[pic] | COMMISSION OF THE EUROPEAN COMMUNITIES |

Brussels, 12.7.2006

SEC(2006) 925

COMMISSION STAFF WORKING PAPER IMPACT ASSESSMENT

OF POLICY OPTIONS IN RELATION TO A COMMISSION PROPOSAL FOR A REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL

ON

ROAMING ON PUBLIC MOBILE NETWORKS WITHIN THE COMMUNITY

{COM(2006) 382 final}{SEC(2006) 926}

TABLE OF CONTENTS

Executive summary 3

1. Procedural issues and consultation of interested parties 10

1.1. Background 10

1.2. Chronology of events and current policy framework 11

1.2.1. EU competition rules 11

1.2.2. Telecoms Regulatory Framework 11

1.3. Consultation 13

1.3.1. First-phase consultation 14

1.3.2. Second-phase consultation 15

1.4. Additional information 17

2. Problem definition 17

2.1. Background 18

2.2. The nature of the problem 19

2.2.1. The economic and commercial context 19

2.2.2. Wholesale charges – Inter-operator tariffs (IOTs) 20

2.2.3. Retail prices and transparency 21

2.3. Technological and market evolution 24

2.4. The case for EU action (subsidiarity test) 25

3. Objectives 26

4. Options and impacts 26

4.1. Policy options 26

4.2. Analysis of impacts 35

4.2.1. The economic model 35

4.2.2. Impacts 36

4.3. Broader impacts 52

4.3.1. Dynamic impacts 52

4.3.2. Spill-over effects 52

4.3.3. Redistributive issues 53

4.3.4. Firm-level effects and consolidation 53

5. Evaluation and monitoring 54

6. Conclusion 54

ANNEX Model – Welfare Impacts of International Roaming Regulation 64

Executive summary

BACKGROUND

This impact assessment (IA) report examines options for achieving substantial reductions in international roaming charges in the EU, and their impact on consumers, users and the industry. National regulatory authorities (NRAs), Member States, the European Parliament, consumers and users are concerned that these prices are unjustifiably high. There is little evidence that the market alone can deliver.

Charges for international roaming have been the focus of Commission attention for some time. The Commission is conducting competition investigations under both Article 81 ( ex-officio) and 82 of the Treaty. The wholesale market for international roaming is covered under the regulatory framework in the Commission’s Recommendation on relevant markets. The Commission urged NRAs to hasten the process of analysing this market in October 2004. A subsequent common position by the European Regulators' Group (ERG) indicated that high retail charges appeared to result from high wholesale charges and high retail mark-ups, with little pass-through of reductions in wholesale charges. In December 2005 the ERG alerted the Commission to the difficulties of applying the regulatory framework to resolve this case of consumer detriment.

The Commission has also drawn attention to high roaming prices on a number of occasions and has published a website showing unjustifiably high prices across the EU.

Consultation

In the first round of consultation on this issue the Commission’s focus on international roaming was broadly welcomed by Ministries, NRAs, consumer and user associations and some smaller mobile operators. Operator groups and most individual operators were opposed to regulatory intervention, and stressed the effective competitiveness of roaming markets.

The second round of consultation introduced a concrete concept for regulation (the 'home pricing principle') involving ‘pegging’ retail roaming prices to the customer’s home prices for comparable domestic mobile services. The customer would not pay for receiving a call. Most market players in the second round were against any form of regulation. However, six operators favoured wholesale regulation. The ERG supported the Commission’s objectives but was against the approach as set out in the consultation document. It favoured wholesale regulation, with a ‘wait and see’ approach to retail regulation. The 10 Member States that responded took the same line as the ERG.

The nature of the problem

Prices for EU-wide roaming at both wholesale and retail levels are not justified by the underlying costs of providing the service. This is compounded by a lack of retail price transparency and cannot be solved using existing regulatory tools. The EU market for international roaming is estimated at around €8.5 billion, which is 5.7% of total mobile industry revenues estimated at around €150 billion.

Roaming prices have an impact on at least 147 million EU citizens, of whom 110 million are business customers, while 37 million are travelling for leisure purposes. Consumer groups believe that the benefits of lower roaming charges would be welcomed by a very wide cross-section of consumers, including SMEs.

International roaming services differ from other telecoms services in that the customer buys the services of an operator in one Member State but is connected to the network of a foreign operator when roaming abroad. The latter bills the home operator for this ‘wholesale’ service. Most operators claim that competition in the wholesale market is working and is helping to bring down prices. However, at €1.15 per minute, the average retail charge for a roamed call (residential) is more than five times higher than the actual cost of providing wholesale service and 50% higher than the average IOT. Retail roaming charges are roughly four times higher than domestic tariffs.

Transparency is still a significant problem. Furthermore, many consumers are not aware of the high charges for receiving calls which are probably at least four times the average cost to the operator.

Technological and market evolution

A number of technological developments could have an impact on roaming prices, including voice over IP. However, IP mobile telephony is set to become a reality only in the medium term. Traffic direction which enables operators to direct consumers to their chosen networks while roaming for around 80% of roamed calls has had some effect but wholesale charges remain high.

The case for EU action (subsidiarity test)

NRAs are not fully equipped to deal with this issue at national level. Moreover, attempts to enhance price transparency have not had the effect of lowering prices. In these circumstances there is pressure for Member States to take measures to address roaming charges. However, any such measures could create divergent results and be ineffective, given the particular cross-border characteristics of the services concerned. Consequently, the regulatory framework needs to be amended to ensure a harmonised approach.

Objectives

The objective of EU action is to promote the development of the single market for EU-wide roaming services so that the prices paid for roaming when travelling within the Community are not unjustifiably higher than the charges payable for calls within the consumer's home country.

POLICY OPTIONS AND ANALYSIS

NO POLICY CHANGE

If no new policy were introduced, there would be continued reliance on existing tools for regulatory intervention, political pressure could be maintained and market and technological developments would take their course.

Remaining with existing policy is unlikely to lead to substantial reductions in roaming charges. Despite recent activity by operators, consumers are still faced with unjustified prices. NRAs have already stated that they believe existing regulatory tools to be insufficient to address this problem. Furthermore, Commission decisions under EU competition rules are only applicable to their addressees and have no direct legal effect on other operators who may behave in a similar way.

Self regulation

Self-regulation in the context of roaming is the possibility for operators or associations to adopt amongst themselves common guidelines at European level (particularly codes of practice).

