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Paul T. Oki : George Etomi & Partners.
Introduction
The commercial launching of GSM services in Nigeria last year was widely celebrated by a nation long starved of access to basic telecommunications services. Although acquisition costs were initially set at a premium, subsequent promotional sales embarked upon by the GSM operators have contributed towards the increasing affordability of the service in recent months. The Nigerian public now appears somewhat reconciled to current acquisition costs, probably discounting those costs against the convenience of connecting to functional networks within minutes of purchasing a starter pack.
Acquisition costs aside, the loudest complaint against the GSM operators today concerns the high end-user tariffs attached to the use of the service. The GSM operators have repeatedly blamed several factors for their current tariffs, namely the cost of the GSM licenses, the state of NITEL’s backbone infrastructure, the duties levied against the importation of telecommunications equipment, the cost of rolling out the GSM network, and the poor state of national power supply. The Federal Government has in turn responded, not by refunding part of the license fees as some might have hoped, but by lowering import duties on telecommunication equipment, pursuing deadlines for the improvement of national power supply and approving major contracts for expanding NITEL’s network infrastructure. However the impact of these measures is yet to felt in the industry.
Only recently, one of the leading GSM operators implicated yet another factor on this question of high tariffs, this time blaming the unfair interconnection charges imposed upon it by NITEL. The operator emphasized that interconnection with NITEL upon fair and reasonable terms must be considered the most significant challenge facing the company today, and it wondered why the Nigerian Communications Commission (“NCC”) appeared unwilling to intervene in the matter. The public may also recall that other operators in the industry have similarly complained about the unfair interconnection terms imposed upon them by NITEL, also with little or no response from the NCC. The NCC’s position on this matter has therefore invited much criticism from the industry, including accusations of regulatory subservience to NITEL and its monopolistic interests.
This article therefore seeks to highlight the nature, structure and significance of interconnection charges within the industry, and examines the powers of the NCC to regulate NITEL’s interconnection charges for the benefit of both the subscribing public and the providers of telecommunications services.
Interconnection Charges – Basic Structure
Interconnection charges refer to the commercial or financial terms on which telecommunications operators agree to interconnect their networks. Broadly speaking, these charges arise from the two basic aspects of Interconnection: the Facilities Aspect (which includes the cost of physically connecting both networks and maintaining the various points of interconnection), and the Service Aspect – which includes the costs involved in transmitting calls across networks from one subscriber to another. Interconnection charges are typically structured as follows:
- Usage Charges
This refers generally to the cost charged by an operator for delivering or collecting a call across a point of interconnection (“POI”). The basic principle is that the collecting network is entitled to receive terminating charges from the originating network for completing a call. For example, if a phone call is made by a NITEL subscriber to an MTN subscriber, MTN would generally be entitled to receive terminating charges from NITEL for completing the call upon its network. Usage charges are said to be the most significant commercial component of interconnection charges.
- Rental Charges
Operators breaking into a new market often find it economical to rent certain services and facilities from the incumbent operator. Such facilities may include floor space for the co-location of equipment, special ducts for running cables, radio masts, and towers. For example, NITEL typically levies rental charges for floor space, E1 Channels, utilities (electricity and water) consumed upon its premises, ground rent and tenement rates.
- Access-Deficit Contributions
This Access Charge component of end-user tariffs guarantees a subscriber access to the services and facilities of an operator’s network. However, the incumbent operator’s Access Charge is typically lower than that of a new entrant into the industry, often because such charges may have been subsidized over the years to meet social policy objectives or universal service obligations. The incumbent operator may therefore require the new entrant to pay up certain fees to compensate for the subsidies offered over the years (“the Access Deficit”) as part of the entrant’s contribution to such policy objectives. NITEL does not appear to demand this specific category of charges from operators, although this charge may very well be built into the other charge categories.
- Charges associated with Points of Interconnection.
Operators would normally share the cost of installing and maintaining the points of interconnection linking their individual networks. This cost naturally increases with the establishment of each new POI.
- Charges for Other Services.
Operators may also charge one another for ancillary services rendered in the course of their relationship, for example, NITEL usually offers its Research and Development facilities to other operators for a fee.
