Important note explaining how Telkom's tariffs are determined

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Debbie

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There is quite a bit of confusion going on regarding the price changes Telkom announced today. Some people are convinced that these changes will not go ahead in August, other are annoyed and ask why the changes can't be implemented immediately, and yet still others are predicting future random price hikes to counterbalance the 'decreases' announced today. This thread will explain how prices are determined, who has what power, and when and how they can use that power.

So here goes.....

There are four players here who, at various levels, lawfully have some kind of power over Telkom's prices.

1) The public. The public may exercise their power by commenting on almost everything regarding Telkom's prices that is gazetted. Practically, there are two arena's in which this happens. Firstly it happens when the Price Cap Regime is constructed. Secondly it happens when ICASA does investigations, as they are doing now with Telkom's ADSL service.

2) ICASA. ICASA has the power to initiate hearings about any of Telkom's services or pricing of such services. They also have the power to reject any price increase that Telkom files, but only if such an increase falls outside what is allowed by the Price Cap regime.

3) The MoC. Poison Ivy is the person with the most power overall. She can direct ICASA to do anything she wants them to do, whether her directions fall within the law or not. Ivy's power is, in a sense, 'above' whatever laws are written on paper. Also, ANYTIME Telkom changes their prices for anything that is a 'regulated service', Ivy has to approve them before they become lawful.

4) Telkom. Telkom actually does not have that much power to increase prices of regulated services. They do, however, have great power to decrease prices of all or any services, although once again the minister must approve.


Here are some basics that govern Telkom and their prices.

In SA, as in most other countries who are in the process of liberalising the telecoms industry, the incumbent provider (Telkom) is forced to abide by certain rules and regulations concerning their prices. In SA, we have adopted the 'Price Cap' method of regulating Telkom's prices (as opposed to a 'Rate of Return on Investments' method).

The 'Price Cap Regime' is basically like the daddy of the laws. What the Price Cap regime does is it provides a set formula dictating maximum price increases of certain regulated services. Currently, the formula is CPI - 3,5%. CPI, or the Consumer Price Index, changes every year due to inflation etc, so every year the maximum price that Telkom can implement is different from the previous year (unless the CPI is exactly the same). The Price Cap regime also allows for upward price changes (to regulated services) to take place only ONCE every year (in August).

How this works is that once a year, around June, Telkom must propose to ICASA their new tariffs. ICASA can only reject them if they do not conform to the maximum prices allowed by the Price Cap regime. If Telkom's proposed new tariffs are all in line with this, then ICASA has no choice but to accept the changes and forward them on to the minister for her approval. The minister has the power to accept or reject whatever Telkom is proposing, but generally she just signs the proposed tariff changes without any fuss.

What all this means is that there are certain services for which the prices are controlled. These services are further catergorised into what is referred to as 'sub-baskets'. Now each service alone may or may not have a maximum increase allowed year-on-year.

For example, (if I am not mistaken) the price of local calls is subjected to a 5% cap - Telkom may not increase the price of local calls more then 5% in any year. Local calls, along with other services, further fall under something called the 'residential sub-basket' (there are other sub-baskets as well). I am not sure if my figures are correct, but I believe that the residential sub-basket is subject to a 10% (or 20% ?) cap. This means that, when all the little percentage increases and decreases are added up, overall the prices for the services in the residential sub-basket may not be increased more than 10% (or 20%, I forgot the exact figure).

To further complicate this, when all the price increases and decreases of all the services in all the baskets are added up, they may not exceed whatever is prescribed by the formula CPI - 3,5%.

Therefore, if the CPI for the previous year was an average of 3,3%, then when Telkom files their tariff changes (which they are required to do once a year), all the prices of all the services THAT FALL INTO A SUB-BASKET may not be increased by: 3,3% - 3,5% = -0,2%. Using this example, we can see that overall Telkom would be required to REDUCE their prices by AT LEAST 0,2%. (Conversely, if CPI was 3,7%, then Telkom would be required to NOT increase their prices by more than 0,2%).

