Memorandum by Orange
INTRODUCTION
1. Orange is part of the France Telecom
Group, which is one of the world's leading telecommunications
operators with more than 153 million customers on five continents,
including controlled operations in eight EU Member States. In
the UK, Orange has over 17 million customers (15 million mobile
and 2 million Internet), making it one of the principal mobile
phone network operators and broadband providers.
2. Throughout the EU Orange has more than
60 million mobile customers of which around one quarter use roaming
services. Orange's international roaming revenues in the EU represent
around 5 per cent of its total mobile revenues. More than 50 per
cent of Orange's roaming revenues are generated by business users.
3. As the Committee's Call for Evidence
is very broad, we have only picked on certain areas and questions
of greatest interest to us rather than attempting to provide a
comprehensive response to all points raised. In addition, as this
is a live and constantly changing area of policy, there are some
other issues that have arisen which we would wish to raise that
are not included in the Call for Evidence.
SUMMARY
4. Orange does not believe that the international
roaming market requires regulation at either wholesale or retail
level, as competition rather than regulation is the best way to
deliver long-term benefits to consumers. Wholesale rates have
declined significantly as a result of traffic steering tools which
allow the home operator to determine which foreign network its
customers use when they are in a particular foreign country. This
means that foreign operators will compete to offer the lowest
rates. Retail charges are also falling dramatically (by 12 per
cent in Q1 2006 alone) and roaming charges have fallen by 22 per
cent since 2005 with further reductions expected.
5. However, if political imperatives mean
that regulation must be imposed, there are some broad principles
which should be applied. Average mobile termination rates are
not the best means of calculating a wholesale price cap, but if
they are to be used, there should be a one-off cap based on 2005
figures, rather than an ever decreasing rate. There should be
a single wholesale cap for outgoing calls made both within the
foreign country or to another country. The resulting cap should
be imposed as an average cap between pairs of operators, rather
than an absolute cap.
6. From a retail perspective, if a cap must
be imposed, it should again be a single blended average price
target for calls within the foreign country or to another country,
as well as for incoming and outgoing calls. The level of the price
target should include an allowance for genuine retail costs as
well a profit mark-up. This target should be applied as an average
rather than an absolute in order to maintain operators' ability
to differentiate their tariffs and in order to provide the greatest
choice to consumers with very different needs. The use of this
price target as part of a retail sunrise clause mechanism would
be preferable and there should be an adequate period for implementation
and assessing compliance.
7. If a separate consumer protection tariff
is to be imposed, it should not be set at such a low level that
it simply becomes the default position and that any other average
cap is irrelevant. Urgent clarification is needed as to what level
the cap may be set, together with detail as to the basis of that
calculation. Any consumer protection tariff must be opt-in, rather
than opt-out, not only because of major operational issues, but
also because many customers would lose the discounts, bundles
and options which they have adopted to suit their needs.
8. Pricing transparency is an important
consideration in order to allow consumers to make informed choices
and to benefit from competition. But operators must be granted
flexibility in how they inform consumers of prices (whether by
SMS or voice, push or pull) as micro-regulation in this area is
both unhelpful and unnecessary, as well as costly.
9. The Commission's consultation and impact
assessment process has been inadequate and failed even to meet
its own stated minimum standards. It conducted two short consultations
which did not provide adequate substance for substantive responses
to be provided. It's much delayed impact assessment was also wholly
inadequate by not containing a rigorous assessment of the proposals
and any possible alternatives, especially the possibility of imposing
wholesale regulation only, which would be Orange's preferred approach.
10. Article 95 is an inappropriate and potentially
unlawful instrument by which to impose this form of regulation.
As a result, we would urge the Committee to consider how far the
EU risks departing from its founding principle of establishing
a competitive market for goods and services freely traded throughout
Europe. The New Regulatory Framework contains a process to review
the wholesale international roaming market which was underway
in early 2006, but which was superseded for political reasons.
Use of Article 95 is unlawful because it only allows for measures
aimed at harmonising law, regulation or administrative action
aimed at the establishment and functioning of the internal market.
