AIDE MEMOIRE

European Commission's comments on NTT interconnection offer.

The Delegation of the European Commission in Japan wishes to bring to the attention of the Ministry of Posts and Telecommunications the concerns of the Commission Services on the proposed interconnection charges submitted by NTT on 30 January to the Ministry of Posts and Telecommunications.

We welcome the fact that the new charges are designed to reflect the costs of the underlying facilities rather than being based on profit calculations as in the past. Nevertheless, we are surprised about the relative level of these charges when compared to the equivalent cost oriented charges in the European Union.

The Commission has published a set of 'best practice" prices for call termination (Commission Recommendation on Interconnection Pricing C(98) 50, 8 January 1998, to be published in the OJ), based on actual call termination charges in EU Member States.

The NTT charges for fixed-fixed network interconnection appear to be several times higher than the EC 'best practice' prices. While it is clear that there are some differences in the cost of constructing networks and providing telecommunications services in different world regions, the extent of the difference between the EU prices and the NTT prices appears difficult to explain. Part of the difficulty arises because of lack of transparency of the NTT prices (see below).

The NTT prices do not explain the cost basis for the figures given (historic costs or forward looking costs), nor do they indicate whether the interconnection charges include any element related to tariff imbalances within the NTT network as a result of previous or on-going universal service obligations.

We consider that the most appropriate basis for calculating interconnection charges is a forward looking long-run average incremental cost approach. In a newly liberalised market, the interconnection services of an incumbent operator are not services which can be easily duplicated, and call termination in particular is not subject to significant competition. The forward looking long-run incremental cost approach provides an analytical framework which can be used to obtain an estimate of the cost that would be found in a fully competitive market, where firms are compelled to look forward to survive, rather than backward to the cost of their original investment.

We are aware that MPT is considering to implement an long-run average incremental costing approach within the next two years. However, the fact that such an approach is not yet possible does not, in our opinion, justify the use of fully allocated historic costs to calculate interconnection prices.

On the issue of tariff imbalances, we note that the WTO agreement on basic telecommunications services calls for the administration of universal service schemes to be transparent and competitively neutral. Hidden cost component arising from deficits in the local access network of NTT should therefore not be included in interconnection charges.

In addition, the NTT proposal sets different charges for termination of mobile (PHS) calls compared to termination of calls from other fixed networks. The cost to NTT of terminating a call from a mobile network is basically the same as the cost of terminating an equivalent call from a fixed network. NTT's interconnection charges for call termination should be independent of the origin of the call, except to the extent that there are genuinely objective cost differences for NTT.

We have concerns about the extent to which these proposals fulfil the GATS principles and the obligations of Japan under the WTO agreement on basic telecommunications services.

The Delegation of the European Commission in Japan wishes to thank the Ministry of Posts and Telecommunications for the opportunity to comment on the proposed interconnection charges by NTT and would very much appreciate that these comments be put on the record to be made open to free and public perusal in accordance with the invitation from the Ministry of Posts and Telecommunications to comment.