The Commission services have not received any general industry proposals for self-regulation. Moreover, any such approach would have to meet competition law requirements. Self-regulation would have to deliver guaranteed substantial price reductions across the board, most likely at wholesale and retail levels. This seems to be difficult to achieve given the fact that many operators do not acknowledge that there is a problem with roaming charges.

Co-regulation

This approach implies regulation in which an overall framework is set out and the role of operators and other actors determined. In the context of international roaming, targets for price reductions could be set by regulation.

Under this approach, regulation at wholesale level could be combined with robust retail price transparency. However, price transparency is problematic, and could be easy for operators to by-pass. Moreover, arriving at an agreement which could form the basis of a co-regulatory approach could give rise to competition concerns.

Soft law

The Commission could issue a recommendation on the appropriate prices to be charged for international roaming, possibly based on benchmarked best practice prices.

While soft law approaches in the form of benchmarking have proved effective in the past, lengthy processes are involved, supervision by NRAs is required, and the fact that they are non-binding means they do not provide certainty of outcome.

Targeted regulation

Regulation could be used to tackle wholesale prices, retail prices or both. Wholesale regulation could be based on cost orientation or a price cap. From a retail perspective, there are a number of options, such as prices linked to home pricing, visited country pricing or a cap on retail prices (based on regulated wholesale rates).

Regulatory intervention could also take the form of measures to stimulate further competition, using a concept similar to pre-selection in fixed networks.

Wholesale regulation only

This is the approach suggested by the ERG, which believes wholesale roaming charges should be controlled by means of a uniform European price cap. An index of retail charges would show whether wholesale price reductions were being passed through to retail customers. A form of retail price control could be necessary at a later stage.

The Commission services believe that a modified approach to that of ERG, but which is still based on the use of MTRs as a benchmark, may be required at wholesale level. They also believe that including a trigger mechanism for retail regulation if benefits are not passed through to consumers would be highly complex and raise significant procedural and legal problems.

In their responses to the consultation some EU operators expressed concern that they could be required under the GATS to offer wholesale roaming tariffs to non EC-based operators at a level not exceeding the regulated level. Pursuant to the GATS, national treatment has to be accorded to like services and service suppliers.

Retail regulation only

This option depends on whether wholesale prices are in effect low and whether retail margins are such that retail-only regulation would bring about a decrease in retail prices without creating price squeeze for certain operators.

Intervening only at a retail level could mean that some operators might be forced to offer roaming services below cost. Retail-only regulation is likely to benefit larger operators which already enjoy lower-than-average IOTs, and would not address the problems faced by smaller players.

Wholesale and retail regulation

ERG recognises that if market forces proved insufficient to guarantee substantial pass-through of wholesale gains to the retail level, retail price control might be needed. There is evidence that pass-through of wholesale price reductions to consumers is not automatic. Despite some gains at wholesale level average retail charges have remained high, with margins well above 200% for calls originated while roaming.

Operators have also been making retail margins of close to 300% or 400% for received calls while roaming, even though they could have decreased the prices without the need for wholesale regulation. Economic theory confirms that players do not necessarily have an incentive to use monopoly profits made at wholesale level to compete for the acquisition and retention of domestic retail customers.

There is therefore a serious risk that if applied at wholesale level only, the ultimate aim of regulation would not be achieved.

Home pricing principle

Retail roaming prices would be 'pegged' to the customer’s home prices for comparable domestic mobile services. Parallel action would be needed at wholesale level in the form of cost-orientation obligations or a capping mechanism, otherwise market distortions could ensue.

The home pricing principle was the starting point for the Commission for the second phase of consultation. Given the fact that around 80% of the calls go back home, under this principle such calls would equate to international calls. The impact on operators should therefore not be huge given the fact that there is not a large gap between the price of international calls and of international roaming calls. On the other hand gains to consumers are limited for the same reason. The home pricing principle also poses a number of implementation difficulties.

Visited country approach

Consumers would be charged the actual domestic rate for making a call within the visited country and an international rate equivalent to what a subscriber in that country would normally pay to make an international call.

While this option has advantages, it presents a number of problems in terms of enforceability and transparency.

European home market approach

In order to take account of comments received and of practical implementation issues a development of home pricing, the European home market approach, could be envisaged which would mean EU-wide roaming at rates comparable to those paid at home.

Maximum wholesale prices would be set by reference to a benchmark based on multiples of the average EU mobile termination rates (MTR) as set for operators with significant market power. As ERG has pointed out, the MTR provides an excellent starting point as a benchmark for wholesale prices as it provides transparency, simplicity and certainty.

At retail level a ceiling would be set at a 30% margin above the wholesale rate, to ensure that savings are passed on to consumers. Such a margin is reasonable while at the same time guaranteeing price reductions. Operators would be free to compete at lower margins than these levels. A transitional period of 6 months would be provided to enable operators to adapt. A maximum safeguard price would be set for receiving calls at the level of the MTR plus a margin of 30%.

This approach overcomes the implementation difficulties identified with the home pricing principle and provides greater consumer benefits.

Transparency

Transparency of charges remains a very important issue for consumers. While recent initiatives by the Commission and NRAs have been positive, more needs to be done. These measures could be supplemented by a requirement on mobile operators to provide access free of charge by either short message service (SMS) or a mobile call to personalised information on international roaming tariffs while they are roaming.

Economic impact

Focussing principally on consumer surplus, the retail and wholesale regulation policy option, (different elasticity effects notwithstanding), delivers the greatest benefits. Indicative figures suggest that consumer surplus could be between €5.28 and €5.96 billion, compared to between €2.2 and €2.3 billion and €1.50 and €1.55 billion under the ‘wholesale only’ and ‘no policy change’ options respectively. Broader impacts

Dynamic impacts

To the extent that overall mobile revenues would come down as a result of regulation under some of the policy options, it is reasonable to assume some reduction of investment following a reduction in roaming charges. However, it is also reasonable to assume targeted cut-backs rather than across-the-board reductions.

Spill-over effects

Some submissions to the consultation suggested that in response to a reduction in roaming revenues, operators could be expected to raise prices for other services. It is reasonable to assume that while at the margin some rebalancing of tariffs will occur, a general increase in the price level for other services, given intense competition in major markets, is highly unlikely.

