Principles of Interconnection:

Response to "Regulation of Access to Vertically-Integrated Natural Monopolies," submitted to the New Zealand Ministry of Commerce

by

Nicholas Economides

Executive Summary

Following privatization of Telecom NZ and entry of competing network operators, significant disputes have arisen over termination pricing and other terms of interconnection. This paper describes principles of interconnection and it proposes that they be incorporated in the law, so that they are applied to negotiations and possible arbitration of disputes among network operators. The main objective of these principles is the leveling of the competition playing field, so that the benefits of competition (lower prices, higher quality of service, and innovation) can be realized. The principles are: mandatory interconnection of networks; reciprocity of interconnection charges for the same service; no discrimination across network operators for the same service; unbundling of interconnection charges; geographic de-averaging of interconnection charges; and exclusion of monopoly rents from interconnection charges. We show how these principles help in promoting competition and increasing efficiency. We also discuss in detail the inappropriateness of the use of the "efficient component pricing rule" in the telecommunications sector in New Zealand.

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