New Price Cap Period could bring rate reductions …if proper adjustments are made

By Randy Howard

THE new period of the Price Cap Mechanism (PCM), the system used to regulate the telecommunications industry, could result in reduced rates for certain services for consumers, if the right adjustments are made to the plan.

This was the assertion made by Chris Halsall, Director of Ideas 4 Lease, an independent consulting group, and a voting member of the Telecommunications Act Review Committee.

Halsall was commenting on the recent “First Decision” released by the Barbados Fair Trading Commission (FTC) on the issue of the controversial PCM, which over the last three years has allowed local telecommunications provider, Cable & Wireless, to raise their rates on fixed line domestic service by 7 per cent (compounded) each year.

He first stated that he is “very pleased that the FTC has decided to continue with the Price Cap Mechanism. That was the correct decision.”

“Going back to Rate of Return, in my opinion, would have been a step backwards. Rate of Return regulation is known to encourage inefficiency – exactly the opposite of what is desired.”

He stated the decision which has been announced is simply to continue with the PCM, but with adjustments. He made the point that they have “tenuously admitted that they didn’t get the X-factors correct [for the first period], and they also have basically admitted that they made a mistake with Basket 1.”

Basket 1 contains domestic residential fixed lines, and is one of the baskets regulated by the PCM.

“The Price Cap Mechanism is a very simple, elegant and effective mathematical tool. It empowers a regulator to instill into a marketplace the same dynamics as one finds in a competitive environment. Specifically, the enviable lowering of prices to consumers through increased operational efficiency.”

“There are two control values with the PCM – the ‘X factor’, which is the amount that prices for services within a basket should decrease over a year, and the ‘I factor’, which is simply a rate of inflation. If the X factor is larger than the I factor, then prices will fall.”

“A large part of this also is to basically announce this [the decision] and then to ask for additional submissions from interested parties and Cable & Wireless as to what those X-factors, and I-factors might look like.”

Halsall commented that there should not be concern that the commercial entity to be regulated, in this case Cable and Wireless Barbados, is to be consulted. “The FTC have a legal obligation to consult with them, and further, the FTC will require confidential information which only C&W can provide.”

What is pleasing to him, and important in his opinion, is the fact that the FTC has actually listened to the independent conveners, such as himself, representing the consulting group Ideas 4 Lease, Roosevelt King, from the Barbados Association of Non Governmental Organizations (BANGO), among others.

“They are listening to independent advice, which is encouraging.”

With regards to the FTC’s Objective C [one of the goals of the PCM], that of allowing C&W a reasonable opportunity to earn a fair return, Halsall stated that the record profits that the provider has been seeing in recent times shows that they have benefited even more than was anticipated.

“This indicates that the Commission initially got their X-factor extremely wrong. It is also important to realise that of the profits that Cable & Wireless are enjoying, not all of that profit is from the regulated services. So the fact that they’re making, for example, a fortune in ADSL is something that under the current legislation they’re allowed to enjoy, because it’s not regulated.”

“I would argue that ADSL should be regulated. In fact, I would argue that any and all telecommunications services where the incumbent company enjoys greater than, let’s say, 40 percent market share should be under PCM regulation.”

He stated that he would also argue that “the FTC should be somewhat embarrassed that they got the X-factor so wrong. To paraphrase the conclusion of the BANGO submission to the FTC, ‘this is either gross incompetence or a policy directive’.”

Halsall went on to make the point that the FTC will be examining C&W’s claim that the rates applied to Basket 1 are below the cost of providing the service, which is an important development.

He argued that, “as soon as you factor in the value-added services like voice mail, like ADSL, like call-forwarding, and all the other services dependent on the legacy ‘copper plant’, there is in my mind no question that Cable & Wireless are making a net profit on the services in Basket 1, so those should also lessen over time.”

C&W, he stated, have argued that the cost of providing Basket 1 service is indeed above the rates that they charge, and also that there is competition in the value-added services.

Halsall indicated that one of the sources of competition that was identified was answering machines, an argument that he thought was weak.

Halsall indicated that “this exact same thing happened in England, when PCM was first applied to British Telecom. British Telecom became extremely aggressive, extremely efficient, and they made huge profits. The public screamed at the top of their lungs because of this. However, what was very important is that at the next review period, which I believe was also three years, the X-factors were adjusted significantly upwards and there were reduced rates to consumers. The company was not allowed to continue at that extreme profit.”

This is what he is hoping to see happen here.

Published in the Barbados Advocate Business Monday, 2008.02.11. Reprinted with permission.

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