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Comm. recommends regulation of mobile termination

Media Release

Issued 9 June 2004-05 / 139

Telecommunications Act: Commission recommends regulation of mobile termination

The Commerce Commission has recommended to the Minister of Communications that the termination of fixed line voice calls on a cellular telephone network should be regulated. However, the Commission has specifically excluded from its recommendation voice calls using third generation (3G) mobile technology.

Telecommunications Commissioner Douglas Webb said the Commission considers that limited competition in the market for mobile termination has resulted in mobile network operators setting mobile termination rates for fixed-to-mobile calls significantly above the level required to cover costs, including a reasonable return on capital.

“We have estimated the cost of mobile termination to be around 15 cents a minute, in comparison with around 27 cents a minute which is currently being charged. There is an obvious and significant impact on prices charged to users calling mobiles from a landline...

“The Commission considers that a regulated reduction in the price of terminating fixed line calls on a cellular network is likely to lead to increased competition and lower prices for fixed-to-mobile calls,” said Mr Webb.

“The Commission believes there will be substantial benefits to consumers and business from regulating mobile termination rates, despite the likely upward pressure on the price of mobile phone services that may result from the regulation” Mr Webb said.

“We have deliberately excluded the new 3G (or later) technology from our recommendation to the government because we were concerned that regulation in this emerging market may affect investment. The planned investments of the mobile operators in 3G are large and it is important that they have the opportunity to make them without facing the risk of returns being restricted by regulation.”

“Regulation needs to strike a balance between promoting competition through providing access for competitors to network assets, and maintaining the incentives for operators to invest in new networks ” Mr Webb said.

“The Commission’s technical analysis has demonstrated that Telecom’s 027 network does not provide voice calls using 3G technology, and therefore, termination of fixed line calls on Telecom’s CDMA network would be regulated under the Commission’s proposals, along with calls terminating on Vodafone’s GSM network.”

The Commission’s recommendation is for the initial price for mobile termination to be set by benchmarking against other comparable countries and the final price by TSLRIC (forward-looking cost based modelling).

Though the Commission’s recommendations relate only to fixed-to-mobile calls, the Commission has considered the overall price levels of mobile services. Mr Webb said that mobile services prices in New Zealand are relatively high compared to other OECD countries, even after making allowances for the characteristics of the New Zealand market. A comparison of New Zealand prices with those in other OECD countries shows that New Zealand is one of the most expensive countries in the OECD for users of mobile phones, and that the comparison becomes even less favourable as usage levels increase.

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

A copy of the Commission’s final report on mobile termination is available on www.comcom.govt.nz (select Telecommunications and then Investigations).

Executive Summary (three pages) attached

ENDS

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

Executive Summary (extract from final report)

1. Mobile termination rates are the fees mobile network operators charge other telecommunications companies to terminate calls on cellular mobile networks. In particular, mobile termination is the most significant cost input into the provision of fixed-to-mobile calls.

2. The Report sets out the Commission’s final findings on whether mobile termination should be regulated.

3. In carrying out this investigation, the Commission has considered whether regulating the service promotes or is likely to promote competition in telecommunications markets for the long term benefit of end-users of telecommunications services within New Zealand.

4. There is a separate wholesale market for mobile termination services on each of the mobile networks operated by Vodafone NZ Ltd and Telecom NZ Ltd.

5. There are two relevant downstream retail markets, namely the retail market for toll and fixed-to-mobile calls, and the retail market for mobile services.

6. The relationship between these markets is depicted below:

7. There is limited competition in the markets for mobile termination services on each mobile network, and the price charged for this service is significantly above cost. There is also limited competition in the retail market for tolls and fixed-to-mobile calls.

8. A reduction in mobile termination rates is likely to result in increased competition in the retail market for tolls and fixed-to-mobile calls. Regulation of mobile termination rates will promote competition in this market through an improved alignment of prices and costs. This will reduce the cost asymmetry between fixed-only suppliers and integrated fixed/mobile suppliers of fixed-to-mobile calls, and will therefore promote entry and expansion within the market in which fixed-to-mobile calls are supplied.

9. The reduction in mobile termination rates, and the increased competition, will lead to a reduction in the retail price of fixed-to-mobile calls to the benefit of end-users. The Commission conducted a cost-benefit analysis to estimate the quantum of these benefits.

10. A regulated fall in mobile termination rates is likely to lead to some rise in the price of mobile services (mobile subscription and mobile-to-mobile calls), relative to the scenario of no regulation, or alternatively, lesser price reductions than otherwise. To the extent that regulation leads to a relative increase in mobile prices, and a reduction in mobile subscription levels, a range of detriments may be generated. Accordingly, this effect has been factored into the cost-benefit analysis. Direct costs associated with regulation have also been allowed for.

11. The cost-benefit analysis shows that substantial net benefits to end-users are likely to arise from making mobile termination a designated access service. The analysis focuses on the years ending June 2006 to June 2010, although the Commission acknowledges that any benefits and costs are likely to continue beyond this period.

12. In considering the results of the quantitative analysis of costs and benefits of regulation, the Commission is mindful of the range of assumptions used in that analysis. Given these assumptions, and the likely linkages of mobile termination services with other services, there is a risk that regulation may lead to a range of unanticipated results, some of which may increase the benefits realised from regulation while others may reduce the benefits (or raise the costs) of regulation. However, the Commission is satisfied that its quantitative cost-benefit analysis captures those effects that are likely to be most significant. This satisfaction is based on a number of factors, including:

· careful consideration of all the arguments and information provided in submissions received by the Commission throughout this investigation;

· appropriate amendments made to the cost-benefit analysis in light of submissions;

· analysis of the sensitivity of the results to changes in a range of key assumptions; and

· a conservative approach in selecting relevant inputs, such as the estimated cost of mobile termination services which is towards the upper end of benchmarked estimates.

13. In addition to the benefits and costs of regulation which the Commission has been able to measure, a number of qualitative factors have also been considered. In particular, the Commission considers regulation is likely to generate improvements in productive efficiency, though it has not attempted to quantify that impact. These improvements will be in addition to the estimated benefits.

14. In terms of dynamic efficiency, regulation of 3G networks is likely to increase the risk of delay or restrict investment in 3G networks and cause a significant dynamic efficiency detriment. The Commission does not consider, however, that there is a material dynamic efficiency detriment from the regulation of termination on existing non-3G networks.

15. The Commission considers that the regulation of mobile termination on existing networks but not future 3G networks as a designated access service will result in significant long-term benefits to end-users through the promotion of competition in the fixed-to-mobile/tolls market.

16. Chapter 9 describes the proposed alteration to the Act and the initial and final pricing principles required to give effect to the Commission’s recommendation.

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