Redistributive issues

The customer segment benefiting most from a reduction in roaming charges will be high-frequency roamers. Other things being equal, business customers who currently are not on large-scale competitive contracts (as would be the case for most SMEs), high-frequency leisure travellers and people living in border regions would profit most from a reduction in roaming charges.

Firm-level effects and consolidation

The impact of regulated price changes at firm level will vary according, first, to any particular firm’s exposure to roaming revenues, and second, to the precise nature of the regulatory approach taken.

Assessment of administrative burdens

All regulatory options presented in this Impact Assessment include some administrative costs, but their significance varies. Wholesale regulation based on a price-cap, as proposed by the ERG, would require regular monitoring of wholesale and retail roaming charges, to ascertain the pass-through of wholesale reductions to the retail level. This would imply administrative costs for operators and NRAs, not however significantly different from the current situation. Wholesale and retail regulation in the form of price caps would imply a similar administrative burden.

Evaluation and monitoring

If regulatory intervention is required, NRAs will have to monitor and supervise compliance. The principal indicator for monitoring the implementation of the proposal is tariffs at retail level. NRAs should monitor retail roaming charges for voice calls, SMS and multi-media message services (MMS) and should report findings to the Commission on request. One year prior to the review of the functioning of any regulation the Commission could prepare an evaluation report assessing the impact of the measure on markets and consumers.

Conclusion

The proposed regulatory option of combining wholesale and retail regulation under what the Commission’s services term the ‘European home market approach’ ultimately results in the greatest benefit to consumers. Each of the other assessed options has specific merits – from being minimally intrusive to offering maximum flexibility to industry. However, only regulation under the ‘European home market approach’ makes certain that consumers - no matter where they physically are in the EU – have the same experience of using their mobile phone as if at home.

1. PROCEDURAL ISSUES AND CONSULTATION OF INTERESTED PARTIES

1.1. Background

This impact assessment (IA) report examines options for achieving substantial reductions in the level of international roaming charges in the EU, and their impact on consumers, users and the industry.

For several years now, there has been growing concern that consumer prices for EU-wide roaming are unjustifiably high. National regulatory authorities, Member States, the European Parliament, consumer groups and users of mobile services have complained about high roaming prices. There is, furthermore, little evidence that the market alone is working to bring prices down. Indeed, over the past months, even mobile operators themselves have in many cases acknowledged that prices are high and that something has to be done. Recent announcements by players in the market of price cuts, to take effect now and over the coming year, have clearly been driven by the threat of regulatory action.

For consumers, continued high prices run counter to their experience in other telecommunications markets. A series of reports[1] on the implementation of the electronic communications framework shows that, while consumers have benefited from increasing choice and lower prices across a wide range of fixed and mobile voice services, they have yet to experience lower prices for roaming within the EU.

From its recent consultation on this issue, the Commission services note that there is widespread support for the goal of reducing international roaming charges. Regulatory authorities at national level have indicated that the problem cannot be addressed using existing regulatory tools, considering its cross-border dimension, and have called on the Commission to propose a single market solution. The European Parliament has also highlighted the issue on a number of occasions, and has called for action at EU level. The European Council in its conclusions in March 2006 noted the importance for competitiveness of reducing roaming charges.

The Commission has published a consumer-oriented website aimed at improving the transparency of these charges. The site not only corroborates the fact that roaming charges are in many cases manifestly excessive, but shows a range of prices across the EU that cannot be justified in a competitive market for calls with identical characteristics in terms of quality, time of day and duration.

1.2. Chronology of events and current policy framework

1.2.1. EU competition rules

In mid-1999, the Commission decided to carry out a sector inquiry covering inter alia national and international roaming services. Based on the results of this enquiry[2], the Commission carried out unannounced inspections on the premises of all UK and German mobile telephone operators. As a result of this in-depth investigation, in July 2004 statements of objections were sent to O2 UK and Vodafone UK and in February 2005 to T-Mobile and Vodafone Germany.

The statements of objections set out the Commission’s preliminary position, according to which these operators had infringed Article 82 of the EC Treaty. According to the Commission’s findings these operators enjoyed a dominant position on each of their monopolistic national wholesale markets for international roaming services since it was necessary for home operators to conclude roaming agreements with all operators in the visited country from 1997 until 2003. All operators in the visited country therefore enjoyed market power vis-à-vis home operators. During this period their wholesale tariffs exceeded by far the prices applied by these operators when selling airtime to independent service providers; furthermore, they yielded profits several times higher than other comparable services supplied by mobile network operators[3]. The new traffic direction technology makes it difficult to maintain from 2004 that each of these operators enjoys a dominant position on the wholesale market for international roaming services. However, since tariffs have remained high, the Competition DG has continued to monitor the market.

Following hearings held in June and July 2005 and a further exchange of views with the parties involved, the Competition DG plans to finalise its investigation in the second half of 2006, possibly with the adoption of formal decisions by the Commission.

1.2.2. Telecoms Regulatory Framework

Concurrently, international roaming was already an issue at the time of the adoption of the new regulatory framework to the extent that the Commission’s Recommendation on relevant markets[4] included the wholesale market for international roaming on public mobile networks (market 17).

Given the urgency of tackling the issue, the Commission urged the NRAs to hasten the process of market analysis in October 2004 following discussions with the ERG. This resulted in the development of a common position by the ERG which was launched for consultation in June 2005. ERG noted that:

- Retail charges were very high without clear justification.

- This appears to result both from high wholesale charges levied by the foreign host network operator and also, in many cases, from high retail mark-ups charged by the customer’s own network operator

- Reductions in wholesale charges are often not passed through to the retail customer

- Consumers often lack clear information on the charges for roaming

- There are strong linkages between the markets in the different Member States.

The Commission has drawn attention to these high prices on a number of occasions. For example at the GSM Association World Congress in Cannes in February 2005 Commissioner Viviane Reding told mobile operator CEOs that she was particularly concerned about international roaming charges and that she wanted to see progress.

In March 2005 a hearing on international roaming was organized by the ITRE Committee of the European Parliament, at which representatives of NRAs and market players were invited to speak.

In October 2005 the Commission drew attention to the problem of high international roaming charges and the lack of price transparency by publishing a consumer-oriented website[5]. The site not only corroborated the fact that these charges are in many cases manifestly excessive, but shows a range of prices across the EU that could not be justified in a competitive market for calls with identical characteristics in terms of quality, time of day, and duration. The latest version of the site, made available on 28 March 2006, confirmed that little progress had been made on these charges. Indeed most prices had remained stable and in fact some prices had even increased since the site was first published in October 2005.

