Competition and Regulatory DevelopmentsAffectingMobileCommunications

06 March 2003

Richard Eccles



Contents

1..... Introduction

2..... The EC Electronic Communications Regime of 2002
2.1.. General Objectives
2.2.. The Framework Directive
2.3.. The Commission's Recommendation
2.4.. The Access and Interconnection Directive
2.5.. Spectrum

3..... The Commission's Recommendation – implications for mobile services
3.1.. Mobile voice services
3.1.1... Retail markets
3.1.2... Wholesale markets:
3.1.3... Wholesale call termination on mobile networks:
3.2.. Mobile data services
3.3.. Mobile Communications Markets identified in the Recommendation
3.4.. The question of whether mobile communications markets will be likely to be effectively competitive

4..... Competition Commission investigation of mobile call termination rates
4.1.. Overview
4.2.. Background to the investigation
4.3.. Oftel's views on market definition
4.4.. The conclusions of the Competition Commission
4.5 Interaction between the EC Electronic Communications Directives and the Competition Commission's Report
4.6.. Possible regulatory obligations to be imposed pursuant to the Competition Commission's report and Oftel's market review
4.7.. Possible reactions of the mobile network operators

5. The question of whether MVNOs should be granted compulsory access to mobile communications networks

6..... Mobile network infrastructure sharing
6.1.. Germany
6.2.. The UK
6.3.. Key factors underlying the Commission's position

7..... Conclusions

1. Introduction

This paper will analyse the EC Electronic Communications Directives of 2002 in relation to mobile communications. The paper will consider, in the light of the European Commission's Recommendation on products and services markets within the electronic communications sector, which particular mobile communications markets are likely to be investigated and which might be considered to be not effectively competitive, and subject to possible regulation, under the new EC regime.

Wholesale call termination on individual mobile networks is treated as a separate market both in the European Commission's Recommendation and at national level in some Member States, including the UK. This results, at least in the UK, in each operator of a mobile network being regarded as having a dominant position in relation to the termination of calls on its own network, giving rise to the need or likelihood of price controls. The Competition Commission has reached such conclusions pursuant to its investigation of the mobile call termination sector, on which it reported to the Director General of Telecommunications in January 2003. This paper will consider the relationship between these conclusions of the Competition Commission and the required implementation of the EC Directives.

The paper will also consider developments at EC level concerning infrastructure sharing in respect of mobile communication networks and will consider briefly the likelihood or otherwise of mobile virtual network operators being able successfully to claim to be granted access to a mobile network pursuant to the new EC regime.

2. The EC Electronic Communications Regime of 2002

2.1 General Objectives

The new EC Electronic Communications Directives of 2002 provides for a harmonised system for the regulation of electronic communications services and networks, largely by delegating to National Regulatory Authorities ("NRAs") the application of the Regulatory Framework laid down in the Directives. The Framework Directive 2002/21 requires NRAs to take the utmost account of the following objectives specified in Article 8 of the Framework Directive:

  • Promoting competition in the provision of electronic communications networks and services by inter alia:

- ensuring maximum benefit to users in terms of choice, price and quality;

- ensuring that there is no distortion or restriction of competition;

- encouraging efficient investment in infrastructure and promoting innovation; and

- encouraging efficient use and management of radio frequencies and numbering resources;

  • Contribute to the development of the internal market by inter alia:

- removing remaining obstacles to the provision of electronic communications networks and services at European levels;

- encouraging the establishment and development of trans-European networks and the interoperability of pan-European services and end-to-end connectivity;

- ensuring that there is no discrimination in the treatment of undertakings providing electronic communication networks and services;

- co-operating with each other and the Commission to ensure the development of consistent regulatory practice and application of the Directives;

  • Promote the interests of EU citizens by, inter alia, ensuring the provision of the universal service specified in the Universal Service Directive and a high level of protection of personal data and privacy and requiring transparency of tariffs and conditions for publicly available electronic services.

