Commerce Commission responds to mobile termination undertakings

The Commerce Commission has today given feedback to three telecommunications companies on their proposed undertakings for mobile termination access services. The undertakings were submitted to the Commission as an alternative to regulation.

Vodafone, Telecom and NZ Communications supplied undertakings to the Commission for mobile termination access services in January 2009. The proposed undertakings were in response to the Commission's Schedule 3 investigation under the Telecommunications Act 2001 into whether mobile-to-mobile, fixed-to-mobile and short-message-service termination (SMS) should be regulated. Telecommunications companies and other interested parties then made submissions to the Commission on the undertakings.

The Commission has today written to Vodafone, Telecom and NZ Communications with its preliminary views.

"The mobile termination rates provided by Vodafone and Telecom in their undertakings (see table in attached pdf) are significantly above the Commission's preliminary view on current international cost-based benchmarks," said Commerce Commission Chair Paula Rebstock.

Vodafone have offered rates starting at 15 cents per minute (cpm) and reducing over time to 11 cpm for voice calls, and starting at 9.5 cents per SMS and reducing over time to 7 cents per SMS. Telecom have offered rates starting at 16 cpm and reducing over time to 10 cpm for voice calls, and a flat rate of 3.5 cents per SMS.

"The Commission's preliminary view, based on current benchmarks, is that cost-based termination rates could be as low as 7cpm for mobile to mobile and fixed to mobile voice calls, and 1 cent per SMS," Ms Rebstock said. "Based on these preliminary benchmarks, the Commission expects that any revised undertakings will need to offer significantly lower mobile termination rates before the Commission could consider recommending that the Minister accept them."

"Another key feature of the undertakings was the approach to pricing," said Ms Rebstock. "The Commission's preliminary view is that cost-based pricing is currently more appropriate than the 'bill and keep' (*see background) pricing approach proposed by NZ Communications because cost-based pricing is likely to best promote competition." However, Ms Rebstock noted that it may be appropriate for the Commission to reconsider the adoption of 'bill and keep' in the longer term, but this would depend on New Zealand market conditions.

The Commission's investigation relates to the wholesale terms that telecommunications companies charge each other, rather than the price that consumers directly pay for mobile calls. The Commission can only recommend regulation at the wholesale level.

"However, the Commission would expect increased competition, as a result of reduced wholesale charges, to benefit end-users by leading to lower retail prices," said Ms Rebstock.

Any revised undertakings from Vodafone, Telecom and NZ Communications must be supplied by 22 April 2009. After the Commission has received any revised undertakings it will issue a draft report. A conference will be held before the Commission releases a final report.

The Commission's comments, the undertakings and submissions are all available on the Commission's website under Mobile Termination Access Services.

Background

MTAS Investigation. On 6 November 2008 the Commerce Commission commenced an investigation under Schedule 3 of the Telecommunications Act 2001 (the Act) into mobile termination access services (MTAS). The investigation incorporates mobile-to-mobile voice termination (MTM), fixed-to-mobile voice termination (FTM) and short-message service termination (SMS). The investigation is to consider whether these services should become regulated services under Schedule 1 of the Act.

The PDF below contains a diagram which illustrates how calls to mobile phones can be split into originating services from mobile phones or fixed lines, which are handed over at a point of interconnection (POI) to the MTAS supplied by a mobile operator. The current MTAS investigation is only considering whether or not the MTAS should be regulated under the Act.

Undertakings. On 12 January 2009, the Commission received five undertakings under Schedule 3A of the Act, from:

a. Vodafone - three separate undertakings for the three components of MTAS;

b. Telecom - one undertaking covering all three components of MTAS; and

c. NZ Communications - one undertaking covering MTM, SMS, multi-media-message-services (MMS) and video telephony calls.

Submitters. Submissions were received on the undertakings from Vodafone, Telecom, NZ Communications, TelstraClear, CallPlus, the Telecommunications Users Association of New Zealand, and a combined submission from Orcon, Kordia and Woosh.

**'Bill and keep' pricing. The OECD[1] defines 'bill and keep' as:

"A pricing scheme for the two-way interconnection of two networks under which the reciprocal call termination charge is zero - that is, each network agrees to terminate calls from the other network at no charge."

Under a 'bill and keep' pricing approach each network bills their own customers for the calls that those customers make and the SMS' that those customers send, and keeps that revenue. This contrasts to a 'cost-based pricing' approach to mobile termination rates, where the sending network is required to pay the terminating network for each call or SMS that the sending network's customers make or send to the terminating network's customers.

*Charges provided for under Telecom's undertaking

Note: the rates in bold reflect the current requirements under Telecom's Deed for FTM[2], the rates in italics reflect the current offer under Telecom's standard interconnection agreement.[3]

Charges provided for under Vodafone's undertakings

Note: the undertakings would commence for FTM from 1 April 2012, at the expiry of Vodafone's MTR Deed[4] - the rates in bold reflect the current requirements under Vodafone's MTR Deed.