However, in this case: the objective is reducing charges rather
than harmonising laws; there are no existing laws to harmonise;
and any obstacles to the internal market which exist are as a
result of pricing conduct of private undertakings, not disparities
between laws.
11. There is also a question whether the
regulatory proposal would be compatible with the EU's obligations
under the GATS. Members are required to offer to suppliers of
other Members, treatment which is no less favourable than it offers
its own suppliers, which could include modifying the conditions
of competition. This may be breached if a non-EU operator has
to pay a higher unregulated wholesale charge to an EU operator,
than the regulated rate that would be paid by another EU operator.
Separately, Members are also obliged to ensure that a service
supplier of any other Member is given access to telecoms networks
on reasonable and non-discriminatory terms.
Is there a need for regulation?
12. As a matter of general principle, Orange
does not believe that the international roaming market requires
regulation at either wholesale or retail level. Rates in both
parts of the market are witnessing significant declines which
are set to continue indefinitely. None of the European Commission,
European Parliament or European Regulators Group have demonstrated
market failure or significant market power in the hands of any
EU operator in respect of international roaming tariffs.
13. Wholesale rates have declined significantly
as a result of the availability of traffic steering tools. Traffic
steering allows the home operator to determine which foreign network
its customers will use when they are in a particular foreign country,
rather than this being determined solely by the strength of signal
wherever the customer happens to be making/receiving a call.
14. It means that the home operator can
therefore direct a certain number of calls onto a particular network
allowing it to negotiate a lower wholesale rate for the use of
that foreign network. The existence of traffic steering has over
the past two or three years introduced greater competition into
the wholesale international roaming market because operators in
a particular country compete to offer the lowest wholesale rate/best
quality for use of their network, in return for the increased
volumes of traffic/revenue that they will receive as a result.
15. Furthermore, in August 2006, Orange
was one of several major European mobile operators voluntarily
to sign the "International Roaming Code of Conduct"
requiring that wholesale international roaming rates be reduced
to €0.45 per min on 1 October 2006 and then to €0.36
per min on 1 October 2007.
16. Meanwhile, all elements of the mobile
retail market (particularly in the UK) are characterised by high
levels of competition and falling prices. Across Europe, the average
cost of voice calls fell by over 12 per cent in Q1 2006 alone,
compared with 1.3 per cent in Q1 2004, with increasing reductions
in every intervening quarter. This is clear evidence that competition
and reduction in prices are accelerating at an ever increasing
rate.
17. Since 2005, the average price for making
and receiving calls when roaming in the EU has fallen dramatically
by 25 per cent (according to an AT Kearney study comparing average
prices in Q4 2006 with those in 2005). Although there have been
reductions in headline prices, roaming tariffs in particular are
characterised by bundles, discounts and frequent traveller options,
all of which do much to reduce the overall average price which
consumers actually pay. In the UK, Orange introduced a range of
discounted travel bundles in summer 2006 providing savings on
standard rates of up to about 30 per cent. Further tariff changes
and reductions are expected during 2007 as a result of the competitive
market in which we operate.
18. Furthermore, by signing the Code of
Conduct referred to above, Orange and the other European operators
also agreed to pass on the reductions in wholesale costs to consumers
by way of reductions in retail prices, although standard economic
theory suggests that the normal competitive forces in the mobile
market will do this in any case.
19. Even where roaming profits might be
generated, the intensity of competition in the UK market means
that those profits will simply be re-invested/competed away elsewhere
to the benefit of consumers. It is critical to understand that
mobile operators do not sell "roaming" as a distinct
service, separate from anything else. Rather it is part of a package
of services (with domestic calls, text messages, international
calls etc). It is therefore artificial to look solely at the profits
or return on capital for roaming services in isolation from other
less profitable parts of the mix.
20. It is worth noting that the UK mobile
market is one of the most competitive in Europe with five network
operators as well as number of mobile virtual network operators.
This has led to a wide range of extremely attractive offers for
consumers and relatively low levels of profitability in the UK
mobile industry. In particular, CSFB has estimated that the pre-tax
return on capital for UK mobile operators as a whole is only 6
per cent compared to its pre-tax cost of capital of around 12
per cent.
