6. Pricing, Tariffs & Interconnection
6.1  General
6.2  Tariff Fundamentals
6.3  Price and Revenue Generation Calculations
6.4  Summary
6.5  Revenue and Cost Sharing: Subsidization Issues
6.6  Transfers among Operators
6.7  Summary

The following issues are addressed in this section:

• cost recovery and incremental cost pricing
• the relation of price levels to user demand and willingness to pay;
• cost and revenue sharing or cross-subsidy mechanisms in relation to national infrastructure goals; and
• the role of interconnection agreements in commercial viability.

To be commercially viable, the total revenue figure must obviously match the operating cost plus profit. Besides the basic tariff structure, varying calling patterns can have a large affect on revenue generation. For example, a smaller subscriber base with less minutes per year can generate higher revenues if the calling pattern has a higher percentage of long-distance calls.

Ideally, operators should be allowed the flexibility to set tariffs to match the characteristics of the marketplace – in particular the costs, customer calling patterns and elasticity of demand.

Also interconnection plays an important role for commercial viability of an operation. The incremental costs of providing interconnection between rural and urban exchanges differ significantly. For the urban operator, interconnection of rural traffic is only a small increment on top of a relatively large base volume. Incremental costs will therefore be relatively small. However for the rural operator, the majority of calls may be to/from urban centers, thus a large portion of the costs of the rural operator are associated with interconnection to the urban or national operator. As a result, incremental costs are significantly higher. Additionally, the rural operator also has higher risks.

Some asymmetric payment mechanism is therefore required to redress the burden of both cost and risk on the rural operator. The rural operator could recoup higher access costs through a combination of mechanisms. The options are discussed in this chapter.