Both bottom-up and top-down cost models are complex to develop and lead to uncertain outcomes. In some markets the detailed information required may not be available. Even where regulators can apply the same cost model for the same access product, divergences in implementation can lead to large divergences in price [1].
A more practical alternative to developing cost models for a developing country with limited resources is benchmarking. Regulators in many jurisdictions have used benchmarking to set initial interconnection rates. For example Botswana used benchmarking to resolve an interconnection dispute quickly [3].
Benchmarking has two main purposes in interconnection pricing. In situations where detailed cost models can be estimated, benchmarking can be used as a common sense check on the results of the modelling. Alternatively, benchmarking can be used directly to set interconnection prices.
In a benchmarking exercise, adjustments need to be made for differences among jurisdictions, for example population density, local area size, extent of urbanisation, traffic patterns and call durations, input prices, scale economies, exchange rates and taxes.
END NOTES
[1] For example, in Europe the price for unbundled local loop ranges from 5.21 €/moth in Lithuania to 12.41 €/month in Ireland [EU Questionnaire, October 2011]
[2] Another effective option would have been final offer arbitration making clear the regulators preference for LRIC and leaving it up to the parties to narrow their differences and submit models or benchmarking studies to support their respective final positions.