It is an underlying principle of the new EC regime that ex ante regulation should be rolled back when it is no longer needed.

2.2 The Framework Directive

The EC Electronic Communications Directives allow the imposition of ex ante regulatory measures only where, following a review by the national regulatory authority ("NRA"), the relevant market is shown to be not effectively competitive. For this purpose:

  • Market definition is to be carried out on competition law principles; and
  • A market will only be not effectively competitive where an undertaking has significant market power ("SMP"), i.e. is in a dominant position or two or more undertakings are jointly dominant in that market.

The Framework Directive referred to the adoption by the Commission of a Recommendation (since adopted in February 2003) identifying the product and service markets within the electronic communications sector, which may justify the imposition of regulatory obligations under Directive 2002/19 on Access and Interconnection and Directive 2002/22 on Universal Service. The Recommendation is accompanied by Guidelines, adopted by the Commission in 2002, which set out the principles on which markets are to be defined and dominant positions identified.

Article 16(1) of the Framework Directive requires NRAs to begin their market analysis as soon as possible after the adoption of the Commission's Recommendation. The Commission states in its Explanatory Memorandum accompanying the Recommendation, that it would expect these analyses to be completed in most cases and where possible by 25 July 2003, the date by which the Electronic Communications Directives are required to be implemented into national law. Various pre-existing regulatory obligations in relation to access to and interconnection of networks are to be maintained in force until after the relevant market reviews have been carried out, but thereafter could only be maintained if the relevant market is shown to be not effectively competitive and the relevant obligations are shown to be an appropriate remedy. Any other regulatory obligation must be withdrawn, unless the market definition and analysis procedures of the Framework Directive have resulted in that condition or a similar one being reimposed following such market analysis. Any such condition which is reimposed or introduced after such market review would apply as from 25 July 2003.

Where NRAs adopt a measure pursuant to the market definition and analysis procedures of the Framework Directive or a measure imposing obligations pursuant to the Access and Interconnection Directive or the Universal Service Directive, the NRA must make the draft measure available to the Commission and the NRAs of other Member States, giving them the opportunity to comment. Where the intended measure defines a relevant market which differs from those defined in the Commission's above Recommendation or designating an undertaking as having SMP (individually or jointly with others) and which would affect trade between Member States, then the Commission may indicate to the NRA that it considers that the draft measure would create a barrier to the single European market or that it has serious doubts as to its compatibility with EC law and in particular the above objectives specified in Article 8 of the Framework Directive. The NRA must then defer any adoption of the measure for a further two months, during which period the Commission may take a decision requiring the NRA to withdraw the draft measure.

Therefore, NRAs cannot identify markets which differ from those of the Commission's Recommendation without giving the Commission the opportunity in advance to veto such determination.

2.3 The Commission's Recommendation

The Recommendation lists the following markets as justifying possible ex ante regulation, which the Commission recommends for review by NRAs. These market definitions are based on the provisional market definitions set out in Annex I of the Framework Directive:

  • Retail level - fixed networks:

- access to the public telephone network at a fixed location for residential and non-residential customers respectively;

- publicly available telephone services provided at a fixed locations for residential and non-residential customers respectively and for national and international services respectively;

- the minimum set of leased lines;

  • Wholesale level - fixed networks:

- call origination on the fixed public telephone network;

- call termination on individual public fixed telephone network;

- transit services in the fixed public telephone network;

- wholesale unbundled access to metallic loops and sub-loops for the purpose of providing broadband and voice services;

- wholesale broadband services;

- wholesale terminating segments of leased lines;

- wholesale trunk segments of leased lines;

- broadcasting transmission services, to deliver broadcast contents to end users.

  • Wholesale level – mobile networks:

- access and call origination on public mobile telephone networks;

- call termination on individual mobile networks;

- the wholesale national market for international roaming on public mobile networks.

