I am publishing today the key conclusions from the Competition Commission’s report to me on its inquiry into mobile termination charges. The Competition Commission has endorsed Oftel’s analysis and proposals in this important area. Implementation will bring substantial benefits for consumers.

Background

In 2000-01, I reviewed both the broad mobile market (ie the state of competition in the provision of mobile telephony services to mobile customers) and the call termination market (ie the state of competition in the delivery of inbound calls to mobile customers) separately. This was not a theoretical exercise. We consulted extensively with the industry and consumer groups, including setting up a joint industry working group to discuss costing issues. In addition we undertook substantial consumer research.

On the broader market review, although the market was not effectively competitive, I found growing evidence of competition. As a result, I was able to roll back some of the access requirements on Vodafone and BT Cellnet (as it was then named). Although we identified some issues for ongoing monitoring, the overwhelming thrust of that review was deregulatory.

This was in line with my general aim to limit regulation to the absolute necessary minimum. However, I must take targeted and proportionate action in markets where consumers need protection. The Competition Commission has agreed that call termination is just such a case.

What is call termination?

When a call is made to a mobile phone, whether from a fixed line or from a mobile on another network, the call passes from the originating operator (A) to the terminating operator (B). The terminating operator charges a fee for connecting the call to its customer – the termination charge. This charge is paid by the originating operator and passed on to the caller in the retail price they pay for their call.

The key point about call termination is that it is the caller, not the person being called, who pays for the call and so pays the termination charge. However, it is the person being called who chooses the mobile network operator (MNO) on which the call terminates (operator (B)) and which sets the termination charge. So the normal market discipline of consumers reacting to higher prices, forcing the MNO to bring down charges, does not happen because the consumer who pays the charge is not the customer of the MNO which sets the charge.

Oftel’s proposal

Oftel imposed a price cap of RPI-9 on the termination rates of Vodafone and O₂ (BT Cellnet) in 1999 after an earlier Competition Commission investigation. Our task in the 2000-01 review was to check whether competition was sufficient, or was likely to be sufficient in the near future, to constrain the level of termination charges or whether regulation such as a continuation of the charge caps was still necessary.

In examining call termination, we first had to review the relevant market. We concluded that the correct market to examine was that for termination on each individual network. This is because if a call is made to a particular number, there is no other way to connect the call to that person’s number except by terminating it on the network to which the person subscribes. The Competition Commission has agreed with my analysis, pointing out that "there are currently no practical technological means of terminating a call other than on the network of the MNO to which the called party subscribes". The European Commission has also indicated their agreement that this is the correct market definition and the Competition Commission has now also endorsed our judgement.

This market definition implies that each MNO has a monopoly for termination on its own network and that competitive pressures are insufficient to constrain the termination charge. Again, both Oftel and the Competition Commission looked very closely at the MNOs’ arguments about future technological change and the nature of mobile calls. They did not convince either of us that this monopoly position would erode quickly.

In the light of this, I concluded that the termination charge should be made cost-reflective. My scrutiny of the data revealed a major gap between costs and the charges. I proposed a charge cap of RPI-12 for each of the four years from 2001-02 to 2005-06 to bring the charges into line with costs. In addition to the cost of termination, an allowance was made for the benefits to callers of being able to make a call to a mobile customer.

The MNOs rejected my proposed modification to their licences. I then referred this issue to the Competition Commission for it to consider whether the absence of controls on termination charges would act against the public interest. This has had the effect of delaying benefits reaching consumers and has increased uncertainty in the market place. The MNOs made substantial representations to the Competition Commission to try and persuade it that Oftel had its analysis wrong. The report shows that that they have totally failed to convince the Competition Commission.

The Competition Commission’s verdict

The Competition Commission has spent a year on its inquiry and has thoroughly analysed all relevant issues. The Competition Commission has concluded that the absence of a control on termination charges would be against the public interest. The CC has concluded that:

• the termination charges of the four mobile operators operate against the public interest;
• current termination charges are 30-40% above a fair charge;
• consumers pay too much for calls from fixed lines to mobiles and from one mobile network to another;
• the high cost of termination deters people from calling mobiles; and
• those who make more calls to mobiles, either from a fixed line or another network, unfairly subsidise other mobile owners who mainly receive calls or make on-net calls.

