Select Committee on European Scrutiny Thirty-Seventh Report


13 Mobile phone "roaming" costs

(a)

(27315)

6700/06

COM(06) 68

+ ADDs 1-2

(b)

(27710)

11724/06

COM(06) 382

+ ADDs 1-2


Commission Communication: European Electronic Communications Regulations and Markets 2005 and Annex (Commission Staff Working Paper Volumes I and II)


Draft Regulation on roaming on public mobile networks within the Community and amending Directive 2002/21/EC on a common regulatory framework for electronic communications networks and services

Legal baseArt 95 EC; QMV
Document originated(b) 12 July 2006
Deposited in Parliament(b) 21 July 2006
DepartmentTrade and Industry
Basis of considerationEM of 12 September 2006
Previous Committee Report(a) HC 34-xxiii (2005-06), para 7 (29 March 2006)
To be discussed in CouncilDecember 2006 Telecoms Council
Committee's assessmentLegally and Politically important
Committee's decision(a) Cleared

(b) Not cleared; further information requested

Background

13.1 Mobile termination rates are the fees mobile phone companies charge other carriers to terminate calls on their networks and are a significant input cost in providing the retail service of fixed-to-mobile and mobile-to-mobile calls.

13.2 By way of background, a report published in January 2006 by a US telecommunications consulting group[29] noted that while mobile telephone subscribers surpassed fixed line subscribers globally in 2002, mobile usage significantly lagged fixed line usage. It said that "the main reason is the high price of mobile calls, which are often caused by high mobile termination rates (MTRs, the cost per minute of terminating a call on a mobile network)" and concluded that "there is compelling evidence that mobile users in countries with low termination rates or that charge the receiving party for the call spend more time talking on their phones". The report finds that the average MTR in the world was US$0.142 at the beginning of 2005, and that there are significant variation in MTRs around the world, with Asian rates the lowest at US$0.048 per minute, as illustrated in the table below:
MTR by region 2005, US$
Asia 0.048
Africa 0.116
Americas 0.131
World 0.142
Europe 0.162
Pacific 0.200

13.3 "International roaming" is the ability of mobile phone subscribers to use their phones whilst travelling abroad. Users can make and receive calls using the same number as they do at home. For this, a mobile network operator needs to conclude international roaming agreements with operators in other countries. At the heart of these are MTRs, whereby the mobile phone subscriber pays both to make and receive calls when "roaming".

The draft Council Regulation

13.4 In its own Explanatory Memorandum, the Commission says that the high prices that mobile users pay for international mobile roaming has been identified as a persistent problem by consumer organisations, regulators and policy makers across the Community. It reviews its own earlier investigations, dating from 1999 and leading to the Commission opening proceedings (which are still ongoing) against "certain mobile operators in the United Kingdom and Germany". It further notes that in May 2005, the European Regulators Group (ERG) said that:

"retail charges were very high without clear justification; that this appeared to result both from high wholesale charges levied by the foreign host network operator and also, in many cases, from high retail mark-ups charged by the customer's own network operator; that reductions in wholesale charges were often not passed through to the retail customer; and that consumers often lacked clear information on the charges for roaming".

13.5 It then says that, in October 2005 the Commission drew attention to the problem of high international roaming charges and the lack of price transparency by publishing a consumer information website "that not only corroborated the fact that charges are in many cases manifestly excessive, but showed a variation in prices across the Community that could not be justified for calls with the same characteristics". It goes on to recall the European Parliament resolution of 1 December 2005 on European electronic communications regulation and markets 2004 which "called on the Commission to develop new initiatives in order to reduce the high costs of cross-border mobile telephone traffic"; further concern from the ERG "that measures being taken by NRAs would not resolve the problem of high prices"; and the March 2006 European Council conclusions on "the importance for competitiveness of reducing roaming charges, in the context of the need for focused, effective and integrated information and communication technology (ICT) policies both at European and national level, in order to achieve the renewed Lisbon Strategy goals of economic growth and productivity". Against this background, the Commission concludes as follows:

"While some operators have announced plans to reduce the prices for international roaming services in response to the EU initiatives, there has been no general industry response that would achieve the objectives of this proposal without the need for regulatory action. In particular there is no guarantee that all international roaming customers would see the benefits of lower prices envisaged by the proposal.

"This proposal therefore aims to provide a harmonised legal basis for such action that will facilitate the completion of the internal market for electronic communications."