It should be noted that the markets which NRAs are recommended to analyse do not include any retail mobile communications markets. At wholesale level, the mobile markets which are recommended to be investigated include access and call origination on mobile networks. However, the Commission's accompanying Explanatory Memorandum further states that the Commission does not at this stage anticipate that this market will be included in future revisions of the Recommendation. The other mobile communications markets featured in the Recommendation are international roaming, and wholesale call termination on individual mobile networks which will be considered further below.

The Commission's Recommendation will be revised from time to time to take into account changes in market conditions. The Explanatory Memorandum states that the identification of relevant markets, and therefore of whether an electronic communications market continues to be identified in subsequent versions of the Recommendation as justifying possible ex ante regulations, should depend upon:

  • the persistence of high entry barriers,
  • the dynamic state of competitiveness, and
  • the sufficiency of competition law (absent ex ante regulation) to redress market failures.

A market could also be removed from the Recommendation once there is evidence of sustainable and effective competition on that market, provided that this is not due to the existence of already imposed regulatory obligations.

The Recommendation further makes clear that the identification of markets in the Recommendation is to be without prejudice to the markets that may be defined in specific cases under competition law. Although markets identified in the Recommendation are based on competition law methodologies, they will not necessarily be identical to markets defined in individual competition law cases taking into account the fact that the starting point for carrying out a market analysis under the Framework Directive is an overall forward-looking assessment of the structure and functioning of the market under examination, rather than just the current market position.

Further, with regard to remedies, the Explanatory Memorandum states that the availability of a competition law remedy corresponding to that which might be imposed by an NRA does not preclude the NRA from imposing a similar remedy. For example, where behavioural remedies need to be imposed on a dominant undertaking under competition law, it may also be appropriate for an NRA also to impose specific ex ante transparency and reporting requirements for monitoring purposes.

The basic objectives of NRAs, as stated in the Explanatory Memorandum, are to:

  • promote competition in the provision of electronic communications networks and services;
  • contribute to the development of the internal market; and
  • promote the interests of EU citizens.

When imposing any specific obligation on an undertaking with SMP, the NRA must ensure the obligation in question is based on the nature of the problem identified and is proportionate and justified in the light of the NRA's basic objectives as set out in the Framework Directive. The requirement of proportionality means that the action to be taken must pursue a legitimate aim and that the means employed to achieve that aim must be both necessary and the least burdensome, i.e. the minimum necessary to achieve the aim.

It is quite likely that the principle of proportionality will give rise to considerable scope for argument by SMP operators in individual cases.

2.4 The Access and Interconnection Directive

Where, after carrying out market reviews pursuant to the Commission's Recommendation and the Guidelines, an NRA has concluded that a market is not effectively competitive (i.e. the market features an SMP, i.e. dominant, operator or two or more jointly-dominant/SMP operators), the NRA can impose (proportionate and justified) obligations under the Access and Interconnection Directive on such undertakings:

  • Obligations in relation to transparency (including publication of accounting or technical information and/or a reference offer);
  • Obligations in relation to non-discrimination (Article 10);
  • Obligations in relation to accounting separation (Article 11);
  • Obligations of access to and use of specific network facilities (Article 12); and
  • Obligations in relation to price controls and cost accounting (Article 13).

Under Article 9, an NRA may require a vertically integrated operator to make transparent its wholesale prices and its internal transfer prices, in the situations where a market analysis indicates that the operator concerned provides input facilities which are essential to other service providers, while competing itself on the same downstream market. Moreover the non-discrimination obligation in Article 10(2) enables an NRA to ensure that an operator provides services and information to other undertakings under the same conditions that they provide for their own services or for their subsidiaries or partners. This goes beyond the specific requirements of Article 82 of the EC Treaty by treating transfer prices within the same undertaking (the owner of the network or facility) as equivalent in competition policy terms to prices charged to independent undertakings.

