l
F
ADSL d a ta
m odem
D S L access N ew
P C o r o th e r c u s to m e r
m u ltip le x e r e n tra n t
e q u ip m e n t
(D S L A M )
Interconnection
receive basic PSTN services from the incumbent, speed bit stream to new entrants. To do this, the
and at the same time, receive DSL access services incumbent would install a high-speed access link to
from a new entrant. As illustrated, a splitter is located the customers’ premises and then make it available
between the MDF and the incumbent’s local switch. to other operators to enable them to provide high-
The splitter is connected to both the incumbent’s speed services. Provision of bit stream access
switch and to a DSL access multiplexer (DSLAM) services requires provision of both the transmission
connected to the new entrant’s high-speed network. medium (e.g. copper cables, coaxial cables and
optical fibre cables) and the transmission system
As indicated, the splitter separates telephone and (e.g. synchronous digital hierarchy transmission on
data traffic. Thus, the voice frequencies of the loop optical fibres and xDSL transmission on copper
continue to be used by the incumbent. The non- cables).
voice frequencies are made available to the new
entrant to provide high-speed services. In effect, this In the case of high-speed bit stream access, the
arrangement provides unbundled access to the high point of interconnection will usually be at the incum-
frequency spectrum of the local loop for the com- bent’s local switch, but circuits could be back-hauled
petitive provision of Digital Subscriber Loop (DSL) to points of interconnection further up the switching
services by new entrants. hierarchy. Technically, bit stream access can be
provided to any transmission system, since it only
Shared use of copper line can provide a cost- requires reservation of a specified bandwidth, rather
effective solution for some customers. For example, than dedicated use of a physical loop. This access
it permits a customer to retain the incumbent as its arrangement does not entail any unbundling of a
telephone service provider, and at the same time, copper pair. Rather it uses the higher frequencies of
select a new entrant to provide high-speed Internet the copper local loop, as in the case of shared use
service over the same loop. of the copper line.
High-speed Bit Stream Access Providing high-speed bit stream service can be
attractive for incumbent operators as it does not
A third approach to providing access to the local involve physical access to copper pairs. As a result,
loop involves provision by an incumbent of a high- for example, it would not hinder the progressive
3 - 45
modernization of the local access network by Implementation of Local Loop Unbundling

