Will fixed-only operators pass on MTR reductions?

Media Release
20 August 2009

Will fixed-only operators pass through MTR reductions?

New Zealanders are unlikely to see any savings provided by further MTR reductions.

Research from Auckland based analyst Covec shows pass-through rates among fixed-line only operators* currently sits at 30% - significantly less than the 85% used in the Commission’s cost benefit model. This is despite the market leaders, Telecom and Vodafone, passing through 100% of savings.

With this in mind, the Commerce Commission’s own model for determining the benefit of regulating mobile termination rates proves regulation won’t deliver the cost savings the Commission hopes for.

The Commission’s cost benefit model expects fixed-line operators will voluntarily pass on at least 85% of any rate reduction to customers but provides no explanation for this level of pass through.

Vodafone’s general manager for corporate affairs, Tom Chignell, says the Commission’s assumption that such high levels of savings would be passed on to consumers simply doesn’t stack up.

“In Europe the average pass-through rate is 50%. In the UK it’s 65% but even at these levels the Commission’s cost model does not deliver net savings to the consumer. If we look to Australia we find Telstra’s annual report shows a level of pass-through of only 16.6%. Telstra has also begun raising the price of calling a mobile.”

Reducing pass-through to only 30% means regulation not only wouldn’t benefit customers, but would cost up to $195m over five years.

“In New Zealand both Vodafone and Telecom have already committed to pass through 100% of the savings to customers. That commitment ends if the Commission regulates and yet the Commission is pressing ahead in the mistaken belief that businesses will simply pass any savings on to the customers when evidence from both New Zealand and overseas is that this simply will not happen.”

This is a key reason for the Australian Competition and Consumer Commission’s conclusion it will no longer reduce termination rates as the savings are simply not reaching the customers.

Note To Editors:

*The fixed-line only operators include:

Orcon,
CallPlus,
WorldxChange
Woosh

as assessed by Covec in its “Further Analysis of FTM Pass-through” report, available from the Commerce Commission website (www.comcom.govt.nz).

Covec has access to information restricted from public view and its report says “a reasonable assumption for FTM pass-through under regulation is around 40%”.

Vodafone and Telecom signed a legally binding deed with the government to pass through every dollar of reduction in termination rates. That means a saving of $325m to New Zealand consumers over the extended duration of the Deed.

The Commerce Commission cost benefit model includes pass-through of 85% in 2011 rising to 100% by 2015.

If the pass-through rate falls to only 30% as it is today, the model returns a loss of between $173.2m and $195m over the five year period. The benefits of regulation are far outweighed by the detriments, according to the Commission’s own model.

ENDS

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