The Importance of Interconnection Charges
International telecommunications studies establish that the level and structure of interconnection charges between competing operators will continue to be of fundamental importance to the development of robust telecommunications industries. According to a published industry report, “the level and structure of interconnection charges will be major determinants of how efficiently the industry uses scarce network resources, how well end-user prices reflect underlying costs, how rapidly incumbent operators improve their efficiency and how responsive the industry is to changing market needs”.
Interconnection charges alone are said to account for as much as 50% of an operator’s costs when breaking into a new telecommunications market, clearly constituting a significant financial barrier to efficient market entry in the industry. Furthermore, high interconnection charges significantly increase the cost of providing basic services, thereby forcing new operators to increase end-user prices at a competitive disadvantage to the incumbent operator. In these circumstances the general public is deprived of the expected diversity, efficiency and reduced prices associated with robust competition. In attempting to avoid high interconnection charges for specific network facilities (radio towers, masts, cable ducts) owned by the incumbent operator, a new operator may be forced to replicate those same facilities at extra cost, thereby undermining fundamental principles of economic efficiency within the industry. High interconnection charges can also become a source of ‘easy’ revenue for the incumbent operator, significantly reducing its incentive to improve efficiency and services as a means of attracting subscriber revenue.
Viewed against this background, interconnection charges may rightly be considered the single most important factor affecting the growth of robust competition in telecommunications industries. The fundamental importance of this single factor must therefore entitle the Nigerian public to examine the manner in which these interconnection charges are fixed in our evolving industry.
Determining Interconnection Charges – General Principles As a general rule, telecommunications operators expect to be guided by established laws and regulations in determining the appropriate interconnection charges between their respective networks. Such regulations are primarily designed to create the enabling environment for commercial negotiations between operators. They typically impose a legal obligation on operators to interconnect with each other, publish the economic and other internationally recognized principles of tariff regulation in the industry, ensure the publication of standard terms and procedures for interconnecting with the dominant operator, establish deadlines for the conclusion of interconnection negotiations, provide for “default arrangements” in the event that negotiations break down, and provide for arbitration and settlement of disputes. The industry regulator thereafter plays the role of impartial umpire, intervening only when necessary to ensure strict compliance with the established ground rules.
However, regulators also recognize that an unequal bargaining relationship always exists between incumbent operators and new entrants in the telecommunications industry. A new entrant urgently needs to interconnect with the incumbent operator in order to offer seamless communication across both networks to its fledgling subscriber base. But the incumbent operator, with the bulk of the national subscriber base under its belt, is under little or no pressure to interconnect with a new entrant, thus significantly tilting the bargaining balance in its favour. Regulators therefore often find it necessary to review and modify the interconnection charges proposed by incumbent operators during commercial negotiations, ignoring the incumbent’s complaints of undue interference in the overriding interest of the wider industry. Having established these general principles, we may now examine the practice in our own industry.
The NCC and the Regulation of Interconnection Charges.
The principal legislation regulating the Nigerian telecommunications industry is the Nigerian Communications Commission Decree No. 75 of 1992 (as amended by Decree 30 of 1998) also called “the NCC Decree”. The objectives of the NCC are listed in Section 2 of the Decree and include the following:
- To create a regulatory environment for the supply of telecommunications services, facilities and to promote fair competition and efficient market conduct.
- To facilitate the entry into markets for telecommunications services and facilities of persons wishing to supply such services and facilities.
- To protect licensees and the public from unfair conduct of other providers of telecommunications services with regard to the quality of service and the payment of tariffs.
The importance of these statutory objectives is further emphasized by their deliberate inclusion among the legal functions of the NCC under Section 4 of the NCC Decree, that is to say:
- The promotion of competition in the telecommunications industry.
- The protection of suppliers of telecommunications services or facilities from unfair practices of other telecommunications suppliers which are damaging to competition.
- To facilitate the entry into the market for such services and facilities by persons wishing to supply such services and facilities; and
- The protection of licensees from misuse of market power by other carriers.
Taken together, the statutory objectives and functions of the NCC clearly embrace the fundamental and tested economic principles of fair competition, efficient market entry, efficient market conduct, appropriate use of market power, and tariff regulation in the industry. However it is obvious, as we have seen, that none of these laudable objectives can be successfully attained without addressing the level and structure of interconnection charges within the industry.