replacing copper with fibre.
Different approaches may be used in mandating and
Figure 3-4 illustrates the provision of high-speed bit regulating local loop unbundling. The appropriate
stream access by an incumbent. In this example, approach will often depend on the state of competi-
two customers obtain high-speed data services from tion in the relevant market for local access. Possible
two different service providers, the incumbent and a approaches include:
new entrant. At the same time, the incumbent
continues to provide basic PSTN services to both ➢ Mandatory loop access without specification of
customers. the type of access arrangement. In this case, it
is likely many incumbents will choose to offer bit
The three means of access to the local loop referred stream access, which enables them to retain
to above are not necessarily mutually exclusive. greater management control and possibly obtain
Where regulators mandate local loop access, they higher access charges from competitors. The
may require or permit incumbent operators to disadvantage of this approach is that
provide one or more alternative forms of access. competition may be delayed. Incumbent
operators will have little incentive to accelerate
Advantages and Disadvantages of Unbundling implementation of bit stream access
the Local Loop arrangements, at least until they are positioned
to provide competitive services.
The main reason regulators have required incum-
bents to unbundle their local loops is to promote ➢ Requiring bit stream access only (see previous
competition and innovation in access and advanced point – same considerations apply).
high-speed services. However, there continues to be
an active debate on the merits of mandatory loop ➢ Requiring all three forms of access described
unbundling. There remain arguments against it, as above, except where the incumbent can
well as for it. Table 3-5 summarizes the pros and
cons of mandatory loop unbundling.
Figure 3-4: Provision of High-Speed Bit Stream Access
C u s tom e r o f
in c u m b e nt’s
d a ta
s e rvic e s s p litte rs
L o ca l lo o p M
D P STN
F
L o c a l lo o p
C u s to m e r of
n e w e n tra n t’s
d a ta s e rv ic es
DS LAM H ig h s p e e d b it
o p e ra te d s tre a m s e rv ice
by p ro vid e d to o n e
in c u m b e n t o r m o re n e w
e n tra n ts
3 - 46
demonstrate significant problems with dedicated States. In the US, the 1996 Telecommunications
loop rentals. Act requires incumbents to offer access to unbun-
dled network elements and to making retail services
➢ Requiring all three forms of access in some or available at wholesale prices. The US regulator has
all national markets. stated that “[p]reventing access to unbundled local
loops would either discourage a potential competitor
Various other regulatory approaches to unbundling from entering the market in that area, thereby
may be developed. denying those consumers the benefits of competi-
tion, or cause the competitor to construct
Local loop unbundling may be a transitional unnecessarily duplicative facilities, thereby
phenomenon in some areas. Unbundling of loops misallocating societal resources” (FCC, First Report
may be required, for example, to facilitate competi- and Order in the Matter of the Implementation of
tion in the short term. This will enable new entrants the Local Competition Provisions in the
to roll out service rapidly, while they are constructing Telecommunications Act of 1996). The FCC and
alternative access networks in the areas where there US state regulators have subsequently taken further
is sufficient demand. steps to facilitate loop unbundling.
Implementation of local loop unbundling continues to As of June 1999, approximately 685,000 loops had
be a novel issue for regulators in many countries. A been provided to competitors in the US as unbun-
Interconnection
major source of experience to date is the United dled network elements. This represented an
Table 3-5: Arguments For and Against Local Loop Unbundling
Pros Cons
➢ Accelerates introduction of local access ➢ Reduces incentive to build alternative access
competition, including xDSL access networks and more sustainable facilities-based
competition
➢ Accelerates competition, service innovation ➢ May undermine investment in alternative
and roll out for high speed services, including: access networks (wireline and wireless)
➢ Internet services ➢ May complicate modernization of incumbent
operators’ networks (e.g. if some access loops
➢ Video services (including interactive ones) are dedicated to competitors use)
➢ E-commerce ➢ Requires prolonged and detailed regulatory
➢ other data services intervention compared to facilities-based access