To summarise: The current Price Cap regime came into force in June 2005. Telkom may only increase the prices of their regulated services once a year, and price changes have to be in line with sub-basket price caps as well as the overall Price Cap (CPI - 3,5%). Furthermore, the price changes that were announced today constitute Telkom's annual Price Cap regime filing. They are not a 'random' decrease.

Cara asked howcome then Telkom enforced two price changes in 2005, once in March and then again in August. This was allowed because the old Price Cap regime required new prices to take effect in March every year. So in March 2005, the usual price increases went ahead. But in June 2005, the old Price Cap regime was thrown out in favour of a new (and better) Price Cap regime. The new Price Cap regime changed the annual date for increases from March to August. Therefore, since the new regime came into effect in June, Telkom was allowed to change their prices again in August that year. (Take note that the fact that there had already been a price increase that year was taken into account and worked in to the CPI - 3,5% formula for that year only).

Other's then tried to tell me that what I was saying was bs because Telkom also changed their prices in November of 2005. The reason why the cost of BANDWIDTH went up (or down, depending on your point of view) is because bandwidth is NOT a regulated service. In other words, bandwidth is not a service that falls under the Price Cap regime. But, this being said, I strongly believe that, by implication of ADSL being regulated, bandwidth actually IS a regulated service and therefore DOES fall under price controls. However, that is a complicated argument and not one I will get into here.

Ok, so to address some of the other questions that have come up.....

What is to say that Telkom won't increase their adsl prices again in a few months?
This will not happen, as it will be illegal in terms of the laws. ADSL falls under regulated services, and therefore in order for Telkom to increase prices on this, the prices will firstly have to conform to the Price Cap regime. And secondly, to increase prices, they will have to wait until June next year, when they file their 2007 tariff changes, and even then any ADSL price increases will be constrained by the maximum's allowed under the Price Cap regime.

I think ICASA should reject these ADSL price changes because they are not good enough!
ICASA does not have the power to do this. When Telkom submits their annual tariff changes, the only time ICASA may reject them is if the changes do not conform to the Price Cap regime regulations- i.e if Telkom says that they want to increase prices by more than what the Price Cap regime allows. If Telkom wanted to suddenly offer free local calls, ICASA wouldn't have the power to reject this.

Typical of Telkom to only implement these changes in August. They should make them effective immediately!
Telkom does not have the power to do this.As explained extensively above,ICASA can only reject them if the new tariffs exceed the price caps allowed by the Price Cap regime.

Spineless ICASA! If they can't make Telkom decrease ADSL prices, then WTH is the point of this ICASA ADSL hearings? They can't reject Telkom's tariffs in any case, unless they exceed the PC regulations!
Wrong. ICASA has the power to, at any time of the year, investigate Telkom's services and Telkom's pricing for a specific service. This is what they are doing at the moment with the ICASA ADSL hearings. ICASA is empowered to make regulations that force Telkom to reduce their ADSL prices. But they cannot force ADSL prices down by using the annual Price Cap process. They have to use a different process. Also note that before any regulations that result from the ADSL hearings come into effect, the minister of communications is required to sign them. The minister is the ultimate authority, and she has the power to tell ICASA that proposed regulations are too harsh on Telkom. It is highly doubtful she will do this though.

Why isn't bandwidth a regulated service?
I think this is because ICASA had a hard enough time getting ADSL to be a regulated service, as well as ICASA lacked understanding on how much of an effect the price of bandwidth has on the end-user (not to mention the ISP industry). However, as I said earlier, I do think that an argument could be made that bandwidth is included implicitly in the residential sub-basket. At the moment gov is trying to take back control of the SAT3 cable. Telkom is fighting tooth and nail against this happening. Telkom told government to F*off when gov asked for the SAT3 shareholder's agreement. To my knowledge, Telkom has still not provided gov with this. From what I undrestand, Telkom doesn't own SAT3, they were merely appointed as 'guardians' of SAT3. But they have been 'guardians' for so long now that they have forgotten that they don't own it, or any part of it. Correct me if I am wrong here!

