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Chapter 1 - Introduction, Statement on Wholesale Mobile Voice Call Termination consultation

Introduction

1.1 This review considers the markets for wholesale mobile voice call termination services.

1.2 Prior to this review, these markets were reviewed as part of a Monopolies and Mergers Commission investigation in 1998, an Oftel review of the controls on Vodafone and O2 (then Cellnet) in 2000/01 and a Competition Commission ("CC") investigation in 2002^(-2-). This background is discussed in more detail in paragraphs 1.2 - 1.8 of the December consultation.

A new regulatory regime

1.3 A new regulatory framework for electronic communications networks and services entered into force on 25 July 2003. The framework is designed to create harmonised regulation across Europe and is aimed at reducing entry barriers and fostering prospects for effective competition to the benefit of consumers. The basis for the new regulatory framework is five new EU Communications Directives:

Directive 2002/21/EC on a common regulatory framework for electronic communications networks and services ("the Framework Directive");
Directive 2002/19/EC on access to, and interconnection of, electronic communications networks and associated facilities ("the Access Directive");
Directive 2002/20/EC on the authorisation of electronic communications networks and services ("the Authorisation Directive");
Directive 2002/22/EC on universal service and users' rights relating to electronic communications networks and services , ("the Universal Service Directive") and;
Directive 2002/58/EC concerning the processing of personal data and the protection of privacy in the electronic communications sector ("the Privacy Directive").

1.4 The Framework Directive provides the overall structure for the new regulatory regime and sets out fundamental rules and objectives which read across all the new directives. Article 8 of the Framework Directive sets out three key policy objectives which have been taken into account in the preparation of this consultation document; namely promotion of competition, development of the internal market and the promotion of the interests of the citizens of the European Union. The Authorisation Directive establishes a new system whereby any person will be generally authorised to provide electronic communications services and/or networks without prior approval. The general authorisation replaces the former licensing regime. The Universal Service Directive defines a basic set of services that must be provided to end-users. The Access and Interconnection Directive ("AID") sets out the terms on which providers may access each others' networks and services with a view to providing publicly available electronic communications services. These four Directives were implemented in the UK on 25 July 2003. This was achieved via the Communications Act 2003 ("the Act").The fifth Directive on Privacy establishes users' rights with regard to the privacy of their communications. This Directive was adopted slightly later than the other four Directives and was implemented by Regulation which came into force on 11 December 2003.

Market reviews

1.5 The new Directives require National Regulatory Authorities ("NRAs") such as the Office of Communications ("Ofcom") and previously the Director General of Telecommunications (referred to in this document as "the Director" or "Oftel") to carry out reviews of competition in communications markets to ensure that regulation remains appropriate in the light of changing market conditions. This document is part of the ongoing market review process which Oftel commenced in anticipation of the new regime.

1.6 Each market review has three parts:

a definition of the relevant market or markets;
an assessment of competition in each market, in particular whether any companies have Significant Market Power ("SMP") in a given market; and
an assessment of the appropriate regulatory obligations which should be imposed where there has been a finding of SMP.

1.7 More detailed requirements and guidance concerning the conduct of market reviews are provided in the Directives, the Communications Act, and in additional documents issued by the European Commission, Oftel and Ofcom.

Consultation processes

1.8 The consultation process for this market review began with the consultation published by Oftel on 15 May 2003. The Director published, in the May consultation, a Notification under the Electronic Communications (Market Analysis) Regulations 2003, setting out proposals for identifying markets, making market power determinations and setting SMP conditions on O2, Orange, T-Mobile, Vodafone, '3' and Inquam. The document invited comments over a 10 week period on the proposals for the definition of relevant markets, market power determinations and the setting of new SMP conditions.

1.9 A second stage of consultation began on 19 December 2003 ("the December consultation"). This consultation updated the analysis based on market developments and responses to the first stage of consultation. This second stage of consultation, which closed on 10 February 2004, invited representations from UK stakeholders and from the European Commission and other NRAs, in accordance with Article 7 of the Framework Directive (2002/21/EC).

1.10 In accordance with Article 7 of the Framework and the European Commission's Recommendation on notifications, time limits and consultations of 23 July 2003, Ofcom also sent the European Commission a summary notification form of its draft proposals. Ofcom's notifications are published on the European Commission's website at: http://forum.europa.eu.int/Public/irc/infso/ecctf/library?l=/&vm=detailed&sb=Title

EC Commission "Recommendation on relevant product and service markets" adopted on 11 February 2003 ("the Recommendation")

1.11 The European Commission identified in the Recommendation a set of markets in which ex ante regulation might be warranted. The Recommendation seeks to promote harmonisation across the European Community by ensuring that the same product and service markets are subject to a market analysis in all Member States. However, NRAs are able to regulate markets that differ from those identified in the Recommendation where this is justified by national circumstances. Accordingly, NRAs are to define relevant markets appropriate to national circumstances, taking due account of the product markets listed in the Recommendation (see section 79 of the Act), which Ofcom has done.

EC Commission "Guidelines on market analysis and the assessment of SMP" ("the Guidelines")

1.12 The European Commission has also issued Guidelines on market analysis and the assessment of SMP ("SMP Guidelines")^(-3-). Oftel produced additional guidelines on the criteria to assess effective competition (see www.ofcom.org.uk/static/archive/oftel/publications/about_oftel/2002/
smpg0802.htm). Ofcom has taken due account of the SMP Guidelines (in accordance with section 79 of the Act), and the Oftel guidelines when identifying a services market and when considering whether to make a market power determination under section 79 of the Act.