competition
➢ Avoids duplication of access networks, and ➢ Requires more technical co-ordination between
increases network operating efficiencies operators compared to facilities-based access
competition
➢ Provides new revenue streams to incumbent
(which may or may not exceed existing
revenues from loops, depending on tariffs)
➢ Reduces disruption of streets and
environment due to construction of new
access networks
3 - 47
increase of 180 percent over the previous year. In Operator negotiations, or unilateral price setting by
addition, competitors had collocation arrangements incumbents can result in anti-competitive pricing.
in exchanges covering 60 percent of all lines in the Where advance regulatory guidelines are not
US (compared with 32 percent of all lines the established, ex post regulatory intervention will often
previous year). By the end of 1999, competitors had be required. A recent Australian case illustrates the
provided 117,000 xDSL lines, up from 1,500 lines in point. In early August 2000, the Australian regulator,
1997, while incumbents provided 386,000 DSL lines, the ACCC, found that prices imposed by the
up from 32,000 at the end of 1998. Competitors had dominant operator (Telstra) on competitors for local
installed over 1,400 data switches, a fivefold loop access were too high.
increase over 1997. Recent estimates suggest that
about 60% of the US population had access to DSL 3.4.7 Sharing of Infrastructure and
at the beginning of 2000, with 25% located in cities Collocation
with four or more DSL providers.
Extensive infrastructure is required to build tele-
In July 2000, the European Union adopted a communications networks. Key supporting
Regulation on Unbundled Access to the Local infrastructure includes poles, ducts, conduits,
Loop. The regulation will be binding on dominant trenches, manholes, street pedestals, and towers.
operators in EU Member States, as of 31 December Sharing of such infrastructure can significantly
2000. Issuance of the regulation is based on the increase the efficiency of telecommunications supply
assumption that providing access to the local loop to in an economy. The same is true in the case of
all new entrants will increase the level of competition sharing building space in exchanges to permit two or
and technological innovation in the local access more operators to “co-locate” their cable and radio
network, and in turn stimulate the competitive provi- transmission facilities and related equipment.
sion of a full range of telecommunications services Collocation permits direct (or near-direct) access to
from simple voice telephony to broadband services. exchange switches and local access lines.
The regulation is aimed, in part, at ensuring that the
EU does not fall further behind the US in the Availability of infrastructure sharing and collocation
deployment of high speed access and the advanced can significantly decrease barriers to competitive
services it enables. entry. The acquisition of rights of way and other
permits required to build pole lines or towers, dig
The European regulation requires dominant trenches or install ducts and conduits can be very
operators to provide physical access to third parties time consuming and expensive. In some countries,
at any technically feasible point of the copper local only government entities, such as the incumbent
loop or sub-loop. The third party can locate and operator, have clear legal authority to obtain rights of
connect its own network equipment and facilities at way, occupy public property or expropriate private
such points (i.e. at the local switch, concentrator or property. Sharing of infrastructure and collocation
equivalent facility) in order to deliver services to its can reduce costs for the new entrant, and at the
customers. Dominant operators are required to same, time provide additional revenues to incum-
make unbundled loop access available to third bents.
parties under transparent, fair and non-
discriminatory conditions. In addition, the regulation An added benefit is reduced environmental impact
provides that the dominant operators must provide and public inconvenience. Competitive entry into
competitors with the same facilities as they provide telecommunications markets has led to a prolifera-
to themselves or their associated companies, and tion of cellular and microwave towers, aerial pole
with the same conditions and times. Regulators are lines and road trenches in many countries. This
given authority to intervene in pricing issues and result has become an increasing concern for many
resolve disputes in connection with the regulation. municipalities and other local administrations.
