The relevance of the UK

, posted: 18-Apr-2010 08:33

Two weeks ago OfCom, the UK telecommunications regulator, released a proposal to set mobile termination rates after the existing set of controls expire in March 2011. OfCom's draft proposal is to reduce termination rates from their current level at 4.3 pence per minute down to 0.5 pence per minute by 2015.

Ernie Newman of TUANZ has argued that this will mean that New Zealand termination rates (at 6 cents from 1 January 2014 under the undertaking) are six times higher than those in the UK at the same time. Mr Newman argues that this is a reason the Minister should send back the Commission's report for further work.

In passing I should say that I think Mr Newman's maths is a little suspect. The OfCom rates are expressed in constant 2008/09 prices, so the nominal rate will be around 0.6 pence. And the long-run exchange the Commerce Commission uses in its MTAS Final Report against the pound is just over 0.38. Together this means the equivalent UK rate would be 0.6/0.38 = 1.6 NZ cents.

But his point is basically that the undertakings aren't a good deal. So rather than focusing on the maths, what I want to do here is explain what I think we can take out of this new draft UK report, and why I think the UK 0.6 rate is not especially helpful as a benchmark, even for 2015.
The Commission has estimated that the costs for mobile termination in New Zealand will be just over 4 cents in 2015. This is the mid-point of the upper and lower bounds for cost in Table 13 of the MTAS Final Report, page 126.

The major difference between the Commission’s 4 cent cost estimate and the UK regulator’s 0.6 pence draft proposal for 2015 is that the UK regulator is using a new and different method of estimating costs. The Commission here uses TSLRIC, which is comparable to what OfCom calls LRIC+. OfCom is now proposing to move to pure LRIC, essentially taking off the allocation of common costs that would previously have been recovered from the mobile termination service.

There will doubtless be a lot of argument about whether this is the right approach. OfCom seems to be strongly influenced by the need to line up with guidance in favour of pure LRIC from the European Commission. Submissions are open until 23 June with a final proposal in the second half of the year.

But this new proposed approach from OfCom does not require the report to be sent back to the Commission for further consideration. The Commission already considered the pure LRIC approach in its Final MTAS Report. It concluded that TSLRIC was the better approach. Wik, the consultants advising the Commission, had this to say (see page 28 of the Wik Report on the Commission's MTAS page):

"WIK-Consult considers this new interpretation of the LRIC cost standard as ill-founded."

Wik also pointed out that this new approach to modelling would risk setting prices far too low.

"Simulations with the WIK mobile cost model indicate that if the cost of termination is derived in the way proposed by the European Commission the result would be a “cost” figure that could be lower than relevant cost by more than 50 %."

So even if the Minister were to send the mobile termination report back to the Commission, the 0.6 pence draft benchmark from the UK seems unlikely to be adopted. This is unless, of course, the Commission were to change its mind on the appropriate cost estimation approach.

I think there are two other interesting things in the OfCom draft report. First, OfCom also calculate LRIC+ numbers. These come out at 1.5 pence for 2015. Using the Commission's exchange rate against the pound of 0.38, this translates to 3.9 New Zealand cents, very close to the Commission's 4 cent estimate. And probably slightly above the Commission's 4 cent estimate if the UK figures were inflation adjusted.

That said, Vodafone has been a firm critic of the Commission's cost estimates in the entire MTAS process. In my view there are many differences between the UK and New Zealand that mean that directly reading across from UK cost model results to New Zealand is fraught with difficulty. And certainly the UK cost model results are at the low end of international TSLRIC model results, as you can see from Table 11 on page 109 of the Commission's Final MTAS Report.

The second interesting thing is OfCom proposes a four year glidepath to get to the new rates. This has been something we have also argued for in the MTAS process, often against trenchant criticism. The Commission has also picked up some of these arguments in its MTAS Final Report (paras 513 to 515).

So where all this get me to is:
  • The undertaking rates take us to 6 cents a minute in 2015.
  • The Commission's cost estimate for 2015 is 4 cents on a TSLRIC basis.
  • The OfCom report only supports much lower rates if the Commission were to change its approach to cost modelling away from the TSLRIC standard it has consistently used and most recently accepted in its MTAS Final Report.

