Telkom wants zero X factor

Telkom has asked telecommunications regulator the Independent Communications Authority of SA (ICASA) to "adjust to zero" the productivity factor, designed to force efficiency from operators, and to maintain rebalancing leeway of 20% in its pricing.

In December last year, ICASA published a discussion document on the proposed new tariff control structure to be implemented during 2002. Proposals included limiting the maximum tariff increase for residential customers to 3% below the consumer price index (CPI) and limiting the increase of any individual service to 5% above the rate of inflation. Current rules allow an increase of 20% above inflation.

However, in its written submission to ICASA on the proposal, Telkom has objected to both these suggestions, saying they would harm its business.

In its submission, Telkom called on ICASA to remove the "X" from its price cap calculation. "X" signifies the 3% under CPI by which ICASA would like to see Telkom increase its tariffs. The factor is also referred to as the productivity factor as it is the measure by which the company must improve efficiency to maintain its profit margins.

Regulators commonly use such measures to force a reduction in telecommunications prices to consumers.

But Telkom argues that such price control is detrimental to the telecommunications market and should be reduced. "Too high a level of X may deter competition, investment, innovation and quality, to the detriment of the consumer," states the company in its submission.

The company sets forth no objection to the use of the X factor, but its submission calls for it to be reduced to zero.

Telkom also wants to maintain the 20% rebalancing factor within its overall basket of services, despite accusations by some of its largest customers that rate rebalancing is being used as a competitive weapon.

However, it`s here that the company faces opposition from an unexpected quarter. In the most extensive submission outside of Telkom`s, the Congress of South African Trade Unions (Cosatu) calls for an increase in X instead of its abolishment.

"We agree with the view...that the current level of X (of 1.5%) appears fairly undemanding in the light of various considerations," the organisation says in its written submission. "Cosatu believes that local telecommunications prices should be falling much faster than they are, and that much stronger, more targeted price capping is required to ensure that services which are disproportionately consumed by low-income consumers fall the fastest."

The organisation says it would like to see an increase in X for residential consumers as soon as possible, as it believes this is the best way to ensure universal affordable access.

Cosatu does not object to the 20% rebalancing leeway currently allowed, saying the reduction to 5% would be a welcome safeguard to residential consumers but could undermine other objectives based on cross-subsidisation.

"Moving towards cost-based pricing means that those who do not yet have access to telecommunications - predominantly poor and black - would be paying closer to the full cost, while services have been extended to whites over decades funded through public subsidies," it says. It fears that a reduction to 5% would "lock in" the current structure and says there should be scope to increase the cost of international calls.

The SA Value-Added Network Services Association (SAVA) disagrees with Cosatu, saying that the 20% margin has been abused during the past five years to strengthen the Telkom business in areas where it competes with other providers. Such "predatory pricing", it says, can be prevented by lowering the rebalancing margin.

The association says Telkom uses its monopoly power in areas such as providing data links to make it impossible for service providers to compete in non-monopoly areas, such as value-added network services (VANS).

"SAVA believes that 5% above inflation represents a significant price increase more than sufficient to allow Telkom to manage its profitability," it says in its written submission.

Despite arguing for a mechanism of rebalancing, Cosatu also points out the problems with monopoly pricing by a company that competes in other areas. "The fact that Telkom is a multi-product/multi-service firm also gives it leverage to use its dominant position to ensure control in areas which are not controlled," Cosatu says in its submission.

SAVA recommends that Telkom be forced to provide wholesale discounting to major clients by the middle of this year, saying VANS make it more efficient for Telkom to do business and should be treated as such.

It also recommends an investigation into the Telkom Rate Stability Plan, a scheme it says effectively extends the telecommunications monopoly through contract by binding customers until after exclusivity lapses.

Three companies considering entering the ring as Telkom competitors in the post-exclusivity market, Transtel, M-Cell and Eskom Enterprises, also made submissions on the rate regime.

While neither M-Cell nor Transtel highlight the X factor or rebalancing margin, Eskom expresses support for the 5% maximum increase in individual services, and says the X factor is not unachievable.

"Should Telkom be privatised and recapitalised, the 1.5% to 3% range for X should be achievable," it says in its submission. Eskom is quick to point out that the same is not true of future competitors, such as itself. "This is, however, not achievable by new network operators who will be at the start-up phase and incur huge capital investments."

Eskom also raises the issue of a floor price, a maximum price decrease allowed to any operator. It, too, is concerned about predatory pricing.

"If left unregulated, Telkom can and will price-undercut the new network operators in [international, long distance and business sector] markets and effectively stifle competition," it says.

In its submission, Internet service provider (ISP) M-Web argues the case for cash-hungry dial-up ISPs, saying the monopoly situation and current rate regime is not conducive to the development of Internet use in SA.

M-Web calls for flat rate charges for dial-up users connecting to the Internet. It would also like to see a slice of the Telkom pie go to ISPs.

Among the areas it recommends for investigation is "the extent to which dial-up calls for Internet access contribute to Telkom revenues to assess what benefit from the surplus can be passed on to consumers and also to assess whether interconnect revenues should be passed on to Internet service providers".

The review process is unlikely to lead to any changes or regulation before next year, as ICASA late last year reluctantly agreed to the Telkom tariffs for 2001.

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