Ok, got it? :)
 
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Debbs when the overall increase or decrease is calculated how are the various services weighted. for example and to make it simple lets just use two services.

analogue line rental increases by 10%.

Adsl 512 decreases by 20%

But their are 100 analogue lines for each one Adsl line.

So would the net be 10 - 20 ie decrease of 10%

or (100 * 1.1) - (1 * 0.8) = 109.2 ie an increase of 9.2%
 
I will find the Price Cap Regime law now, so that everyone can see what is, and what is not, a regulated service.

I can't find them - please can someone else try find the most recent Price cap regime regulations. These came into effect in June 2005.
 
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Daveogg said:
Debbs when the overall increase or decrease is calculated how are the various services weighted. for example and to make it simple lets just use two services.

analogue line rental increases by 10%.
Adsl 512 decreases by 20%
But their are 100 analogue lines for each one Adsl line.
So would the net be 10 - 20 ie decrease of 10%
or (100 * 1.1) - (1 * 0.8) = 109.2 ie an increase of 9.2%
Click to expand...

I understand what you are saying, but no, services are not 'weighted' strictly in this way. There is a small "weighting" that comes into play in terms of the sub-basket constitutions, but this is extremely difficult to explain.
 
This is very informative, thanks for all the info Debbie.

I'm just wondering, if Telkom was forced NOT to increase their prices by more than 3.5% under CPIx, is that not an "admission" that they were way overpriced?

No other "private" company that I know of will be forced to keep their increases under CPIx. Heck, just look at by how much medical aid goes up every year!!

Anyway, my 2c worth.........
 
thanks for the clear explanation :)

It would be nice to find out how much weight local calls and line rental hold in the final calculations? My guess is that profits gained from increases in these services will more than cover the cost of dropping adsl prices and Telkom will come out smiling as always. :(
Have any mass petitions been attempted to somehow cajole Ivy into taking a meaner stance against telkom?
 
Thanks for the excellent breakdown... Good to see that ICASA does actually have SOME authority to do something with these ADSL hearings, contrary to the views of some of the big companies submitting arguments *coff* Vodacom *coff*...

Anyway i think it's all starting to fall in place now...
 
Paulr said:
I'm just wondering, if Telkom was forced NOT to increase their prices by more than 3.5% under CPIx, is that not an "admission" that they were way overpriced?

No other "private" company that I know of will be forced to keep their increases under CPIx. Heck, just look at by how much medical aid goes up every year!!
Click to expand...

There is a body of theory, gleamed from international experiences in liberalising telecoms, that is to be considered here. Basically, the prevailing thought is that telephone companies are, historically speaking, inefficient, wasteful government monopolies. In fact, in the case of South Africa, Telkom's predecessor was statutorially prohibited from making a profit! Yes, there really was a law that said they were not allowed to make a profit! (Those were the days, eh? :) ). This resulted in a great deal of internal cross-subsidising, as well as the monopoly being run according to political economy objectives as opposed to market objectives.

Now it would have thrown the entire telecoms industry into absolute turmoil to suddenly expose such a monopoly to a competitive market immediately. Changing the internal processes and culture and business-plan of a monopoly is rather difficult. The transition from a government-owned monopoly to a liberalised, competitive industry must necessarily address this fact, and prepare the former monopoly for the coming competition by giving them time to eliminate cross-subsidising and other practices which do not conform with market principles.

The CPI - X formula is one structure that forces the monopoly to start acting like a company in a competitive market. 'X' is also called the 'productivty factor'. By imposing the CPI - 3,5% formula, what the regulator is essentially doing is saying that Telkom MUST become at LEAST 3,5% more efficient every year if they want to increase profits. But since inflation affects the end-figures, CPI is added on. In other words, the addition of CPI is simply meant to be a control for inflation.

So this is not really an 'admission' by anyone that Telkom is over-priced. It is simply a widely-used method to force the incumbent to realign internal practices in accordance with market principles. The value of X can, however, be viewed as kind of like a 'monopoly penalty' - i.e. a 'penalty' imposed on Telkom for being the monopoly. From this viewpoint, it's kind of like saying, "Dumbass monopoly! If you are the only company in this arena then you BETTER be able to make a profit!"

