In all cases calculations are made on the basis of a given pattern of growth of customer connections and/or traffic, and capital and operating costs are discounted back to a base year of 1988. The discount rate used for this purpose is 6% p.a., net of inflation, representing approximately the real interest rate at the time of writing.
In Chapter 3 we discuss the classification of components of cost into the three categories noted in Exhibit 1.4. The resulting magnitudes of cost under each of the competitive scenarios under study are given in Chapter
4.
1.3.3 Detail on assessment of user benefits
Exhibit 1.5 illustrates the method of estimating the magnitude of potential user benefits arising from the introduction of competition into telecommunications service markets (i.e. relating to argument 1B on Exhibit 1.3). The analysis proceeds in two stages, corresponding to the two stages of processing of data indicated on columns two and three of Exhibit 1.3. First, we estimate the magnitude of the market which is being subjected to competitive pressure by the proposed second network. This is done by dividing the revenues of the main telecommunications network operator into different services, and then estimating the proportion of revenues within each service which are subjected to competition. For example, if competition is introduced into international networks by a carrier having access to the same origins and destinations as the existing carrier, we conclude that 100% of this category of revenues is subject to competitive pressure. Another revenue category, such as that derived from rental of business lines, may be subject to competition only in part, due to the limited geographical coverage of the second network. Finally, there may be elements of the market, such as the residential telephone service, which the second network does not serve at all. Through this process we arrive at an estimate of the total revenues subject to competition (see central column of Exhibit 1.5).
The benefits which telecommunications users obtain from the introduction of a competitive carrier are obviously very difficult to quantify. Experience overseas, particularly in the United States and the United Kingdom, indicates that two types of benefits follow:
a price reduction, due to pricing by the new competitor at levels lower than that charged by the main provider and to subsequent price reductions by both parties
improvements in the promptness with which service requests are met, in the speed of response to repair and other customer calls, and in related non-price measures of service quality.
Only the price reduction benefits are quantified in this study. Although it is extremely difficult to draw generalizations from the limited international experience of introduction of competitive
telecommunications networks, a figure of 15% corresponds to the types of price reduction experienced in such circumstances. Typically, the
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