The European Parliament, in a resolution on 1 December 2005 on European electronic communications regulation and markets 2004, welcomed the Commission’s initiative on transparency in the international roaming sector and called on the Commission to develop new initiatives in order to reduce the high costs of cross-border mobile telephone traffic, so that a real internal market for consumers could be realized.

In December 2005, the ERG alerted the Commission to its concern that measures being taken by NRAs would not resolve the problem of high prices. It also made it clear that it was committed to working with the European Commission to develop an appropriate and more complete solution. The ERG described the problem as ‘not trivial’. It further noted that roaming creates an exceptional instance where an apparent case of consumer detriment is not prospectively solved by the application of the framework.

Concurrently, at the end of 2005, the DG Competition opened an ex officio investigation in Member States under Article 81 EC Treaty in order to ascertain whether exclusive dealings between mobile network operators existed, and why mobile network operators are not necessarily buying roaming minutes from the mobile network operator which sells them at the lowest price. This investigation is still under way.

On 8 February 2006, at the ERG plenary in Paris, Commissioner Reding noted that despite warnings, operators had not acted to bring about a decrease in consumer prices for roaming, and stated that determined action was required.

In March 2006 the European Council noted in its conclusions the importance for competitiveness of reducing roaming charges.

On 4 May 2006, a mini hearing on ‘International Roaming – Its Economic Implications’ was organized by the European Parliament’s Committee on Industry, Research and Energy (ITRE) and the Committee on the Internal Market and Consumer Protection (IMCO). At the meeting, DG Information Society, a regulator (French regulator ARCEP on behalf of ERG), operators (Telia Sonera, Vodafone, T-Mobile) and consumer organization BEUC gave their views on the issue. During question time, MEPs in general reiterated their support for decreases in roaming prices.

The recent consultations conducted by the Commission (see below) on a regulation for international roaming charges confirmed that there is widespread support among Member States, NRAs, consumer groups and even some operators for the Commission’s goal of reducing roaming charges. While many operators argue that the market is competitive and that prices are falling, some have proposed either self-regulation or some other form of regulation.

1.3. Consultation

In the first round, from 20 February to 22 March 2006, general feedback on wide-ranging principles to tackle the unjustifiably high prices for roaming was sought. The Commission services launched a second round of consultation, from 3 April to 12 May, on the basis of a specific concept referred to as the ‘home pricing principle’. The second phase consultation was placed on the 'Your voice in Europe' website. This is the European Commission's single access point to a wide variety of consultations, discussions and other tools, and was set up in the context of the Interactive Policy-making Initiative as part of the Commission's minimum standards on consultation.

The Commission services have kept an open-door policy throughout the process. The services have listened to and taken note of all views expressed, and have gathered as much information as possible from different players and stakeholders. Meetings with operators and representatives of the European Regulators Group (ERG), which established a special project team to provide input to the Commission, have continued during the process of drafting this impact assessment report. In all, from the launch of the first consultation phase, 40 meetings have taken place between the Commission services and interested parties, including 34 bilateral or multilateral meetings with operators, two with the GSMA and four with the ERG.

1.3.1. First-phase consultation

In the first round of consultation[6], to which a total of 51 responses was received, the Commission called for comment on three questions as follows:

- What form should a regulation of international roaming charges take i.e. should it be targeted at wholesale level charges or retail level or both?

- What regulatory and pricing mechanism (or control) would achieve the desired objectives of such a regulation in the most effective and simple manner?

- What is your view on the impacts, positive and negative, that regulation of international roaming charges at EU level could have

- In general economic and social terms?

- On industry players?

- On consumers?

A synthesis of the responses was published when launching the second consultation on 3 April 2006. Copies of all non-confidential submissions are available on-line[7].

Broad response

During this phase of consultation, the Commission’s initiative to focus attention on the issue of international roaming was broadly welcomed by those national Ministries which responded, by the NRAs – by means of the submission from the ERG, by consumer and user associations (INTUG – International Telecommunications Users Group, BEUC – Bureau européen des unions de consommateurs, and German Telecom e.V.), by members of the public and by some smaller mobile operators who saw themselves disadvantaged by reason of their restricted bargaining power at wholesale level (due to their limited size and independence from the major pan-European operators or alliances).

On the other hand, the associations representing operators, principally the GSMA, ETNO (European Telecommunications Network Operators’ Association, Bitkom (German e-communications and new media association) and VAT (Austrian Alternative Telecoms Operators’ Association) were opposed to regulatory intervention, as were the large majority of individual operators who responded.

Policy options

Referring to a possible approach to regulation and what form this could take, different views were expressed. A few respondents expressed the wish to see regulation at both wholesale and retail level (Irish Ministry, INTUG, Telecom e.V. and one small operator). The great majority of respondents who addressed this issue favoured wholesale regulation only, although the large majority of these did so only on the hypothesis that some form of regulation was inevitable. The CMT indicated a preference for retail regulation at European level, but only as a last resort.

There were suggestions as to other approaches that could be taken. The national Ministries from the United Kingdom and Finland indicated a preference for alternative solutions to the problem of high roaming prices, at least in the first instance. The Finnish Ministry favoured an approach based on an SMP analysis of a cross-border market for international roaming services, while the UK Department of Trade and Industry favoured voluntary or co-regulatory solutions focused on robust arrangements for price transparency. The CMT (Spanish NRA) favoured action under the existing regulatory framework involving market analysis of the wholesale national market for international roaming (market 17 in the Commission’s Recommendation on relevant markets) or the definition of a new national or trans-national relevant market.

The operators’ associations GSMA and ETNO and a large number of operators recommended the completion of the NRA reviews of market 17 currently under way. Bitkom also referred to the possibility of defining a transnational market under the existing regulatory framework.

Some operators also recommended action under the competition rules, where appropriate, to address anti-competitive or discriminatory behaviour in the international roaming market.

Much emphasis was placed by operators opposed to regulation on the effective competitiveness of the roaming markets at wholesale and retail levels, evidenced in their view by the results to date of market analyses by NRAs, price reductions and the introduction of new tariff packages aimed at roaming customers, traffic direction and volume discounts at wholesale level, as well as the challenges from new technologies such as WiFi and VoIP.

