Termination a new step ahead, or not... (update)

Update from 18/08/09 post

Today some friends of mine are celebrating after the Commission's new heartbreaking announcement regarding termination rates. Others will be surprised and astonished, as I am now.

This revelation could be the result of the hot summer in Brussels or the start of a new trend. This is for you to decide.

On 17/08 the Commission released a comment "Telecoms: European Commission comments on the German regulator's proposals for the regulation of fixed and mobile termination rates" regarding the German NRAs proposal to not regulate alternative operators and MVNOs’ termination rates.

BNetzA's argument is very simple - in my view - since termination rates of fixed alternative operators are the same as those of DT and MVNOs, as well as mobile termination rates being the same as the hosting operators, there's no need to regulate. Regulation would be not proportionate to the case and would do more harm than good.

Background

In its decisions of mid-2006 BNetzA expressed its expectation at that time that this would be the last time asymmetric rates were accepted. Previously BNetzA accepted asymmetric rates for two reasons:

1- Limited impact (traffic of alternative operator was very low)

2- Structural cost differences due to economies of scale

BNetzA is of the opinion that alternative operators’ rates should be below the one of an efficient operator

“Entgelte an ihren Kosten der effizienten Leistungsbereitstellung erfolgt, so dass die Entgelte gegenüber der Deutschen Telekom AG nur eine Obergrenze darstellen und eventuelle Effizienzgewinne der alternativen Teilnehmernetzbetreiber bei diesen verbleiben.“

Therefore, they should be the same of DT.

What is the Commission’s point of view?

"The Commission stressed that commercial agreements together with a non-discrimination

obligation cannot always ensure interconnection and that operators do not raise termination rates above costs."

This is true, but it's also true that we do not have an indication of termination costs of these operators in Germany right now. The French NRA indicated in 2008 in a Market Analysis that cost-orientation obligations for Altnets were not proportionate

"It has invited BNetzA to impose an access (interconnection) obligation and a cost

orientation obligation on each of the alternative fixed network and virtual mobile network

operators, taking into account the Commission's recent Recommendation on termination rates

(IP/09/710)."

What are the implications for fixed operators?

All 56 small operators should calculate the costs of providing termination services and set termination rates on costs. [can you imagine reviewing and negotiating the new tariffs?]

Potentially some will have higher termination rates of DT, therefore, I am sure DT will not accept them and go to court. Moreover, it is possible it will have an impact also on the retail market.

NOTE:

I cannot be certain that 56 termination rates are consistent with the recent recommendation on termination rates that advocate one single termination rate for mobile networks. What do you think?

What are the implications for MVNOs?

MVNOs will have to set termination rates at the same levels of the negotiated MVNO termination price (for non full MVNOS) or as a combination of their costs. Also, in this case it is probable that we will have several MTRs for every small MVNO.

NOTE:

Again, as above, I am not sure the commission has really internalised its own recommendations. What do you think?

What about in other countries?

UK

There are reciprocal termination rates since 1997. In a statement issued in July 1997, Network Charges from 1997, the Director General supported the principle of reciprocal charging for Operators termination. The aim of reciprocity was to ensure competitive neutrality between BT and Operators and to remove the distortive effects of the call termination externality. The current Operator Charge Change Noticedistinguish between single switching operators and multi switching operators.

France

In France, reciprocal termination charges were ordered in earlier rulings, in 1999 and 2001. In decisions taken on 20 June 2003, ART has allowed Completel, Estel and UPC France to require charges from France Télécom until the end of 2007 not more than the level of charges that the incumbent had levied for like services five years previously. In 2008 Arcep in a market review proposed new caps and a glide path to reach harmonisation.

Italy

In Italy Agcom decided with a costing model differential termination rates for Altnets, however, the asymmetry will be eliminated in July 2010. As you can see from the table below Fastweb had in 2007 a 400% higher termination rate than Telecom Italia.

	Fastweb	Wind	BT Italia	Tiscali	Tele2	Eutelia	Other Operators
1/07/2007	2,01	1,90	1,78	1,76	1,45	1,25	1,25
1/07/2008	1,53	1,44	1,38	1,36	1,15	1,02	1,02
1/07/2009	1,05	1,01	0,97	0,97	0,86	0,80	0,80
1/07/2010	0,57	0,57	0,57	0,57	0,57	0,57	0,57

My view

It is a very interesting development to a very boring and old subject. I don't think the effort is worth the costs (potentially very high for operators and regulators) of developing costing models, negotiating new tariffs, changing business models and retail rates. It will be interesting to see the development of this new trend and monitor its implication.

