EU Slams Ofcom Termination Charges

In a letter to Ofcom, made public this week, the European Commission says that the regulator is keeping termination values higher than necessary due to historical 3G cost valuations.

For a telecom operator to deliver an end-to-end call across networks to its retail customers, interconnect agreements have to be established between providers. The provider originating the call will have to have sought and purchased a ‘call termination’ service from the network provider of the called party. The provider delivering the final stage of the call to the called party will have to have offered and agreed to provide the call termination service to the originating network provider. The price paid for these services are charged as mobile termination rates which are regulated in all EU Member States by national telecom regulators on the basis of the EU regulatory framework for electronic communications.

In a letter sent to Ofcom the European Commission expresses concerns as to how wholesale tariffs, charged by the five UK mobile operators for terminating calls to their customers, have been assessed. In the Commission’s view, Ofcom’s proposed tariffs keep termination values higher than necessary due to 3G spectrum cost valuations which risk overestimating the costs. The Commission therefore asks the UK watchdog to reconsider the valuations. OFCOM’s approach would be detrimental to fair competition in the UK’s mobile market and lead to higher consumer prices for consumers.

"I am concerned that Ofcom’s approach to calculate 3G spectrum costs could hinder the movement towards lower mobile interconnection prices." said Information Society and Media Commissioner Viviane Reding. “The Commission believes that such costs should not be calculated on the basis of prices paid during the spectrum auctions, which are in today’s context inflated. Otherwise, distortions of competition and higher prices for mobile customers could be the result. I therefore ask OFCOM to reassess their method of calculating mobile termination rates in the UK.”

Back in September Ofcom, in applying EU telecom rules, notified the Commission of the measures that it intends to impose on the UK’s five mobile network operators, given their respective significant market power for terminating voice calls on their networks. The measures proposed follow Ofcom’s 2003 market review where the 2G/3G operators O2, Orange, T-Mobile and Vodafone, and 3G Three were already found to have significant market power on their respective networks. The 2G/3G-operators were subjected to price regulation until the end of March 2007. Three was only obliged to publish price changes for 2G termination.

Ofcom’s proposed remedies require UK mobile operators to implement cost-oriented tariffs for terminating calls on their networks. This aims at reducing mobile termination rates to target prices in three years, starting on 1 April 2007. The target prices are 5.3 pence per minute for 2G/3G and € 6 pence per minute for 3G operators.

These mobile termination target prices include 3G spectrum costs. Ofcom indicates the inclusion of 3G spectrum costs adds, on average 1.2 pence per minute to the mobile termination rates for the 2G/3G operators and 1.9 pence per minute for the 3G-only operator.

The Commission, in a letter sent to Ofcom on 22 November and made public this week, considers that the mobile termination rate charges proposed by Ofcom disproportionately reflect their historical 3G spectrum auction value and do not appear to reflect their current value. In its letter the Commission therefore invites Ofcom to reconsider the valuation of 3G licences so that users derive maximum benefit in terms of price. On a more general level, the Commission advocates moving towards a common, more market-based approach to allocating the radio spectrum needed for innovative services and devices to work EU-wide. Mobile operators will then be able to sell spectrum to others at a value prevailing at the time of the transaction.