One or two respondents referred to the possibility of mandating some form of wholesale access to the visited network for other operators as an alternative to regulating international roaming prices themselves. One market player argued that price regulation could stifle the MVNO business model and make new market entry more difficult.

Received calls

As for received calls, most of the responses did not explicitly address the issue of the treatment of charges levied on a roaming customer for receiving calls. INTUG was clear that such charges should be abolished. However, two of the operators who responded said that abolishing charges did not take account of the costs (transit and termination) involved and would therefore be inequitable. They noted that abolishing charges would be disproportionate and illegal, since it would require the home operator to provide a service below cost. It could also involve large losses in revenue and cause unpredictable changes in calling patterns.

1.3.2. Second-phase consultation

The second round of consultation introduced the home pricing principle as a possible option for regulation[8]. A total of 101 responses was received from a wide range of stakeholders (operators, NRAs, Member States, trade and users' associations and others, including members of the public). Copies of all non-confidential submissions are available on-line[9].

Home pricing concept

In line with principles of transparency, comprehensibility for the consumer and parallelism with home-country prices, comment was invited on a concept for ‘pegging’ retail roaming prices to the customer’s home prices for comparable domestic mobile services. Under this ‘home pricing’ approach, a Belgian customer, for example, roaming in Spain and making a local call (i.e. a call to a Spanish number) would be charged a rate not exceeding the rate (as charged by his or her home network) for a local call in Belgium. The same customer roaming in Spain and making a call home to Belgium (i.e. a call to a Belgian number) would be charged a rate not exceeding the rate (as charged by his or her home network) for an international call to Spain from Belgium. The customer would not pay for receiving a call.

Broad response

The responses followed the pattern set in the first phase. In general, most market players were against any form of regulation, and among their arguments they noted the recent market developments as evidence of progress in the market. The argument against wholesale regulation was mainly that this was unwarranted and would create market distortions.

However, there were a few operators (six) who were in favour of wholesale regulation. Given that all of these operators have marked their submissions as confidential, they are not identified here. The possible approaches advocated vary.

One operator suggested a wholesale price cap of €0.25, another that wholesale regulation should apply only to operators with market power, and another that asymmetric regulation should be allowed. Two operators suggested that a formula of 2 x mobile termination rate (MTR) should be applied in order to set the wholesale rate, although one favoured the European average MTR, the other the highest MTRs. One operator also stated that there should be an obligation on every mobile network operator to keep supplying wholesale international roaming services to every requesting operator within the EU, or at least to those with whom roaming agreements are currently in place.

Three operators[10] also suggested different forms of self-regulation as an efficient way of tackling the problem.

The home pricing principle was criticised by all market players, who were evidently against any form of retail regulation. Moreover, many operators also questioned the legal basis for any intervention.

The ERG (24 out of 25 NRAs, CMT again demurring) supported the Commission’s objectives but were against the approach as set out in the consultation document. They reiterated their view in favour of wholesale regulation based on the 75th percentile of average MTRs, with a ‘wait and see’ approach to assess whether retail regulation was necessary. CMT again submitted a separate response noting that it favoured adherence to market analysis but supporting retail regulation in the last resort.

In general, the 10 Member States that responded to the second phase consultation took the same line as the ERG, supporting the Commission’s overall objective but showing preference for wholesale regulation only in the first instance. However, together with the ERG they acknowledged that the need for retail regulation could arise if benefits were not passed through to end customers.

1.4. Additional information

In order to assess the broad impact of the policy options set out in this report, the Commission services have used a model which is explained in section 4.2 and further detailed in the annex. To assist in obtaining data for the model, the Commission services requested specific data from the GSMA and from 16 EU operators, selected so as to provide a representative split between large and small players, those with a preponderance of inbound roaming traffic, those providing mainly retail service, and those with a larger service footprint as a result of network roll-out or membership of an alliance as opposed to ‘non-aligned’ market players.

The GSMA has provided the standard inter-operator tariffs (IOTs) of the majority of mobile operators in the EU 25. On the other hand, while excellent data has been provided by some players, not all have been forthcoming with the specific data requested.

Data sources for the impact assessment included:

- NRAs

- Mobile operators

- Commercial research (investment banks and consultancy reports)

- Commission sources.

The data extracted from these sources allow for reasonable estimates of key assumptions with regard to overall mobile price levels, wholesale and retail roaming prices, business vs. residential demand relationships, and call patterns (outgoing/incoming; destinations)

2. PROBLEM DEFINITION

The core problem is that prices for EU-wide roaming at both wholesale and retail levels stand in no meaningful relationship to the underlying costs of providing the service. This problem is compounded by a lack of transparency of prices at retail level which means it is extremely difficult for consumers to understand what they will actually pay. The Commission and some national regulatory authorities have attempted to address the transparency problem by creating websites for roaming prices but these initiatives have not led to sufficient improvements.

Unlike most other problems in the telecommunications market this issue cannot be solved using existing regulatory tools. Having studied this market carefully, national regulatory authorities have alerted the Commission services to the fact that they believe the problem is ‘non-trivial’ and requires action at EU level. A key issue is the cross-border nature of this service whereby no one national regulatory authority can solve the problem.

At this point the problem is defined as relating to international roaming voice services. During the consultation process some respondents identified similar issues of unjustifiably high prices with data services such as SMS and MMS. However, the basis for this initiative is not only that the charges at wholesale and retail levels are unjustifiably high but also that the problem cannot be addressed effectively national level. National regulatory authorities have not to date identified similar issues when it comes to SMS services and consequently have not called on the Commission to address the problem at EU level.

In relation to MMS services it remains difficult at this stage to foresee how such data services and access to Internet will develop. At this stage of their development there are clearly significant risks of applying inappropriate regulation which could hinder the development of this market.

The reminder of this section provides more detail on the background and nature of this problem.

2.1. Background

The EU regulatory framework for telecommunications services is designed to ensure that competition drives the provision of quality services, choice and lower prices to consumers. A series of reports[11] on the implementation of the framework shows that consumers are indeed benefiting from lower prices for fixed and mobile voice services, with one notable exception, international roaming. There is a further anomaly in that travellers face excessive charges for receiving mobile calls while they are abroad.

