Termination rates

Termination rates are the charges which one telecommunications operator charges to another for terminating calls on its network. Traditionally three models of charging these fees are known: calling party pays (CPP), bill and keep (BAK, peering), receiving party pays (RPP).

For example, a customer of Operator A wishes to call a friend who has an Operator B mobile. Operator A will charge the customer a fee per minute (the retail charge) for this call. Operator B will charge Operator A a fee for terminating the call on its network. This termination rate therefore forms part of Operator A's cost of providing the call to its customer.

Termination rates may be commercially negotiated or may be regulated. A range of approaches can be used to regulate rates. International benchmarking or cost models such as a LRIC (Long Run Incremental Cost Model) or LRIC+ cost models are the most common approaches to calculate the efficient levels of termination rates. In LRIC models, the termination costs are calculated for an efficient hypothetical mobile operator. The model assumes that firms use the best technologies to provide mobile calls and services. It is a long run model as it takes into account the growth of demand, which is calculated using data on observed traffic, income and user information. It considers the time period that the service provider needs to invest in capital improvements to provide the mobile call services. Termination rates (TRs) derived from this model therefore calculate capacity costs of each element of the network, expressed in terms of per minute use. Under a pure LRIC model, costs are also calculated for an efficient hypothetical firm. The difference between both models is that while the former calculates TRs through the division of total costs by total demand, pure LRIC methodology calculates TRs by comparing a firm that provides mobile voice access and one that does not, to determine the necessary costs of providing mobile services.

Historically there was and in some countries still is much debate about the best level for interconnection rates. Some argue that approaches based on models do not take into account real world risks and costs and suffer, among other things, from survivorship bias (they consider that risk can be assessed by looking only at the returns of surviving companies) and therefore underestimate the true level of risk. Another concern is based on Real Options. This considers the benefit that is extinguished from the moment that an investor chooses to invest and suggests that the loss of this right to invest should be taken into account when looking at the expected returns on investments made.

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