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Introduction

5.1 Chapter 5 of the December consultation set out proposals for ex ante regulation to address each MNO's SMP.

5.2 This chapter sets out Ofcom's conclusions on regulatory remedies, and discusses the responses to the December consultation proposals.

Charge controls for 2G termination services

5.3 In paragraph 6.15 of the December consultation, Ofcom proposed an RPI-X cap on the charges for 2G mobile voice call termination of O2, Orange, T-Mobile and Vodafone to run from 1 April 2004 to 31 March 2006. This proposal is described in detail at Chapter 6 and Annex I of the December consultation. Having considered responses to the December consultation, Ofcom still considers that consumers will, on the whole, be made substantially better off by the regulation of mobile termination charges and Ofcom has concluded that a charge control, applied from 1 September 2004 until 31 March 2006, for 2G voice call termination services is still appropriate.

5.4 As set out in paragraphs 6.4 to 6.10 of the December consultation, Ofcom has set the target charge on the basis of LRIC plus a mark-up for common costs, based on the equal proportionate mark-up (EPMU) approach, and a network externality surcharge. However, rather than applying a glide path over the period of the control, Ofcom has concluded, for the reasons set out in chapter 6, that it is now appropriate for termination charges to be reduced directly to an efficient charge level for 2005/06 in the first period of the charge control.

5.5 The efficient charge level is set (in nominal terms) at 5.63ppm and 6.31ppm for combined 900/1800MHz and 1800MHz MNOs respectively. Full details of the charge control can be found in Chapter 6 of this statement.

5.6 In responding to the December consultation, the four MNOs put forward arguments against the imposition of the proposed charge controls. These are discussed below. Points concerning the assessment of detriments, and the charge control calculations and cost-benefit analysis are discussed separately in Chapter 4 and Chapter 6 of this document respectively.

"Retrospection"

5.7 In their responses, Vodafone, 02, Orange and T-Mobile all argue that the December consultation unlawfully and unreasonably proposes a charge control that is 'retrospective' or 'backward-looking' and hence is disproportionate.

Ofcom's response

5.8 Ofcom notes that the objective of the charge control proposals is to ensure that termination charges are lowered to an efficient level (the efficient charge). This aim is necessarily forward-looking. The method by which the proposed charge controls might reduce MNOs' current termination rates over the control period - such as via a glide path - is simply a mechanism by which these rates reach the fair target charge. This is set out clearly in Annex H of the December consultation, in particular paragraph H.12.

5.9 The objective of the charge control proposed in the December consultation remains unchanged from the May consultation. The same objective applies in relation to the charge controls set out in this statement.

5.10 The purpose and effect of the charge controls is forward-looking. Ofcom therefore does not accept the argument that the charge controls are retrospective. Hence, it does not accept that in setting such controls Ofcom is acting ultra vires, nor does it accept that its proposals are Wednesbury unreasonable. In paragraphs 5.94 and 5.161 of the December consultation, Ofcom explains why it considers that the control is proportionate and meets the tests in section 47(2) of the Act.

5.11 Chapter 6 (paragraphs 6.74-6.103 of this statement) deals with the path of reductions to the efficient charge. Paragraphs 6.91-6.92 relate specifically to the MNOs' arguments that the path of reductions to the efficient charge in the December consultation effectively involved a retrospective charge.

"Ofcom in breach of Framework Directive by delaying the setting of SMP conditions"

5.12 Related to the issue of 'retrospection', T-Mobile's response to the December consultation argues that Ofcom's delay in deciding whether to set SMP conditions breaches paragraph 9(11) of Schedule 18 of the Act and Article 16(1) of the Framework Directive (T-Mobile, Part I paragraph 15).