  • I think the best way forward is for the Minister to accept the undertakings. To my mind it isn't worth sending this back to the Commission for another six to nine month reconsideration. There is only a potential two cent difference in five years time between the undertaking rates and where regulation might end up. The speedy and certain reduction offered by the undertakings are the best option for now.
    The Commission and the industry have spent the better part of the last two years debating termination rates, and coming up with a solution that lowers prices faster than the deeds and minimises further argument. The Minister should accept the Commission's recommendation.
     
    Hayden Glass
    Public Policy
    Vodafone NZ


    Other related posts:
    Of termination rates and regulatory holidays
    Minister recommends regulation - Vodafone's response
    Vodafone's response to the Commerce Commission's report




    Permalink to The relevance of the UK | Add a comment (8 comments) | Main Index




    Comment by ajw, on 18-Apr-2010 09:05

    I say again, why is NZ and Mexico the only two countries in the OECD that do not regulate mobile termination rates. The OFCOM consultation process is only taking seven weeks. It is a sad indicement of the regulatory process that this latest investigation has taken two years and still no resolution in sight which shows that the process is flawed and needs radical reform.


    Author's note by Paul Brislen, on 18-Apr-2010 13:19

    So... we should regulate the industry because the regulator takes too long to regulate?

    That seems a tad wrong to me.

    The resolution is in sight - the Commission's process has given us an answer: accept the quasi-regulation undertakings. That you're not happy with that outcome doesn't mean there isn't an outcome.

    Undertakings in October versus another 18 months of process which, at the end point, will deliver a similar result but with capital R regulation instead of small r regulation.

    Seems like an easy one to me.

    Putting aside any desire "just to regulate", the outcomes are similar. Similar levels of rate reduction but in a time frame that we as telcos can better manage. One of the key things the UK regulator does is to include a glidepath: something our Commission does not.

    And that's just on voice - on TXT the offer is immediately better than under regulation: BAK from October 1.

    Even the UK regulator isn't suggesting that.

    Cheers

    Paul


    Comment by ajw, on 18-Apr-2010 14:43

    Paul if everything is so straightforward as you suggest why is it that Anita Mazzonleni has recommended these undertakings be rejected. After all these are voluntary undertakings and are not regulation as such. It ain't over until the Minister makes a final decision whenever that may be.


    Comment by Chris, on 18-Apr-2010 15:47

    I am thinking they should delay the whole investigation for 18 months, In order for the competition to heat up... And by 18 months there will be no need for regulation as the competition will be very intense, As it is heating up now without regulation..


    Comment by hellonearthisman, on 18-Apr-2010 16:30

    Those termination rates are a burden to new entreats and the development of SMS services. NB http://www.geekzone.co.nz/sbiddle/7110 MTR's are used as a tool to block sms services, making such services commercial impossible. The current MTR is a form of protectionism and should be regulated.


    Comment by sbiddle, on 19-Apr-2010 09:24

    MTR's are not a burden for new entrants - far from this. They are a valuable revenue tool for new networks. The irony of this whole saga is what 2degrees are fighting for is the reverse of what has happened in the past.

    Historically networks like One2One who very much pioneered on-net discounted calling drove significant subscriber growth by giving cheap on-net calling. Meteor are another classic example who entered the Irish market that was controlled by two operators. As people introduced new friends they end up with more subscribers and start receiving more and more inbound MTR revenue as their customers numbers increase.

    I also fail to see how they stop the development of SMS services, NZ has some of the highest rates of SMS usage in the world. We also have a mryiad of SMS services and plenty of companies developing SMS based products for a global market. The only thing that has been hurt in NZ is voice, but once again this isn't a result of MTRs - it's a result of a lack of competition in the marketplace.


    Comment by Chris, on 19-Apr-2010 10:00

    @Paul

    If your company decided to charge for incoming calls and texts would you do that for those calls/texts that stayed On Net?


    Comment by sbiddle, on 19-Apr-2010 11:12

    @chris

    While I can't answer that question it's worth knowing that in the USA with MPP a user pays for an inbound call no matter whether it's on or off net.

    NZ isn't looking at a move from CPP to MPP so there is certainly no suggestion charging would ever occur in NZ.


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    Paul Brislen
    Auckland
    New Zealand


    You’ll have heard about mobile termination rates and how the Commerce Commission is investigating whether or not to regulate them. But what is a mobile termination rate, how does it work and why is it so important?

    In this blog, we’ll try to answer your questions, tell you a bit about what we think and keep you up to date with the Commerce Commission and its process.


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