21. Orange accepts that some (although by
no means all) of the reductions in wholesale and retail roaming
charges have been as a result of the threat of regulation by the
Commission. But Orange does not believe that they should be dismissed
or ignored on that basis. Orange (and other European mobile operators)
has introduced significant price reductions which have brought
about real reductions in the charges paid by consumers. This is
exactly what was demanded by the Commission and so we feel it
must be taken into account when considering the need (or otherwise)
for regulation.
What form of regulation?
22. In spite of all the points raised above,
Orange recognises that there may well be a political imperative
to impose regulation, which will be hard to avoid. We therefore
set out below some issues which we believe the Commission should
take into account in framing any regulation. Principally, however,
we believe that if regulation is deemed necessary, wholesale regulation
only should be imposed.
Mobile Termination Rates (MTRs) as a basis for
calculating a price cap
23. In general, we do not believe that there
is any particular logic in linking regulation of wholesale international
roaming rates to MTRs, principally because no allowance is made
for roaming specific costs in the rates. We believe the use of
simple numbers is clearer for all concerned. However, these numbers
must still be set according to a clear and justified methodology.
Removing the MTR link should not be an excuse for the Commission
to impose arbitrary figures, which have not been based on any
proper analysis of cost and acceptable levels of profit.
24. If MTRs are to be used, we believe (i)
the benchmark should be the average of all EU MTRs (not only regulated
MTRs) (ii) it should be a one-off reduction and should not decrease
in line with decreasing MTRs (iii) it should be set according
to the average MTR of 2005, about €0.12 per min.
The level and type of wholesale price cap
25. Orange does not agree with the Commission
that it makes sense to have separate sub price caps for making
"national" calls within a visited country and "international"
calls outside a visited country. We believe a better approach
would be to adopt a single blended average cap for both types
of call, but it must be set on the basis that 85 per cent of calls
made whilst roaming are "international" (usually a call
back home).
26. The Commission is proposing that an
absolute price cap be imposed such that no EU operator can ever
charge another EU operator more than the price cap for any call
at any time of day. However, Orange believes that this is a somewhat
artificial approach and that it would be more sensible to impose
an average cap which would be calculated by dividing total wholesale
revenue by total corresponding call minutes on a bi-lateral basis
between operators. This would guarantee that no operator would
be penalised in favour of another, as the cap would apply between
every "pair" of operators, but it would allow some flexibility
in terms of billing.
The level and type of retail price cap
27. Orange believes strongly that throughout
this process, the Commission has totally failed to demonstrate
why it believes retail regulation should automatically be imposed
from the outset, rather than imposing only wholesale regulation.
It could then assess whether the effects of competition were sufficient
to ensure that lower wholesale costs are passed through into reduced
retail charges, as would be expected according to standard economic
theory. The Commission's own impact assessment does not address
this point, which we regard as a significant failing.
28. Furthermore, it is worth noting that
the initial submission by the European Regulators Group to the
Commission's first consultation in March 2006 suggested wholesale
regulation only, with the introduction of retail regulation suggested
only as a last resort in the event that wholesale regulation failed
to work. The ERG position was supported by all EU regulators except
the CMT in Spain.
29. We have argued above that there should
be a single wholesale price cap for both in-country "national"
and out of country "international" roaming calls and
so naturally this approach should be continued within the retail
market. In addition, Orange believes that it would be preferable
to have a single blended price target covering the cost of both
making and receiving calls. This is because there is a direct
substitution effect between incoming and outgoing calls. A blended
price target will also give operators greater flexibility to provide
a wider variety of tariffs to meet individual customer needs,
as there may be significant differences between whether they make
or receive more calls.
30. In setting the level of any price cap,
it is critical to take account of retail costs (as opposed to
retail profit) as operators must be able to recover their genuinely
incurred costs. Unfortunately, the Commission has made no allowance
for these costs.
31. As with wholesale, Orange does not support
the Commission's proposal for an absolute retail price cap, whereby
no call on any tariff, at any time, in any country could ever
exceed a set limit. We would strongly advocate an average retail
target (total revenue divided by total minutes) which is critical
in maintaining an operator's ability to differentiate its own
tariffs and offers from each other, as well as from those of its
competitors, in order to be able to provide the greatest choice
to consumers.