Ofcom's response

5.13 Ofcom has a duty under paragraph 9(11) of Schedule 18 to the Act to take all steps necessary for enabling it to decide whether or not to set new conditions. It must do this as soon as reasonably practicable after giving a continuation notice. One of those steps is to consider fully all responses made to the relevant consultations, which Ofcom has done. Ofcom therefore does not accept that it has acted in breach of its duties under either paragraph 9(11) of Schedule 18 of the Act. A similar duty is contained in Article 16(1) of the Framework Directive i.e. to carry out market analysis "as soon as possible" after the adoption of the Recommendation. Again, Ofcom does not accept that it has acted in breach of this duty, having dealt with responses to both consultations on mobile voice call termination as quickly as possible, consistent with its obligations to give full consideration to all responses.

"Pass-through"

5.14 In their responses, Orange and Vodafone raise concerns that a proposed charge control reducing the fixed-to-mobile termination rates paid by fixed network operators ("FNOs") would not necessarily be reflected in the retail rates FNOs set for their customers. Thus, should FNOs not pass through the perceived savings to consumers making fixed-to-mobile calls, the rationale for a charge control is not met. The suggestion is thus that a charge control is disproportionate.

5.15 In section 2.1 of its response, Orange disputes that sufficient steps have been taken by Ofcom to ensure pass-through. This view is also expressed by Vodafone in paragraph 1.42 of its submission. Orange in particular focuses on BT, arguing that Ofcom has allowed BT such flexibility so that BT is able to retain the benefits of any reductions in fixed-to-mobile termination charges. Orange further submits that Ofcom's policy (as set out in paragraphs 5.92 to 5.93 of the December consultation) is wrong in law, and that Ofcom is unable to direct BT to ensure pass-through. Orange alleges that Ofcom does not have the power to modify SMP conditions except where there has been a material change in circumstances so as to warrant a modification, and that Ofcom's policy is to regulate BT's retention 'by the back door' and lacks transparency.

Ofcom's response

5.16 Ofcom does not agree that on the basis of the 'pass-through' argument above, the proposed charge control is disproportionate. For reasons set out in paragraphs 5.95 to 5.103 of the December consultation and in Chapter 4 and Chapter 6 of this statement, Ofcom considers the proposed charge controls appropriate in response to a finding of SMP and an assessment of the distortion associated with SMP in the relevant wholesale market(s). Problems associated with excessive pricing in retail markets are, in the first instance, more appropriately addressed in other market reviews (for example, the fixed narrowband retail services market review of August 2003: http://www.ofcom.org.uk/static/archive/oftel/publications/eu_directives/
2003/fix_narrow_retail0803.pdf)

5.17 Ofcom does not accept the view that absent a specific pass-through requirement, the charge control will be ineffective in achieving its stated aim (Orange, pages 27 and 28) and would fail to meet the section 47(2) test of the Act. As stated earlier (paragraph 5.10), Ofcom believes that in imposing the charge control set out in this document, it has satisfied the section 47(2) test.

5.18 Ofcom explained its views on pass-through in paragraphs 5.92 and 5.93 of the December consultation and has not changed its view. Ofcom has explained that it will monitor the issue of pass-through closely. It does not accept Orange's arguments that it does not have the power to address the issue via ex-ante regulation if deemed necessary, nor does it accept that its policy to address the issue via ex-ante regulation if necessary amounts to regulation "by the back door" and lacks transparency. The setting of ex ante regulation is subject to rigorous consultation requirements and legal tests, as set out in the Act.

5.19 The specific mechanisms of the charge control set out in Chapter 6 of this document take account of the concerns raised by industry that pass-through might not be achievable without both sufficient notice for MNOs to adjust and advise third parties of termination charges, and a sufficient period for FNOs to adjust retail rates to reflect the new charges.

5.20 As discussed in Chapter 6 of this statement, the implementation date for the charge control takes account of both concerns, to help ensure that pass-through can take place as quickly as possible after implementation of the further reductions in the price of termination.

"Issues concerning ex-post powers"

5.21 In its response to the December consultation, T-Mobile (Part II, paragraph 36) appears to be arguing that Ofcom has not satisfied section 88(1)(b)(ii) of the Act, concerning the promotion of sustainable competition.