NRAs may impose obligations on a dominant operator to grant access to, and use of, specific facilities and/or associated services, inter alia in situations where the denial of access or the grant of access only on unreasonable terms and having a similar effect to a denial of access would hinder the emergence of a sustainable competitive market at the retail level, or "would not be in the end-user's interest" (Article 12(1)). Specifically, under Article 12(1), operators may be required:

  • to give third parties access to specified network elements and/or other facilities;
  • to negotiate in good faith with undertakings requiring access;
  • not to withdraw access facilities already granted;
  • to provide specified services on a wholesale basis for resale by third parties;
  • to grant open access to technical interfaces, protocols or other key technologies that are indispensable for the interoperability of services or virtual network services;
  • to provide co-location or other forms of facility sharing, including duct, building and mast sharing;
  • to provide specified services needed to ensure interoperability of end-to-end services to users, including facilities for intelligent network services or roaming on mobile networks;
  • to provide access to operational support systems or similar software systems necessary to ensure fair competition in the provision of services;
  • to interconnect networks or network facilities.

However, when NRAs are considering whether to impose such obligations, and in particular in assessing whether such obligations would be proportionate, they are required under Article 12(2) to take into account the following:

  • the technical and economic viability of using or installing competing facilities, in the light of the rate of market development, taking into account the nature and type of interconnection and access involved;
  • the feasibility ofproviding the access proposed, in relation to the capacity available;
  • the initial investment by the facility owner, bearing in mind the risks involved in making the investment;
  • the need to safeguard competition in the long term;
  • where appropriate, any relevant intellectual property rights;
  • the provision of pan-European services.

Under Article 13, an NRA may impose obligations relating to cost recovery and price controls, in situations where a market analysis indicates that a lack of effective competition is likely to result in the relevant operator sustaining prices at an excessively high level or applying a price squeeze to the detriment of end-users. Such obligations may require cost orientation of prices. However, NRAs are required to take into account the investment made by the operator and to allow the operator a reasonable rate of return on adequate capital employed, taking into account the risks involved.

Therefore, NRAs cannot in future impose regulatory obligations requiring access or interconnection without first identifying one or more dominant (SMP) operators and then taking into account a variety of economic factors to ensure the proportionality of any measure, including the level of investment made by the network or facility owner, capacity considerations and the feasibility of establishing or using competing facilities. Accordingly, especially as regards mobile communications networks, there is likely to be a significant range of factors that can be invoked in individual cases by operators, even where they have been identified as having SMP, to resist or curtail the imposition by the NRA of regulatory obligations. This is particularly a consideration as regards third generation mobile operators, taking into account the level of investments made by them to acquire their spectrum allocations (at least in the UK and certain other Member States), to acquire the third generation technology, and to roll out their networks.

2.5 Spectrum

The Framework Directive requires radio frequencies for electronic communications to be allocated and assigned by NRAs on objective, transparent, non-discriminatory and proportionate criteria. Further, the Framework Directive requires Member States to make provision for spectrum trading, i.e. for undertakings to transfer rights to use radio frequencies with other undertakings.

This obligation regarding assignment of radio frequencies is restated in Commission Directive 2002/77 on competition in the markets for electronic communications networks and services ("the Competition Directive").

The Competition Directive specifically requires that Member States shall not grant exclusive or special rights of use of radio frequencies for the provision of electronic communication services.

3. The Commission's Recommendation – implications for mobile services

3.1 Mobile voice services

The Commission's Explanatory Memorandum accompanying its Recommendation, describes and defines the following retail markets and linked wholesale markets for mobile voice services:

3.1.1 Retail markets:

  • Access network to mobile networks is a separate market from the supply of services over the network at a retail level;
  • Pre- and post-pay mobile services are part of the same market;
  • It is not clear whether residential and business customers can be considered to be part of the same market or not, even though there may be significant differential pricing of services in order to attract certain types of customer or use. As regards demand-side substitutability, end users may be indifferent between tariff packages designed for business or residential users, provided the terms suit their usage profile. With regard to supply-side substitution, an undertaking serving the business market may easily switch to supplying residential users (in response to a small, but non-transitory price increase by a hypothetical monopolist);
  • As regards retail services for roaming on other national networks;

- The retail provision of international roaming services appears to be a separate market;

- It is also possible to provide a broader outgoing calls market at the retail level that includes national, international and roaming calls.

