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The Competition Commission ended its year-long investigation of mobile call termination charges and has concluded that each of the four second generation mobile network operators (“MNOs”) have a monopoly in respect of call termination on their respective networks. The Competition Commission concludes that the four MNOs’ termination charges are 30 to 40% in excess an estimation of the fair charge and the immediate remedy recommended by the Competition Commission involves a reduction of the four MNOs’ charges by 15% prior to 25 July 2003.

As from 25 July 2003, the new EC electronic communications regime contained in the 2002 Directives are required to be transposed into national law. The Competition Commission’s views for the period following 25 July 2003 were set out in their report. However, their assessment will only be valid under the new EC regime after that date if, as expected, Oftel (or in due course the Office of Communications) carries out a market assessment under the EC Framework Directive 2002/21 which likewise concludes that call termination on each MNO’s network is a distinct market and that each of the MNOs is therefore dominant in respect of termination on its own network. Any such finding that an operator has significant market power, i.e. is in a dominant position, under the new regime, would need to be submitted by Oftel to the European Commission under the Framework Directive in order for the European Commission to be given an opportunity to intervene against such a measure, which it can do if the proposed measure is shown not to be compatible with the fundamental objectives set out in Article 8 of the Framework Directive. This is not affected by the European Commission’s inclusion of mobile call termination on individual networks in its recently published Recommendation on markets to be assessed by national regulatory authorities.

The Competition Commission investigation resulted from the four MNOs’ refusal to accept Oftel’s conclusions in its Review of the Charge Control on Calls to Mobiles of 26 September 2001 in which it proposed a tightening of the price controls on mobile calls termination charges from RPI – 9% to RPI – 12% during a four-year period ending in March 2006.

The basis for the Competition Commission’s conclusion that each MNO has a monopoly of call termination on its own network, is that there is no practical technological means of terminating a call other than on the network in question. The principal conclusions of the Competition Commission were as follows:

The termination charges of the four MNOs operate against the public interest and can be expected to be up to double the level of the fair charge by 2005/06 in the absence of charge controls.

Customers who make more fixed to mobile calls or off-net calls (calls from one mobile network to another) than on-net calls (calls from within the same mobile network) unfairly subsidize those who mainly receive calls on their mobile calls or who mainly make on-net calls (or who make little use of their mobile phones). (The Competition Commission found that during 2001/02, calls to mobiles from fixed network operators accounted for a larger proportion (70%) of termination charges than off-net calls (about 30%). This results in greater use of the higher cost (mobile) technology at the expense of the lower-cost (fixed) alternative. This in turn distorts patterns of telephone use.

The excess charges for termination are used to finance retail competition by the MNOs which in turn result in distortions of competition because MNOs do not charge and subscribers do not pay the proper costs of handsets. This under-evaluation of mobile phone handsets by customers results in greater turnover (churn) than would take place if customers paid charges which reflected the proper value of the handsets. Ironically, this seems to indicate that the current mobile termination charges indirectly result in greater retail competition between MNOs, but the Competition Commission took the view that MNOs incur disproportionate expenditure on mobile customer acquisition than they would if termination charges reflected costs more closely.

The Competition Commission concluded that the appropriate method for determining the costs of termination was long running incremental costs (LRIC) calculated on the “cost-causation principle” i.e. that only the costs caused by the caller should be included, with the addition of a mark-up for relevant non-network costs and a mark-up for network externality to reflect the benefits to the caller of having a large, accessible pool of people to call and be called by. The price cap was recommended to be imposed by way of an immediate 15% reduction in termination charges over the period 1 April to 25 July 2003 and then a progressive reduction expressed as an RPI – X formula for the period leading to 31 March 2006. The Competition Commission concluded that this would not result in increases in average retail prices or pose a threat to the financial viability of the MNOs because their business plans both projected a continued decrease in retail prices and assumed some reduction in termination charges.

The MNOs can be expected to attack the Competition Commission’s conclusions by means of a judicial review action. As the EC Recommendation has since been adopted and includes call termination on an individual mobile network as a distinct market, mobile operators could consider challenging its validity in the context of such judicial review proceedings, with a view to seeking a reference to the European Court of Justice under Article 234 of the EC Treaty. MNOs could even consider the possibility of a direct challenge to the Recommendation in the European Court, although this would involve asserting inter alia that that the “Recommendation” is in substance a decision, and one which is of direct and individual concern to the MNO.

It is also open to the MNOs to lobby the European Commission under the new EC Framework Directive against the adoption of any measures proposed by Oftel based on the Competition Commission’s report.