Whew mbs...thats quite a question, and has been the subject of a lot of adversarial exchanges between Telkom and Icasa.
To give you a basic summary:
The Telecoms Act of 1996 gave the minister the power to set the Price Cap for three years. The Price Cap formula is expressed as "CPI - X". CPI is the inflation rate, X is the productivity factor.
CPI makes Telkom's prices rise, X makes them go down.
CPI is obviously something that the economy's performance determines, and changes each year. So the minister (was jay naidoo at the time) set the price cap for three years at CPI - 1,5%. In 2000, the regulator (SATRA/ICASA) was to take over the setting of the price cap.
But what happened in 2000 is that ICASA didnt complete its work in time (i dont know why, could have been underfunding issues or political pressures), so Telkom was able to set 2001 prices based on the old formula of CPI - 1,5%.
In 2001, ICASA got their act into gear and created a new cap, which the minister approved, but telkom refused to abide by it. Long story. Landed up in court, and suffice it to say that Telkom just simply refused to abide by the law, and they won the day in an out of court settlement, and the old price cap was continued for yet ANOTHER year.
Things changed a bit in 2003, but I dont know the details of this.
Then, at the end of last year, Icasa started the process to revise the price cap again. This process has been through two round of public commenting, and at the moment Icasa is about to send their proposals to the minister for approval. The proposal is to set X at 3,5%.
The productivity factor (i.e. the value of X) is not subject to oversight by a third party. Icasa has the authority to determine the price cap, but this is subjetc to the ministers approval. The minister can veto icasa's proposals, but she cannot substitute Icasa's proposals for her own. Basically, the minister can keep rejecting Icasa's proposed price cap until Icasa submits one that she wants. So effectively, the minister still has the authority over the price cap's values.
The way in which Icasa arrived at their current proposed figure of 3,5% is very very very very very complicated. At first Icasa would not release info about this. The earlier this year, they decided to make the methodology public. This can be found at:
http://www.icasa.org.za/Repository/resources/Telecoms/Note on Methodology 7 December 2004.doc
Further info on the Price Cap can be found at:
http://www.hellkom.co.za/info/action.htm (I was trying to get ppl to submit comments to ICASA)
My submission to Icasa, which I sent in as a group submission, can be found at:
http://www.geocities.com/vionectro/pricecap.doc
Just another note- in other countries in a similar stage of development, the productivity factor is usually set at about 5-10%.