5.22 T-Mobile argues that the behaviour addressed by the ex ante regulation should be considered by general competition [ex post] powers. In raising this point, T-Mobile refers in particular to anti-competitive price discrimination as the behaviour being addressed by the proposed ex ante regulation:

"36. Oftel's analysis seems to be based on the general proposition that the lower the level of termination charges, the smaller the scope for anti-competitive price discrimination. However, ex ante regulation should not be put forward to deal with behaviour that should properly be considered under general competition law. Oftel's own analysis supports the need to consider such behaviour under competition law taking into account the facts of the case rather than applying a blanket prohibition." (T-Mobile, Part II, paragraph 36)

Ofcom's response

5.23 Ofcom does not agree with T-Mobile's argument. The underlying problem addressed by the ex ante charge control regulation proposed in the December consultation is the detrimental effects arising from SMP - pricing freedom leading to excessive charges. Ofcom considers that the increased risk of anti-competitive behaviour is an example of other concerns associated with pricing freedom. This is explained in paragraph 4.54 of the December consultation:

"…the Director puts forward this example as an illustration of competition problems that could arise when termination charges are set excessively."

5.24 Ofcom does not accept T-Mobile's argument that ex ante regulation is an inappropriate mechanism to address excessive pricing and anti-competitive price discrimination. Annex N of the December consultation set out a general analysis of why ex ante regulation might be appropriate in certain markets rather than rely solely on ex post competition law.

5.25 Ofcom's view continues to be that reliance on general competition law is not a sufficient remedy in the circumstances of the mobile termination markets analysed in this market review. Ofcom considers that ex ante obligations provide greater certainty in the relevant markets, are aimed to promote competition and reduce the likelihood of an impairment to fair and effective competition. This issue was discussed in relation to the non-discrimination obligation and potential effects on anti-competitive price discrimination, in the December consultation (paragraph 5.41).

Ofcom conclusion on the charge control

5.26 Ofcom concludes that a charge control is an appropriate remedy for the provision of wholesale 2G mobile voice call termination on the networks of the four MNOs. The reasons for this are set out in chapter 5 of the December consultation (in particular paragraphs 5.59 - 5.106 and 5.154 - 5.161) and Chapter 4 and Chapter 6 of this statement.

Regulation of 3G voice call termination

5.27 The December consultation proposed no ex ante regulation of 3G voice call termination services.

5.28 At the time of writing, there is still only one MNO ('3') offering voice call termination over a 3G network. Vodafone and T-Mobile have so far restricted 3G services to data, whilst Orange and O2 have yet to offer 3G services.

5.29 The reported number of subscribers to '3''s services - and thus the total number of subscribers using 3G voice services - in the UK by the end of March 2004 was in the region of between 384,300^(-19-) and 420,000^(-20-). This amounts to approximately 0.75% of the total mobile subscribers in the UK.

5.30 At such an early stage of roll-out, the costs of 3G voice call termination are unclear, and robust cost information is difficult to ascertain. Thus, in terms of the charges set for 3G voice call termination, there is currently insufficient evidence to conclude that such charges are excessive.

5.31 Ofcom also considers that any adverse effects to consumers associated with charges for 3G voice call termination are likely to be small, given the very limited size of '3''s mobile subscriber base relative to the wider mobile sector. In Ofcom's view, the lack of evidence of excessive charging, combined with the modest effect any charges have on consumers as a whole, mean that it would be disproportionate to impose ex ante obligations on 3G voice call termination at this time. Ofcom does, however, intend to keep this position under review, and will retain the ability to bring forward proposals for regulation if warranted.

5.32 Ofcom therefore remains of the view that no specific ex ante regulation of 3G voice call termination services is at present required.

