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Commerce Commission suggests pricing regulation for mobile industry
The war around mobile termination regulation in New Zealand has taken another turn with the Commerce Commission (the Commission) suggesting that prices are too high and need regulating.
Prompted by the entry of 2degrees into the mobile market in New Zealand, the Commission has released its draft recommendation that mobile termination prices – that is the rates telecommunications companies charge rivals to connect voice calls and text messages to their mobile networks, should be regulated.
The Commission argues current wholesale mobile termination charges are likely to limit the ability of any new entrant into the industry to compete. Reduced charges would result in an increase in competition, which the Commission says should lead to lower calling costs for consumers wanting to call mobile phones. However, Telecom and Vodafone argue that the impact of the reductions will actually lead to higher prices for Vodafone and Telecom mobile customers. This so called "water-bed effect" means that, as prices charged to call a mobile network are pushed down, the prices to mobile customers are pushed up. While the Commission recognised that regulation would likely increase mobile prices, its preliminary view is that, overall, the regulation will produce net public benefits.
At the same time, and also motivated by a desire to encourage new competition in this area, the Commission has announced an investigation into whether regulation of national mobile roaming services should be extended to include price.
Mobile termination price regulation in New Zealand
The Commission conducted an investigation into mobile termination prices in New Zealand in 2004/2005, recommending to the Government in 2006 that certain aspects should be regulated.
In 2007 Telecom and Vodafone avoided regulation by offering voluntary deeds of undertaking to the Telecommunications and IT Minister to reduce mobile termination rates every year, over five years. Telecom offered to reduce prices from approximately 20 to 12 cents per minute, and Vodafone from 20 to 14 cents per minute. The Minister accepted those undertakings and the rate charged by both companies is now at 15 cents per minute.
The Commission takes another look
The Commission was prompted to re-examine mobile termination pricing following the announced entry of a third mobile player – 2degrees, which is seeking to eliminate mobile termination fees and other charges on calls between networks.
The three companies submitted revised undertakings, but the Commission's preliminary view is that those undertakings do not go far enough and the prices offered are significantly above "cost", thereby limiting the ability of an efficient entrant mobile network operator to compete with the established mobile operators.
In reaching its view, the Commission benchmarked the prices offered in New Zealand to forward-looking cost based estimates from a range of other comparable jurisdictions. These benchmarks indicated an average cost of 7.2 cents per minute for calls and 0.95 cents per SMS, with those rates reducing to 3.8 cents per minute for calls and 0.5 cents per SMS by 2015.
In contrast, the prices offered in New Zealand were on average 15.25 cents per minute for calls falling to 10.53 in 2015 and 6.68 cents per SMS in 2009 falling to 5.36 in 2015.
Where to from here?
The report is the result of an investigation by the Commission under clause 2 of Part 1 of Schedule 3 of the Telecommunications Act 2001 (the Act). Under the Act, the Commission may, on its own initiative, commence an investigation into whether or not a telecommunications service should be regulated as a designated or specified service and make a recommendation to the relevant minister. The report is currently a draft and submissions from interested parties are due by 27 July 2009.
Telecom, Vodafone and 2degrees have also been invited to submit further revised undertakings at the same time as their submissions on the report.
After public consultation closes, the Commission will submit a final report to the Communications and IT Minister, Steven Joyce. The Minister will then decide whether to accept, reject or seek clarification or amendment of the recommendations contained in that final report at which time one can anticipate the arguments about the impact on mobile customers from the regulation to come to the fore. Given the previous Labour Government's preference for a commercial solution over regulation, the more "business friendly" National Government may face considerable political pressure to resist regulation.
Mobile roaming investigation
The Commission has announced an investigation into whether regulation of national mobile roaming services should be extended to include price. "Roaming" allows subscribers to one mobile phone network to use their mobile phone on a different network. This is particularly useful where a new market entrant is building its own mobile network and, in the meantime, its customers can still use its services by roaming on another network. The Commission has stated that it considers that the prices contained in current commercial roaming agreements may be significantly above cost, and has concerns over future market participants negotiating competitive agreements to enter the market.
The Commission is planning to commence its investigation in August, aiming to release a draft report in mid-October and complete its investigation by the end of February 2010. The Commission is encouraging parties to reach acceptable commercial solutions at any time, including before any investigation is formally commenced.
In the past, the Commission has used mobile termination rates as a proxy for mobile roaming rates. Thus Steven Joyce's decision on the Commission's recommendations for regulating mobile termination rates is likely to inform the Commission's view on how to proceed with the mobile roaming investigation.
For more information contact:
Dean Oppenhuis
Partner