Experience in other jurisdictions suggests that Some regulators require incumbents to permit infra-
regulatory guidance is required in determining the structure sharing and collocation of a new operator’s
pricing (and costing) of unbundled local loops. transmission facilities in their exchanges. Other
3 - 48
operators, including new entrants, are frequently ➢ Appointment and supervision process for mutual
required to cooperate as well, at least in the sharing cut-overs and work affecting more than one
of infrastructure that is seen to be environmentally operator’s facilities. Payment and rates for the
degrading, such as towers. In some countries, third same.
parties that own support infrastructure, such as
electrical power utilities, are also encouraged to ➢ Provision and pricing of ancillary services such
participate in sharing arrangements. as electrical power and back-up power, lighting,
heating and air conditioning, security and alarm
In some jurisdictions, sharing of infrastructure occurs systems, maintenance and janitorial services,
without regulatory intervention. Both sharing parties etc.
can benefit from the arrangements. In these jurisdic-
tions, sharing of infrastructure is often seen as a ➢ Negotiation of other lease and/or licence
matter to be freely negotiated between operators. arrangements, including issues of sub-licences
However, as with other interconnection issues, there on property of third parties (e.g. building owners,
is often an asymmetrical market situation. In some right of way owners, municipal and other public
cases, incumbents resist sharing their infrastructure. property owners), insurance and indemnification
In these markets, regulatory intervention will be for damages.
required to implement efficient sharing and colloca-
tion arrangements. 3.4.8 Equal Access
Interconnection
Table 3-6 lists steps regulators can take to promote On a level competitive playing field, telecommunica-
sharing of infrastructure and collocation. tions users should be able to access the services of
new entrants as easily as those of incumbent
Once there is clear regulatory direction that infra- operators. Without equal ease of access, new
structure sharing and collocation must be permitted, entrants will find it difficult to attract customers. While
operators are sometimes able to negotiate mutually access need not be exactly equal, accessing a
acceptable sharing arrangements. In many other competitor should not be significantly more difficult.
cases, however, regulatory direction or dispute
resolution has been required to finalize sharing In the early days of long-distance competition in
arrangements. Regulators seeking to expedite Canada and the US, for example, customers were
sharing arrangements may want to provide advance often required to dial up to 20 or more extra digits to
guidelines on such arrangements, after taking into route calls to new entrants’ networks. This significant
account the views of incumbents and new entrants. difference in access was due to the historical design
Some of the main issues that have arisen in relation of the PSTN. The operators’ switches had been
to infrastructure sharing and collocation are: programmed for a monopoly environment. The addi-
tional digits were required to permit the operators’
switching software to identify the new entrant to
➢ Rationing of space between incumbents’ future
which the call should be routed as well as to provide
requirements and current and future
billing details for the customer. It is not surprising
requirements of various new entrants;
that the new entrants initially found it difficult to en-
reservation of future expansion space for each
courage customers to switch services from the
operator.
incumbents.
➢ Pricing of facilities, and costing basis for the
Over time, many incumbents and telecommunica-
same.
tions equipment manufacturers redesigned their
switches and related software. These facilities are
➢ Access and security arrangements for various
now far more adaptable to the requirements of a
operators’ equipment. Collocation premises of
multi-operator environment. Dialling parity is easy to
different operators are usually separated
achieve with the right software package. This has
physically (e.g. by wire mesh) and locked.
made it much easier to implement equal access.
3 - 49
However, changes in incumbent procedures and the equal access in a previously monopoly environment.
regulatory environment are also required to facilitate
Table 3-6: Steps to Promote Infrastructure Sharing and Collocation
Develop ➢ Publish a regulatory policy encouraging infrastructure sharing and collocation