Views of INTUG (cross-subsidy)

5.33 In response to this proposal, INTUG submits that 3G networks are able to offer voice transmission at much lower costs than 2G, whilst 3G network operators have a stronger incentive than 2G operators to set high termination charges, given the

"..greater scope for cross-subsidies to yet more expensive handsets and a much wider range of new services, in addition to the costs of network construction." (INTUG response, page 3)

Ofcom's response

5.34 It is Ofcom's view that INTUG's arguments about potential cross-subsidy do not provide sufficient justification to support the ex ante regulation of 3G voice call termination charges. As with all SMP conditions, the evidentiary thresholds for setting charge controls are high. In the case of 3G voice call termination, there is insufficient evidence to justify imposing a charge control. For the reasoning in paragraph 5.111 of the December consultation and as explained in paragraphs 5.27-5.31 above, Ofcom does not consider that charge control regulation is appropriate for calls to 3G networks.

Views of INTUG (MNP)

5.35 INTUG also argues that as 3G customers move from 2G but retain their phone numbers by means of Mobile Number Portability ('MNP'), the possibility of high[er] termination rates would confuse callers to these handsets.

Ofcom's response

5.36 Ofcom considers that the concerns raised by INTUG are addressed by the current arrangements for number portability. Current industry arrangements are for termination of a call to a ported number to take place via the donor operator, where the terminating operator receives a charge set by the donor operator (this arrangement is discussed in Annex J of the December consultation and paragraphs 6.46-6.49 of Chapter 6 in this statement).

Views of INTUG (no ex ante regulation of 3G)

5.37 In page 4 of its response, INTUG suggests that Ofcom's decision not to impose ex ante regulation on 3G voice call termination is not correct, but does not advance any evidence to support this. INTUG also appears to suggest that Ofcom's decision not to regulate 3G would affect trade between member states and the development of a single market, but this proposition is not developed.

Views of BT

5.38 BT appears to believe that Ofcom has identified similar concerns in relation to 2G and 3G wholesale mobile voice call termination, but does not propose similar regulation of 3G as it does for 2G. BT argues that the regulation proposed for 2G mobile voice call termination should equally be applied to 3G voice call termination on mobile networks. BT also appears to suggest that since 2G is the predominant means of terminating mobile voice calls, 2G costs could be used as the basis for setting 3G termination charges (BT, paragraphs C1-C2).

Ofcom's response

5.39 BT's argument does not characterise Ofcom's position correctly. As discussed in paragraphs 5.27-5.31 above, Ofcom does not believe that ex ante regulation of 3G voice call termination is appropriate at present.

Views of European Commission

5.40 Pursuant to Article 7(3) of the Framework Directive, the European Commission provided comments on the draft measures notified by Ofcom in the December consultation.

5.41 In its response, the European Commission includes comments on the appropriateness of the proposals for 3G voice call termination (European Commission, Section III). In particular, the European Commission advises that

"…although 3G retail services might constitute a newly emerging market,…,termination of voice calls on 3G networks is not as such to be considered as a novel service or a newly emerging market."

5.42 The European Commission is of the view that absent ex ante transparency obligations in relation to 3G termination, MNOs could bypass the proposed regulation of 2G termination. The European Commission suggests that it

"…might be appropriate for Ofcom to impose…transparency obligations… regarding 3G termination, allowing Ofcom to monitor and to determine whether the assumptions as to the constraining effect of 2G termination pricing on 3G termination are borne out." (emphasis added).

Ofcom's response

5.43 Ofcom's view (as discussed in paragraphs 5.27-5.32 above) is that there is insufficient justification for ex ante regulation of 3G voice call termination at present. Ofcom has, however, taken utmost account of the European Commission's comments there is a case for monitoring 3G voice call termination charges. Ofcom does not, however, consider it necessary to impose specific ex ante regulation in relation to 3G voice call termination in order to achieve the requisite level of transparency.

