Independent Communications Authority of South Africa briefing on Final Mobile Termination Rates

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Communications and Digital Technologies

07 March 2011
Chairperson: Mr S Kholwane (ANC)
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Meeting Summary

The Independent Communications Authority of South Africa (ICASA) briefed the Committee on progress made regarding the reduction in mobile termination rates/interconnection rates. This was a continuation of a meeting that took place on 24 November 2010. They explained that termination rates formed an important part of overall call charges. ICASA found that call termination rates were set at excessive levels. Small operators’ ability to compete was hampered by existing commercial terms in interconnection agreements. ICASA then sought to reduce termination rates as well as the cost of access into the market. Networks now had more control and the ability to charge lower retail prices. ICASA also ensured that new entrants did not face high barriers to entry. Competition enabled networks to compete on price. The expected impact was enhanced competition in the provision of retail services. This would allow for new operators to enter the market and the result would be competing retail rates, which meant consumers could enjoy lower charges.

Members asked ICASA to clarify what termination rates were, if there were be a reduction in SMS costs and international roaming costs, whether there was a link between wholesale rates and retail rates, what they were doing to inform the public about the cheaper SMS bundles, and whether ICASA wanted the Committee to amend the Electronics Communications Act to include a provision on fair retail prices. Members were concerned that the ordinary member of the public could not notice the difference when they looked at their phone bills at the end of the month, and wondered when they would be able to feel the effects of the reduction in termination rates. They understood that having competition in a market was beneficial to the consumer as it would keep prices down, but asked if it meant that consumers were paying to have competition in the market. They queried whether consumers were impacted on in a negative way by the retail price when ICASA tried to assist new operators i.e. they wanted to know if the consumers were paying that extra 20% maximum fee on termination rates that new operators were allowed to charge.

ICASA said that consumers would feel the effects of the reduction in interconnection rates over time. The Committee asked ICASA to clarify how long it would take for the effects to be felt. Also, there was an alleged letter regarding MTN that was circulating in the media, which spoke of the MTN CEO trying to coerce executives from other operators into a certain “plan”. Members asked ICASA to elaborate on this. The Committee also wanted to know how long ICASA was going to monitor the reduction in interconnection fees, and if there was a relationship between ICASA’s Complaints and Compliance Committee and the National Consumer Commission.

The Committee noted that there were certain issues that were clear from the discussions such as the finalisation of the agreements between new operators and established operators, and whether ICASA had the capacity to enforce and monitor their regulations. Members asked ICASA to send them bi-annual reports on the progress of the reduction in the call termination rates. The Committee was also interested in hearing the other regulations that ICASA had passed.
This had to be coupled with an audit of the impact ICASA’s regulations had on the market and on consumers.

Meeting report

Opening Statements
The Chairperson stated that the meeting with the Independent Communications Authority of South Africa (ICASA) was a continuation of a meeting that was held last year, 24 November 2010. The Committee had requested that ICASA “revamp” their presentation as Members had some difficulty understanding the technical wording of it. It also gave Members more time to understand what type of issues they needed to take note of regarding call termination regulations.

Dr Stephen Mncube, Chairperson of ICASA, noted that the previous presentation had been very technical. ICASA was happy to redo the presentation in simpler terms as it understood that the Committee Members had to explain the problems to their constituencies.

ICASA Briefing on Final Mobile Termination Rates
Mr Thabo Makhakhe, ICASA Councillor, informed the Committee that government policy was to ensure fair retail prices through the promotion of competition. This was done through the Competition Act of 1998 and the Electronic Communications Act (ECA) of 2005. In order to implement this policy, ICASA had to identify what the bottlenecks were to ensuring competition in the market.

ICASA explained what final mobile termination rates were. They explained that On-net calls and terminations meant that End-user A would call End-user B. End-user A’s network, Network A, would then route the call to End-user B. This meant that Network A completely controlled the retail price. In terms of Off-net calls and terminations, End-user A would start a call to End-user B. Network A would then route the call to End-user B’s network, Network B. The outcome was that Network B would also have an impact on the retail prices. It was found that interconnection charges or termination rates formed a very important part of overall call charges.