13.6 In her comprehensive and helpful Explanatory Memorandum of 12 September 2006, the Minister of State for Industry and the Regions (Margaret Hodge) says that the Commission signalled their intention to legislate in a speech by the Commissioner for Telecommunications and the Information Society (Vivian Reding) in March 2006, which was followed by two rounds of consultation earlier in the year[30] (with details of responses to these consultation exercises given in Annex II-IV), before the issuing of the proposed Regulation and accompanying Regulatory Impact Assessment on 12th July 2006. She explains the main provisions of the draft Regulation as follows:

i)    Wholesale pricing

"Article 3 states that a 'wholesale' price cap should be introduced for the charges made between the operator of the roaming customer and the operator of the network the customer will use while roaming in the EU. This cap is proposed to be based on the (so called) termination rate a mobile operator pays when a call from a customer is made to (i.e. terminates on) another network. This rate is already regulated within the EU. For calls made within a country the 'cap' would be twice the average termination rate, whilst it would three times the rate for calls made back home.

ii)  Retail pricing

"Article 4 states that a 'retail' cap for calls made abroad should be introduced; which would be 130% of the maximum wholesale price.

iii)  Timing of application of maximum retail charge limits for regulated roaming calls

"Article 5 states that the retail price cap on international mobile roaming calls should be implemented six months after the regulation enters into force.

iv)  Receiving Party Pays

"Article 6 introduces a cap of 130% of the average termination rate of calls for the cost of receiving calls while travelling abroad.

v)  Transparency of pricing information

"Article 7 obliges the home provider to gives its roaming customers information on the costs they will incur on request and free of charge. In addition, the home provider must provide new customers with full information about roaming charges when they take out a subscription for a mobile phone service.

vi)  Supervision and enforcement

"Articles 8 and 9 state that national regulatory authorities (in the UK's case, OFCOM) will be responsible for monitoring and supervising compliance with this regulation within their territory and for devising appropriate penalties for infringements of it

vii)  Calculation of the average mobile termination rate

"Article 10 explains the way in which this is to be done — this rate is used for calculating the maximum price limits in Articles 3 and 6.

viii)  Articles 11-16 deal with procedural issues relating to the effective implementation and review of the Regulation."

13.7 The Minister then discusses the proposed legal base for the regulation, viz., Article 95 EC, as follows:

"This has been the legal base for a number of measures in the past, which have established a community framework for regulating electronic communications under which certain price restrictions on operators with significant market power have been made. However, we will need to explore the issue of legal base further in the course of the discussions in Council on the proposed regulation. The measure is subject to the qualified majority voting by the Council as well as to the co-decision procedure involving both the Council and the European Parliament. In terms of impact on UK law, EC regulations are directly applicable and there are currently no other provisions which cover this area in UK law."

13.8 On the question of subsidiarity, the Minister says that the ERG stated that, as a result of the cross-border nature of mobile telecommunications, it was beyond the competence of each individual Member State to legislate on the matter of international mobile roaming prices effectively: "Hence they requested that the European Commission take action on this matter on an EU-wide basis".

13.9 On the costs of compliance, the Minister goes on to say that

—  the additional administrative cost for OFCOM in fulfilling the monitoring and reporting requirements in the proposed draft Regulation will not be significant, the current estimate being no more than £30,000-£60,000.

—  Mobile network operators do not expect there to be a huge impact upon compliance costs, as they already gather information for their own purposes.

—  Proposed "transparency measures" could however be more costly, "again depending on the requirements of the final regulation (with specific messages to customers about tariffs every time they switch on their phones being the dearest option), though again not necessarily worryingly so".

13.10 However, with respect to the "true economic costs of the proposal", there is "as might be expected …. a degree of dispute between the Commission (in their draft Regulatory Impact Assessment) and the operators". She continues as follows:

"The Commission — on the basis of what they say are current roaming revenues of €8.5 billion — estimate that the overall benefit of their proposals could represent a consumer surplus of up to €6 billion. The operators argue that this estimate is too simplistic, is based on erroneous revenue projections, and would in fact vary between €39 million and €187 million. What is clear, however, is that the thrust of the proposal would benefit consumers who roam while affecting the revenue (and thus the capitalisation) of the operators.

"The current proposals (with the current retail cap proposed in Article 4) could lead to inefficiencies and unintended 'spillover effects' in related markets, as operators seek to recover the shortfall in their roaming costs in other ways (subscriptions, restrictions, higher domestic rates, etc.). Such actions could bear especially heavily on infrequent roamers (since they will have least countervailing power) and especially those on pre-pay contracts, who are often the most disadvantaged in society. Pre-pay customers are at risk as it is easier (than it is for those contracted customers) for operators to terminate their ability to roam or (if arbitrage in the EU market for SIMs takes place) to terminate the sale of SIMs altogether. Arbitrage becomes a potential issue where the regulated "roaming" price dips below the domestic price for calls in an EU country.

"Non-aligned operators (i.e. those without major networks of their own) are potentially badly affected by the introduction of retail caps since they are less able to internalise their costs to the same extent as larger ones (e.g. Vodafone and Orange). Some of these may as a result be forced to exit the roaming market altogether, with a consequence depressive impact on competition and innovation."

