Recent announcements reflect rising EU pressure on mobile termination rates

By Gareth Willmer

There has been a notable rise in announcements on mobile termination rates (MTRs) at an EU and local level in recent months, reflecting increased pressure for member states to reduce rates.

At the start of May, the Commission issued a recommendation on MTRs, giving guidelines on the method for reducing rates. The central tenet was that charges should be based “only on the real costs that an efficient operator incurs to establish the connection.”

Both before and since then, the European Commission has published comments on a number of moves by national regulators to cut MTRs. Many of these have praised authorities for moving in the right direction, but also say that reductions remain out of sync with the exact methodology proposed by the Commission.

These comments show that the Commission is trying to get the message across that it is applying a rigor to ensuring that methods for calculating MTRs are harmonized and that regulators are fully aware of the measures they should put in place in good time. At the same time, different methods for calculating rates show the challenges of harmonization across markets with contrasting conditions.

A good example is the comment addressed to Austrian regulator TKK at the end of May. The Commission welcomed TKK’s move to bring charges to a more competitive level, but highlighted that the methodology used is not yet in line with EU guidelines.

The Commission pointed out that the regulator took into account lower costs caused by a recent data surge on 3 Austria’s network when determining MTRs. However, data growth in Austria has been particularly pronounced and the Commission stressed that using the same approach may not be effective in countries with different competitive characteristics.

It should be noted that member states are not obliged to come in line with the EU recommendation until end-2012 and that the Commission has supported TKK’s intention to follow the recommendation in its next market review in 2011. Furthermore, TKK’s intended rate of €0.02 (US$0.028) for all operators by January 2011 is well within the Commission’s anticipated ideal termination rate of €0.015-€0.03 by 2012.

However, it appears that the Commission is trying to signal the importance of a common European approach in order to ensure that all member states adhere to the same guidelines within its timeframe. The Commission has been at pains to stress the wide variations in EU termination rates, between €0.02 and €0.15 in 2008.

Other recent published comments tend to focus on EU member states in Central and Eastern Europe, where operators generally charge higher MTRs than their Western European counterparts and where the impact of regulation could therefore be strongest. In October 2008, the mean MTR in the 10 CEE countries was €0.1021, compared with an average of €0.0855 for the EU as a whole.

In particular, the Commission has issued comments on the proposed regimes in Bulgaria, Poland, Romania and Slovakia. In Slovakia, for example, regulator TUSR recently announced plans to impose price controls on MTRs and oblige operators to align their prices with costs, but is yet to finalize its methodology for calculating costs. The Commission is therefore putting pressure on TUSR to implement transitional price-control measures in 2009.

And the Commission commented that a methodology chosen by Polish regulator UKE “does not promote efficiency and as such should only be considered as a temporary measure.” It added that UKE has repeatedly set MTRs without following EU or national consultation procedures.

Indeed, Poland’s smallest operator Play has made a large net outpayment in MTRs despite being free to set higher termination rates than its competitors. CEO Chris Bannister said that Play had paid about €50 million in interconnection revenues to its competitors in the 15 months after its launch.

Telekom Austria also has a large number of operations in the CEE region and said it paid out more than €8 million in MTRs to its larger European rivals last year.

But the fact that MTR reductions in CEE markets were the highest among EU countries last year shows the efforts of regulators to bring their charges in line. And the rising number of announcements on MTR reductions in both Western Europe and CEE shows that member states are moving in the right direction.

UK regulator Ofcom has meanwhile just issued a major public consultation on MTRs. The consultation looks at how rates could be set between 2011 and 2015, even though it still highlights that different methods for reductions are being considered. Ofcom’s review sets out six different options, some of which it says are “radical alternatives to the current arrangements.”

One certainty is that any regulation that significantly brings down MTRs will be welcomed by fixed-line carriers and smaller mobile operators such as 3, which has long campaigned for a reduction to charges and says that such a move would help lead to flat-rate cross-network deals.

In the UK, 3 and incumbent BT have launched a public campaign to cut MTRs to about £0.01 (US$0.016) or less. In a press release they said that MTRs accounted for as much as 80% of the price to call a mobile from a landline and that UK mobile operators charged £750 million for fixed-to-mobile termination last year.