TOKYO-NTT Corp. and new common carriers (NCCs), carriers competing with NTT in the liberalized market, are in a debate about implementing the Long Run Incremental Cost (LRIC) interconnection model, which is scheduled to be introduced in Japan by the end of this year.
LRIC is a universal interconnection model used by other nations around the world, including the United Kingdom.
At a series of public hearings held by the Telecommunications Council, an advisory body for the Ministry of Posts and Telecommunications (MPT), NCCs supported the MPT model and urged the government to employ the model soon. MPT is working on creating a Japanese version of the LRIC tailored to Japanese conditions.
NTT, which owns virtually all of Japan’s subscriber networks, said its own top-down model should be employed. Most Japanese wireless operators, including most PHS carriers and all cellular carriers, interconnect with NTT’s networks and will be affected by the LRIC.
The company said the MPT model, if employed, will impose a “destructive” impact on its business. An NTT representative at the hearing said the MPT model would reduce NTT’s annual revenues by 430 billion yen (US$4.23 billion) based on fiscal 1998 financial results.
NTT currently employs historical cost-based interconnection charges rather than a forward-looking model such as LRIC.
NCCs, on the other hand, said the impact on NTT will be limited to 200 billion yen (US$1.9 billion).
In its opinion paper submitted to the government, Japan Telecom (JT), the second-largest NCC, said: “NTT will be able to cope with such a moderate impact if it improves its efficiency.”
However, partly due to strong pressure from the U.S. government, the Japanese government decided to introduce the LRIC model as the basis for calculating interconnection charges by the end of 2000.
Upon the decision, the LRIC Study Group, an informal group at the MPT, released its own LRIC model in September 1999, invited public comments on it via the Internet by mid-October and held three public hearings between October and November 1999.
The study group defined LRIC as the cost required for constructing the network, with the capacity for dealing with the same number of subscribers and the same amount of traffic as the present system, using the least expensive and the most efficient machines and technologies.
Based on the public comments and hearings, the government plans to decide the pricing methodology by February at the earliest. If it introduces the LRIC-based interconnection charges system in 2000 as scheduled, the government will have to submit a revision bill for the Telecommunications Business Law to the Japanese Diet in the second quarter.
The LRIC Study Group report included two plans: Plan A and Plan B. When Plan A is employed, the local network switch connection charges will be reduced by 16.7 percent. When Plan B is employed, the charges will be reduced by 41.1 percent, but then the subscriber line rental fee will increase by 300 yen (US$2.95), according to the report.
According to NTT’s top-down model, the local switch connection charges will be reduced by only 2 percent.
Cable & Wireless IDC, which owns stakes of the J-Phone Group wireless operators, said it supports Plan B of the MPT model. But the foreign carrier (C&W recently took over IDC) argued that even when Plan B is employed, NTT will not need to increase basic monthly charges for users.
Tokyo Telecommunication Network Company Inc. (TTNet), a regional telecommunications service provider based in Tokyo, said the government should not keep interconnection charges at a higher level out of fear that such an introduction of LRIC may deteriorate NTT’s business performance. The carrier also said discussions of interconnection charges should be carried out separately from discussions of universal services.
NTT said if the MPT model is introduced, it will be difficult for the company to continue to provide universal services. Under the NTT Law, NTT Corp., NTT East and NTT West are responsible for providing universal services.
JT criticized NTT’s top-down model, saying NTT does not disclose the model program and input data. JT also said even if the MPT model is introduced, the impact from the introduction will remain at around 200 billion yen, or 2.4 percent of NTT Group’s fiscal 1998 revenues.
On 17 November, 1999, NTT Corp. announced a drastic restructuring plan. Under the plan, NTT East and NTT West will reduce their total regional offices to 200, about one-third the current number; reduce their annual investments in plant and equipment by 300 billion yen (US$2.95 billion); and reduce employees by 21,000, or about 16 percent of total current employees. However, NTT said the restructuring plan does not include any impact caused by introducing LRIC.
MPT said it will consider the financial status of NTT, the impact on its telecom service users and its ability to provide universal service when it makes a decision about the new interconnection charges.
The issue will test MPT’s leadership and is dependent upon MPT finding a solution, given that both NCCs, foreign governments and carriers support the MPT model, while NTT persistently sticks to its own model.