The ECA allowed ICASA to regulate prices where there was a lack of effective competition in a particular market. In order to do so, ICASA had to evaluate the value chain over which retail services were provided and they had to regulate “away” bottlenecks to fair competition. In order to compete with established operators, ICASA allowed small and new entrants to charge up to 20% more on their termination rates than the established entrants were allowed to. For example, if an 8ta subscriber called the Vodacom network, Vodacom would be able to charge a termination fee of 73 cents. If a Vodacom subscriber phoned an 8ta subscriber, the 8ta network would be able to charge 73 cents plus 20%.

In terms of call termination and retail prices, retail prepaid prices have not increased since 2007. In fact, they had declined. Retail price trends from Statistics SA showed that the cost of telecommunications had and were definitely on the decline. There was a large reduction in the telecommunications spending when compared with inflation and food prices. 

ICASA found that call termination rates were set at excessive levels. Small operators’ ability to compete was hampered by existing commercial terms in interconnection agreements. ICASA then sought to reduce termination rates as well as the cost of access into the market. Networks now had more control and the ability to charge lower retail prices. ICASA also ensured that new entrants did not face high barriers to entry. Competition enabled networks to compete on price.

The expected impact was enhanced competition in the provision of retail services. The question was whether operators were seeing this yet. ICASA said that they were because licensees were expressing interest in entering the retail mobile market. Also, mobile retail rates had been reduced and consumers had more transparent mobile to mobile retail tariffs.

Discussion
Mr N van den Berg (DA) stated that the consumers could now feel more positive about the decrease in call termination rates. However, he did not think that the ordinary member of the public noticed the difference when they looked at their phone bills at the end of the month. People were concerned that they were not really benefiting from the decrease. ICASA had to do something to reassure the people of the country that they would benefit from the decrease.

Mr Fungai Sibanda, ICASA Councillor, replied that the observation made by the Member was quite correct, as many members of the public had not felt the effects of the decrease yet. It was important to indicate that what ICASA was trying to do was to introduce competition into the sector. The reduction in termination rates or interconnection rates would facilitate competition and make it easier for smaller operators to compete in the market. It would also make it easier for new operators to enter the market. Once this happened, the public would definitely be able to see an impact on retail rates. However, there would be a lag at first, but eventually consumers would experience the effects of the reduction. There were positive signs that competition was beginning to take place.

Mr C Kekane (ANC) asked ICASA what termination rates were.

Mr Sibanda replied that call termination rates included two networks, where someone using one network to call a person using a different network. This was called “interconnection of the networks”. An example of this was when an MTN subscriber called a Vodacom subscriber. When an MTN subscriber called a Vodacom subscriber, Vodacom would “terminate” the call i.e. MTN originated the call but it ended or was terminated by the Vodacom network. The termination rate was the cost of the call being terminated by another network. Another term for termination rate was interconnection cost/rate.

Ms W Newhoudt-Druchen (ANC) understood that there had been a reduction in call rates, but wondered if there had been a reduction in SMS rates. In terms of travelling overseas, would roaming costs decrease as well?

Mr Pieter Grootes, General Manager: Markets and Competition, ICASA, addressed the Member’s question on decreasing SMS rates. He said it was a concern of ICASA’s. The concern was about consumer knowledge rather than high SMS rates. There were bundle SMS packages where if one bought a certain number of SMSes, people would receive vastly reduced rates. ICASA was concerned that consumers did not have this information. ICASA would have a look at why consumers were not aware of this information.

Mr Grootes indicated that MTN had reduced its roaming fees within Africa. The reason this could be done was because it was their network within Africa. International roaming fees required international agreements. ICASA did not have power over international roaming rates as they were a national regulator. International roaming rates were managed by international or regional co-operative blocks. The Competition Regulators’ Association of Southern Africa (CRASA) was conducting a study on roaming rates. It would be a multi-lateral decision as to what the governments would follow regarding roaming rates policies.

