Calculating the Long-run Incremental Cost of Interconnection Using a Network Cost Simulation Model

As the world's telecommunication providers privatize, governments turn toward regulatory mechanisms to resolve interconnection disputes. Following provisions of the World Trade Organization agreement, these decisions are supposed to be decided on the basis of "cost;" however, the language employed requiring this standard is rather poorly defined. We develop an engineering-economic model of an interoffice telephone network suitable for calculating interconnection cost. The model utilizes the method of simulated annealing described by Metropolis et al. to determine an "optimal" SONET ring. Using actual switch location data for Maryland we calculate such a network and demonstrate its incremental cost for interconnection. The results may be applied in a variety of tariff formats; we argue for a multipart tariff as most closely representing the cost structure of modern networks and offering flexibility in creating incentives for network buildout in a developing country context.