The dynamics of roaming differ depending on the type of operator, its geographical location and its position in the market. Some operators are preponderant recipients of wholesale revenues. Other operators make high profits by relying principally not on wholesale revenues but on very high margins at retail level. The relationship between wholesale charges and retail charges is complex and not amenable to simple explanation. However, it is true that from an operator’s point of view high input prices (wholesale inter-operator tariffs IOTs) are not much of a commercial problem if (1) everyone else is paying high input prices, too, and (2) input prices can easily be recovered from one’s own retail customers, as is presently the case[12].

It is also interesting to note that - because from a demand perspective receiving a call is a good substitute for making a call (rather than a complement) - the price difference between these two kinds of calls, active and passive, - is economically crucial: large price differences will lead to large substitution effects. Thus, there are good reasons to assume that the price level of active calls is determining indirectly the price level for passive calls – and vice versa[13]. If this is true, then even a dramatic reduction in wholesale input prices would not result in comparable reductions at retail level for active calls, because operators would seek to preserve the current price ratio between active and passive calls. This casts some doubt on the possibility of pass-through which is considered in more detail later.

2.2. The nature of the problem

2.2.1. The economic and commercial context

International roaming is a significant issue for both operators and consumers. In revenue terms the GSMA estimates the market for international roaming to be worth around €8.5 billion for operators in the EU. Total value of the mobile industry in the EU is estimated to be around €150 billion, according to analysts' and industry estimates. Roaming constitutes around 5.7% of all revenues. In terms of profitability measures such as EBITDA[14], roaming is very significant.

The commercial importance of roaming varies according to types of operators. For countries that have a positive traffic flow of tourists/business travellers, high-margin wholesale roaming revenue may constitute a higher percentage of overall revenues.

The GSMA has estimated that 45% of EU citizens travel outside their own country within a period of one year. According to analysis by A.T. Kearney, a consultant retained by GSMA and quoted by the latter in its submission in response to the second-phase consultation, out of 439 million mobile subscribers, 66% or 293 million never roam. Taking the estimates provided by the GSMA, it can be seen that roaming prices have a direct effect on at least 147 million EU citizens. It can also be seen, of course, that with such low figures for roaming penetration (roughly half of all customers travel abroad but only a third uses roaming services) retail roaming prices must be at extremely high levels. After all, penetration rates for the use of standard domestic mobile services are significantly higher than 80% - mainly as a result of decreasing prices over the past years.

The GSMA goes on to say that, out of 147 million roamers, 110 million are business customers while 37 million are travelling for leisure purposes. Roamers can also be segmented by usage: 116 million or 26% of mobile subscribers are heavy roamers, 22 million or 5% of mobile subscribers are medium roamers and 10 million or 2% of mobile subscribers can be considered light roamers[15].

Operators have argued that their customers do not all use roaming. For example Vodafone, in the ITRE hearing in the European Parliament on 4 May 2006, noted that 35 million of its 100 million European customers travel each year, and that of these, 30 million are roamers.

The GSMA suggests that analysis of different roaming customers reveals that the major beneficiaries from lower prices would be business customers and more affluent leisure customers who roam frequently, at the expense of consumers who roam less often. However, the GSMA does not substantiate why this should be the case. Indeed in general, corporate customers already have significantly lower rates than residential customers according to the submissions by most operators.

In fact, input from consumer representative groups, including the International Telecommunications Users Group (INTUG), suggests that the benefits of lower roaming charges would be welcomed by a very wide cross-section of consumers.

It is therefore evident that while large corporate clients have been able to benefit from cheaper roaming rates, small and medium enterprises (SMEs), which are crucial for Europe’s competitiveness, are not reaping the same benefits.

2.2.2. Wholesale charges – Inter-operator tariffs (IOTs)

International roaming services differ from all other telecoms services in one respect: the customer buys the services of an operator in one Member State; however, when the customer travels abroad, he or she is connected to the network of a foreign operator, which provides facilities for making and receiving calls and bills the home operator for this ‘wholesale’ service. The level of these charges does not appear to be justified by the underlying costs and there appears to be insufficient competitive pressure on operators to bring prices down.

IOTs can take different forms in that many operators distinguish between peak and off-peak tariffs, phoning in the visited country or in different international zones including the home country. There are also IOTs for data and SMS.

Operators bill for IOTs in different ways. Some use a flat-rate tariff structure while others opt for destination-specific charges. In addition some operators use per-second billing, while others charge in intervals varying between 15 seconds and 30 seconds for example. More recently, operators charge different IOTs for on-net and off-net calls within the visited country.

In their presentations and responses to the consultation, operators claim that competition in the wholesale market is working and is helping to bring down wholesale prices (IOTs) considerably. They claim that traffic steering i.e. the ability to direct traffic to a specific operator enables them to guarantee volumes to their wholesale partners for which they can negotiate better wholesale prices.

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The table above illustrates the difference between the actual estimated cost (includes a margin and is based on confidential industry input), the IOT charged and the average price the end customer has to pay for a roaming service. As can be seen from the above the level of IOT charged is almost 4 times the cost. Despite the fact that there are signs of wholesale prices coming down for some operators, the level of the wholesale IOT charge suggests that wholesale prices are still significantly above costs and that not all operators are benefiting from reductions.

Nominal IOTs[16] should be the starting point of the analysis since they give an indication of how the system works. Most operators – though not all - obtain better rates through volume discounts, and will therefore have different agreements in place than the standard tariffs. Wholesale input costs – taken here as IOTs - clearly are one aspect of our discussion in this impact assessment of persistently high retail prices. However, there are others (demand characteristics for roaming services, for instance), and it is to these that one must turn for a better understanding of the problem.

2.2.3. Retail prices and transparency

Average retail roaming charges are roughly 4 times higher than the equivalent prices for domestic calls. The graph below, based on Commission estimates[17] illustrates the difference in the average price of a domestic and a roamed call of a one-minute duration.

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The domestic and roaming tariffs shown above are standard tariffs, so that like is being compared with like. In general, typical retail charges for a post-paid customer range from around €0.80 per minute to around €1.30 per minute on average, while charges for pre-paid roaming are around 25% higher.

While some of the difference between retail roaming charges and domestic charges can be explained by unjustifiably high wholesale charges for roaming it is also clear that in many cases the retail prices for roaming seem to be set without reference to the wholesale charge. For example, even where wholesale charges differ significantly, the home operator will often charge the same rate for roaming on each network. Leaving recent moves by operators aside (which are clearly a response to the threat of regulation) it seems that there has been relatively little movement in retail prices over recent years despite some reductions at wholesale level. Confidential data provided to the Commission suggests that operators have benefited from higher margins as a result of reductions in prices at wholesale level.