3.1.2 Wholesale markets:

  • The wholesale market for access and the call origination on mobile networks is subject to entry barriers because undertakings without spectrum allocations can only enter the market on the basis of future allocations of spectrum (or where possible, assignments of spectrum), the secondary trading of spectrums, or by purchasing a licensed operator. However, the level of competition generally observed in this market at the retail level indicates that ex ante regulatory interventions at wholesale level may not be warranted. The Commission states that it does not anticipate that this market will be included in future revisions of the Recommendation.
  • International roaming can be considered to be a separate market from access and call conveyance from a demand side perspective (international roaming and wholesale access and call origination are substitutable on the supply-side). There are entry barriers because only licensed mobile network operators are able to supply international roaming services in any given national market.

3.1.3 Wholesale call termination on mobile networks:

The Commission concludes in its Explanatory Memorandum on the Recommendation that, under a calling party pays system, call termination on individual mobile networks is the appropriate relevant market at present, but that this must be kept under review.

The presence of such evidence on the last two points would imply a linked market definition, comprising access, call origination and termination.

On the demand side, there is no potential for demand-side substitution at wholesale level. Demand at the wholesale level is inextricably linked to supply; the caller's network operator is unable to purchase call termination on a given network from any alternative source. Fixed to mobile calls can be a substitute for mobile to mobile calls; mobile to fixed calls would not generally be a substitute for mobile to mobile calls as a means of avoiding mobile network termination charges. The Commission concludes that there is no reason to believe that any of these demand substitutes would constrain a mobile network operator's behaviour regarding termination charges.

Likewise, there is no supply-side substitutability in relation to mobile call termination, because an alternative supplier cannot switch to supplying call termination to a user without that user's SIM card details.

As a result of the market definition of call termination on each mobile network, the supplier and the product are perfectly linked as each mobile network operator is a single supplier on each market. However, the Commission states that whether an operator then has market power still depends on whether there is any countervailing buyer-power, which could constrain the operator's pricing behaviour. Countervailing buyer-power could arise from closed user groups, where a particular group of users makes sufficient calls between them that intra-group calls constitute a significant proportion of their bills. If a given network raised termination charges and thereby increased the price of incoming calls, the members of the group could switch networks, so as to take advantage of lower termination charges and prices. However, even with the presence of such closed user groups, mobile operators are able to price-discriminate amongst the various categories of users, offering closed economic group discounts for calls to particular mobile numbers.

The Commission's conclusion at the present time as stated in its Explanatory Memorandum is that call termination on each mobile network will constitute a distinct market and that the operator of the network in question will be an SMP/dominant operator in such markets. However, the Commission states that such a definition would be undermined by the following:

- technical possibilities to terminate via other networks (this would broaden the market definition to call termination on all networks);

- evidence that users employ alternative means to circumvent high termination charges, or

- evidence that users subscribe to networks on the basis of what it costs to be called.

The last two points would imply a linked market definition, comprising access, call origination and termination.

The Commission states that the situation will have to be closely followed and will be part of its next review in June 2004.

3.2 Mobile data services

With regard to mobile data services, the Explanatory Memorandum states that no markets are identified in the Recommendation because such services are still developing. Current generation networks are in the process of being modified and upgraded to enable data rates in excess of those possible using dial-up access. It is uncertain how services will be deployed using such networks or using third generation networks.

3.3 Mobile communications markets identified in the Recommendation - Summary

In summary, as stated above, the only mobile communications markets which are recommended in the Commission Recommendation for analysis by NRAs, are access and call origination on mobile networks, the wholesale market for international roaming on mobile networks and wholesale call termination on individual mobile networks. The Commission states in its Explanatory Memorandum, that it does not anticipate that access and call origination will be included in future revisions of the Recommendation, and that the identification of call termination on individual mobile networks as a separate market, needs to be kept under review.