32. Mobile consumers and particularly their
use of roaming services, vary enormously, as a result of which
tariffs/discounts/bundles are specifically designed to cater for
these varying requirements and provide as personalised a package
as possible for each consumer. The imposition of an absolute cap
requiring every operator to charge exactly the same would, at
a stroke, remove all of this and some of our current tariffs would
be banned despite their suitability for a particular sector of
our customers.
33. Although the issue of a sunrise clause
has moved slightly from the political agenda, Orange would on
balance, support such an initiative, although the end result is
largely the same. In any case, we would wish to ensure that sufficient
time is allowed for implementation before the regulation comes
into force. We believe that 3 months is required from the passing
of the regulation before the wholesale regulation comes into force
and before the period (which we believe should be 6 months) for
assessing compliance with the average retail target begins.
34. It is important that Government/regulators
understand the time required not only to implement and operationalise
any tariff changes which could affect 15 million customers, but
also to develop and design them. Assuming that operators will
be given the flexibility of average and blended, rather than absolute
caps, we will need time to assess how best to comply with the
target and what tariffs and discounts are most likely to be attractive
to consumers in a highly competitive market.
35. The possibility of a "consumer
protection tariff' has been developed by the German Government.
Effectively a consumer protection tariff is simply an absolute
price cap by another name and so the critical question is at what
level the cap would be set. Orange is naturally concerned that
if the cap were too low, it would simply become the default position
and therefore any other average cap would be irrelevant. Orange
would therefore welcome urgent clarification as to what level
of cap the Government proposes and what is the basis of the calculation.
Orange strongly believes that the tariff should be opt-in, rather
than opt-out, as we believe many of our customers will not want
to be forcibly moved onto less flexible tariffs, which might actually
cost them more for certain calls. Forced migration would also
be a massive operational issue, which would take considerable
time and resources to implement.
36. Finally, Orange acknowledges the importance
of pricing transparency, which is critical in allowing customers
to make informed choices. Orange believes operators should have
flexibility in how they inform customers of prices and that such
information is "pulled" by customers that want such
information rather than simply "pushed" to all customers
irrespective of their specific needs.
CONSULTATION AND
IMPACT ASSESSMENT
37. Aside from the obviously substantive
issues outlined above in relation to the regulation itself, Orange
is very concerned about the consultation process and particularly
the impact assessment, which the Commission has undertaken. To
a large extent this is inextricably tied up with the Commission's
decision to follow the Article 95 procedure, which is discussed
further below.
38. The Commission recognises that it has
a duty to undertake pre-legislative consultation when proposing
legislation and it has committed to certain minimum standards
in that regard. The consultation process (such as it was) began
with a speech by Commissioner Reding on 8 February 2006 in which
she announced her intention to propose a new regulation. There
followed a first phase consultation from 20 February to 22 March
in which comments were invited on three open questions, followed
by a second phase consultation from 3 April to 12 May in which
the Commission summarised the objectives, scope and broad concepts
of the proposed regulation.
39. This consultation clearly failed to
adhere to the Commission's own minimum standards (i) by not providing
clear content/proposals upon which it was consulting (ii) by not
properly publishing the consultations with adequate awareness
raising publicity (iii) by not allowing sufficient (eight weeks)
time to respond.
40. The Commission also has a duty to conduct
an impact assessment when considering major policy initiatives.
This should follow a number of methodical steps in defining objectives,
developing policy options, analysing and comparing their impacts.
41. The impact assessment was much promised
and delayed and finally published after the "consultations".
Orange believes it was totally inadequate and did not contain
any rigorous assessment of the proposals are possible alternatives.
In particular, it did not properly consider the possibility of
imposing only wholesale regulation. It therefore failed to perform
its fundamental role.
THE USE
OF ARTICLE
95
42. Orange has received a legal opinion[1]
that Article 95 of the Treaty of Rome is an inappropriate and
potentially unlawful instrument by which to impose this form of
regulation. Its use appears to have been prompted by political
imperatives.
