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Telecoms: Commission acts on termination rates to boost competition

Commission Européenne - IP/09/710   07/05/2009

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IP/09/710

Brussels, 7 May 2009

Telecoms: Commission acts on termination rates to boost competition

The European Commission has today set out clear guidance for EU telecoms regulators on the cost-based method to be used when calculating termination rates – the wholesale fees charged by operators to connect the call from another operator's network which are part of everyone's phone bill. The guidance is in the form of a "Recommendation" that national regulators are obliged to take "the utmost account" of. The Recommendation indicates specifically that termination rates at national level should be based only on the real costs that an efficient operator incurs to establish the connection. Eliminating price distortions between phone operators across the EU will lower consumer prices for voice calls within and between Member States, saving business and household customers at least €2 billion in 2009-2012, and help investment and innovation in the entire telecoms sector. Mobile termination rates varied widely in the EU in 2008 from 2.00 euro cents per minute (in Cyprus) to 15 euro cents per minute (in Bulgaria). Mobile termination rates (on average 8.55 euro cents per minute) are also typically 10 times higher than fixed termination rates (on average ranging from 0.57 to 1.13 euro cents per minute). Higher mobile termination rates make it harder for fixed and small mobile operators to compete with large mobile operators. These divergences, and differing regulatory approaches, undermine the Single Market and Europe's competitiveness.

"Despite efforts by some national regulators to bring termination rates closer to their real costs, they remain very disparate across the EU, with large gaps between fixed and mobile termination rates. This is not in line with the increasing convergence between fixed and mobile telephony and can lead to serious distortions of competition between Member States and operators," said Viviane Reding, EU Telecoms Commissioner. "The Commission decided to intervene today against these distortions of competition in the Single Market, which deter investment into upgrading fixed networks to fibre and for which in the end consumers are paying the price."

"Bringing down termination rates to an efficient level will increase competition to the benefit of European consumers," said EU Competition Commissioner Neelie Kroes: “Only a rigorous and harmonised approach to regulation will ensure that the existing distortions of competition are removed in the whole EU and that innovative new products combining fixed and mobile calls will emerge. This is why today's Commission decision is a milestone in the pro-competitive development of EU telecoms regulation. "

To realise the full potential of a single telecoms market, the Commission's Recommendation sets out cost factors that all EU national telecoms regulators should take account of when setting termination rates which are not market prices, but regulated by national regulators. This will make termination rates converge to a considerably lower level than today (to approximately 1.5 euro cents to 3 euro cents per minute by the end of 2012, according to a Commission Staff Working Paper that accompanies the Recommendation). Termination rates should be based on the costs of an efficient operator and should apply to all operators at the same level. Exceptions are allowed in certain conditions, for a limited period of time, for cost differences outside an operator's control.

The Commission has identified inconsistencies across Europe in an assessment of about 120 regulatory proposals from national telecoms regulators relating to termination rates over the past 6 years. Mobile termination rates (on average of 8.55 euro cents per minute) are also around 10 times higher than fixed-line termination rates (that range on average from 0.57 to1.13 euro cents per minute). The French regulator, ARCEP, estimates that efficient mobile termination rates would be between 1.00 euro cents and 2.00 euro cents per minute.

Indirect subsidy for mobile operators

For the Commission, these variations cannot be justified by differences in underlying costs, networks or national characteristics. They are an indirect subsidy that benefits mobile operators with a large market share to the detriment of smaller and fixed-line operators. They also direct funds away from critical investments like upgrades to high-speed internet networks, and hinder innovative services like converged fixed-mobile products and competitively-priced bundles of calls.

Termination rates are both revenue and an expense for operators: when one operator makes less revenue from them, another operator faces lower costs. During the four-year period from 2009-2012, as regulators align with the more consistent approach outlined in the Recommendation, smaller mobile operators (who are net senders of call traffic to other networks) can expect to pay less to their larger competitors, fixed operators could get at least €2 billion of additional revenue by paying lower, cost-based termination rates for fixed to mobile calls and consumers are expected to save at least €2 billion. The longer-term impact will be even bigger as operators generate new revenues, as new operators have the incentive to enter the market and grow and as consumers benefit from lower prices and greater service innovation.

All EU national regulators should apply the recommended approach to termination rates by the end of 2012. However, national regulators with limited resources may use different approaches for a limited further period as long as they achieve the same pro-competitive result.

Background

Today's Recommendation on the regulation of termination rates in the EU follows a consultation of the public (June to September 2008 (IP/08/1016) and of Member States (October 2008 to February 2009), and a 30-day scrutiny by the European Parliament.

Under Article 19 of the Framework Directive on the EU telecoms rules, the Commission harmonises the application of EU telecoms rules in the Single Market to promote competition and consumer benefits.

See also MEMO/09/222

The Recommendation and the Staff Working Paper can be found at:

http://ec.europa.eu/information_society/policy/ecomm/implementation_enforcement/article_7/index_en.htm

The European Regulators Group position on termination rates:

http://www.erg.eu.int/doc/publications/erg_07_83_mtr_ftr_cp_12_03_08.pdf
Annex

[ Figures and graphics available in PDF and WORD PROCESSED ]
Source: European Electronic Communications Regulation and Markets, 14th Progress Report

[ Figures and graphics available in PDF and WORD PROCESSED ]
Source: European Electronic Communications Regulation and Markets, 14th Progress Report

[ Figures and graphics available in PDF and WORD PROCESSED ]
Source: European Electronic Communications Regulation and Markets, 14th Progress Report

[ Figures and graphics available in PDF and WORD PROCESSED ]
Source: European Electronic Communications Regulation and Markets, 14th Progress Report

Call termination at local level: refers to the conveyance of calls from the local exchange or switch located nearest to the called subscriber to the premises of the called subscriber where the call is completed.

Call termination at single transit level: refers to the conveyance of calls from a transit switch located at a higher network level through the local exchange/switch for completion at the called subscriber's premises.

Call termination at double transit level: refers to the conveyance of calls from a transit switch located at a higher network level through two exchanges/switches for completion at the called subscriber's premises.


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