3.4 The question of whether mobile communications markets will be likely to be effectively competitive

At least in the UK, it is possible that most mobile communications markets can be regarded as effectively competitive within the meaning of the Electronic Communication Directives, at retail level. This is based on the fact that there are, in the UK, four strong second generation operators and there is the prospect of five third generation operators. It is therefore questionable whether any of them will be in a dominant position, and therefore have SMP individually, in retail markets.

However, taking into account the Commission's Recommendation in relation to wholesale call termination on mobile networks, it is likely that call termination on individual mobile networks will be treated by NRAs as a distinct market in respect of each of such networks, at least in relation to systems or networks which operate on the calling party pays principle. As the Commission has acknowledged, this would result in each mobile network operator being dominant, i.e. having SMP, in relation to call termination on its own network, unless it can be shown that there is countervailing buyer power to neutralise such market strength of the operator. In the UK, call termination has been examined closely by Oftel and has now been fully investigated by the Competition Commission.

4. Competition Commission investigation of mobile call termination rates

4.1 Overview

The Competition Commission completed its report in January 2003 on its investigation into questions of whether the call termination charges of mobile network operators ("MNOs") operate or may be expected to operate against the public interest. The Competition Commission concluded that there is a separate market for termination of calls on the network of each of the four current MNOs, and that voice call termination is not part of a wider market for telecommunication services. Further, it concluded that call termination charges are not subject to competitive constraints due to the fact that the MNOs are monopolists in relation to the supply of termination services on their own networks.

4.2 Background to the investigation

Oftel issued two reviews on 26 September 2001 as follows:

  • Oftel's Effective Competition Review: Mobile concluded that the market for mobile communication services was not yet effectively competitive, but that competition was developing, taking into account the imminent entry of a fifth mobile network operator, and the changing nature of mobile communication services, which was likely to bring countervailing buyer-power in the form of new content providers and providers of mobile internet services.
  • Oftel's Review of the Charge Control on Calls to Mobiles concluded that competitive pressures do not currently exert sufficient constraints on termination charges for calls from fixed lines to the mobile networks of the existing four MNOs and that competitive pressures are not likely to exert sufficient constraints in the near future. Accordingly, Oftel proposed a tightening of the price control on such call termination charges from RPI-9% to RPI-12% for the period March 2002 to March 2006.

The MNOs refused to accept such reductions, and as a result two separate references were made on 7 January 2002 by the Director General of Telecommunications to the Competition Commission in respect of mobile call termination rates, one reference being made in respect of Vodafone and BT Cellnet (now mmO2) and the other in respect of Orange and One2One (now T-Mobile). Each of the references requested the Competition Commission to examine whether the respective MNOs charges to operators of fixed or mobile telecommunication systems for calls to the MNOs handsets, operate or may be expected to operate against the public interest, and whether any adverse effects could be remedied by further controls on interconnection charges.

4.3 Oftel's views on market definition

In its Review of the Charge Control on Calls to Mobiles, Oftel concluded that, for competition regulation purposes, call termination on each mobile network is the appropriate market definition, and that each mobile operator has market power in the supply of mobile call termination to its own network, taking into account the caller-pays principle. Therefore Oftel's conclusion was the same as that subsequently reached by the European Commission for purposes of its Recommendation (above).

Oftel's published submissions to the Competition Commission provide further detail of its analysis that mobile call termination on each network constitutes a distinct market:

  • Each MNO has an incentive to price at the monopoly level for termination charges because of its market power in termination. The extent to which excess profits are competed away through retail prices depends on the competitive conditions in the retail market;
  • There are non-homogenous competitive conditions between termination (characterised by weak competitive pressures) and retail mobile services (characterised by relatively more competition). The non-homogenous nature of the competitive conditions makes it inappropriate to define the relevant market as a single market comprising retail mobile services and call termination services;
  • Mobile termination on one network is not a demand-side substitute for termination on another network;
  • There is no supply-side substitutability in the provision of mobile termination services because neither manual nor automatic intervention systems enable an alternative supplier to switch the call recipient's handset to be connected to its network, rather than the user's main network;