The international experience highlight that harmonisation will be reached in two or three years in Europe. Thus, the burden or calculating with a cost model termination rates for alternative operators is very high, and, in my view, it does not justify the effort.

What do you think?

www.regulation.tk

Regulatory Accounting Roundtable 2008

Cost recovery, transparency and consistency, cost model auditing and simplification in cost accounting are the priorities for the industry and main challenges for the years to come, according to participants to the Regulatory Accounting Roundtable 2008 (RAR08), a high level meeting organized by OFCOM last week.

Last week I had the pleasure of chairing the RAR08, European experts and a delegation from NTC Thailand actively participated to the discussion on the future trends in regulatory accounting policy.

Delegates agreed that a priority for NRAs was to promote transparency and confidence with stakeholders and reduce the incentives of SMP operators to have subnormal cost recovery from regulatory activities.

An interesting presentation came from GSMA, they believe, as I wrote in this blog some time ago, that pricing mechanisms for interconnection should be tailor made for the situation product and market. A standardized pricing mechanism is one solution, but certainly not the best in log term.



Another issue emerged, may be just a trend, many operators agreed that a solution for all our problems in cost accounting and interconnection might be introducing in Europe a regulatory environment that promotes a pricing mechanism similar to Bill & Keep. However, nobody could answer in full to my questions regarding drawbacks of the system:

1) is it possible to have an open market with Bill & Keep? Bill & Keep might promote competition within existing players with same traffic volume, but might reduce competition from new entrants that will face (at least in the short term) much higher termination costs that current players.

2) how should unbalances in traffic volumes be handled? Can small operator ‘profit’ from Bill & Keep or is it (as it is in the internet world) a system advantage only for large players?

3) One operator argued that it will be happy to introduce Bill & Keep on a bilateral basis with the incumbent, but that probably smaller operators will be not able to have the same conditions as the others in the market.

I believe that Bill & Keep might become new barrier to entry in the market, what do you think?

I think that if we introduce Bill & Keep as it is, we might end up with a cost based termination rate valid for small players, that will not be able to ‘play’ a role or enter the market, while existing mid and large operators will be able to have a cost advantage and may-be a sustainable competitive advantage.

Julio Villalobos from SVP Advisors, gave us an open minding presentation on the complexity of the auditing process for regulatory cost modeling. I believe that auditing will be one of the most important activities in the future to come (with the new commission’s recommendation on interconnection due to see the light very soon) and that the importance to validate regulatory cost modeling will arise very soon when interconnection price will collapse. We have time to think about this issue!

Finally, I have to speak about the change in trend from small mobile operators. I wrote about this issue in this blog before. My friend John Blackmore from H3G explained that mobile termination rates based on LRIC and large common costs give suboptimal results now, in time of full coverage and small growth of the market.

I fully agree with him, that usually too many irrelevant costs are included, under full competition firms can only recover their marginal costs of producing the extra output. Common and joint costs should be therefore not recovered by this ‘monopoly’ product.

Why should we subsidize mobile operators, usually large and very rich, with fat-cat termination rates? We can if there is a long-term regulatory objective (e.g. coverage or low retail rate), but sometime at cost distorting the market.

Good point John, did you speak with the commission recently?

Presentations files can be found here

www.regulation.tk

Plans on Termination Rates: No Good News

The commission presented yesterday, to a selected number of representatives of NRAs, a plan for a new recommendation on Termination Rates.

Commission's objective is to achieve a coherent harmonized approach to ex-ante regulation of termination rates. They realized that, despite a common approach (LRIC) there is still 'inconsistent application of remedies' and that there are 'different levels of termination rates across Europe'.

The good news is that the commission is supported by ERG experts on this matter and that they plan to have a transitional period to achieve symmetrical termination rates.

I believe that symmetrical termination rates should be the objective of each NRAs, if we consider an efficient operator there's only one 'efficient' termination rates. Ideally one per country, but potentially, as expected by the commission in the long run, one per the entire European continent.

The bad news is that the commission is still in trouble defining the 'ideal' parameter and approach. At this stage of the process, I would argue that no recommendation is better that a bad 'recommendation" and that the fasted and less painful solution would be a kind of Bill & Keep solution with a level of cap, a trash hold, of about 10-15% above where symmetrical (ideally low) termination rates are charged.

The reason is simple, to prevent destructive retail tariffs, "Free calls to operator's A customers", so that I gain new customers and the costs of these customers are burden by the largest operators that have to increase capacity to its network.

What do you think on this issue? And what about fixed to mobile termination rates? Will it be the old / new problem of next year?

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