Mr van den Berg stated that he understood that having competition in a market was beneficial to the consumer as it would keep prices down. He was also trying to understand the concept of “asymmetry”. For example, if a call was made from the Vodacom network to the 8ta network or from 8ta to Vodacom, Vodacom could charge a termination fee of 73 cents, but 8ta was allowed to charge up to a maximum of 20% more than Vodacom. He did not understand this concept as it meant that consumers were paying to have competition in the market.

The Chairperson added that the Member’s question had to be explained carefully in relation to the concept of dominance in the market. The answer also had to address how new operators accessed the market. ICASA must have been doing something to assist new entrants that were being crowded out by already established operators. The issue was important as the Committee wanted to know if the consumers were impacted on in a negative way by the retail price when ICASA tried to assist new operators. Who was paying that extra 20% maximum fee on termination rates that new operators were allowed to charge? Was this charge absorbed by the consumer? This was the point of Mr van den Berg’s question.

Mr Sibanda replied that it was important to note that interconnection rates had decreases from R1.25 to the current rate of 73 cents. This was a huge reduction. However, the question concerned new entrants and small operators. The assumption was that these new and small operators would face high average costs of production because their networks have not quite matured and because they did not have a critical mass of subscribers in the market. Therefore, ICASA had to allow them some leeway, in that small and new operators were allowed to charge 20% above the regulated rate. This did not necessarily mean that the consumer had to pay the extra amount. Smaller operators had a choice to charge the maximum 20% or not.

The Chairperson stated that operators were saying that there was no link between the wholesale rates and retail rates. He asked if this was true. There seemed to be a dispute between ICASA and the operators concerning this matter. Operators said that ICASA could cut the wholesale rates but it would not make a difference anyway. ICASA said that consumers would feel the effects of the reduction in interconnection rates over time. Twenty or fifty years also qualified as being “over time”. He asked them to clarify what “over time” meant. The Committee wanted to see that ICASA had the ability to enforce its regulations and to achieve its desired outcomes. ICASA’s regulations had to benefit consumers as well as operators. Also, there was an alleged letter concerning MTN that was circulating in the media. He asked ICASA to clarify this. Around January 2011 or so there was a letter regarding the MTN CEO trying to coerce executives from other operators into a certain “plan”. He asked them to clarify this. What was ICASA’s response to this?

Mr Sibanda explained that the termination rate was a wholesale rate. Therefore, there was a complex relationship between the wholesale rate and the termination rate. However, it allowed operators like 8ta to compete with operators that had been established for a number of years already. It was not true that consumers were paying for competition. Competition was there for the benefit of consumers. This was exactly what ICASA was witnessing in the market. 

One of the issues that ICASA had been emphasising was that it had started to monitor retail prices, as this was where its interest was. The indicators showed ICASA that prices were beginning to reduce. However, the regulations for mobile termination rates only came into effect at the beginning of March. ICASA’s next step was to closely monitor retail rates going forward, but they were already starting to see the reduction. Ordinary consumers may not have experienced the reduction, but it was happening. They would begin to experience them soon. If the rates did not decrease to ICASA’s satisfaction, they had the obligation to enter that retail space and see what had to be done, such as regulating retail prices or introducing other mechanisms of reduction. Currently, there were positive movements in the market and prices were beginning to decrease. There were also new operators entering the market such as Red Bull.

Mr Groote also addressed the question of whether there was a link between retail prices and wholesale prices. He answered that it was a question of “balance”. A business received revenue from a number of sources. ICASA has reduced the amount of revenue an operator can now receive from termination services. MTN received a lot of money from all the calls that Vodacom subscribers made to it through termination rate fees. ICASA had now reduced termination rate fees, which meant it had effectively reduced the amount of money they could get. The question now was how these businesses would keep maximising their profit. This was the underlying statement that was coming from the operators. The operators said that there was no direct link because they would now have to balance out the loss that was imposed by ICASA through the reduced termination rate fees with another revenue stream. This should not be a concern though, as competition would take place and operators would have to compete through better offerings of retail prices.

