COSATU Submission on the Findings and Conclusions on the Review of Rate Regime and Proposed Regulations on Fees and Charges in the Public Switched Telecommunications Sector Submitted to ICASA, 23 July 2001

Table of Contents

Introduction

In January and February 2001, COSATU made written and verbal submissions to ICASA on the Review of Rate Regime for Public Switched Telecommunication Services: Consultation Document. ICASA has subsequently published the "Findings and Conclusions on the Review of Rate Regime for Public Switched Telecommunications Sector" on the basis of public submissions to the Consultation Document. COSATU welcomes the fact that the Findings and Conclusions do reflect some of the issues raised in our earlier submission. In section 2 of this submission, we note those aspects which we support and those which we have concerns around.

ICASA has also now published its "Intention to make regulations on fees and charges in the Public Switched Telecommunications Sector" in Gazette No. 22241 [hereafter referred to as "the Proposed Regulations"]. COSATU hereby submits its response to these, in particular identifying those aspects which we support and those areas in which we believe that the proposed regulations do not go far enough. Where appropriate, we table recommendations for strengthening the proposals.

This submission should be read in conjunction with our previous submission on the issue to ICASA (1). This input elaborates the key pillars of COSATU’s vision for telecommunications, namely:

1. Universal service
2. Affordability
3. State ownership and regulation
4. Economic development, and
5. Job retention and creation.

In terms of our approach to the price structure of telecommunications, and the focus of our response to the Findings and Conclusions and Proposed Regulations, we argue strongly that affordability of basic telephony is an integral aspect of and precondition for the achievement of universal service. If prices are excessively high, rollout of telecommunications is hindered, and even where telephones are installed they are likely to be cut off as people cannot afford bills – the phenomenon of churn. This is amply demonstrated by recent experience: local standard time call charges have increased by 35.6% (2), and 35.9% of new lines rolled out in the year to 31 March 2000 were disconnected due to people’s inability to afford bills (3).

The central thrust of our approach to ICASA’s proposals has thus been ensuring the affordability of basic telephony, especially for low-income consumers. The real price cuts in the basket of telecommunications services and especially the residential sub-basket, as advanced by ICASA, would be one element of this and COSATU welcomes these progressive proposals. We also propose the implementation of a telecommunications price structure based on the system of lifeline services and progressive block tariffs developed for municipal services.

We welcome the inclusive consultative process which ICASA has gone through on this issue, as set out in the Telecommunications Act, and we will be available for further interaction on the Proposed Regulations should this be necessary.

Comments on the Findings and Conclusions

Insofar as the findings and conclusions of ICASA’s investigation inform the proposed regulations, some comment on the former are appropriate at this point. Without going clause-by-clause, we specifically note those aspects which we support and those which we have concerns around.

Areas of Support

2.2 Impact of the current regime (4)

We welcome the recognition that "many respondents felt that there was considerable scope for improvement in the application of the regime. In particular, strong views were expressed about the urgent need for greater downward pressure on prices to residential users in order to offset the effect of rebalancing".

2.3 Cost allocation and the competitive pricing of services

ICASA notes that "a number of respondents expressed the view that the timescale for the provision of regulatory accounts by Telkom was unreasonably long and that greater priority should be given to putting these accounts in place as soon as possible. ICASA intends to give urgent attention to this issue." As we indicated in our submission, accurate and timely disaggregated cost information is vital for proper regulation.

2.4 International price comparisons

COSATU welcomes the acknowledgement of the limited relevance of comparisons which do not take into account the wide difference in circumstances, especially reliable information on purchasing power parities, and the intention to seek information from more directly comparable countries in future.

2.7 Telkom’s efficiency

We agree with ICASA’s view that it is reasonable to expect continuing efficiency improvements comparable to those that other countries in similar stages of economic development have been achieving in telecommunications. We also welcome the intention to pursue more comprehensive publication of quality of service statistics and more extensive service level agreements. As discussed in our earlier submission, "lines per employee" is not an appropriate benchmark for "efficiency".

2.13 Setting of price controls

COSATU strongly supports the finding that the current level of X is undemanding and that residential users in particular need proper protection from high prices. We agree with ICASA’s rejection of expressing X as a percentage of CPI.

2.14 Level of X

We strongly back ICASA’s proposal for setting the general level of annual average price reductions at 5% below the rate of inflation. This will significantly contribute to making telecommunications services more affordable and will be conducive to the extension of sustainable universal service.

2.15 Separate residential basket

COSATU supports the proposal to establish a separate residential basket, covering the main services used by residential consumers, including payphone tariffs, and to set this sub cap at 5% below the rate of inflation. This should be an ongoing aspect of the regulation of this sector.