Section 15 (j) of the NCC Decree therefore empowers the NCC to determine in writing the principles which shall apply in agreeing terms and conditions about charges payable between licensees, or between licensees and other carriers for:
- Interconnection of facilities to networks of the other party, or
- Carriage of communications across such networks, or
- The supply of facilities for the purpose of such interconnection or carriage, or
- Matters related to interconnection of communications generally.
But in spite of these enabling provisions the NCC has failed to publish the applicable principles for interconnection in the industry, either between the private operators themselves, or between the private operators and NITEL. Industry experience confirms that NITEL has been left with a free hand to arbitrarily impose interconnection charges on other operators without intervention or comment from the NCC. Interconnection terms and conditions are casually offered to private operators on a “take it or leave it” basis, and at least one private operator has been arbitrarily disconnected from NITEL’s network for allegedly breaching those terms. Other operators have been denied interconnection for various unverifiable reasons (e.g. the supposed absence of E1 Channels), or have been arbitrarily restricted to a single location for the establishment of points of interconnection. In short, NITEL appears to have acted contrary to each and every statutory objective earlier listed above without censure from the NCC. So why has the NCC, with so much regulatory power at its disposal, failed to exercise those powers for the benefit of the industry? Why does the NCC appear to look the other way when confronted with NITEL’s arbitrary and anti-competitive conduct? The answers to these questions are to be found, curiously, in the NCC Decree itself.
The NCC Decree and the Regulation of NITEL
Although the NCC Decree is the principal legislation for the regulation of the Nigerian telecommunications industry, Section 4(a) of that Decree deliberately and specifically limits the NCC’s functions to the privatized sector of the telecommunications industry. According to Section 4(a), the first function of the NCC is “the responsibility for economic and technical regulation of the privatized sector of the telecommunications industry”. The significance of this provision may be better appreciated against the historical background of the NCC Decree.
The public may recall that 1992 marked the actual commencement of a liberalization process in the nation’s telecommunications industry. Prior to that time NITEL had enjoyed a complete monopoly over the provision of telecommunications services in the country and, following the military government’s decision to liberalize the telecommunications sector, the NCC decree was promulgated to facilitate the entry of private operators for the provision of 8 specific services within the industry. These services are listed in Schedule II of the Decree as follows: installation of terminal equipment, provision and operation of pay-phones, provision and operation of private network links, provision and operation of public mobile communications, provision and operation of community telephones, provision and operation of value-added network services, repair and maintenance of telecommunications facilities, and cabling. It was therefore these limited services, previously closed to private sector participation and collectively referred to as “Telecommunications Undertakings” by the Decree, that constituted the Privatized Sector of the industry intended for regulation by the newly created NCC.
By contrast NITEL was entirely owned and controlled by the Federal Government at the time of the NCC’s creation in 1992, and therefore did not and could not have fallen within the privatized sector of the industry as contemplated by the NCC Decree. Rather, NITEL has always been under the exclusive authority and control of a supervising ministry i.e. the Federal Ministry of Communications headed by a politically appointed Minister of Communications. NITEL has therefore never been subject to regulation by the NCC or its enabling Decree. Indeed, a close examination of the NCC Decree (the 1998 amendment notwithstanding) reveals that the NCC itself is almost entirely subject to the Minister of Communications from the appointment of its members to the exercise of its functions, confirming that the NCC was never intended to be a truly independent regulator overseeing the entire telecommunications industry, and neither was it intended to exercise regulatory control over NITEL in conjunction or competition with the Honorable Minister for Communications. That position remains exactly the same today, 10 years after the creation of the NCC, because NITEL is yet to be successfully privatized and the NCC Decree is yet to be succeeded by a telecommunications law that vests full regulatory powers in the NCC.
