Barbados: Price Cap Decision

Editor’s note: This note summarizes the salient features of the Barbados Fair Trading Commission’s decision of April 2005 on price cap regulation of Cable & Wireless (Barbados) Limited’s (C&W’s) retail prices. The price cap plan became effective on April 1, 2005 and will conclude on July 31, 2008. This note highlights the structure and key variables of the price cap system including the composition and number of service baskets and the treatment of quality of service, exogenous events and unused caps (headroom).

The Commission was established as a statutory corporation in January 2001 by the Fair Trading Commission Act (FTC Act) 2001-31. The Commission enforces the provisions of the FTC Act, the Consumer Protection Act, the Utilities Regulation Act, and the Telecommunications Act 2001-36. The Utilities Regulation Act and the Telecommunications Act empower the Commission to regulate the telecommunications sector.

Price Cap Formulae

The Commission’s price cap plan replaced the rate of return system previously used to regulate C&W’s retail prices. The main price cap formula is defined as:

APItk represents the Actual Price Index for basket k of services in year t

PCItk represents the Price Cap Index for basket k of services in year t, and

T is the duration of the Price Cap Plan (in years).

Under the plan C&W has freedom to set its prices. However, the average change in C&W’s prices as measured by the Actual Price Index (API) for a given basket of services must be less than or equal to the Price Cap Index (PCI) for that basket of services.

The Price Cap Index for a given basket of services, PCItk, is defined as follows:

PCIkt-1 represents the Price Cap Index for basket k of services in the previous year (t-1)

It is the inflation rate in year t and is measured by the Barbados Retail Price Index (RPI), and

Xtk and Ztk are the productivity factor and exogenous factor for basket k of services in year t, respectively. Ztk is a factor that accounts for events beyond C&W’s control.

The rules of the plan provide for the Commission to:

  • Reset the Price Cap Index on August 1 of each year of the cap, and
  • Ensure that the price cap constraint for each basket of services is adhered to, that is the Actual Price Index for each basket is less than or equal to the Price Cap Index.

For its part, C&W must demonstrate to the Commission, no later than July 1 of each year of the price cap, that the Actual Price Index is at or below the Price Cap Index. C&W must also notify the Commission and the general public of any price increases at least twenty (20) business days prior to the introduction of the new prices and two business days in the case of price decreases.

Service Baskets

In the wake of the phased liberalization of the telecommunications sector, the Government of Barbados directed the Commission to regulate the following categories of telecommunication services: [1]

  • International service,
  • Domestic voice service,
  • Interconnection,
  • Leased circuits, and
  • International simple resale.

Prices for interconnection and international simple resale prices are negotiated on a commercial basis between operators and are therefore excluded from the price cap plan developed by the Commission.

For price cap purposes the remaining service categories were grouped into four service baskets:

  • Basket 1 comprises the monthly rental for residential telephone lines. The plan restricts increases in the monthly rental for residential telephone lines to no more than 7% per annum,
  • Basket 2 comprises all domestic voice telecommunication services not included in Baskets 1 and 4. These include the monthly rental for business telephone lines, one-off installation charge for residential and business telephone lines, public payphones and value added services. The Price Cap Index for Basket 2 is RPI minus 4.19%,
  • Basket 3 comprises outgoing international calls, and international leased circuits. The Price Cap Index for Basket 3 is RPI minus 11.57%,
  • Basket 4 contains all other retail services not accounted for in Baskets 1, 2, and 3 such as domestic leased circuits, and voicemail. Basket 4 is not subject to a PCI constraint.

In constructing each service basket, the Commission took account of (among other things):

  • The phased liberalization of the telecommunications sector,
  • The need to enforce the competition provisions of the FTC Act, and
  • The need to moderate the impact of price increases on residential telephone customers.

Initial Prices

The going-in prices under the price cap plan were the company’s existing prices for price regulated services. The Commission found that these prices allow the Company to cover its cost and make a reasonable return on capital.

Exogenous Factor

The formula for the Price Cap Index includes a factor to account for exogenous events, Ztk. Exogenous events include hurricanes, changes in the tax regime, significant exchange rate changes, introduction of calling party pays for fixed to mobile calls, alteration of trade union rules and acts of god (that is, force majeure events). The exogenous factor is currently set at zero.

To be included in the Price Cap Index calculation, an exogenous event must:

  • Be beyond the control of the company, for example changes in legislation, or judicial or administrative action,
  • Relate specifically to the telecommunications industry, and
  • Have a material impact on the regulated segment of the company which is subject to price caps.

The productivity factor (Xtk) is derived independently of the Z factor. In the case of an exogenous event the company must make a separate filing with the Commission. The Commission may only make a decision after consulting with stakeholders.

Headroom or Unused Cap

The plan allows C&W to carry-over any unused cap to the subsequent year for Baskets 2 and 3. An unused cap (headroom) is created when the actual level of price increase is below the level permitted under the cap, that is the Price Cap Index exceeds the Actual Price Index.

This means that for the subsequent period C&W has the opportunity to implement price increases that exceed the difference between inflation and the productivity factor for Baskets 2 and 3. In keeping with the Commission’s desire to limit the level of increase in residential telephone lines to no more than 7%, C&W is not permitted to carry-over any unused cap for Basket 1. Basket 4 is not subject to a PCI constraint and therefore the headroom mechanism does not apply.

Quality of Service

The price cap formula contains no explicit variable for quality of service. Instead, the Commission has established guaranteed and overall service quality standards for C&W’s regulated domestic fixed telecommunications service, including those services subject to price cap regulation. [2]

Guaranteed service standards cover fault repair, loss of service, response to customer complaints, reconnection of service after disconnection for non-payment, failure of the company to meet scheduled appointments with customers, and wrongful disconnection of service.

Under the guaranteed standards C&W is required to pay compensation to those customers affected by the company’s failure to meet the defined target for the relevant standard.

The overall standards are designed to reflect the overall performance of the company and are not defined by the service that an individual customer receives. There is no compensation payment to customers should the company fail to meet the overall standards.

Endnotes:

[1] See the Barbados Unregulated Service Policy, November 1, 2003.

[2] See the Commission’s Decision on Decision on Standards of Service for Cable & Wireless.

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