PURC CASE

Reverse Auctions for Universal Service MARK A. JAMISON1

Introduction

400 people in a village.

Nearly every country has universal service or access policies that purport to make telecommunications services more readily available to customers who might otherwise be unable to obtain service. Subsidies are often used to make these services affordable.

Insia is a country of about 4 million people. As Map 1 illustrates, the country has seven regions. Region I contains the capitol city of Gburg, which has a population of 1,000,000. The rest of Region I is made up of 10 small villages of about 400 people each. Region II contains the city of Dursban, which has a population of 500,000. The rest of Region II consists of 15 small villages of 200 people each. Region III contains the city of Timbi, which has a population of 100,000, and 30 villages of 300 people each. Table 1 summarizes the population and communications statistics.

Many countries have used reverse auctions to provide universal service with some success. The auctions are used to try to obtain services as the lowest possible cost to the government or to the universal service fund. Experiences have shown that reverse auctions can lower the cost of universal service or access. Their experiences also show that the details matter. This simulation allows participants to experience a reverse auction. The simulation is hypothetical, but based on actual experiences.

The Telecom Sector There are five possible providers of VPTs. The incumbent operator, Insia Incumbent Telecommunications (IIT), provides mobile services in Region I, Dursban, and Timbi. It also offers fixed line in Gburg, the nation’s capitol, and is the only provider of VPTs at this time. 1MP and 2MP provide mobile services in Gburg, and each as a 20% market share. 3MP provides mobile services in Dursban and has a 30% market share. 4MP offers no services in Insia at this time, but is an experienced provider of VPTs in rural

Background The Government of Insia (GoI) directed the country’s National Telecommunications Regulator (INTR) to institute universal service policies through the use of reverse auctions. The service target is to ensure the availability of one village pay telephone (VPT) for every

1The author is Director, Public Utility Research Center, University of Florida, PO Box 117142, Gainesville, Florida 32611-7142, http://www.purc.ufl.edu. © Mark Jamison and PURC

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Case No. 2011-A Revised July 29, 2011

regions of neighboring countries.

Dursban, and Timbi – have adequate VPTs, so subsidy will be provided for those areas. Auctions will be conducted for the villages without VPTs, but on a regional basis as described in the auction rules.

Auction Plan INTR plans to conduct its reverse auction as follows. A single annual subsidy amount will be offered for each region. INTR will establish a maximum subsidy for each region as the difference between the cost of providing the VPTs in the region and the expected annual VPT revenue. Then INTR will conduct a simultaneous, multi-region and multi-round reverse auction as follows: •

Each bidder can bid on as many or as few regions as it wants in each round.

•

Bidders submit their bids in writing on the established bidding form. INTR records the lowest bid for each region on a public bulletin board for all to see. Once the bids are recorded, the next round of bidding begins and operators are given up to five minutes to submit their bids.

•

The initial bid for each region can be no higher than the maximum subsidy established by INTR.

•

To be considered, each subsequent bid for a region must be lower than the lowest bid offered in a previous round.

•

Bidding will continue for a maximum of five rounds, or until no more bids are forthcoming.

INTR established a maximum price of US$0.25 per minute for VPT usage and estimated annual revenue for each region based upon usage statistics from the major cities. INTR was unable to develop its own cost estimate for VPTs, so it relied upon IIT to provide estimates.

Simulation Logistics Participants are divided into six teams. One team is the INTR. The other five teams are the operators. Each operator is given private information on its own costs. Bidding commences 10 minutes after operators have been given their information so that each has time to develop its bidding strategy. Each operator’s objective is to maximize profit, which is revenue plus subsidy minus cost. Operators submit their bids using the bid form shown as Attachment 1. Copies of this form will be available. Upon receiving each round of bids, the INTR records the lowest bid for each region for all to see. □

Table 2 shows INTR’s estimates of revenue and costs for VPTs in the areas to be auctioned. The three major cities – Gburg,

© Mark Jamison and PURC

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Case No. 2011-A Revised July 29, 2011

References Wallsten, Scott. 2008. “Reverse Auctions and Universal Telecommunications Service: Lessons from Global Experience.” Working Paper, Technology Policy Institute.

Map 1. Regions of Insia

Region II

Region VI

Dursban

Region IV

Gburg (capitol)

Region I Region VII Region V

Region III Timbi

© Mark Jamison and PURC

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Case No. 2011-A Revised July 29, 2011

Table 1. Current Population and Communications Statistics

Region Region I Region II Region III Region IV Region V Region VI Region VII

Cities / Villages Gburg 10 Dursban 15 Timbi 30 100 150 200 100

Population per city or village 1,000,000 400 500,000 200 100,000 300 400 400 800 1000

Current Providers

Current Number of VPTs

IIT, 1MP, 2MP ITT IIT, 3MP None IIT None None None None None

Monthly Minutes per VPT

2500 0 1250 0 300 0 0 0 0 0

Mobile Density (SIMs / 100 POP)

Fixed Line Density (Lines / 100 POP)

75 20 75 0 40 0 0 0 0 0

10 0 5 0 0 0 0 0 0 0

500 NA 500 NA 600 NA NA NA NA NA

Annual VPT Revenue $3,750,000 $0 $1,875,000 $0 $540,000 $0 $0 $0 $0 $0

Table 2. VPT Targets and Forecasts

Region

Number of Villages without VPTs

Region I Region II Region III Region IV Region V Region VI Region VII

© Mark Jamison and PURC

10 15 30 100 150 200 100

Population per village

Expected Annual New VTP Revenue per Region

VPTs to be Provided per Village

400 200 300 400 400 800 1000

1 1 1 1 1 2 3

4

$36,000 $27,000 $81,000 $360,000 $540,000 $1,440,000 $900,000

Estimated Annual VTP Costs per Region $50,000 $75,000 $168,750 $812,500 $1,218,750 $1,950,000 $1,137,500

Maximum Annual VTP Subsidy per Region $14,000 $48,000 $87,750 $452,500 $678,750 $510,000 $237,500

Case No. 2011-A Revised July 29, 2011

Attachment 1. Bidding Form

Round Number ______________________________________________

Bidder Name _______________________________________________

Region

Amounts Bid

Region I

Region II

Region III

Region IV

Region V

Region VI

Region VII

© Mark Jamison and PURC

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Case No. 2011-A Revised July 29, 2011