The unjustifiably high level of roaming charges is evident from the differences in prices that apply for apparently similar calls. For example, a typical price for a local call in Poland is around €0.19. A German customer who crosses the border to Poland can pay from €0.34 to €2.56 per minute for making the same local call i.e. from more than 3 to 9 times the price for the Polish customer. These differences cannot be explained by cost differences.

A French customer roaming in Italy will have a similar experience. The price of a typical local call for an Italian customer can be around €0.10. However, if a French customer crosses the border to Italy he/she will pay from €0.50 €1.18 per minute for making the same local call. Once again these differences cannot be explained by costs. As to transparency, consumers may face difficulties in determining the cost of international roaming in view of a number of factors. It is a problem that has also been acknowledged by the industry. Part of the problem is the sheer volume of tariffs a consumer faces as well as complexity. To know the exact price of a call may prove to be impossible, since call-set up charges could apply and operators may charge on a per minute or a per second basis.

High retail prices charged for receiving calls are not commensurate with the costs incurred by the operator; one reason could be the fact that receiving a call is treated as a substitute for making a call and is priced accordingly.

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The above chart shows the estimated underlying costs incurred by an operator when a customer receives a call while roaming, as a proportion of the overall average charge to the consumer of €0.58. The operator will have to pay a termination rate to the mobile operator in the visited network, together with a transit charge. However, the home operator will have either received a termination charge from the originating network or a retail on-net tariff from the caller. In fact the actual net real cost to operators may be less than €0.10 on average.

The price for receiving a call is clearly an area where operators could act immediately without the need for any movement on wholesale rates. However, operators have an incentive to keep prices for receiving calls high, as otherwise consumers would prefer to receive calls rather than to initiate them.

Transparency of these charges is also a major issue. For example, some operators have a strategy of charging different rates depending on the network used when roaming, while others have flat rates for calls originated within a given country or even a flat-rate tariff for Europe, making it extremely difficult for consumers to determine the exact price for a roaming call.

As indicated above, the Commission, through the launch and updating of its website on international roaming charges, and the NRAs through similar initiatives at national level, have responded to the need for greater transparency. The Commission’s initiative was very successful as a means of placing the spotlight on the level of these charges. However, despite this attention the mobile industry did not respond with significant reductions in charges. Therefore, while improved transparency is important, such measures alone are clearly not sufficient to resolve the problem of high charges. At the same time more could be done by the industry to improve the current levels of transparency. A proposal for improving transparency of roaming charges is outlined later in this paper.

2.3. Technological and market evolution

Voice over IP

Voice over IP (internet protocol) has to a certain extent revolutionized fixed telephony, paving the way for cheaper voice services and the provision of innovative services. The advent of 3G networks and Wi-Fi hotspots is leading to interesting developments in mobile services. New mobile handsets which are capable of providing mobile over IP are also emerging.

However, IP mobile telephony is set to become a reality only in the medium term. Given that the early adopters of such handsets are likely to be business users which can negotiate special roaming packages, such a development is unlikely to bring about significant market change for the majority of consumers in the short-to-medium term.

Traffic direction or steering

On the other hand, as a result of technological developments and smart SIM cards, operators can now direct consumers to their preferred networks while roaming for around 80% of roamed calls. This is done using technologies which are known as traffic steering[18]. This has enabled operators to negotiate volume discounts.

However, it seems that retail customers are not yet seeing the benefits of such discounts at wholesale level. In fact operators often offer the same retail tariffs for roaming irrespective of the network on which their customer is roaming. In other words, even though the operator may benefit from a better wholesale deal, the end-customer is charged the same retail price. This obviously means that pass-through of savings is not automatic although some operators claim that they adopt this strategy for transparency reasons. Furthermore, there is no guarantee that an operator will direct traffic to the cheapest wholesale provider, particularly if it has special economic links with an operator in another Member State.

Gateways

A further possible technical development involves ‘gateways’. Gateway operators could offer parallel interconnection of networks, and would generate revenues by using cheap local calls on source and destination networks and routing these calls on through their own interconnection network. In terms of business model, this compares to the call-back services of the early 1990s. Technically, they involve a battery of GSMs making calls on both the originating and destination networks and an interconnection infrastructure (leased lines or high-speed IP connections).

The use of gateways appears to be legal in some Member States but illegal in others. There are currently court cases for example in the United Kingdom relating to the use of this technology, where the NRA has declared such reselling to be illegal. The use of gateways could have an effect on international tariffs and hence on roaming charges. However, given the uncertain legal situation across Europe and the likelihood that this would be a marginal business opportunity that would disappear as prices came closer to cost, the chances that it will have a big impact on international roaming prices are small.

2.4. The case for EU action (subsidiarity test)

The Commission has been aware for some time of the specific characteristics of the international roaming market and the potentially damaging impact of unjustifiably high prices on consumer welfare. Many of the issues connected with roaming have accordingly been aired extensively, in connection both with specific cases examined by the Commission under its Treaty powers and, more pertinently, in the process leading to the adoption of the 2002 e-communications regulatory package[19]. As a result of specific concerns relating to the roaming market arising in that context, and following lengthy consultation, the national market for international roaming services was specifically included in the annex to the Framework Directive as a market to be included in the Commission Recommendation on relevant markets. This resulted in the inclusion in the Recommendation of the wholesale national market for international roaming on public mobile networks (Market 17).

However it has become clear that the subsequent inclusion of this market in the Recommendation did not fully equip national regulatory authorities to deal with this issue. Moreover, the attempt to enhance transparency of prices, through the launch of a European roaming website, has not had the expected effect in terms of lowering prices. Considering this and in the light of calls from the European Parliament[20], the Commission services launched two rounds of public consultation which have been summarized above.

This has led to a situation where NRAs on the one hand, acting through the European Regulators’ Group, claim not to be in a position to act, and, on the other, have called on the Commission to act by proposing a legal instrument at European level. In the absence of any action to address this problem there will be persistent pressure on Member States to take measures to address the level of EU-wide roaming charges. However, any such measures would create divergent results across the European Union and be ineffective, given the particular cross-border characteristics of the services concerned.

