ACCC recommends continued regulation of mobile termination services

The Australian Competition and Consumer Commission plans to continue to regulate the mobile termination service in a preliminary decision issued today.

The decision is part of a wide-ranging ACCC review of the regulation of Australian mobile telephone services, which has involved extensive consultation with the telecommunications industry.

"The decision includes a new approach to regulating the price of the mobile termination service, ensuring a closer correlation between the price and the cost of delivering the mobile termination service", ACCC Commissioner, Mr Ed Willett, said.

"The ACCC's investigations suggest current termination charges are at least twice the cost of delivering the service.

"These above-cost charges are passed on to consumers in the retail prices they pay for fixed-to-mobile and mobile-to-mobile calls.

"The high cost of the mobile termination service is also impacting on competition in the market for fixed-to-mobile telephone calls.

"The ACCC recommends the adoption of a more direct pricing principle, where mobile operators will be required to gradually reduce the price of the mobile termination service to 12 cents per minute by January 2007.

"The draft pricing principle would require the price to fall to the lowest known price currently available in the market – 21c per minute - on 1 July 2004, with three further reductions of three cents per minute on 1 January in each of the three following years.

"This approach should deliver consumers a direct benefit in the form of cheaper calls to mobile phones and indirect benefits flowing from increased competition and investment in the market for fixed-to-mobile calls".

The mobile termination service allows a mobile subscriber to receive incoming calls from a network other than their own service provider. The service is provided by the "receiving network" and paid for by the "calling party's network".

The ACCC believes that under this system, all mobile operators have market power when it comes to terminating calls to their subscribers, as no other provider can terminate a call to these subscribers.

The fact the termination service is paid for by the calling network provides a real incentive for mobile operators to maximise the price of the termination service.

The inflated price has a number of negative consequences, including:

• increasing the retail prices of fixed-to-mobile and mobile-to-mobile calls
• inhibiting the ability of service providers who only provide fixed line calls to compete, as unlike vertically integrated providers, they must pay above-cost termination charges for all calls to mobile phones
• leading to under-investment in the infrastructure required to deliver fixed-to-mobile calls.

By continuing to regulate the mobile termination service, the ACCC will be able to ensure mobile operators provide access to their mobile termination service at competitive rates.

The current approach to regulation was introduced in July 2001 and uses retail benchmarking principles to guide the industry in the wholesale pricing of this service. However, this has not been as effective as it was hoped, as retail prices in mobile services have not decreased as much as was expected.

The ACCC believes its recommended approach will achieve the objective of generating a closer association of prices and costs for the mobile termination service. The recommended price of 12c is based on the accounting information provided by Australian mobile operators and benchmarking against cost estimates from around the world.

The ACCC is seeking submissions on its draft decision from interested parties by close of business, 30 April 2004. The ACCC expects to issue its final decision in June 2004.

The ACCC draft report is available below.

Background

In March 2003, the ACCC announced it would conduct a wide-ranging review of the regulation of the mobile services industry.

One aspect of this inquiry concerns whether the ACCC should extend the expiry date for the declaration of the domestic GSM and CDMA terminating access service (the "mobile termination service"). The current expiry date is 30 June 2004.

The ACCC also indicated it would review what form of regulation – and in particular, what form of pricing principle – would be most appropriate for this service.

What is declaration?

Under the Trade Practices Act 1974, declaration of a service creates a requirement for carriers supplying the service (access providers) to provide the service upon request to other service providers (access seekers). The access provider must take all reasonable steps to ensure the technical and operational quality of the service is equivalent to that which the access provider provides itself.

Thus declaration ensures access seekers have access to the inputs they need to supply competitive communications services to consumers. Access must be provided in accordance with the standard access obligations in the Act. Further terms and conditions can be agreed by commercial agreement. If agreement cannot be reached on the terms of access, the ACCC can arbitrate the dispute.

The mobile termination service was deemed to be declared under the Telecommunications (Transitional and Consequential Amendments) Act 1997.

In July 2001, following a series of arbitrations, the ACCC developed a retail benchmarking pricing principle to guide mobile operators in establishing the price of the mobile termination service.

Public consultation

In April 2003, the ACCC issued a discussion paper to inform its review of the mobile termination service.  It received 27 submissions from interested parties.

The ACCC also held two public forums in Melbourne (29 August 2003) and Sydney (11 September 2003)