This is in line with Oftel’s conclusions, which we set out in our original proposal and with the Competition Commission in hearings and in technical papers. I am pleased that the Competition Commission has endorsed Oftel’s analysis and conclusions.

The Competition Commission has also agreed with the key elements of the remedies I put forward. It agrees the need for cost-reflective termination charges and they agree that Long Run Incremental Cost is the best basis for such charges. It has had access to a broader range of data from the MNOs than my team had available and have therefore produced slightly different caps. It recommends that:

• each MNO should reduce the level of the total termination charge by 15 per cent in real terms before 25 July this year;
• O2's and Vodafone’s charges should be subject to a further reductions of RPI-15% reduction between 25 July and 31 March 2004 and for each of the two subsequent financial years.
• Orange’s and T-Mobile’s charges should be reduced by RPI-14% in each of these subsequent two time periods.

I accept the Competition Commission’s conclusion on a one-off cut of 15% by July. Formal licence modifications to the MNO’s licences are currently being considered and will be put out to public consultation shortly. Arrangements for the control of termination charges after July 2003 will be considered in the market review to be undertaken by Oftel under the requirements of the new European Directives.

Oftel issues

The Competition Commission has tackled head on a number of concerns put forward by the MNOs in the course of their investigation.

The MNOs argued that retail prices would increase if termination rates were capped. Oftel argued that this would not happen and the Competition Commission agrees.

The MNOs’ existing business plans already project a downward trend of retail prices and whilst retail prices might not fall as fast as predicted, the Competition Commission concludes that they will not need to rise as a result of the proposed charge controls.

The MNOs argued that the number of mobile subscribers would fall because handset subsidies would decrease. Oftel did not believe that the capping termination reduced the networks’ ability to gain and retain marginal customers through targeted packages. Again the Competition Commission agreed with our analysis.

I was mindful of the need not to undermine the viability of any of the MNOs in my original proposals. Some of the MNOs argued that my proposals were draconian and would force them to consider leaving the market. The Competition Commission’s analysis shows this claim to be unfounded.

The MNOs have claimed that action to reduce termination charges will delay the rollout of 3G networks. There is no reason why this should be the case. The Competition Commission agrees with Oftel’s analysis that the business case for 3G should stand on its own merits. It argues that, as a matter of principle, 3G investment does not justify termination charges that are above a reasonable estimate of their cost, particularly if those charges are ultimately derived from fixed line customers.

What this means for consumers

Oftel has estimated that, for example, a peak rate call from BT to Vodafone would fall from 20 pence per minute to 13.5 pence per minute over the period of the control proposed by the Commission. Although Oftel does not regulate retail mobile prices, as lower termination charges reduce the costs to MNOs of providing off-net calls, it should make it easier for them to reduce headline off-net call prices or include more off-net calls in their pricing packages.

The lower prices resulting from the implementation of the proposals will lead on average to consumers saving £18 in the last year of the charge control for calls to mobile phones from fixed line phones. Overall, Oftel estimates that consumers should benefit by £190m per year through lower prices for fixed to mobile calls as a result of a 15 per cent cut in termination rates to be made by July 2003. The Competition Commission also proposes further cuts in 2003/04 and over the following two years.

Oftel’s next steps

I will publish the Commission’s full report in early February. Also, I will consult publicly for not less than 28 days on the precise licence modifications to be made. At present, I expect the consultation to begin in February in order to give effect to the Competition Commission’s first recommendation by April.

I now need to review the termination market afresh for the purpose of introducing the new European Telecoms framework with effect from 25 July this year. The Competition Commission’s thorough forward-looking analysis, which both vindicates and builds on Oftel’s conclusions, now gives the best possible starting point for that work.