2.3 Prices

/ Updated on 19.09.2003

The achievement of the objectives inherent to the SLRO, particularly competition and the diversified development of retail offers, depends for a large part on the prices established for this offer. At present, PTC, being an entity with SMP in the market of the fixed subscribers networks and/or fixed telephone services, leased lines and interconnection, has the obligation for cost orientation  of prices. In this context, and considering that the SLRO is an obligation upon PTC, being an entity notified with SMP, the application of the principle of cost orientation of prices ? one of the obligations that may be maintained, under the new Community regulatory framework for electronic communications networks and services1https://www.anacom.pt/render.jsp?contentId=55129, in markets where no effective competition exists ? seems to be the most appropriate option.

Within this context, the most adequate methodology to establish prices must be determined. The main methodologies are presented bellow. and it must be taken into account that not all of them are mutually exclusive.

(a) Long run incremental costs (LRICs)

In competitive markets, the LRICs, which are compatible with effective and sustainable entries in the market, constitute the basis for the decisions of undertakings, that take thus into account the use of the most modern and efficient technologies. Therefore, the resource to these costs in the market regulation leads in principle to an orientation of prices to competitive levels. The use of the LRICs to determine, in particular, interconnection prices was recommended by the EC2https://www.anacom.pt/render.jsp?contentId=55130.

However, in the specific case of services associated to the access network, the putting into operation of a cost methodology based in LRICs may be very time consuming, namely because it implies the resource to price and cost elements practised at present by service and/or equipment suppliers, that in general are not public nor uniform, and because it requires the calibration of a very wide and complex set of cost parameters (such as labour remuneration, network dimensions and costs of ducts, masts and equipment).

Moreover, the resource to LRICs, namely if associated with the use of current costs, may lead to prices higher than those charged at present for the network line subscription (which concern historic costs), as: (i) the local loop may be distinguished by a more intensive use of labour than the remaining network components, and the current remuneration levels of this factor of production are relatively higher than the levels relating to the historic costs; and (ii) the use of LRICs implies the valuation at current prices of the equipment and infrastructure necessary to the service production, whereas in terms of the historic costs only the value of the equipment and infrastructure used for service production which has not been amortized in the accounts is used.

(b) LLU related costs

The prices relating to the SLRO could be determined from the LLU, as both offers share several components. However, some costs are relevant in the scope of the LLU but not relevant as far as the SLRO is concerned, and vice-versa. Thus it would be necessary to adjust the ULL prices, so that they would show the specific features of the SLRO.

This approach was adopted by OFTEL. In the specific case of British Telecom, the use of this methodology lead to prices of the SLRO equivalent service, called ?wholesale line rental?, which are higher than the retail prices, as the network access in the United Kingdom is still financed with revenues from traffic, which means that the tariff rebalancing is not yet finalised.

However, it must not be excluded that the use of a cost methodology based on the LLU, is not only complex, but may also lead to wholesale prices higher than the retail prices practised by the operator with SMP.

(c) Historic costs

An approach based on historic costs would calculate the cost of the subscriber line rental, excluding the costs regarding avoidable retail activities (marketing, for example), and establish a cost planning, making use, namely, of estimates as to cost variation and productivity evolution, adding in the end the costs incurred specifically with the SLRO.

This type of approach has the advantage of using cost elements present in the cost-accounting system of PTC. The monthly subscription has been traditionally in deficit, although the tariff rebalancing is now practically completed. On the other hand, there is a relative uncertainty regarding the development expected for unitary costs, which depend on the level of costs and on the total of accesses. Thus it should not be excluded, also in this case, that the settled cost might be higher than the retail price practised at present by the operator who owns the network. This could lead to a situation of margin squeeze, arising a priori some difficulties as to the purpose of competition promotion, notwithstanding the fact that the margin under consideration could be recovered by means of traffic revenues.

(d) European current practices

The use of the European current practises is also possible in the process of price determination within the SLRO. Nevertheless, this type of approach is not advisable, having regard to the different rebalancing degree of the retail prices that exists in the EU in general, as the 8th Implementation Report has pointed out. Furthermore, the different cost structures of the access network of the several operators who own the network and the different ways of implementing this type of offer may lead to reasoned price differences.

(e) ?Retail minus?

The ?retail minus? approach, according to which the wholesale price of a service is obtained by subtracting an amount to the retail price of that service, or of a similar service, was adopted, within the SLRO, by the regulatory authorities of Denmark (retail ? 21%), Ireland (retail ? 8,5%) and Norway (retail ? 16%). This approach ensures that the wholesale price is lower than the retail price, thereby avoiding, in principle, situations of margin squeeze and reduces the risk associated to the market.

In particular, a cost methodology of the ?retail minus? type is considered to gather a set of benefits that are not to be slighted. In this framework, the following advantages may be highlighted: a relatively easy implementation; its proportionality in view of the problem under consideration; its adequacy towards the promotion of competition; the incentive provided for the minimisation of costs, by limiting the remuneration of the operator who owns the network; the possibility offered to the operator who owns the network to recover the costs of the service under consideration; and there are reasonable requirements as to information on costs, as it is only necessary to use existent information, duly audited.


Question 4
Do you agree with the application of the principle of cost orientation of prices within the SLRO? If yes, which cost methodology do you deem most appropriate for the pursuit of that principle, in the scope of the subscriber line resale offer?


1 Hereinafter referred to as ''New regulatory framework''.
2 Commission Recommendation 98/195/EC of 8 January 1998 on interconnection in a liberalised telecommunications market.