Price Cap Mechanism Can Wait

It has been said that the reason for having a Price Cap Mechanism is to avoid Cable & Wireless (C&W) having to apply to the FTC for a change in rates. This is supposed to save the taxpayers and the consumers the expense of frequent rate hearings.

We understand that the Price Cap Mechanism will be very active, responding directly (up or down) to changes in various factors, including the Retail Price Index (RPI).

The argument used by the FTC in favour of the RPI is that it is employed as a factor in negotiating salaries and wages. However, salaries and wages are not known to go down, except for the time of the eight percent cut during the tenure of former Prime Minister, Sir Lloyd Erskine Sandiford; and that was not in response to the RPI.

We therefore fear that with the introduction of the PCM, C&W will not allow any of its increases to be eroded. Who will police the movement in prices? Since the PCM is automatic, does this mean that C&W can move its rates at the best times, never bothering to make a calculation when or if the RPI drops for whatever reason?

One thing for sure is that nobody will have to check for when C&W ought to increase its rates, but who will be checking to see when the rates should come down?

There is however, another reason why the Price Cap Mechanism should not be rushed into. This has to do with the FTC Decision in the last Rate Hearing, which ruled that C&W was collecting revenue beyond it requirements.

The problem is that the Price Cap Formula (PCF) will be calculated using a start up rate, which is described as the "going-in" rate. This rate should really be based on cost-oriented pricing and should already have been determined at the last Rate Hearing, except that the FTC decision stated that C&W had not supplied sufficient information for them to make the calculation.

Therefore the extent to which the company is over collecting revenue needs to be determined before any PCM is established that would allow the company increases. If the present rate is used as the going-in rate then it means that the company will stay ahead by the amount it is presently charging the consumers.

Since this will not be fair to consumers because it will not allow the consumers any reprieve in the future, a true going-in rate must be determined before we proceed with the Price Cap.

On the other hand, one will also want to be fair to the company. The rules of natural justice demands that the company should be given every opportunity to produce the evidence it has so far failed to provide, even if "in camera" , so that a true going in rate can be established.

In the absence of this cooperation, the FTC should determine a going in rate that would allow a certain number of years to elapse before any rate increase could kick in through the Price Cap Formula.

BANGO therefore registered its protest to a rush to implement a Price Cap Mechanism in its submission to the FTC made on 9 th February 2005 and silently boycotted the open consultation on the grounds that there should be no haste to implement a Price Cap Mechanism. Here are some key arguments submitted by BANGO:

Rapidly Evolving Pace of Technology

With the fast pace of technology, telecom products and services are being constantly created. The next on the line is the marketing and widespread use of mobile internet via cell phones and Personal Digital Assistants (PDAs). This means that C&W will not only be earning revenue from telecoms services but also from the sale of mobile devices as an integral part of supplying its services.

Inflation Factor - RPI

In the absence of a better indicator for inflation affecting the company, the RPI can be utilised. What will be critical will be the choice of goods in the basket and care should be taken not to include goods that are priced artificially high.

Productivity X-Factor

All three approaches to determining the X-Factor - the Historical Approach, the Regulatory Benchmarking Approach and the Forward-looking Approach, should be engaged because none are fool-proof. There should be some comparison using the three approaches in order to find a median that will be representative of the X-Factor.

Initial Prices

The FTC should do what it has to in order to determine what is the true cost-oriented rate that should be charged by the company and use this as the going in rate.

The present rates are too high and sensing that the company will resist every effort to reduce its present rate, even if for the purposes of administering the Price Cap Formula only, a lower going in rate should be established as the initial price.

The Exogenous Z-Factor

The rapidly evolving nature of telecommunications technology; the length of time of the initial Price Cap; the introduction of calling party pays and alteration of trade union rules should not be among the genre of events included in the Z-Factor.

First is the fact that C&W is not in keeping with the rapid changes in technology. The company is always a few steps behind at all times and do not apply technology according to its rapid change of pace.

Second, since the Price Cap in itself offers some scope for relief, it would reduce the probability of any quantum leap in prices that would produce rate shock.

Quality of Service Factor
Quality of Service Factor should not be reflected in the PCF and should be a separate matter since the rationale is to ensure that customers receive quality as a matter of course and not after the fact.

Duration of Price Cap
Four years as recommended.

Treatment of Unused Cap
The company should not be allowed to carry-over unused Cap.

Price cap Rules
Provision of Information to consumers and Competitors: Thirty working days for increases and seven working days for decreases.

Approach to Ensuring Compliance throughout the Year
Check each proposed rate change to ensure it complies with the Price Cap.

Roosevelt O. King
Secretary General
admin@bango.org.bb