The Government's view

13.11 The Minister says that the proposed Regulation has "potentially significant policy implications", upon which she elaborates as follows:

"Not only does it affect a sector already subject to Community legislation but it also is proposing specific, and detailed, retail price controls that would be binding on all EU mobile operators. We therefore, in our consideration of the proposal, have to be aware of the precedent it could set, in addition to the merits, or otherwise, of the measure.

"The UK position during the run-up to the issuing of the draft regulation has been that, whilst we fully support the aim of the regulation, which is to enable consumers to benefit from lower mobile roaming costs, we have some reservations about the way in which the Commission has been proposing to achieve this. The proposal the Commission consulted on in March was potentially flawed in a number of repsects including the prohibition on charges to a customer receiving calls while roaming in the UK, and in equating roaming charges (for calls made) with domestic tariffs."

13.12 The draft Regulation is, she says, more coherent and sensible, but there remain concerns; the two main ones being:

"a)  whether the proposed retail price cap for outgoing calls would have the desired effect, or whether it would impact upon the cost of other mobile communications services, which might disadvantage the less affluent sections of the community, for example, by raising the cost of hand-sets or reducing the range of services available to pre-pay customers. We therefore favour (as made clear to the Commission prior to adoption of the Regulation) the introduction of a 'sunrise' clause, the effect of which would be to only 'trigger' the intorduction of the Article 4 (which sets the maximum retail cap) if — after a certain time period — the operators had not reduced their call charges to an average level agreed by member States. Clearly the 'trigger' would need to be reviewed on an on-going basis to ensure operators maintained their reduced prices;

"b)  the proposed level of the various price caps (wholesale, retail and called party charges). There is a comparatively small 'gap' between the wholesale price of a call and the maximum price that it is currently proposed that mobile network operators should charge consumers. Although 30% may represent a reasonable 'mark-up', the imposition of the retail cap as a 'maximum' rather than as an 'average' would potentially have the negative affects with respect to arbitrage and pre-pay contracts as noted above. In the current form the retail cap would also potentially deter innovation by operators (for example the succesful 'Passport' scheme introduced by Vodafone) which would be prohibited under the proposal."

Regulatory Impact Assessment[31]

13.13 The Minister says she is "not in complete agreement with some aspects of this RIA, and will seek clarification during the forthcoming negotiations at European level on the regulation". She says that of her main concerns is "the Commission's view of a 'sunrise' clause being highly complex and raising significant procedural and legal problems". In her view, the sunrise clause "offers an opportunity to provide the assurance that the Commission is seeking that cuts in wholesale prices will be passed on to consumers in the form of lower retail prices". Although "the details will clearly need to be worked out with care, …. there does seem to be broad support for this approach with the European Regulators Group already expressing a preference for this approach".

13.14 On the future timetable, the Minister says that the draft Regulation will be subject to discussion in the Telecoms Council Working Group from September and in the European Parliament towards the end of the year; that the Finnish Presidency "may seek to obtain a political consensus at their Ministerial Council in December, with a final approval likely in June 2007 under the German Presidency" and that the DTI is currently organising a consultation exercise that will allow UK individuals and organisations to comment upon the draft regulation, the responses to which will be available before the Council discussions in December and "will help determine the position taken in Council and in our lobbying in the European Parliament".

Conclusion

13.15 All the above comprehensively answers the questions arising from an earlier Communication on 'European Electronic Communications and Markets 2005' (document (a)), which we considered on 29 March. We therefore now clear that Communication.

13.16 We have no difficulty with the objective of ensuring lower prices for all types of mobile phone subscriber using "international roaming" in the European Union. However, it is plain that there are a number of significant policy and legal aspects of the draft Regulation that have yet to be negotiated upon and clarified during this autumn. It may be that we shall wish to recommend the draft Regulation for debate prior to the December Telecoms Council meeting, at which political agreement is likely to be sought by the Presidency.

13.17 We should therefore be grateful if the Minister would report on the outcome of the negotiations, with an explanation of the line that the Government is likely to be taking at the Council meeting and her views then on the legal base, in good time for such a debate to be organised beforehand, should we then so recommend.

In the meantime, we shall keep the draft Regulation under scrutiny.



29   Telecommunications Management Group, Inc. (TMG), A Primer on Mobile Termination Rates, For more information about the report, see http://reports.tmgtelecom.com/. Back

30   see http://europa.eu.int/information_society/activities/roaming/roaming_regulation/first_phase/index_en.htm and http://europa.eu.int/information_society/activities/roaming/roaming_regulation/consultation/index_en.htm for further details.  Back

31   http://europa.eu.int/information_society/activities/roaming/docs/assessment_en.pdf. Back


 
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