- Manual intervention would require the recipient to have a dual SIM handset, which is currently rare, and in addition, the caller will need to dial the number of the alternative supplier's SIM card, and not the number of the SIM of the main network to which the recipient subscribes. This would also require the co-operation of the recipient to ensure that the network on which he or she is camped is switched accordingly. Based on the calling party pays system, the call recipient would have little incentive and would be unlikely to behave in the way required;

- Automatic intervention would require the alternative supplier to be able to control the network to which the call recipient is connected, which would in turn require the call recipient to be prepared to allow the alternative supplier to have such control, quite apart from the need for the agreement of the main network to which the call recipient subscribes. Again, there is little incentive for the call recipient to behave in the way required;

  • The effect of the calling party pays principle is that mobile operators do not compete against each other to a significant extent in terms of termination charges. A mobile operator that reduced its termination charge (and held all other prices constant) would not obtain a material competitive advantage over other mobile networks. It would gain few, if any, mobile subscribers from other networks. Moreover, it might even place itself at a competitive disadvantage because it would enable calls originating on other networks to be cheaper. Therefore other mobile operators do not compete against each other in terms of the termination charge.

4.4 The conclusions of the Competition Commission

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, and that no such technological means will become commercially viable in the near future. The principal conclusions of the Competition Commission were as follows:

  • There is a separate market for termination of calls on the network of each of the four MNOs; calls can be terminated only on the network of the MNO to which the called parties subscribe;
  • Voice call termination is not part of a wider market for telecommunications services. In particular, MNOs do not sell termination, a wholesale activity, to the same group of customers to whom they supply other services which are sold at retail level;
  • Neither calls to fixed lines nor text messaging form part of the same market as mobile call terminations;
  • Call termination charges are not subject to effective competitive constraints and are not likely to become so within the foreseeable future. This is because the MNOs are monopolists in relation to the supply of termination services on their own networks. There are insufficient incentives for the MNOs to reduce such charges and moreover, in the absence of regulation, there will be incentives for MNOs to increase them;
  • MNOs’ activities to gain retail customers are broadly competitive, insofar as there appears to be active rivalry between the MNOs. This level of competitiveness is likely to continue;
  • 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 subsidise those who mainly receive calls on their mobile, 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 results 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 Dutch Competition Authority (the "NMa") had already reached the equivalent conclusion on market definition as that subsequently announced by the Competition Commission, as regards termination of mobile voice calls in The Netherlands. As part of an investigation into price levels for calls from a fixed network to mobile telephones, the NMa conducted a study into the market definition for mobile termination services. It reached the conclusion that call termination services on each mobile telephone network constitute a separate relevant market. Consequently, all five mobile telephone operators in The Netherlands have a dominant position with regard to the termination of calls on their respective networks.

4.5 Interaction between the EC Electronic Communications Directives and the Competition Commission's Report

Any regulatory obligations that may be imposed on the MNOs as a result of the Competition Commission's report will not be pre-existing obligations for the purposes of the EC Electronic Communications Directive. Therefore they cannot continue beyond the required implementation date of 25 July 2003, unless Oftel, as the relevant NRA, has first carried out a market review to determine whether such obligations should be imposed as from 25 July 2003. It can be expected, as indeed Oftel has indicated to the Competition Commission, that Oftel would undertake such mobile termination review as quickly as possible after the Competition Commission's report is received, and that it would endeavour to align its analysis in the review as far as possible with the analysis carried out by the Competition Commission.