Regulatory Policy
➢ Encourage local authorities, such as municipal governments to support and
facilitate infrastructure sharing
➢ Encourage reciprocity of infrastructure sharing (i.e. new entrants should be
required to size and build their facilities to permit sharing with incumbents and
other operators)
➢ Require incumbent operator to publish a standard offer and price list for access
to key infrastructure components: poles, ducts, conduits, tower space, etc.
➢ Incumbents should be required to provide information on the location of
infrastructure, and capacity available for sharing (e.g. excess capacity in ducts,
towers, etc.)
➢ A joint committee of operators should be established to plan infrastructure
capacity, co-ordinate permits from local authorities and improve the mutual
efficiency of the infrastructure provisioning process
➢ Operators should be able to reserve capacity in advance on reasonable terms
Price of Shared Regulators should encourage development of clear pricing guidelines (the following
and Infrastructure guidelines are illustrative only)
Collocation
➢ Normally, incumbents and other operators should be able to recover at least
their direct incremental costs of sharing, plus reasonable overheads
➢ Additional price components may be subject to negotiation and regulatory
dispute resolution
➢ Prices for collocation and infrastructure sharing should generally be unbundled
so that the operator requesting access is only required to pay for the services it
uses
➢ Cost of new infrastructure should be shared among 2 or more operators in
proportion to their use of the infrastructure (e.g. number of antennae located
on a microwave tower)
➢ Costs of increased capacity and re-location of infrastructure should be shared
among those that benefit from such works. Where an incumbent operator
receives no benefit from works required to accommodate a new entrant, it
should normally not pay, unless and until it benefits from such works. An
alternative approach is to allocate the costs among sharing operators based on
use, with a surcharge for the operator that requests the work.
➢ Future sharers of infrastructure should reimburse early entrants for
expenditures that benefit them
Regulatory ➢ Shared infrastructures should be made available to all operators on a non-
Safeguards discriminatory basis. This includes the owner of the infrastructure. Capacity
should normally be provided on a first come, first served basis. The regulator
should approve rationing schemes for scarce capacity.
3 - 50
Table 3-6: Steps to Promote Infrastructure Sharing and Collocation (cont’d)
➢ New entrants (or other operators) that do not use ordered infrastructure
capacity within a set time period should be required to return it. A penalty for
excessive orders may also be appropriate
➢ Operators that provide shared infrastructure should record and have available
for regulatory review: provisioning times for their own operations and
competitors
➢ Physical separation of infrastructure (e.g. by walls or fences) may be
warranted where necessary to prevent sabotage, but operators should be
encouraged to share in the most efficient manner
There are basically two approaches to providing ➢ Operator pre-selection – Under this approach,
equal access: customers select a operator for some or all of
Interconnection
their calling. For example, an operator other
➢ Call-by-call customer selection – Customers than the incumbent might be selected for all
select the operator of their choice for each call. long distance and international calling. After the
They usually do this by dialing a short code or selection is made, all calls from these customers
prefix for their selected operator. For example, in will be routed to the operator of choice until their
Colombia, customers dial 09 to route national selection is changed. The main requirements for
calls through TELCOM’s network, 05 to route this type of equal access are:
them through Orbitel’s network, and 07 for
ETB’s network. The main requirements to ➢ Trunk-side interconnection by new entrants
provide this type of equal access on an efficient to incumbent switches.
basis are:
➢ Switch software features to identify customer
➢ Trunk-side interconnection by new entrants selections and to route and bill calls
to incumbent switches. appropriately to the selected operator.
➢ A numbering plan that allocates equivalent ➢ Appropriate billing and audit arrangements to
numbers to the incumbent operators and permit direct billing by each operator or bill-
new entrants (For example similar access ing by one and remission to the others. As
codes for long distance and international with the call-by-call approach, the local
competitors; and equivalent blocks of access operator might do all billing and remit long
numbers for local and mobile operators). distance charges to the other operators.
➢ Provision of basic signalling services by in- The implementation of equal access has been
cumbents to new entrants including Calling uneven around the world to date. It is available, for
Line Identification (CLI); answer and example in Argentina, Australia, Canada, Chile,
disconnect supervision. Hong Kong, and the US, but unavailable to date in
many other countries. Equal access is more
➢ Appropriate billing and audit arrangements to common for international and local services but less
permit direct billing by each operator or bill- so for long distance services. In some countries,
ing by one and remission to the others. For equal access is unavailable due to limitations in
example, the local operator might do all installed switching and software facilities. In others, it
billing and remit long distance charges to the is due to delays in implementing a numbering plan
other operators. that allocates equivalent numbers to competitors. In
3 - 51
some, regulators have simply not seen equal access ➢ Monitoring complaints seriously, and estab-
as a priority. lishing significant penalties for clearly unequal
service quality; and
Market experience in more open markets has dem-
onstrated that there is considerable inertia among ➢ Establishing an independent Interconnection
telecommunications customers. Regulators that Services Group within the incumbent’s
wish to expedite the development of fully competitive organization.
markets will, therefore, want to consider equal
access as a useful approach. Quality of interconnection services can be monitored
by an Interconnection Services Group (ISG) (see
3.4.9 Quality of Service to Interconnecting Section 3.4.2). The ISG should measure quality of
Operators service to interconnecting operators, and compare it
to the incumbent’s self-provisioning. For example, it
It is good regulatory policy to require incumbent should ensure that new circuits ordered by