5.44 As explained above in paragraph 5.29, '3' is so far the only MNO to launch 3G voice services. The proposal for regulating '3' set out in the December consultation was for a transparency obligation requiring '3' to provide advance notification of changes to charges for 2G voice call termination, along with a requirement to submit quarterly data to Ofcom concerning 2G and 3G call volumes. The obligations set out in this statement include a requirement on '3' to submit information to Ofcom on 2G call volumes and on total call volumes, and also to notify changes in charges for termination. In Ofcom's view, this obligation should be sufficient to allow continued monitoring of '3''s behaviour in relation to call termination volumes and charges.

Conclusion on the ex ante regulation of 3G voice call termination

5.45 As explained in paragraphs 5.27-5.32, Ofcom does not believe that specific ex ante regulation of 3G voice call termination is appropriate.

5.46 For the reasons discussed in paragraph 5.44 above, Ofcom is of the view that the proposals set out in the December consultation concerning '3' (the only MNO currently offering 3G voice call termination) preclude the need for additional 3G-specific ex ante regulation of its services. The inclusion of additional SMP obligations would therefore be disproportionate. The issue of transparency is discussed in more detail below.

5.47 For the period covered by the market review, Ofcom thus considers its approach to the ex ante regulation of 3G voice call termination to be proportionate. However, whilst there are currently insufficient grounds to impose additional ex ante regulation, it is possible that during the period of the next formal review of mobile voice call termination markets, 3G voice call termination may establish itself to such an extent that Ofcom may need to reconsider its position. Subject to satisfying the relevant tests (such as section 47(2) of the Act), Ofcom retains the power to impose an SMP condition(s) to address concerns with 3G voice call termination charges at a point after the publication of this statement. In line with paragraph 5.113 of the December consultation, Ofcom's position will be kept under review.

Provision of network access

5.48 Ofcom received no new, material issues concerning network access in submissions issued in response to the December consultation.

5.49 For the reasons set out in paragraphs 5.30-5.36 and 5.138-5.145 of the December consultation, Ofcom concludes that a requirement to provide network access (i.e. for 2G voice call termination services) on reasonable request should be imposed on O2, Orange, T-Mobile and Vodafone. A minor change has been made to the drafting of this condition. Ofcom believes that this change improves the clarity of this condition.

No undue discrimination

5.50 In section 3.1 (pages 11-12) of its response, Orange highlights that the proposed condition provides that undue discrimination may be deemed to have been shown where the MNO concerned

"…unfairly favours to a material extent an activity carried on by it so as to place at a competitive disadvantage persons competing with [it]".

5.51 Orange argues that paragraph 5.43 of the December response effectively states that at the time of writing, a condition prohibiting undue discrimination was unnecessary, as the investigation concerning the relevant issue informing the decision on whether such a condition might be necessary had yet to be concluded.

Ofcom's response

5.52 Discrimination between an MNO's own businesses and FNOs (as referred to in paragraph 5.42 of the December consultation) has been referred to by Ofcom as one potential example of undue discrimination. However, it is not the type of potential undue discrimination of principal concern to Ofcom.

5.53 As set out in paragraphs 5.38-5.39 of the December consultation, several types of discrimination might occur, with discrimination between other MNOs being of the greatest concern (rather than between the MNO concerned and FNOs, as is suggested by Orange's response).

5.54 Whilst the proposed condition might appear to be concerned only with discrimination between the Dominant Provider and other operators, the condition is in fact wider. The condition also, for example, prevents discrimination by the Dominant Provider through setting higher charges for one MNO and lower charges for another. Such behaviour might, for example, target new entrants (as discussed in paragraphs 5.37 and 5.39 of the December consultation).

Conclusion on the prohibition of undue discrimination

5.55 As explained in paragraphs 5.1 to 5.13 of the December consultation, Ofcom has the discretion to set SMP conditions where appropriate. As discussed in paragraph 5.7 of the December consultation, the relevant conditions that might be considered include a no undue discrimination obligation.

5.56 Paragraph 5.41 of the December consultation explains that an obligation not to discriminate unduly would provide greater certainty in the relevant markets. As discussed above, such a condition would address the various potential forms of discrimination, including that of greatest concern to Ofcom, namely discrimination between other MNOs.