Regulation pending the completion of market reviews

1.13 The new Directives also allow Member States to carry forward some existing regulation until the market reviews have been completed and new conditions put in place. Continuation Notices were therefore issued to relevant communications providers to maintain the effect of certain provisions contained in licence conditions that existed under the Telecommunications Act 1984 prior to 25 July 2003 until, inter alia, the market review process is finished. Further details on this continuation regime were published by Oftel and can be found at: www.ofcom.org.uk/static/archive/oftel/publications/eu_directives/2003/
discont1003.pdf

Ofcom's decision on the markets following this review

1.14 Ofcom has now identified the following markets in the UK in accordance with section 79 of the Act:

wholesale voice call termination provided by '3' (such termination provided via '3''s mobile network);
wholesale voice call termination provided by Inquam (such termination provided via Inquam's mobile network);
wholesale voice call termination provided by O2 (such termination provided via O2's mobile network);
wholesale voice call termination provided by Orange (such termination provided via Orange's mobile network);
wholesale voice call termination provided by T-Mobile (such termination provided via T-Mobile's mobile network); and
wholesale voice call termination provided by Vodafone (such termination provided via Vodafone's mobile network).

1.15 Following the December consultation and Ofcom's consideration of responses to that consultation, Ofcom has decided that these are still the appropriate market definitions. The European Commission also indicated to Ofcom in its response to the December consultation that it considers that the product market definition does not differ from that in the Recommendation. This is discussed in greater detail in Chapter 2.

1.16 As set out in the previous consultations, the market reviews are required to be forward looking in their analysis. It is envisaged that there will be another market review of the services covered by this review in 18-24 months and therefore the analysis looks forward over that time period.

1.17 As set out in the Notification at Annex A, Ofcom has made market power determinations in respect of each market to the effect that each MNO has SMP in the market for call termination on its individual network or networks. Following those market power determinations, Ofcom has decided that the MNOs should be subject to SMP conditions, as set out below. In respect of Vodafone, O2, T-Mobile and Orange for their 2G call termination services, the SMP conditions require that they:

provide network access (i.e.2G call termination) on reasonable request;
do not unduly discriminate in relations to matters connects with such network access;
supply to Ofcom copies of any new or amended access contracts;
give advance notification of price changes; and
reduce termination charges in line with charge controls (details of which can be found in Chapter 6 of this statement).

1.18 In respect of Inquam, a requirement that it gives advance notification of price changes.

1.19 In respect of 2G voice call termination services provided by '3', a requirement that it gives advance notification of price changes and supplies to the Ofcom details of call volumes.

Existing regulation

1.20 Copies of Discontinuation Notices posted on 1 June 2004 are included at Annex G to this explanatory statement. These Notices shall take effect on the appropriate date depending on when the new relevant SMP conditions come into force. The Notices are given to:

O2 and Vodafone, discontinuing Conditions 70B and 70C (Control of Interconnection Charges: Fixed to Mobile and Mobile to Mobile respectively);
Orange and T-Mobile, discontinuing Conditions 70A and 70B (Control of Interconnection Charges: Fixed to Mobile and Mobile to Mobile respectively);
Vodafone, ntl Limited and MCI Worldcom Limited, discontinuing an Interconnection direction made on 16 July 2003 in respect of a dispute over Vodafone's credit vetting abuse.

Outline of this document

1.21 This statement should be read in conjunction with the May and December consultations for the full reasoning for Ofcom's decision^(-4-). Ofcom has considered the responses to the December consultation carefully and taken utmost account of the points made when setting out in this statement its final decision on market definition, the making of market power determinations and the setting of SMP conditions. The rest of the document is structured as follows:

Chapter 2 defines the relevant markets;
Chapter 3 sets out Ofcom's conclusions on whether there is SMP in those markets;
Chapter 4 discusses the detrimental effects arising from holding such SMP;
Chapter 5 sets out what regulatory remedies Ofcom is imposing in the markets where SMP has been found;
Chapter 6 discusses the charge controls to take effect;
Chapter 7 sets out the process for discontinuing existing regulation;
Annex A contains the Notification under sections 48(1) and 79(4) of the Act containing Ofcom's final decision on the identification of relevant markets, the making pf market power determinations and the setting of SMP conditions;
Annex B discusses cost of capital;
Annex C provides an explanation of the LRIC target charge;
Annex D provides an evaluation of the surcharge externality to be applied in the charge controls;
Annex E discusses the treatment of ported numbers;
Annex F provides a glossary of the terms used in this statement; and
Annex G contains the discontinuation notices given to relevant operators.

Notification

1.22 Annex A contains the notification under sections 48(1) and 79(4) of the Act of Ofcom's decisions as a result of the review of the mobile call termination market, including the markets defined, the designation of SMP and the conditions that will be imposed as a result of the market analysis.

1.23 This document, including the notification in Annex A, has been made accessible to the European Commission and to the Regulatory Authorities in other Member States in accordance with the scheme of the Directives and sections 50 and 81 of the Act.

Footnotes:

2. - Reports on references under section 13 of the Telecommunications Act 1984 on the charges made by Vodafone, O2, Orange and T-Mobile for terminating calls from fixed and mobile networks, presented to the Director General of Telecommunications ("CC report"), December 2002

3. - "Commission Guidelines on market analysis and assessment of significant market power under the Community regulatory framework for electronic communications networks and services" which can be found at http://europa.eu.int/information_society/topics/telecoms/regulatory/new_rf/
index_en.htm.

4. - Although the May and December consultations were published by Oftel, this document refers to Ofcom throughout unless referring to specific publications issued by Oftel such as consumer surveys, guidelines etc. prior to Ofcom's receiving its powers under the Communications Act.

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