operators to provide a reasonable quality of inter- interconnecting operators are provisioned, on
connection services and facilities. Without such a average, within the same number of days as internal
policy, it would be possible for an incumbent to orders.
frustrate a competitor’s ability to provide competi-
tively attractive services. For example, if an Table 3-7 provides examples of interconnection
incumbent connected its own new customers’ quality of service measures. Where interconnection
circuits within days, but delayed connection of a service problems are serious enough to warrant
competitor’s customers’ circuits for months, regulatory supervision, regulators can monitor these
customers in a hurry would likely choose the measures. Regulators may also establish a
incumbent’s services. monitoring regime in advance, to prevent problems.
A monitoring regime may require reports from
The WTO Regulation Reference Paper deals with incumbents on two types of quality of service
quality of interconnection with major suppliers in performance:
signatory countries. It requires interconnection to be
ensured under terms and conditions that are no less 1. Absolute performance based on established
favourable than those provided for their own similar standards or international benchmarks, and
services. Interconnection must also be no less
favourable than that provided to a major supplier’s 2. Relative performance by the incumbent in pro-
subsidiaries, its other affiliates or to non-affiliated viding interconnection facilities to itself and to
service suppliers. interconnecting operators.
Similar types of policies in many countries require Interconnection policy in some countries may require
“non-discriminatory” interconnection by an an incumbent to provide superior interconnection
incumbent. In practice, it is very difficult to ensure services to interconnecting operators under some
the implementation of such policies. Many intercon- circumstances. For example, it may be useful to
nection complaints of new entrants deal with require an incumbent to provide interconnecting
unequal quality of interconnection as between the operators with higher quality service than it normally
incumbent’s services and their own. provides for its own services – if the interconnecting
operator is willing to pay for the difference. Such an
The practical tools available to a regulator to approach has applications in industrialized countries
promote high quality interconnection are: seeking to promote the provision of advanced
telecommunications services.
➢ Establishing interconnection quality of service
monitoring requirements;
3 - 52
Table 3-7: Some Key Interconnection Quality of Service Measures
Provisioning Measures ➢ Average time for provisioning interconnection circuits and other
interconnection facilities and services (including unbundled
components)
➢ Percentage of installation appointments met for competitors’ service
installations
➢ Average time for processing changes in customers from incumbent
operator to competitor (in an equal access regime)
➢ Percentage of repair appointments met for competitors
➢ Comparative provisioning performance for (1) competitors, (2)
affiliates, and (3) self-provisioning (including measures such as those
set out in the previous points)
Switching and Transmission ➢ Probability of blockage in peak hour on interconnecting circuits
Quality Measures
➢ Transmission delay (ref: ITU-T recommendation G114)
Interconnection
➢ Transmission loss (loudness – ref: ITU-T recommendation P76)
➢ Noise and distortion (ref: ITU-T recommendations, including Q551-
554, G123, G232, G712, P11)
➢ Other transmission quality standards (e.g. for digital services ref: ITU-
T recommendations G821 re: bit errors and timing, and G113 re voice
coding problems, and for both analogue and digital services ref: ITU-
T recommendations G122 re: echo and loss of stability; and P16 et.
al re crosstalk).
This type of policy can also be useful in less incumbent does not require payments from new
developed countries. In many less developed entrants to construct facilities to improve the
countries, the quality of service provided by an incumbent’s competitive advantage, as a condition
incumbent is below international standards. This low of providing an adequate quality of service.
quality of service is often due to financial constraints
on the incumbent. In such cases, regulators should 3.4.10 Quality of Interconnected Services
be willing to promote improvement of the quality of
service provided to a new entrant, provided the new The previous Section discussed the provision of
entrants pays for it. For example, a new entrant may services by incumbents to interconnecting operators.
be willing to pay for new trunk circuits between the Regulators in most countries are also concerned
point of interconnection at a congested customer with the broader issue of the quality of service to the
service exchange and a tandem exchange. public. Many regulators established quality of
service reporting systems during the time services
Such payments can be a win-win situation for the were provided in their countries on a monopoly
incumbent and new entrants. Arrangements of this basis.
type are best negotiated between incumbents and
interconnecting operators. However, some To deal with the emergence of competition, some
regulatory supervision may be required to ensure countries have apportioned responsibility for
new entrants do not have to pay excessive charges. providing a prescribed quality of service among
Similarly, the regulator may need to ensure that the interconnecting operators. For example, in the UK,
3 - 53
the regulator prescribed maximum delays for approach is based on the assumption that new
interconnecting operators. The purpose of these entrants will not be able to attract and retain
maximum delay standards was to ensure calls customers if their quality of service does not match
between operators met national transmission speed or exceed that of the incumbent operator. Based on
standards. Customer PBX equipment at each end of the same approach, it should be possible to remove
a call was allocated 5 milliseconds (ms); originating regulatory quality of service requirements from
and terminating local network operators 3 ms each; incumbents once competition is well established and
and the long distance network operator 7 ms, for a they lose their market power.
total maximum delay of 23 ms.
As competition develops, it should be possible for
Other countries have taken a more deregulatory more and more regulators to take the latter
approach. They have not imposed quality of service approach. Regulation of service quality can then be
reporting requirements on new entrants. This left to the market, rather than to regulators.
3 - 54