43. The New Regulatory Framework was introduced
by the Commission itself to regulate electronic communications
in their entirety. It lists various markets, which national regulators
are required to review in order to assess their competitiveness
and determine whether any players in the market have "significant
market power". It is a basic principle that regulation should
not be imposed in the absence of a finding of SMP in the relevant
market.
44. Market 17 is the market for international
roaming services. In early 2006, a review of market 17 was being
commenced and various data was being requested and collated. This
was being co-ordinated between various national regulators because
of the particular international nature of the roaming market.
Matters were proceeding correctly in accordance with the New Regulatory
Framework process, but this was effectively suspended and overtaken
by the Article 95 process adopted by the Commission, which itself
was prompted merely by a political speech made by Commissioner
Reding.
45. Orange believes that the use of Article
95 in this situation and is illegitimate and unlawful for three
principal reasons, all of which are based on the fact that Article
95 only allows the Council and the European Parliament to adopt
measures aimed at harmonising law, regulation or administrative
action in Member States aimed at the establishment and functioning
of the internal market.
46. Firstly, the objective of the regulation
proposed by the Commission is clearly a consumer protection measure
designed to reduce roaming charges, rather than being directed
at the establishment and functioning of the internal market, which
is not sufficient for Article 95.
47. Secondly, the regulation is not a harmonisation
measure, as is required by Article 95. Logically, in order for
it to be so there must already be "national laws, regulations
or administrative provisions" that establish the level of
international roaming rates in place in at least one Member State.
But there are none and the Commission has not identified any.
International roaming rates are currently set by private undertakings.
The conditions required for preventive harmonisation are also
not met, because the existence of the New Regulatory Framework
makes future disparities of law extremely unlikely.
48. Thirdly, any obstacles to the internal
market which do exist are not caused by disparities between national
laws, regulations or administrative actions, as is required by
Article 95 (but rather by the pricing conduct of private undertakings).
It cannot be used to deal with obstacles resulting from the conduct
of private undertakings, which requires the use of general competition
law. The alternative would be that Article 95 creates a general
power to regulate the internal market which is clearly not the
intention.
49. Irrespective of whether or not the UK
considers roaming tariffs to be too high, we urge it to challenge
the use of Article 95 to implement price caps on (particularly
retail) roaming services. Orange considers the precedent set by
the proposed use of Article 95 to introduce price controls over
goods and services supplied throughout the EU to be a dangerous
and antiquated one. Accordingly, we would urge the Select Committee
to examine this question and to consider how far the EU risks
departing from its founding principle of establishing a competitive
market for goods and services freely traded throughout Europe.
WORLD TRADE
ORGANISATION (WTO) GATS RULES
50. Even if the proposed regulation has
a proper legal basis under EC law, the question arises as to whether
the proposal would be compatible with the EU's obligations under
the General Agreement on Trade in Services (GATS).
51. Once a WTO Member has offered specific
commitments in a services sector, by virtue of Article XVII GATS
it "shall accord to services and service suppliers of any
other member, in respect of all measures affecting the supply
of services, treatment no less favourable than that it accords
to its own like services and service suppliers".
52. Naturally the regulation will create
a distinction between the lower wholesale rate which a regulated
EU operator will have to offer to another EU operator versus the
higher unregulated rate which it will offer to a non EU operator.
In turn, this will modify the conditions of competition of non-EU
operators in the EU and create the possibility of complaints that
the EU is discriminating between EU and non-EU operators in violation
of Article XVII GATS. If, as a result, regulated EU operators
were forced to offer lower regulated rates to non-EU operators
on a non-reciprocal basis, it would be a net cost to them of approximately
€500 million.
53. The annex on Telecommunications also
contains another non-discrimination obligation, whereby each Member
must ensure that a service supplier of any other Member is given
access to telecoms networks on reasonable and non-discriminatory
terms. It may well be the case that benchmarked roaming tariffs
established only for EU-operators constitute discriminatory terms
and conditions in respect of foreign operators.
23 February 2007
1 Please refer to http://www.parliament.uk/parliamentary_committees/lords_s_comm_b/eubwrevid.cfm Back
| 
