Commission mobile termination issues paper

Media Release

Issued 21 June 2003-04/137

Commission releases mobile termination issues paper

The Commerce Commission today released an issues paper to begin public consultation on its investigation into whether or not mobile phone call termination rates should be regulated.

The Commission commenced the investigation in May this year after considering complaints that a potential lack of competition in the wholesale market for terminating mobile calls may be resulting in unreasonably high charges for fixed-to-mobile calls.

The issues paper attempts to describe the relevant markets and the state of competition in these markets and discusses what may happen if the mobile termination market is regulated. The paper also discusses the service description that would be required to implement such regulation.

The Commission is seeking submissions on all these issues, as well as comments on the Commission's interpretation of its statutory obligations and the proposed analytical framework.

The closing date for written submissions is 19 July 2004. Submissions should be sent to:

telecommunications@comcom.govt.nz

Mobile Termination Issues Paper
Enquiries: (04) 924 3668

Network Access Group
Fax: (04) 924 3700

Commerce Commission
PO Box 2351
Wellington

The Issues Paper will shortly be available on the Commission's website, http://www.comcom.govt.nz, select Telecommunications Regulation, then Telecommunications Investigations.

Background

The Commerce Commission has a range of responsibilities under the Telecommunications Act. Under Schedule 3 the Commission may, on its own initiative, commence an investigation into whether or not a telecommunications service should be regulated by making it a designated or specified service. The Commission may do this only if it is satisfied there are reasonable grounds for such an investigation.

In conducting its investigation the Commission will identify the relevant telecommunications markets and assess the level of competition in these markets. The Commission will then look at the difference between what is likely to happen both with and without regulation in order to assess whether there is sufficient benefit to end-users of telecommunications services to justify regulation.

Commission media releases can be viewed on its web site www.comcom.govt.nz

TELECOMMUNICATIONS ACT 2001: SCHEDULE 3 INVESTIGATION INTO REGULATION OF MOBILE TERMINATION

Executive Summary

Introduction

The publication of this Issues Paper is the first stage of the investigation into whether or not mobile termination should become a designated or specified service. The Commission seeks submissions from interested parties on the Issues Paper by 19 July 2004.

The purpose of this Issues Paper is to:

§ Identify the issues which, in the Commission's opinion, may be relevant to conducting the investigation and to making a recommendation as to whether or not regulation of mobile termination would best give effect to the purpose statement of the Telecommunications Act 2001 ("the Act"); and

§ Set out some background material about, and discussion of, those issues which the Commission thinks could be considered in a public process, and on which the Commission seeks comment from interested parties, other stakeholders (including end-users) and the public more generally.

Overview

The Commission has decided to conduct the investigation into mobile termination having considered complaints that a potential lack of competition in the market for mobile termination may be resulting in unreasonably high charges for fixed-to-mobile calls. The investigation is being conducted in accordance with Schedule 3 to the Act.

In conducting the investigation the Commission will apply an economic framework to its decision making process. This will involve identifying the relevant telecommunications markets and assessing the level of competition in these markets. The Commission will then define the factual and the counterfactual between which the assessments of the impact of regulation will be made. Should the Commission arrive at the view that the relevant market is subject to limited competition, then a cost benefit analysis will be undertaken to deliver an overall assessment of the net costs and benefits of regulation.

In its assessment of the relevant telecommunications markets the Commission has provisionally defined a wholesale market for mobile termination services on each mobile network and two downstream retail markets, namely the retail market for fixed-to-mobile calls and the retail market for mobile-to-mobile calls and other mobile services.

The relationship between these markets is depicted below:

At this stage the Commission has not defined a broader mobile services market incorporating mobile termination. Such a definition might be justified on the basis that there are no organisations that supply mobile termination alone. Instead, mobile network operators supply a broad range of mobile services in addition to mobile termination. For the purposes of the issues paper, the Commission has formed the preliminary view that the market for mobile termination is a distinct market(s) as it is purchased by other networks at a wholesale level for purposes of interconnection independent of any additional mobile services.

Both the ACCC and Ofcom found in their investigations into mobile termination that each mobile network operator has a monopoly in respect of termination on its network. Their conclusions were partly based on the mobile technologies currently available, and on the presence of the Calling Party Pays ("CPP") arrangement (as opposed to the mobile phone subscriber paying for calls received). Under CPP, consumers of the downstream retail services have little ability to constrain the suppliers of mobile termination services. Both the technological characteristics and the CPP arrangement are features present in the New Zealand market.

The Commission is concerned that limited competition in the market(s) for mobile termination may result in mobile network operators setting mobile termination rates considerably above cost, leading in turn to unreasonably high charges for services in the downstream markets. Residential fixed-to-mobile rates published by both Telecom and TelstraClear have not changed since at least 1997 and there has been little evidence of downward reductions in mobile calling rates (other than on-net calling).

If mobile termination is priced above cost, a vertically integrated provider (one that owns and operates both a fixed and a mobile network) would have an advantage in competing in the fixed-to-mobile market. A substantial portion of that provider's mobile terminations would be at a rate closer to actual cost as they would terminate on their own network. This may create a price squeeze for other fixed network operators, reducing effective competition in this market.

In other jurisdictions, it has been argued that reductions in mobile termination rates do not lead to similar reductions in fixed-to-mobile prices. Establishing the extent of the likely reduction will be an important facet of determining whether regulation of termination rates will promote competition for the long-term benefit of end-users.

If limited competition is found to exist in the market(s) for mobile termination it will be necessary for the Commission to establish whether regulation best gives effect to section 18 of the Act by promoting competition in telecommunications markets for the long-term benefit of end-users of telecommunications services in New Zealand. The Commission will consider the efficiencies that will result, or will be likely to result, from regulation, including allocative efficiency, productive efficiency and dynamic efficiency. It will also be necessary to consider factors such as the existence of externalities and any technical or practical considerations that may exist prior to making an assessment of net costs and benefits.

Should regulation be recommended, the Commission's draft report must include the detail of the proposed alteration to the Act. If mobile termination is regulated then this could extend to the market for 3G voice termination in addition to 2G voice termination. The alteration to the Act must also include a description of both the initial and final pricing principle.

The Commission is seeking submissions on these issues.

ENDS

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