The Tribune

By NEIL HARTNELL

Tribune Business Editor

THE Bahamas Telecommunications Company (BTC) has warned that preliminary efficiency targets set for it by the industry regulator could force it to reduce wholesale prices "by up to 60 per cent", something that would "substantially damage" its ability to finance existing operations and investment in new services.

Describing the Utilities Regulation & Competition Authority's (URCA) initial efficiency study and conclusions as "not fit for purpose", BTC said its performance had been benchmarked against a group of unsuitable rival countries and carriers, and did not reflect the difficulties of operating across a 700-island archipelago.

The latter aspect, BTC said in its response to URCA's public consultation on the latter's proposed cost efficiency study of the newly-privatised carrier, meant it was difficult to achieve economies of scale while also reducing "economies of scope" gained from adding new services.

Expressing particular concern about the calculations URCA had used to arrive at its conclusions, the newly-privatised carrier said it had "serious reservations" about the regulator's initial finding, namely that BTC should match the efficiency levels achieved by the 'median performer' in its benchmarking sample.

It is difficult to gauge the exact impact this would have on BTC, as the carrier 'blanked out' figures and other financial-related data in its response to URCA.

Nevertheless, BTC charged: "If URCA were to act on the efficiency study as presented by implementing price controls that require BTC to bring prices into line with the 'median performer' levels of efficiency, BTC would likely have to reduce its wholesale prices by between ....... and .......

"Such reductions would be extremely damaging to BTC's ability to invest in its network infrastructure and maintain its universal service obligations against competitors that do not share these social obligations."

Wholesale prices refer to the fees/charges BTC levies on rival communications carriers for interconnecting with, and using, parts of its own systems to deliver and route their traffic. Although initially 'blanked out', BTC later in its reply gave some idea of the impact it claims URCA's proposals will have.

"Enforced reductions in BTC's wholesale prices of up to 60 per cent would substantially damage BTC's ability to fund its ongoing operations, let alone invest in new network and services," the newly-privatised carrier reiterated helpfully.

"BTC has serious concerns that URCA may not have given proper consideration to these factors or appreciate the real risk to the economy of making adjustments to the company's cost structure in the manner it has proposed.....

"BTC has concluded after a detailed review of URCA's proposed conclusions that URCA should not implement the results of the efficiency study on the basis it is not fit for purpose."

Arguing that the proposed efficiency study of its operations was "premature", BTC pointed out that its new 51 per cent majority shareholder, Cable & Wireless Communications (CWC), was only just starting to implement "fundamental structural changes" to a business model that has been scarred by decades of political interference.

Noting that the changes included staff reductions and a "revaluation of the asset base", BTC added: "Where BTC's costs are high, these are due to the costs imposed by its recent government ownership (such as high wage rates and political pressures to employ staff), and the new owner needs time to address these legacy issues."

The newly-privatised carrier added that the CWC-led restructuring needed time to take effect, as did the start of competition in the fixed-line voice market, which is led by Cable Bahamas.

"Market pressures on BTC to become more efficient are starting to have an impact only recently, and the company should be given more time before URCA attempts to intervene," it added.

Arguing that URCA's original study had "underestimated" the difficulties BTC faced in providing communications services to a 700-mile archipelago stretching across hundreds of miles, the carrier said the "material costs" related to its submarine cable network had not been taken into account when its cellular operations were assessed.

And the need to service far-flung islands, many with small populations, also provided a barrier to BTC achieving economies of scale. The carrier noted that, for its fixed-line business, it had deployed 17 Main Distribution Frame's (MDFs) or large switches on Grand Bahama and New Providence, providing service to an average of "around 7,700" subscribers per MDF.

Yet, when it came to the Family Islands, BTC said it had deployed 39 MDFs, serving an average of 590 subscribers per switch. "BTC also enjoys smaller scale effects on its network due to, for example, asset duplication," it added.

"BTC has a small switch for fixed voice services on each island on which it provides fixed telephony services, whereas a much smaller number or large switches would be used if all subscribers were on the same island."

It was the same, BTC argued, for its mobile/cellular monopoly. "For mobile networks, each separate island has to be treated as a separate geographical domain as well, which results in losing the benefits of cost tessellation and therefore the ability to generate scale effects," the carrier added.

"Again, this is borne out by BTC's operational data, with 42 BTSs [Base Transceiver Stations] providing service to an average of 9,000 mobile subscribers per BTS on Grand Bahama and New Providence, while on the Family Islands, 73 BTS have been deployed, providing service to an average of 730 subscribers per BTS.

"This clearly reduces BTC's ability to generate scale effects on its fixed and mobile networks even further."

Calling on URCA to factor in "the unique reality on the ground", BTC also expressed concern that the regulator's study appeared not to incorporate costs associated with it fulfilling its Universal Service Obligation (USO).

It also argued that the regulator's assessment of its 'output' for fixed-line services placed BTC "at a considerable and unmerited disadvantage... by ignoring BTC's high call usage per line". This, the carrier added, led to "a distorted and overstated estimate of BTC's inefficiency".

And, just to make sure the regulator had got its message, BTC signed off by saying that the initial study was "so full of methodological and statistical flaws that no reasonable regulatory authority can use it as a basis for decision-making, especially for the regulation of wholesale prices, which will have such a large impact on BTC's revenues and ability to invest in new networks and services".

It called on URCA to "abandon" the initial study, arguing that to impose it would violate the Communications Act sections that call upon the regulator to promote investment and competition.