As will be discussed in section 2.2 below, however, we believe that there is a need for a sub cap on those residential services particularly relied on by low-income consumers.

2.18 Information for consumers

We support the proposals in 2.18.2 aimed at greater transparency, accountability, and consumer empowerment.

2.20.3 Rollover

The Findings and Conclusions appear to propose some extension of the price control arrangements after the ending of the price control period if new arrangements have not yet been implemented. COSATU believes that this will be useful in ensuring that there is no unintended lapsing of price control.

2.20.5 New services

COSATU agrees that new products or packaged offerings of existing services – particularly those aimed at or used by low income or residential consumers - should be subject to price regulation.

Areas of concern

Disaggregation of residential calls

The price trends for different telecommunications services for the previous period (cumulative over 1998-2000, deflated by CPI) are reported in the Consultation Document. The effective price of exchange line rentals have increased considerably. There have been extremely high price increases for local calls, increasing by 35.6% in standard time and 10.6% in Callmore time respectively (cumulative increase deflated by CPI). The cost of national calls over the 50-100 km range have fallen and those of the >100 km range have fallen even more. The biggest price cuts have been on international calls, of 40%. The ratio of long distance call charges to local calls declined from 21:1 in 1994 to 6.9:1 in 2000.

Examining the above figures in distributional terms, it is low-income consumers – predominantly reliant on local calls – who have borne the brunt of price increases, while it is wealthy consumers and businesses who make more long-distance and international calls who have seen their costs slashed. This is the opposite of the desirable situation, and demonstrates the inappropriateness of basing prices either on costs or on the degree of competitiveness in different market segments.

Arising from these trends, our concern is that even if the price of the residential basket of services falls by 5% in real terms, there is no guarantee that this will lead to substantial real price cuts for local services and rental costs. In order to ensure that low-income consumers do indeed derive maximum benefit from the price control regime, it would either be necessary to narrow the residential sub-basket to local, line rental and payphone costs, or to specify an additional sub-basket for these services with its own sub-cap of at least 5%. Our proposals in this regard are elaborated in section 3 below.

2.20.1 Wholesale discounts

ICASA’s proposal around "the provision of economically sound and fair wholesale rates for the bulk usage of network and other facilities" appears to suggest that large-scale commercial users of telecommunications services may be able to benefit from lower rates. If this is a correct interpretation, it would amount to cross-subsidisation of large corporate clients by other telecommunications users. This would be highly problematic in the context of the need for the extension of affordable universal service to all South Africans, and the funding of this through cross-subsidisation of high-volume business users in particular. COSATU thus rejects this finding and proposes that it should not inform pricing policy.

2.20.2 Carryover

ICASA seems to propose that, should Telkom reduce prices by more than required in a particular year, excess reductions should be carried over to the next year. Our view is that the requirement of a 5% real cut should be a minimum requirement, and reductions greater than this should be encouraged. However, we would be concerned about a situation where price reductions are minimal in a certain year because of carryover from previous years. Perhaps the authority should specify what the absolute minimum real reduction in any year should be, notwithstanding any carryover.

Further comments

2.5 Need for and coverage of price control

We specifically welcome the recognition that continued price control is needed, especially for residential users. However, the need for continued price control of those services particularly used by low-income consumers should also be taken cognisance of.

2.9 Telkom’s profitability and cost of capital

As elaborated in our earlier submission, we believe that Telkom is actually far more profitable that the figures in the Consultation Document indicated, which has implications for the tariffs structure to be set. We therefore do not agree with what is reflected as the majority view in the Findings and Conclusions, that Telkom’s current profits do not appear excessive. We do, however, welcome the explicit acknowledgement at 2.9.4 of our argument that the assets acquired by Telkom in extending the network have a long-term strategic value which also needs to be taken into account, as does the revenue contribution from "unprofitable" customers. We agree that detailed cost breakdown is required. We agree with the proposal at 2.9.6 that universal access should be cross-subsidised from the proceeds of profitable long distance and international traffic. However, additional support from the fiscus to expedite the achievement of universal service and to subsidise the costs of low-use local residential services should not be ruled out.

2.17 Low usage scheme

The Findings and Conclusions do not elaborate concrete proposals for a comprehensive low usage system, but instead propose that ICASA pursue further discussions with Telkom on measures to develop an improved scheme. As outlined in our previous submission, we believe that a more comprehensive cross-subsidisation system is required, not just for groups like the elderly and the disabled, but for low-income consumers in general. Given the levels of poverty and unemployment in South Africa, it is not appropriate to only target narrowly defined "special groups" where the majority of people have very low income levels. In our comments in section 3 below, we elaborate our proposals in this regard in terms of a lifeline service and progressive block tariff system. COSATU proposes our own participation in the further processes mooted by ICASA to develop an improved low usage scheme.