5.57 Further, in Ofcom's view, compliance with such a condition places no onerous requirement on MNOs.

5.58 For the reasons set out in this document, and in paragraphs 5.37-5.41 and 5.146-5.153, Ofcom has therefore concluded that an obligation on O2, Orange, T-Mobile and Vodafone not to discriminate unduly in the provision of network access (i.e. 2G voice call termination services) is appropriate.

5.59 However, Ofcom notes that to address the concerns raised by this particular review (discussed in paragraph 5.53 above), it is not necessary to include the second sections (MC 2.2 and MD 2.2) of the undue discrimination conditions proposed in the December consultation. Ofcom has therefore removed these sections from the final conditions. Ofcom intends to consult on non-discrimination guidelines later in 2004.

Transparency - requirement to notify charges (and call volumes)

5.60 In the December consultation, it was proposed that '3' should be subject to a transparency obligation. This obligation required '3' to provide 28 days' notice of changes to its call termination charges to both those with whom it has entered into an Access Contract and to Ofcom, and to provide Ofcom with details of 2G and 3G call volumes on a quarterly basis. As discussed above, Ofcom remains of the view that this obligation is appropriate. However, a minor change to the drafting of this condition has been made to clarify that these details should be provided by charging period (e.g. peak / evenings / weekends in line with '3''s current charging periods), and to refer to '2G' and 'all' call volumes rather than 2G and 3G call volumes.

5.61 In response to the December consultation's proposals for the regulation of '3', Orange raises three main arguments questioning the rationale behind the proposals.

Orange - '3''s charges excessive

5.62 Orange does not agree that there is insufficient evidence to suggest that '3' will set charges that could be considered excessive, stating:

'3''s termination rates are "substantially higher than the 2G cost estimates of the Director…[and] are also higher than the current rates of the other MNOs, whose rates the Director has consistently alleged to be excessive" (Orange, paragraph 3.7.2)

Ofcom's response

5.63 As explained in paragraph 5.124 of the December consultation, where '3' is unable to provide voice call termination services using its own 3G network, it switches calls at the gateway MSC and thereafter uses the 2G radio network of O2 as part of a roaming agreement. As stated in paragraph 5.126, the expectation would be that the charges set by '3' for 2G termination would be, to a degree, above the industry norm. Ofcom also considers that '3' has strong incentives to use its own 3G network, in preference to the 2G network of O2. This is discussed below, in paragraphs 5.67-5.70.

5.64 As noted in the SMP analysis in chapter 3 of this statement, Ofcom considers that '3' is likely to have considerable pricing freedom in the setting of charges for 3G voice call termination. However, as explained in paragraph 5.130 of the December consultation and paragraphs 5.27-5.31 above, at such an early stage of roll-out, the costs to '3' in providing 3G voice call termination are still largely unknown and there is currently insufficient evidence to conclude with any certainty that charges set by '3' for voice call termination are excessive.

5.65 Ofcom notes that in light of any control to reduce the charges for the 2G termination provided by O2, Orange, T-Mobile and Vodafone, it would expect a consequent reduction in charges set by '3'. There should also be effects on '3''s termination charges associated with the migration of traffic, as discussed in paragraphs 5.66-5.69 below. The obligation imposed by '3' under this Statement will assist Ofcom in keeping these matters under review.

Orange - '3''s incentives to use 3G

5.66 Orange suggests that it is wrong to assume that '3' has strong incentives to use its own 3G network, and not another's 2G radio network, and questions how this assumption is relevant to the analysis of mobile voice call termination services (Orange, 3.7.2)

Ofcom's response

5.67 As stated in the December consultation and confirmed in paragraph 2.1 above, Ofcom's analysis of mobile voice call termination services considers the relevant markets as wholesale voice call termination on each MNO's network (or, where the MNO operates both 2G and 3G networks, across both networks), and that '3' has SMP in the market in which it supplies wholesale mobile termination services (see paragraph 3.21 above). '3''s incentive to use its own 3G network does not directly affect this analysis.

