The Hungarian Communications Market Developments and ...

The Hungarian Communications Market Developments and Regulation between 2004 and 2008
Regulation of mobile call termination
In the market “Voice call termination on individual mobile networks”
(market 16) every authority, including the NHH introduced rigorous
regulations.
The general basic problem relating to call termination is the
consequence of the so-called “calling party pays”-principle (CPPprinciple),
according to which the subscriber originating the call pays
the bill containing all expenses of the call. The CPP-principle takes
effect both in the retail and the wholesale market. The charge of the
call is defined by the subscriber’s service provider, which, upon calling
a mobile telephone, contains, in addition to the expenses relating
to the call, the termination rate payable to the mobile service provider.
As the termination rate is not paid by the party called but the
service provider of the caller, the provider of the termination service
is not pressurised by its own consumers to keep termination rates
low. The wholesale market is similarly affected. In the termination
market, service providers buying call termination services are under
pressure, as they have to terminate the calls of their subscribers.
Analysing the effects of the CPP-principle, the Board established
that the application of this principle makes it possible for mobile
service providers to define their call termination rates for the most
part independently of consumers.
According to the 2005 and 2006 market analysis statements of the
Board, voice call-termination services in the networks of individual
mobile service providers constitute nationwide independent markets.
It means that in respect of termination, every mobile service provider
is in a monopolistic position with reference to its own network, i.e. it
qualifies as a service provider with significant market power.
Before the period under review, certain service providers had
already been subject to regulation. The termination rates of T-Mobile
(Magyar Telekom) were regulated two times (from 1 September 2003
and from 15 July 2004) and the rates of Pannon one time (from 15
July 2004). At the same time, the termination rates of Vodafone had
not been subject to regulation before 2005. As a consequence of the
different regulation of the service providers, which at that time fully
complied with the EU regulatory framework, different termination
rates has been established by 2005: the rates of T-Mobile, the service
provider first undergoing regulation were the lowest, while those
of previously unregulated Vodafone were the highest.
During market analysis, the Board identified two major effects of
market distortion as a consequence of excessive pricing applied in
the wholesale market:
1. High fixed-mobile retail rates.
The unreasonably high call termination rate surfaces as expense
on the part of the fixed service provider originating the call, which
incorporates these expenses in its fixed mobile retail prices. Consequently,
this may cause unreasonably high fixed-to-mobile rates,
with direct effect on the customers of the fixed service provider.
2. Income rearrangement not justified by cost relations between
service providers.
Extreme termination rates may cause unjustified income rearrangement
between fixed and mobile service providers as well as
between call origination and call termination mobile service providers.
Unjustified income-re-arrangements may also come about if
unjustified differences are detected in the call termination rates of
mobile service providers.
Mitigation or elimination of the market distortion effects identified
can be realised by reducing the termination rates to a justifiable
level. Therefore, cost-based price regulation became the primary
obligation of dealing with market failures, to which other obligations
(transparency, non-discrimination, accounting separation, ensuring
access and interconnection) were also added.
For the definition of the cost-based rate level, the Board applied
the internationally accepted and used method of Long Run Incremental
Cost (LRIC). Both decisions obligated service providers to
execute and submit to the NHH for approval a so-called TD-LRIC
cost calculation, to ensure that service providers justify for their
costs themselves. The detailed rules to be applied for the model are
set forth in the decisions.
However, the Authority did not accept the TD-LRIC calculations
submitted by the service providers, as it found that none of them
met the requirements and the rules. Consequently, termination rates
have been established by the NHH itself. In 2005, this was carried
out using the European benchmarks, and upon making the 2006
decision, it was performed by applying the so-called BU-LRIC methodology
developed by the Authority.
The BU-LRIC cost model was prompted by the Authority’s recognition
that the Authority shall have a so-called “gauging line”, a reference
point as regards the specification of the cost-based obligation
to be fulfilled by the service providers with significant market power.
Moreover, NHH continuously confronted with demands arising both
on the part of the service providers and the European Committee,
according to which in its opinion the Authority should declare, in
connection with the cost-based setting of call termination rates and
regarding the current situation of the electronic communications
market, the extent and calculation method of the cost-based call
termination rate as well as the principles and aspects taken into account
for such calculation.
The Board was fully aware of the significant difference between
the average call termination rates previously applied by obliged
service providers, and the results of the BU-LRIC method or any
similar results, therefore, the immediate introduction of the rates so
defined would have caused serious disruption in the operation of
service providers. In addition, the Authority had to remember that the
desired aim, the use of cost-based call termination rates in favour
of ensuring the conditions of effective competition, was not to be