By Pete Farmer
In a recent blog about ITW, I said the UK’s dirty surcharge regime represented a transfer of wealth from the poorest nations on earth to the UK… and I promised to make good on that assertion. Here we go.
I used Haiti as a hypothetical example. I am not an expert in Haitian telecommunications regulation (nor do I want to be), however, the principle of what I am stating will likely apply somewhere, even if it doesn’t to Haiti.
The UK’s charge controls on fixed and mobile termination rates are calculated using an economic model called the Long Run Incremental Cost (or LRIC, pronounced Lyric). This is the minimum possible point a charge control can be, and is basically the incremental cost of providing just one more unit of whatever is being charge controlled, with all common costs being assumed to be absorbed elsewhere. Previously, termination rates were calculated by reference to the Fully Allocated Cost (FAC, pronounced Fahk), which apportions common costs evenly to the unit in question.
There’s a third model used in competition law to calculate a ceiling, i.e. what represents a supernormal profit and potential abuse of dominance, called the Distributed Standalone Cost (DSAC, pronounced Dee Sack) but that’s not relevant here.
Imagine a Heinz factory that produces one million tins of beans and two million bottles of ketchup. The FAC of a tin of beans is the tin, the label, the beans and the sauce, plus one-three millionth of the cost of the production line, CFO, staff Christmas party etc. The LRIC is just the tin, the label, the beans and the sauce.
What should be apparent is that certain common, or fixed costs, get increasingly amortised down the larger the factory. One CFO, one HR person etc can handle three million or five million units of production for the same total cost, but increasingly lower unit costs.
Which means in telecommunications, the larger the hypothetical operator, the more traffic there is to amortise certain fixed costs, more economies of scale to benefit from etc.
Any third country which does not use LRIC, or imposes LRIC on a basis where the reference operator is smaller than that used by the UK, will likely arrive at a charge control higher than the UK. The inverse is also true – although the UK’s dense population negates some of that effect relative to high-population, high landmass countries like China or the USA.
If an efficient Haitian operator is charge controlled at LRIC, then, as a result of their smaller relative scale, they could have a rate higher than the UK, and then be subject to a surcharge on the basis of ‘reciprocity’. This would occur, even though, by definition, they have a termination rate that contributes nothing to their common costs (which they have to recover from elsewhere in their portfolio, i.e. what they charge Haitians) let alone their profitability or ability to invest and innovate.
OR, to put it another way, we have a wealth transfer from one of the poorest nations on Earth to the richest. These are points we will continue to make to Ofcom in the upcoming market review, as it is a rather abhorrent side effect of their stated objective of trying to maintain low international calling rates for Britons.
What’s the solution? Well, this is the only time these words will ever leave my mouth. We can look to the European Union for the answer. They prohibit surcharging in the EuroRates model on the basis of the country in question adopting the same economic process to charge control; i.e., use LRIC, no surcharge. No surcharge, no wealth transfer.
Had origin based surcharging been introduced with some forethought, instead of a knee-jerk reaction to lobbying by Three and Vodafone, that sort of common sense might have made it into regulations we have to live with for another two years.