The Chairperson stated that he wanted to know how much time ICASA was going to take to monitor the reduction in interconnection fees. The Committee wanted to hold ICASA accountable, so it was important to have this information.

Mr Sibanda replied that ICASA would give periodic reports to the Committee on an ongoing basis as this was going to be an ongoing process. ICASA would be receiving reports from operators regarding the reduction in their retail prices. ICASA could give the Committee a report on a quarterly basis but this had to be guided by the Committee. The reports could be given quarterly or bi-annually.

Dr Mncube added that ICASA would present to the Committee its business plan. All this information would be included in the plan. The budget has been a constraint, but with the Committee’s intervention, they would be able to strengthen the institution.

Mr Groote replied that ICASA expected rates to reduce over the next three years.

Mr Sibanda commented that ICASA had received letters from smaller operators saying that they faced challenges in respect of concluding interconnection rate agreements with the larger operators. ICASA had written to the established operators and published a note explaining the regulations and how the asymmetrical charges were supposed to be levied. ICASA also released a media publication explaining how asymmetry was supposed to be implemented. He thought the major operators were just behaving badly, as the regulations were straight-forward and ICASA had gone the extra mile to explain the regulations to them. There would be consequences for established operators that failed to implement the regulations. If they failed to implement the regulations, they would be called before ICASA’s Complaints and Compliance Committee (CCC) to explain why. If needed, sanctions would be imposed upon them. 

Mr Groote addressed the query about the letter concerning MTN. He said that licensees had written to ICASA to complain about certain matters. ICASA had gone through the press and the Gazette stating how the regulations should work and what licensees conduct should be. He was not sure about the letter the Chairperson referred to but, he was sure the matter would be resolved since all operators had to adhere to the regulations. 

Ms Newhoudt-Druchen stated that she was not satisfied with ICASA’s answers regarding her question on the reduction in SMS rates. She asked what ICASA was doing to ensure consumers were getting the information about the SMS bundles. She noted that ICASA promoted fair retail prices through increased competition in the market. She wanted to know if ICASA wanted the Committee to amend the Electronic Communications Act (ECA) to include a provision for fair retail prices.

Mr Grootes noted that the concern regarding SMSes had been raised a number of times by the Committee. There was a new communications plan that was going to be rolled out. ICASA would be presenting their strategic plan to the Committee on 22 March 2011 and would explain in detail a clear consumer advocacy and information programme so consumers could be aware of what was available to them and how they could get it.

Mr Sibanda replied that the ECA complemented the Competitions Act because the ECA was competition-focused. ICASA regulated prices so consumers could benefit from it. ICASA recognised that market failure existed, which reduced competition and it was their duty to cultivate and induce competition. This was exactly what ICASA was doing.

Ms N Magazi (ANC) stated that a new National Consumer Commission (NCC) had been established to monitor all consumer abuses. What was the relationship between the CCC and the CPC? There had to be a relationship between the two commissions as they were going to be doing the same thing.

Mr Sibanda replied that the Consumer Protection Act said that the NCC must enter into agreements with regulators that also regulated consumer issues. ICASA met with representatives of the NCC and were in the process of negotiating a Memorandum of Agreement to coordinate activities between the NCC and the CCC as there would be areas of contradiction and duplication.

The Chairperson thanked ICASA for their presentation. He appreciated that their presentation had been simple and precise. There were certain issues that were clear from the discussions such as the finalisation of the agreements between new operators and established operators. The Committee would be following up on this matter. The second issue that had to be monitored was whether ICASA had the capacity to monitor their regulations. The Committee was concerned about the time ICASA took to enforce and monitor their regulations. He appreciated ICASA’s offer to send the Committee quarterly reports regarding progress made with reducing call termination rates. However, the Committee would prefer bi-annual reports, as quarterly reports were too much. The Committee was also interested in hearing the other regulations that ICASA had passed. They might have to call ICASA to get them to explain what was happening. This had to be coupled with an audit of the impact ICASA’s regulations had on the market and on consumers. The Committee noted that ICASA was improving and doing well. Members looked forward to a continuous interaction with the regulator.

The meeting was adjourned.



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