In the South African case, this principle has gone somewhat haywire. The reason why Telkom has been making such enormous profits in recent years is, in a large part, due to the low 'productivity factor' (i.e. the value of X that has been imposed on them. Until June of last year, this number was a measely 1%. In other words, Telkom needed to become at least 1% more efficient every year if they wanted to match the previous year's profit. If you can understabd the economics behind this, you will also see that this 1% is, by design, passed back onto the consumer.

In reality, and this was calculated by an academic at Wits' Link centre, Telkom has been making productivity gains in the region of 11-30% every year. But with a productivity factor set at 1% until last year, only 1% was being passed back on to the consumer, while the rest of the productivity gains were accruing directly to Telkom. This partially explains why their profits have been escalating exponentially in the past few years.

Out of interest, other countries typically have their productivity factor set at about 5-12% initially. Australia, for example, currently has a 7,5% productivity factor on their incumbent. I think that British Telecom too is still subject to a Price Cap method (owing to the near invincibility of the incumbent in a liberalised market). If SA were to become more in line with international practice, Telkom should ideally be subject to about a 15% productivity factor (for a limited time only though). This is because, in the SA case, qualitatively 15% is equal to about a quantitative 8% productivity factor in other countries, once purchasing power pariety is taken into account.
 
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Thanks to Yuu for finding the link to the Price Cap regime. Well, sort of....This PDF has been placed online erroneously - unfortunately this version contains comments and looks like it is actually a draft version and not the final version. Nevertheless, I don't see any important differences between this version and what I remember of the the actual version that was signed.

The link can be found here: http://www.info.gov.za/gazette/regulation/2005/27752.pdf

To save you the time, products covered in the 'residential sub-basket': line rental, local calls, national calls, international calls, ‘Home” branded ADSL services or their equivalent and public pay telephones.
 
Debbie2 said:
Telkom told government to F*off when gov asked for the SAT3 shareholder's agreement. To my knowledge, Telkom has still not provided gov with this. From what I undrestand, Telkom doesn't own SAT3, they were merely appointed as 'guardians' of SAT3. But they have been 'guardians' for so long now that they have forgotten that they don't own it, or any part of it. Correct me if I am wrong here!
Click to expand...
Interesting.
 
Originally Posted by Debbie2
Telkom told government to F*off when gov asked for the SAT3 shareholder's agreement. To my knowledge, Telkom has still not provided gov with this. From what I undrestand, Telkom doesn't own SAT3, they were merely appointed as 'guardians' of SAT3. But they have been 'guardians' for so long now that they have forgotten that they don't own it, or any part of it. Correct me if I am wrong here!
Click to expand...

Debbie2 - I believe SA has something similar to a "freedom of Information act"

What would stop someone from approaching the courts and requesting access to the Shareholders Agreement - A strong case can be made that visibility of this agreement would be in the "public interest" ISPA - Do you Job
 
Toby said:
Debbie2 - I believe SA has something similar to a "freedom of Information act"

What would stop someone from approaching the courts and requesting access to the Shareholders Agreement - A strong case can be made that visibility of this agreement would be in the "public interest" ISPA - Do you Job
Click to expand...

Toby I am unsure what the current status of this is - this info may very well be outdated and Telkom may since have handed over this agreement - dominic, you would know the current status of this indaba...? AFAIK it has still not been handed over.

Nevertheless Toby you are 100% correct in what you say. The Act you are referring to here is called the Promotion of Access to Information Act (PAIA). It's a rather newish law, and, well, that kinda presents it's own problems. To complicate matters even further, Telkom is exempt from certain portions of the Act.

I suppose that if Telkom is still being anal about handing this over to the govt, then govt MUST use PAIA to get a hold of it. I think an ordinary member of the public would have a harder time justifying their need for it (though I have no doubt that such justification exists).

In short, it's up to the govt.
 
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