Cost-ori­ent­ed prices and cost mod­els

Many years ago before the telecom­mu­ni­ca­tion mar­ket was lib­er­al­ized in the Caribbean and Latin Amer­i­can coun­tries, basic tele­pho­ny was a nat­ur­al monop­oly and there­fore incum­bent play­ers many times passed on each and every cost, regard­less whether effi­cient or not, through to the end-cus­tomer.

The cre­ation of autonomous enti­ties to reg­u­late oper­a­tors in terms of usage of resources and tar­iff-set­ting began at the end of the 1990’s as these mar­kets we being lib­er­al­ized, by the pres­sure from small ser­vices and call-back providers. As the incum­bent monop­o­lis­tic oper­a­tors were usu­al­ly gov­ern­ment owned, lib­er­al­iza­tion was delayed for many years.

Due to the fact that many of these incum­bents were gov­ern­ment owned and back then con­sid­ered the largest con­trib­u­tors of funds to these government’s bud­gets, tar­iffs were there­fore way out of line com­pared to actu­al costs.

Con­sid­er­ing the obvi­ous link between the telecom­mu­ni­ca­tions indus­try and eco­nom­ic and social devel­op­ment, coun­tries began look­ing more real­is­ti­cal­ly at tar­iff struc­tures, com­pared to oth­er devel­oped coun­tries and how these referred to the under­ly­ing costs.

With the entrance of new oper­a­tors and the evo­lu­tion of new ser­vices height­ened the need to bring the reg­u­lat­ed prices of the monop­o­lies in line with costs, while at the same time pub­lic inter­est and gen­er­al well-being became one of the require­ments of the reg­u­la­tors.

In a lib­er­al­ized mar­ket, the task of a reg­u­la­tor is to ensure that oper­a­tors have equal rights and pos­si­bil­i­ties to com­pete with­in the same mar­ket and there­fore rules are estab­lished and inter­con­nec­tion with oth­er oper­a­tors made oblig­a­tory. This guar­an­tees the prin­ci­ple of non-dis­crim­i­na­tion and equal treat­ment with the pos­si­bil­i­ty for each par­ty to appeal or request arbi­tra­tion.

In order to guar­an­tee equal treat­ment and non-dis­crim­i­na­tion, reg­u­la­tors have the task to mon­i­tor price-set­ting or, at least the ori­en­ta­tion of inter­con­nect prices. The bot­tom line in major­i­ty of cas­es results in an oblig­a­tion upon the dom­i­nant oper­a­tor or operator(s) with sig­nif­i­cant mar­ket pow­er to uti­lize one of the most com­mon­ly used cost allo­ca­tion mod­els, indi­cat­ed by the reg­u­la­tor.

Our con­sul­tan­cy firm has many years of expe­ri­ence apply­ing the fol­low­ing cost method­olo­gies:

• His­tor­i­cal Costs (“HC”)
• For­ward-Look­ing Costs (FLC”)
• Cur­rent Costs (“CC”)
• Ful­ly allo­cat­ed costs (“FAC”)
• Activ­i­ty-Based Cost­ing (“ABC”)
• Long-Run Incre­men­tal Costs (“LRIC”)
• Bot­tom-Up Long-Run Incre­men­tal Costs (“BULRIC”)