5.68 However, in considering the appropriate ex ante regulation then to be applied to '3', Ofcom has taken into account a number of factors, one of which when considering the regulation of '3''s 2G call termination is '3''s incentive to use its own network rather than using the spare capacity of a competitor's 2G network.

5.69 This is considered in paragraphs 5.129 and 5.132 of the December consultation. Ofcom still considers it entirely rational for '3' to use its own network to terminate calls whenever possible (indeed it would be irrational not to do so, as that could lead to a reduction in potential revenues and the under-utilisation of its network, whilst conversely increasing revenues generated by, and utilisation of, O2's network). On this basis, Ofcom believes that the proportion of calls terminated by '3' as 2G will reduce over time. This is one factor that has informed Ofcom's decision on the appropriate regulation to impose on '3''s 2G termination services.
Obligation on '3' insufficient to address concerns

5.70 The third point raised by Orange is that the fact that enforcing a LRIC obligation would place a significant burden on '3' to provide accurate and updated information (paragraph 5.132, December consultation) is not a reasonable justification for the decision to treat '3' in a different manner to other MNOs.

Ofcom's response

5.71 In terms of '3''s 2G voice call termination services, Ofcom believes that the expected decline in '3''s 2G traffic would mean a 2G-specific LRIC obligation would be disproportionate. As part of its voice termination, '3' combines 2G with 3G and unlike with 2G call termination, there is significant uncertainty concerning the costs associated with '3''s provision of voice call termination. Ofcom is still of the view that there would be a significant burden on '3' in meeting a LRIC obligation. However, this is not the sole basis against imposing such an obligation. A full explanation to Ofcom's position as regards the regulation of '3''s call termination is provided in paragraphs 5.129 - 5.132 of the December consultation.

5.72 Ofcom remains of the view that a transparency obligation including a reporting requirement is a proportionate obligation to impose on '3' at this stage, as explained in paragraphs 5.134 - 5.137 of the December consultation.

5.73 However, this does not prevent Ofcom from setting additional remedies at a later date if such action is justified and compliant with all relevant tests in the Act (see also paragraph 5.47 above).

5.74 For the reasons set out in paragraphs 5.171 to 5.178 of the December consultation Ofcom also remains of the view that an obligation to notify proposed changes to charges in advance should apply to O2, Orange, T-Mobile and Vodafone. Ofcom has amended this condition to provide that the four MNOs must give notice, no later than 28 days after the condition comes into force, of the charges which will be in effect on 1 September 2004 for 2G call termination. This has been included to give purchasers of call termination sufficient time to adjust their retail prices and assist with pass-through (as referred to in paragraphs 5.19-5.20 above).

5.75 In the December consultation (paragraphs 5.179 - 5.188), it was proposed that Inquam should be subject to a transparency obligation requiring it to provide 28 days' notice of changes to its call termination charges.

5.76 Ofcom received no new, material issues concerning this proposal in submissions issued in response to the December consultation and Ofcom remains of the view that Inquam should be subject to the proposed transparency obligation.

Transparency - requirement to publish Access Contracts

5.77 In the December consultation (paragraphs 5.162 - 5.170) it was proposed that the four MNOs should be subject to an obligation to publish Access Contracts. Ofcom received no responses concerning this proposal in the December consultation and remains of the view that, for the reasons set out in those paragraphs, the four MNOs should be subject to such an obligation. Ofcom has made a small amendment to this condition to change the obligation to publish the Access Contracts within 28 days, rather than one month of the Condition coming into force and to publish any amendments to its Access Contracts or new Contracts within 28 days rather than one month. Ofcom considers that this is consistent with its approach taken in the advance price notification condition.