2.19 Average residential bill

ICASA appears to support requiring Telkom to produce statistical information from which an accurate estimate of the average residential bill can be derived and on which the application of the proposed residential sub-cap will be based. We recommend that this requirement be extended to include the disaggregated analysis of different market segments in order to assess the differential impact of prices or policies, particularly on different income groups, and to make decisions accordingly.

Response to the Proposed Regulations

General price control formulae

The central issue dealt with in the Proposed Regulations is the implementation of the price regime recommended in the Findings and Conclusions. The central proposals of the Proposed Regulations are for a 5% real price cut for the basket of telecommunications services; and furthermore a 5% real price cut specifically for the residential sub-basket. As discussed above and in our earlier submission, COSATU believes that lower telecommunications prices are a priority, especially for low-income residential users. We thus commend ICASA for its proposals for increasing the value of "X" (5) and furthermore for ensuring that residential users also benefit from 5% real price reductions.

As discussed in section 2.2 above, however, we are concerned that, by aggregating residential services in a single basket, the proposed price control structure may not sufficiently target low-income users. As the proposed residential basket sub-cap also includes long-distance national and international services, there is no guarantee that there will be substantial real price cuts in the services used primarily by low-income users. It would presumably be conceivable for the costs of local residential calls to continue their upward trend, while the costs of long-distance and international calls continue to fall, hence the real costs of the residential basket could indeed fall 5% without the desired objectives being met.

We thus propose a separate sub-basket for local residential calls, residential exchange line rental, and payphone calls with its separate sub-cap of at least 5%. Our preferred option would be for this to supplement the proposed residential sub-basket; alternatively the proposed residential sub-basket could be narrowed down to the abovementioned three services. COSATU believes that this would ensure that low-income residential users do indeed maximally benefit from the price control formula.

Carryover

The Proposed Regulations propose a carryover of any unused part of the allowed tariff increase to the next price control year. As discussed above, we believe that the requirement of a 5% real cut should be a minimum requirement, and reductions greater than this should be encouraged. COSATU is concerned that a provision for carryover from previous years may lead to only very small price reductions in a subsequent year. One way of dealing with this would be for ICASA to specify what the absolute minimum real reduction in any year should be, irrespective of any carryover.

A more comprehensively progressive price structure

In addition to the proposed price control formulae proposed in the Proposed Regulations, COSATU recommends a more comprehensively progressive price structure to facilitate the extension of affordable universal service (6). COSATU proposes a price structure based on the system of lifeline services and progressive block tariffs developed for municipal services. This would ensure that everyone has access to some basic telephone services. While the package of free lifeline services could be discussed further, it could at least include outgoing local and national calls up to a certain amount, incoming calls, access to emergency services, and of course regular rental costs. Telephone charges would then rise progressively at higher levels of usage. Based on the assumption that high-income households with higher ability to pay are likely to make greater use of telephones, this would build in cross-subsidisation to lower-income users (7). It would also enhance the overall financial sustainability of the model as high-level users would carry the costs of the free basic services.

COSATU would be available for further discussion of this proposal, particularly as to how it could be integrated into the proposed rate regime.

Footnotes:

1. The submission can also be found on COSATU's website at http://www.cosatu.org.za/docs/2001/icasatr.htm.


2. A figure cited in the Consultation Document for the period 1998 – 2000.
   
3. Cited in Telkom's own report on its license obligations in the year to 31 March 2000.
   
4. The numbering of these issues refers to the section in the Findings and Conclusions document.
   
5. “X” refers to the targeted real rate of reduction in the average price of a specified basket of services. It is currently set at 1.5% and ICASA proposes an increase to 5%.
   
6. This was mooted inter alia in section Q17 of our previous submission to ICASA. This and other proposals are also raised in our Submission on the Intended Telecommunications Policy Directions, submitted to the Department of Communications on 2 May 2001 and available on COSATU's web site.
   
7. The Benton Foundation proposes a three-tier system of universal service which at least assures low-income users of some basic services and remaining connected even if they are unable to pay for calls. The first level, a comprehensive universal service package (local national and international outgoing calls, incoming calls, access to emergency services, toll blocking and toll limitation on request, and directory enquiries) would be available as long as the total bill can be settled. If this is not possible, then local call charges should be deducted first followed by long distance and toll charges, and the user could be moved to a second tier of a limited basic package which excludes international calls and limits long distance calls to those going though an operator. The third tier, essential services, would only allow operator outgoing calls, incoming calls, and access to emergency services. Source: Discussion Paper on Definition of Universal Service and Universal Access in Telecommunications in South Africa, Government Gazette Vol. 400 No. 19397, October 1998.

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