Telecommunications Regulation Handbook: Interconnection

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Telecommunications

Note: Detailed Tables of Contents appear at the beginning of each Module

Module 1 Overview of Telecommunications Regulation 1-1

A WTO Regulation Reference Paper A-1

© 2000 The World Bank

First printing November 2000

3.2 Interconnection Procedures 17

3.3 Financial Terms of Interconnection 23

3.4 Technical and Operational Conditions 35

Funding for the preparation of this Handbook was provided

Additional funding was provided by

Telecommunications Lawyers and Consultants

The authors gratefully acknowledge the support and assistance provided

The modules of this Handbook are available electronically at

3.1 Interconnection Principles competition. For most of the history of

Box 3-1: Some Key Interconnection Issues

Framework and Procedural Issues

Technical and Operational Issues

The most important interconnection-related rules set

This approach is sometimes subject to criticism by 3.1.6.3 Transparency

Box 3-3: Summary of Widely Accepted Interconnection Principles

3.1.6.6 Other Interconnection Principles framework. If the existing regulatory framework

Table 3-1: Contents of a Typical Interconnection Agreement

Contents Detail and Comments

Points of Interconnection and Interconnection Facilities

Table 3-1: Contents of a Typical Interconnection Agreement (cont’d)

➢ Description of network facilities to be interconnected (e.g. OC-3 fibre

Network and Facility Changes

Table 3-1: Contents of a Typical Interconnection Agreement (cont’d)

➢ Procedures to expedite specific orders

Traffic Measurement and Routing

Infrastructure Sharing and Collocation

Table 3-1: Contents of a Typical Interconnection Agreement (cont’d)

➢ Negotiation of other lease and/or licence arrangements, including

Table 3-1: Contents of a Typical Interconnection Agreement (cont’d)

Quality of Service/Performance and Trouble Reports

Interchange and Treatment Information

Table 3-1: Contents of a Typical Interconnection Agreement (cont’d)

Access to and use of ➢ Confidentiality procedures for customer information, including:

Equal Access and Customer Transfer

Table 3-1: Contents of a Typical Interconnection Agreement (cont’d)

Other Ancillary Services ➢ Subscriber listings in telephone directories

Table 3-1: Contents of a Typical Interconnection Agreement (cont’d)

sponsibility in the telecommunications sector, such countries, lengthy regulatory interconnection

Table 3-2: Approaches to Resolving Interconnection Disputes

Table 3-3: Main Approaches to Interconnection Charges

Approach Description and Examples Comments

Forward ➢ Charges based on forward-looking ➢ Generally accepted as best practice

➢ Examples: Australia, Canada, the ➢ Closest approximation of costs in a

Table 3-3: Main Approaches to Interconnection Charges (cont’d)

overheads, and fixed-service operator

Table 3-3: Main Approaches to Interconnection Charges (cont’d)

payable between interconnecting competitive (i.e. when excessive

3.3.3 Comments on Different Approaches interconnection costs in different circumstances.

3.3.5 Structure of Interconnection Charges ture of interconnection charges. Several examples

Box 3-4: Principles for Efficient Interconnection Price Structures

➢ Interconnection charges should be cost-based (ideally based on long-run average incremental

➢ reduced peak-hour congestion; In many countries, incumbent operators incur

thought to be set at levels that are significantly ➢ It facilitates comparisons of interconnection