Alternatives

5.78 In the May and December consultations, Ofcom considered carefully whether there were effective alternatives to direct regulation of mobile voice call termination charges which would adequately protect the interests of citizen-consumers by creating the necessary conditions to bring down termination charges to the competitive level. These were discussed in Annex D of the December consultation document. At the time, Ofcom concluded that none of the alternatives discussed could be expected to be effective in the immediate future.

5.79 No new evidence has been presented to Ofcom that causes it to alter this view, although it notes that two responses - from O2 and UKCTA - both promote further consideration of alternative solutions, whilst acknowledging that these do not currently offer suitable substitutes for the proposed ex ante regulation.

5.80 For example, in page 3 of its response, UKCTA states:

"..Ofcom should continue to consider other alternatives to price controls…However, we agree with Oftel's view…that no technological substitute is currently available"

5.81 Whilst O2 advises that it does:

"..not expect the Director General to abandon completely formal regulation…on the expectation that the implementation of one or more of the alternative solutions might have the desired effect." (O2, page 5)

5.82 In page 6 of its response, O2 anticipates that looking forward, Ofcom will work with industry as part of a de-regulatory approach, stating that

"…O2 does reasonably anticipate that Ofcom will take a more participative approach in order that, over time, the industry can be weaned off formal regulation which, as is widely acknowledged, is inferior to the discipline exerted by competitive forces." (O2, page 6)

5.83 O2 suggests that if supported by FNOs, MNOs and Ofcom, a call back service in particular might offer an avenue to move away from regulation.

5.84 Whilst Ofcom's view remains that no solution(s) is currently available as an alternative to the proposed ex ante regulation, Ofcom notes the views of both O2 and UKCTA that alternatives should continue to be pursued with a view to moving away from ex ante regulation.

5.85 As part of its regulatory principles^(-21-), Ofcom aims to operate with a bias against intervention and seek the least intrusive regulatory mechanisms necessary. Ofcom would welcome the development of alternatives to regulation, in particular if these can be developed to a point where charge controls can be removed. Ofcom looks forward to discussing proposals with the MNOs, FNOs and others. As part of the review of voice call termination for the period after March 2006, Ofcom will discuss with industry the full range of regulatory options available to it, including options for holding charges at the 2005/06 efficient level, and where possible, alternatives to charge control regulation.

Conclusions on remedies

5.86 Having considered responses to the December consultation, Ofcom has concluded that:

1. O2, Orange, T-Mobile and Vodafone should be subject to charge controls for 2G voice call termination as set out in chapter 6 of this statement;
   
   
2. O2, Orange, T-Mobile and Vodafone should be subject to an access obligation for 2G voice call termination;
   
   
3. O2, Orange, T-Mobile and Vodafone should be subject to an obligation not to discriminate unduly in relation to 2G voice call termination;
   
   
4. O2, Orange, T-Mobile and Vodafone should be subject to obligations to notify 2G voice call termination charges in advance and to publish Access Contracts;
   
   
5. '3''s 2G voice call termination should not be subject to charge controls;
   
   
6. '3' should be subject to a transparency obligation to notify charges for 2G voice call termination and notify 2G and total call volumes; and
   
   
7. Inquam should be subject to a transparency obligation to notify charges for call termination in advance.

5.87 Currently, suitable alternative solutions to the ex ante regulation set out in the statement do not exist, but such alternatives should be considered as part of a move towards potential future de-regulation.

5.88 As considered for the purposes of each of the May (see Chapter 6) and December (see Chapter 5) consultations, and as further considered for the purpose of this statement, Ofcom has in setting these obligations, met all relevant obligations under the Act and new EU regulatory framework, and given full consideration to all relevant factors including responses to the December consultation and the recently published ERG common position on the approach to appropriate remedies in the new regulatory framework: http://www.erg.eu.int/doc/whatsnew/erg_0330rev1_remedies_common
_position.pdf

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Footnotes:

19. - As reported by 3G Mobile, 26 May 2004

20. - As reported by Mobile Communications, 1 May 2004

21. - First published in Ofcom's Foundation and Framework document, September 2003

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