In a bid to prevent a dramatic termination rate cut, mobile operators have said recently drafted mobile termination regulations are outside of the law.
Public hearings on the regulations are expected to begin next week, with almost all industry players taking a spot to discuss the value of the regulations at the Independent Communications Authority of SA (ICASA).
Mobile operators will have the most to lose if the regulations are passed into final format, since they will be forced to drop the interconnect rate by 50% this year alone, including a voluntary rate cut in March this year.
The draft regulations were proposed in April, cutting the rates operators charge each other to terminate calls on their networks. If the regulations are passed, the rate would be cut to 65c in July, with a glide path leading to 40c by July 2012.
At the time, many analysts expected the operators to go ahead with the proposal, despite the possibility of hefty losses to the bottom line, saying the termination rate debate has become a matter of reputation.
However, the operators have put their legal specialists to the test, and MTN, Vodacom and Cell C have all rated the regulations outside of the Electronic Communications Act (ECA), the law that governs the telecoms industry.
MTN’s written submission to the regulator, which will likely be the basis of its open discussion next week, says: “The draft proposals suffer from serious legal and regulatory flaws.”
The Act has several prescriptions on determining the competitiveness of the market, including drawn out market studies and regulations that are expected to be drafted on the methodology of determining which companies have significant market power.
Once the regulator has found significant power, it can then apply “corrective measures” to make sure companies with significant market power don’t drown out smaller competing businesses.
MTN’s submission states that none of these aspects of the ECA have yet been completed or complied with, and the company says this makes the suggested regulations “ultra vires to the ECA” or outside the prescribed laws.
Vodacom has a similar complaint, saying the draft regulations did not follow the proper procedure. “In the circumstances, Vodacom believes the draft regulations, if issued in their current form, would be unlawful and open to judicial review,” the company’s submission reads.
Cell C has an entire document detailing the legalities of the regulations using the Promotion of Administrative Justice Act as a basis for its submission. The third mobile operator has used a different tactic, saying the process has not been fairly applied.
The company’s submission to the regulator says that, while the regulator allowed for the minimum time for operators to respond to the draft regulations, given the importance and the possible heavy business impact, Cell C felt there was just not enough time to get a comprehensive response into ICASA.
Cell C also says its request for the reasoning behind the termination rate regulations have gone unanswered.
The third mobile operator is in an untenable situation, because ICASA has deemed it a significant market power, based on the fact that it has its own network infrastructure. However, Cell C still has a small market share compared with its far larger competitors.
Cell C has been lumped alongside Vodacom and MTN in terms of the draft regulations, which could hamper its market success.
All operators have called on the regulator to at least look at the possible business and economic effects expected by the dramatic rate cut.
“The impact of two steep and unbudgeted cuts in a single financial year would force MTN to take dramatic cost-cutting actions in the second half of 2010, affecting not just MTN’s business, jobs and investment plans, but also its customers and the whole mobile ecosystem,” reads MTN’s submission.
Service providers and least-cost routing customers are already seeing a dent in their profits following the initial rate cut in March.
MTN goes on to say: “The business shock is further heightened by the removal, overnight, of the peak/off-peak price structure that has characterised the market for the past 15 years, with great wholesale, retail, and network disruption.”
Vodacom agrees, and its submission talks to a decrease in competition as opposed to lower costs for consumers if the termination rates are hacked again.
The company’s submission asked ICASA to consider postponing the next rate cut. “Vodacom recommends delaying the first step in the proposed glide path (reduction to R0.65) until March 2011. This will assist businesses to factor the new rates into their business models and decisions for the next financial year.”
Smaller operators like ECN, which spearheaded the initial calls for termination rate cuts, have hailed the regulations. “The regulator could not have done a better job on these regulations. Every issue that we have ever had with interconnect has been addressed,” explained ECN CEO John Holdsworth, on the day the draft was revealed.
ECN will join the mobile operators at the public hearings next week, where the real showdown is expected to get started.