Editor’s Note: In May 2006, the Public Utilities Commission of The Bahamas authorized The Bahamas Telecommunications Company (BTC) to introduce reduced prices for International Long Distance (ILD) calls as part of a wider price rebalancing program. The decision was informed by price benchmarking. This note summarizes the justification for resorting to benchmarking, the methodology employed, and the Commission’s final decision.
Background
BTC is the dominant fixed operator and holds an exclusive license in cellular mobile services. System Resource Group (doing business as IndiGO Networks) operates a fixed radiocommunications systems offering local access, International Long Distance (ILD) and Domestic Long Distance (DLD) calls in competition with BTC. Licensing of additional voice operators has been postponed until BTC is privatized.
The government of The Bahamas mandates the state-owned BTC to gradually rebalance its prices, to make them more cost reflective) [1]. In January 2005, BTC made a formal application to the Commission to increase monthly prices for telephone lines [2] and reduce prices for ILD calls [3]. In analyzing BTC’s rebalancing application, the Commission was required ensure that rebalanced prices are not anti-competitive. For those services where BTC faces competition this means rebalanced prices must not be below cost.
The regulatory framework for analyzing BTC’s rebalancing application comprises:
- The Telecommunications Sector Policy (TSP),
- BTC’s Licence dated September 4, 2002 (the “Interim Licence”), and
- The Telecommunications Act, 1999.
Condition 15 of the Interim Licence permits the Commission to approve or reject the proposed new prices. Where approval is granted Schedule 1 of BTC’s Licence is modified accordingly. However, in the event of a rejection, BTC may amend the original application and resubmit it to the Commission for approval.
Reason for Benchmarking
In support of the application, BTC furnished the Commission with estimates of the forward-looking economic costs it incurred to provide the abovementioned services along with details of the cost standard and principles underlying those estimates. As is the experience in some other Caribbean markets (for example Jamaica, and the Cayman Islands), the Commission encountered delays in completing its examination of the forward-looking cost study.
The Commission is required by statute to act in a timely manner. Rather than delay price rebalancing, the Commission sought to make its decision based on existing information. The Commission was able to approve increases in monthly prices for telephone lines based on historic cost data available to it. However, no such data existed for ILD calls. The Commission therefore used price benchmarking to evaluate the proposed decrease in ILD prices.
Benchmarking Methodology
The purpose of the benchmarking exercise was to establish whether the prices proposed by BTC were above or below the efficient cost incurred by operators in competitive markets to provide ILD services. Prices in competitive markets are assumed to be reasonable proxies of the efficient cost of providing ILD services.
The study compared the BTC’s proposed prices with prices in sixteen countries with both competitive and monopoly markets in ILD services. Of the sixteen countries, thirteen have competitive ILD markets while liberalization has not yet occurred in the remaining three countries (Antigua & Barbuda, Turks & Caicos Islands, British Virgin Islands). There are also disparities amongst the countries, in population, network size, geography/topography, and income.
Countries were selected based on:
- Their economic importance to The Bahamas (the United States, Canada, the United Kingdom, and Switzerland are The Bahamas’ principal trading partners),
- Per capita income (high income island economies with per capita GDP of $17,000 to $40,000 — Guernsey, British Virgin Islands, Barbados, Bermuda, Cayman Islands), and
- Economic structures that are similar to The Bahamas (Antigua & Barbuda, Turks & Caicos Islands, Cayman Islands, Barbados, Bermuda, British Virgin Islands, Anguilla, Jamaica, Dominica, St. Vincent & Grenadines, and Grenada). These regional economies compete with the Bahamas in tourism and or financial services.
The main findings of the benchmarking exercise are set out below:
- The price of making a call from The Bahamas to countries with competitive ILD markets is significantly higher than the price customers in competitive markets pay to make a call to The Bahamas,
- Customers in countries with competitive ILD markets pay significantly lower prices to make telephone calls to The Bahamas than their counterparts in monopoly markets,
- BTC’s existing and proposed prices were more comparable to prices in monopoly markets.
Commission’s Decision
Based on the above findings, the Commission concluded that the prices proposed by BTC are not below the efficient cost incurred by BTC to provide ILD calls. The Commission also took note of the disparities between the countries. In this regard, it concluded that limited competition in the market, coupled with BTC’s pricing structure are the principal reasons why BTC’s existing and proposed prices are comparable to prices in monopoly markets.
The Commission noted that BTC’s proposed prices are still high by international standards. However, BTC has indicated in its response to the Commission’s public consultation document that it proposes to apply for approval for further reductions in prices for international and domestic long distance calls.
Having regard to the above factors, the Commission saw no justification to deny BTC’s request to reduce ILD prices. The Commission granted approval for BTC to introduce the proposed prices, and modified Schedule 1 of BTC’s License accordingly.
Endnotes:
[1] See the Government of the Bahamas Telecommunications Sector Policy, as amended October 2002, available at www.pucbahamas.gov.bs [hyperlink to http://www.pucbahamas.gov.bs].
[2] Public Consultation Document on “The Bahamas Telecommunications Company’s Application to Modify Monthly Rates/Prices for Telephone Lines”, August 2005. In October 2005 the Commission approved the increase in monthly rates sought by BTC, see Statement of Results on BTC’s Application to Increase Monthly Rates/Prices for Telephone Lines, October, 2005, available at http://www.pucbahamas.gov.bs.
[3] Public Consultation Document on The Bahamas Telecommunications Company’s (BTC’s) Application to Reduce International Long Distance Rates/Prices, March 2006, see Table 1.