Against this background the industry may not be entirely fair in regarding the NCC’s inaction over NITEL’s interconnection charges as a failure or abdication of the regulatory function. Rather, this regulatory inactivity clearly results from a fundamental failure of the enabling legislation responsible for creating both the regulatory authority and its statutory functions. It is simply unfortunate that in the year 2002, 10 years after the industry’s liberalization, and following the introduction of the Internet, Cable Television, VOIP, VSAT, GSM and GMPCS services, our burgeoning telecommunications industry continues to be regulated by a piece of legislation originally designed for an emasculated regulator supervising the provision of 8 rudimentary services. This is one reason why the House of Representatives’ Committee on Telecommunications recently promoted a Private Member’s Bill for extending the NCC’s regulatory powers to enable it address present-day realities in the industry. That pioneering effort was subsequently studied and built upon by the more comprehensive state-sponsored Telecommunications Bill, and both bills are currently believed to be making their way through the Federal Legislature. It would however interest industry operators to note that both efforts directly address the NCC’s regulation of NITEL, including the regulation of interconnection and associated tariffs.
Under the Private Member’s Bill, the NCC is specifically empowered to prescribe clear guidelines determining the deadline for effecting interconnection, the quality or level of service expected of each operator and, most importantly, the fees and charges payable for interconnection. The state-sponsored Bill goes further and requires the dominant operator (i.e. NITEL) to submit a Reference Interconnection Offer (“RIO”) to the NCC for approval, stating the list of interconnection services offered to other operators and the applicable terms, conditions and tariffs applicable thereto. The NCC is also empowered to reject the RIO where it violates applicable laws, regulations or license conditions.
The Way Forward
In recommending an urgent solution to the inadequacies of the NCC Decree, particularly concerning the regulation of NITEL, the immediate temptation is to advise the industry to ensure the successful Privatization of NITEL in the coming weeks, as this might be the fastest means of shoving NITEL into the “privatized sector” of the telecommunications industry, and thus within the regulatory control of the NCC. The NCC may then begin the immediate review of NITEL’s interconnection charges in exercise of its objectives and powers under the NCC Decree, and in line with the recommendations of the National Telecommunications Policy prescribing a cost-based tariff regime in the provision of telecommunications services. But this would amount only to a temporary quick fix, leaving fundamental regulatory issues in the industry un-addressed including, for instance, the problem of the NCC’s subservience to the Minister of Communications.
A comprehensive solution to the regulatory dilemma must therefore depend instead on the industry’s commitment to the process of legislative reform. It is simply amazing to observe operators investing millions of dollars into this industry without investing a fraction of their effort towards the effective regulation of the environment in which they operate. Although the industry is aware of the telecommunications bills currently pending before the legislature, the same industry appears somewhat aloof from the process of transforming these bills into law. It appears that very few operators are adequately informed about the number of readings required to pass the bills into law in the first place, or whether both bills are to be consolidated into one law or how many readings the bills may have gone through at this very moment. Yet these are fundamental issues that should interest every serious stakeholder in this industry. Industry stakeholders must therefore begin to focus their efforts on the process of passing the pending telecommunications bills into law, for those bills, as we have seen, clearly address fundamental industry concerns including the question of interconnection and associated charges.
The NCC must also be persuaded to publish the actual interconnection agreements operating in the industry as a first major step towards providing the Nigerian public with accurate information on the fairness or otherwise of those agreements. Consumers of telecommunications services certainly have a justifiable interest in understanding the basis of the end-user tariffs they are daily forced to pay, and if interconnection tariffs have been held responsible for current end-user tariffs, the publication of prevailing interconnection terms and tariffs should certainly assist industry operators in their arguments for regulatory intervention and reform. The NCC should also go further to publish the principles of interconnection applicable to the privatized sector of the industry as it is empowered to do by Section 15(j) of the NCC Decree. The preparation and publication of these principles cannot but prepare both NITEL and the industry for the comprehensive reforms contained in the awaited telecommunications law.
Finally, an improved telecommunications law conferring extended powers upon the NCC should improve the timeliness and appropriateness of the NCC’s response to complaints of unfair or anti-competitive conduct within the industry. Anything short of the desired responsiveness may then be met with appropriate Judicial Orders compelling the NCC into the performance of its public duties. But as long as the industry continues to rely upon the current NCC Decree for the regulation of the industry, the Nigerian public can have very little hope of reaping the full benefits of a truly liberalized telecommunications industry. |