The Competition Commission's report acknowledged that the licence modifications to facilitate the price controls recommended in the report could only be valid until 25 July 2003 (unless they were then re-adopted by Oftel under the new EC regime). However, the Competition Commission also stated that as a longer period of three years is considered more suitable for regulatory assessment, in carrying out its investigation, it used such a longer period for analysis purposes. This enabled the Competition Commission to express its view of the levels at which charges should be set for the period from 25 July 2003 to 31 March 2006, even though such views can have little more than persuasive effect. Also, Oftel had requested the Competition Commission to express its views on the appropriate level of charges beyond July 2003. Oftel had also indicated publicly during the course of the investigation that whatever adjustments to the analysis are necessary, it is unlikely that market conditions will change so fundamentally in the six months or so between the Competition Commission's report and the new framework coming into effect, as to necessitate a change of policy in terms of the appropriate measures which should apply.

Oftel could only proceed with the implementation or re-imposition of such licence modifications after 25 July 2003, if it first complies with the procedures set out in Articles 6 and 7 of the Framework Directive. These involve giving notice to the European Commission to enable it to veto the use of any proposed measure of an NRA deciding whether or not to designate an undertaking as having SMP (individually or jointly with others) (Article 7 (4)(b)).

In all such cases, as explained above, the Commission could require the NRA to defer such a measure for two months if the Commission considers that the draft measure would create a barrier to the single market, or if the Commission has serious doubts as to it compatibility with EC law and in particular the objectives set out in Article 8 of the Framework Directive. Within this two months period, the Commission may make a decision requiring the NRA concerned to withdraw the draft measure. Accordingly, it is likely that any regulatory measure introduced pursuant to the Competition Commission's report in respect of termination charges after 25 July 2003 will need to be submitted to the European Commission. This is to verify that the European Commission does not have any objection, prior to reimposition of such measures following the required entry into force of the Directives at national level on 25 July 2003.

4.6 Possible regulatory obligations to be imposed pursuant to the Competition Commission's report and Oftel's market review

Assuming that (following its market analysis under the new regime) Oftel follows the Competition Commission's finding that mobile operators have SMP for call termination on their individual networks, then Article 8(2) of the Access and Interconnection Directive will require Oftel to impose obligations set out in Article 9 to 13 of that Directive. Article 13 refers to the imposition of price control and cost accounting obligations; therefore the terms of the proposed modification by the Director General of Telecommunications falls within the provisions of Article 13. Thus, after the Commission's Recommendation has been published, Oftel will be able to define the relevant market, assess the issue of significant market power and prepare a new mechanism for controlling the price of calls to mobiles to take effect on 25 July 2003, in each case taking into account the conclusions of the Competition Commission.

Whilst Oftel had proposed price controls on mobile telecommunications operators based on the RPI-X formula, it is likely following the Competition Commission's views that this would be linked with a long run incremental costs ("LRIC") methodology on any price controls to be imposed. This is also taking into account the following:

  • EC Recommendation 98/195 recommends the use of LRIC for the assessment of cost-orientated interconnection tariffs for terminating access.
  • Various NRAs of other countries, particularly in Europe, favour the regulation of mobile call termination charges, including Austria (which uses LRIC methodology), Belgium and France.
  • In relation to fixed telecommunications, the majority of incumbent fixed network operators in Western Europe have their interconnect rates set on an LRIC basis, including those in Austria, Denmark, France, Germany and Ireland, as well as the UK.
  • In other regulated industries in the UK, LRIC or a similar formula is used, in water (to determine access prices in water supply), gas (to calculate entry and exit capacity charges for Transco's transmission network), aviation (for airport charges) and rail (for access to the network, on the basis of train miles).

The Competition Commission's views in respect of the period up to 25 July 2003 are of persuasive value only, due to the change of regime as explained above. The Competition Commission concluded that the LRIC approach would be appropriate, but that this could be expressed by means of the RPI-X formula for the period 25 July 2003 to 31 March 2006.

4.7 Possible reactions of the mobile network operators

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 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. The content of the European Commission's Recommendation in this area, as summarised in section 3.1.3 above, could provide some argumentation to the MNOs for use in this regard and also in relation to Oftel's prior market analysis. Six months will already have elapsed between the Competition Commission's report and the new EC regime taking effect, and a similar period will also then have elapsed since the Commission's Recommendation.

5. &am

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