DUBLIN, Ireland-One of the most common complaints from telecommunications companies competing with former monopoly operators is cross-subsidization by the incumbent, particularly in countries where the incumbent also controls a major cellular operator. However, regulators across Europe have been tackling this issue, and it now seems many of the major disputes have been resolved.
The use of financial resources from a fixed-line telecommunications business to subsidize mobile operations is clearly unfair to new market entrants who don’t have access to similar funding. Interconnection costs are a major source of debate in recently liberalized markets, particularly for calls to and from mobile phones, and any favorable consideration given to a mobile operator whose parent company is a dominant service provider is clearly unacceptable in an open market.
Interconnection charges can account for a substantial proportion of operator costs, and regulators are recognizing the importance of interconnection charges being soundly derived from appropriate costs, giving proper economic signals to operators to guide their investment decisions. This is particularly significant given that many second operators in Europe are struggling against former monopoly operators.
Etain Doyle, director of telecommunications regulation for Ireland, has made a number of moves in recent months to clarify accounting procedures for all operators. This issue is particularly critical in Ireland where the dominant service provider, Telecom Eireann, also is majority owner of the largest cellular operator, Eircell.
On 20 March 1998, one year after it launched service, Ireland’s second mobile operator, Esat Digifone, claimed its rival was spending as much as seven times more on product launches to win new customers. “We would like to see Eircell publish financial figures so that we can see whether it is a standalone company, which is being run at arm’s length from Telecom Eireann,” said Esat Digifone Chief Executive Barry Maloney.
He claimed it was difficult to see how Eircell could be making any money on its business and said the figures “just don’t add up.” He then called for the regulator to ask Eircell to publish its accounts. However, one of the difficulties for the regulator was that under company law Eircell, as a subsidiary of Telecom Eireann, does not have to publish separate accounts.
“This situation exists in many other countries,” said U.K.-based industry analysis firm Philips Tarifica. “For example, we looked at Deutsche Telekom (the dominant fixed-line operator in Germany and Europe’s largest telecommunications company), and the financial results for its mobile subsidiary, DeTeMobil, appear to be included in the consolidated accounts.”
Although both Telecom Eireann Chief Executive Alfie Kane and Stephen Brewer, chief executive of Eircell, denied any subsidizing was taking place, in June 1998 Eircell agreed to publish separate accounts following requests from the regulator, which also requested audited accounts for the previous two years. Etain Doyle claimed that the company was required to provide this information in order to ensure an open and competitive market.
However, the publication of those accounts drew the sting from the complaints made by Esat Digifone. Although Barry Maloney claimed the publication showed that Eircell was “little more than the marketing arm of Telecom Eireann’s mobile phone service” and that they hid a host of intricate financial transactions between the two companies, the figures did explain where Eircell’s funding came from.
Borrowings from Telecom Eireann’s treasury unit to help fund part of its network investment increased, but the company’s financial controller said commercial rates were paid for these borrowings and that additional investment was funded by operations. While net debt to its parent company rose from 59 million Irish pounds (US$85.5 million) to 89 million pounds (US$129 million), turnover also increased to 209 million pounds (US$303 million).
In March, Doyle issued proposals for the introduction of Long Run Incremental Costing (LRIC) as a basis for calculating interconnection tariffs. This move is expected to reduce interconnection charges to operators that are currently based on fully allocated costs. The European Commission has recommended LRIC be used as a model for interconnection rates, with the recommendation underlining the importance of transparency.
“The provision of interconnection on fair and efficient terms is widely recognized as an essential requirement for the creation of a competitive market. This is because operators in a competitive market need to terminate calls on other operators’ networks and to receive calls originated on other operators’ networks.”
Proposals have also been issued for the costing methodologies to be used in the separated accounts of operators designated as having significant market power (SMP), which in Ireland would refer to former monopoly Telecom Eireann. Further consideration is also given to an SMP operator’s detailed description of its costing system and cost drivers.
U.K. dominant fixed-line operator British Telecom (BT) is also a 60-percent stakeholder in the country’s second largest cellular operator, BT Cellnet. As a result of investigations into the price of calls made to mobile phones late last year, U.K. regulator David Edmonds, director of OFTEL, announced that calls from a BT fixed line to BT Cellnet and its major rival Vodafone had to be lowered by 25 percent.
Edmonds said findings supported the regulatory body’s arguments that Vodafone, Cellnet and BT were overcharging telephone customers and that if the other U.K. wireless operators, Orange plc and One-2-One, were to follow the price reductions, then mobile phone bills would fall by around 1 billion British pounds over the next three years.
The investigation started following complaints received in 1996 as part of OFTEL’s review of BT’s price control. The termination rates charged by Orange and One-2-One were not investigated since they have historically been lower than those of Vodafone and Cellnet.
It has been calculated that more than half of a mobile call’s price is made up of the terminating charge BT pays to the mobile network. OFTEL’s key conclusions were that the interconnection charges made by BT Cellnet and Vodafone for the delivery of calls to mobile handsets operate against the public interest because they are too high in relation to the operators’ costs and that BT’s retention on fixed-to-mobile calls also operates against the public interest because it is too high in relation to costs.
Edmonds’ predecessor, Don Cruickshank, instigated the original inquiry with a view to examining the structure of charges and cross-subsidy.