Consequently, since the tools provided to national regulatory authorities on a harmonised basis by the existing EU regulatory framework have not proved sufficient to enable those authorities to act decisively in the consumers’ interest to bring down the level of international roaming charges, it is necessary to amend the regulatory framework and to ensure that legal and administrative measures taken at national level are harmonised, so that obligations imposed are effective on a cross-border basis and that divergent approaches by Member States do not constitute an obstacle to the realisation of the internal market or distort the competitive conditions for international roaming services across the Community.

The ERG noted that it has put considerable effort into analysis of roaming services using the tools provided by the current framework. While the ERG believes that the Framework is generally sound, nevertheless in the exceptional case of international roaming markets, the Framework does not provide effective regulatory tools. It added therefore that given the urgent need to resolve the roaming pricing issue, the ERG agreed that an EU initiative to tackle the problem was the only appropriate approach.

3. OBJECTIVES

The objective of EU action is to promote the development of the single market for electronic communications services for users of public mobile telephone networks for EU-wide roaming services when travelling within the Community. This means that the prices paid by users of public mobile telephone networks for EU-wide roaming services when travelling within the Community are not unjustifiably higher than the charges payable by that user when calling within his home country. The gains for consumers should be significant in terms of immediate price reductions and overall welfare. These would allow for a clear demonstration that Europe can act in the interest of citizens in a case where Member States are not equipped to act. In addition, lower roaming rates would strengthen the competitiveness of European industry, which is a user of roaming services.

4. OPTIONS AND IMPACTS

4.1. Policy options

There are a number of ways in which the problem of excessive roaming charges could potentially be solved. For example, regulation may not be necessary if market or technological forces act in the short term to bring prices down. Equally, regulation could be avoided if acceptable and effective self-regulation is an option. Regulation should always be used as a last resort and only when it is clear that market forces will not bring about the desired objective. It is necessary therefore to consider the potential impact of regulatory and non-regulatory approaches. The graph illustrates potential strategies or policy options for achieving lower roaming prices. These options and their potential impact are examined below.

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Option 1 – No policy change

Before taking action, regulatory or otherwise, to resolve a particular problem the possibility of ‘doing nothing’ should be considered. In other words, is intervention in some form necessary or will the issue resolve itself within an acceptable timeframe? If no action is taken will roaming charges fall? The chronology of events leading up to this initiative clearly indicates that action has already been taken by the Commission and NRAs to attempt to reduce roaming charges. This includes competition law investigations, initiatives aimed at promoting transparency of prices (at EU and national levels), regulatory action under the current telecoms framework and continuous political pressure. The problem has been recognized for some time and a range of action has already been taken. The issue therefore is not to ‘do nothing’ but rather to consider whether a change in policy is required.

Faced with the threat of regulation[21] a number of major EU operators have announced price cuts in the second quarter of 2006 which could amount to significant reductions when compared to existing tariffs. It would appear that these offers are not a response to the forces of competition but rather to the threat of regulation. In most cases, these packages are offered to customers on an opt-in basis. Political pressure has led operators to act and to announce initiatives that aim to bring about a decrease in the consumer price for roaming.

Some developments have also taken place at a wholesale level with six operators who between them have around 200 million mobile subscribers in the EU announcing that they would be offering wholesale rates of €0.45 as of October 2006 and reducing to €0.36 in October 2007. Another operator had announced a similar wholesale rate of €0.45 as from October 2006 on a reciprocal basis. These developments would need to be analysed throughout their implementation, given the fact that to date cost savings have not always been passed on to consumers.

Smaller operators have argued that wholesale rates need to be lower if they are to be in a position to compete, otherwise they would be squeezed out of the roaming business. Given the dynamic of the mobile industry, further consolidation could take place in the medium to long term giving rise to a small number of pan-European operators. Such a development could also change the way roaming is being delivered to consumers.

From a regulatory perspective, NRAs that have not analysed market 17 for wholesale international roaming would need to continue with their analysis but in many cases would probably be unable to find dominance. Meanwhile, it is also expected that DG Competition will finalise its investigation in the second half of 2006, possibly with the adoption of formal decisions by the Commission. However, given that this is an ex-post investigation involving four operators, it would be unlikely to have an impact on the whole roaming market.

If no new action is taken by regulatory authorities the status quo is preserved i.e. there would be continued reliance on existing tools for regulatory intervention (including the telecoms regulatory framework and competition law remedies), political pressure could be maintained and market and technological developments would take their course in the hope that this would lead to the desired objective.

Despite these developments, and despite the fact that mobile penetration is reaching record levels in the EU, the discrepancy between domestic prices and roaming prices remains high. In many instances it has even increased, as domestic prices have gone down while prices for roaming have remained relatively stable.

Option 2 – Self regulation

Self-regulation is defined as the possibility for economic operators, the social partners, non-governmental organisations or associations to adopt amongst themselves and for themselves common guidelines at European level (particularly codes of practice or sectoral agreements). As one of its responsibilities, the Commission scrutinises self-regulatory practices in order to verify that they comply with the provisions of the EC Treaty.

The Commission notifies the European Parliament and the Council of the self-regulatory practices that it regards, on the one hand, as contributing to the attainment of the EC Treaty objectives and as being compatible with its provisions and, on the other, as being satisfactory in terms of the representativeness of the parties concerned, sectoral and geographical cover and the added value of the commitments given.

One submission by an operator indicates that the industry is currently considering such a proposal. The operators would draw up a code of conduct in which they would commit themselves to further price reductions. The proposal, which is currently being reviewed by the operator community, calls for a decrease of IOT tariffs to below €0.40.

In the submission, the operator notes that this would mean a significant reduction in today’s discounted IOTs and it would also leave room for operators to compete for inbound roaming traffic by agreeing additional discounts to bring the effective IOTs below the cap. The operator is also proposing a retail price index to ensure that these savings are actually passed through to consumers. The operator notes that the code of conduct has the advantage that it could already become effective in the course of this year.

From publicly available information, it is becoming clear that some operators (the larger operators in Europe) are already charging in some cases a wholesale level IOT (with discounts) which is very close to €0.45. Vodafone, in a recent announcement, was also willing to offer a wholesale rate on a reciprocal basis of €0.45 or less. Operators have also indicated that a cap of €0.45 would still allow for competition because operators could offer rates below that and direct volumes through traffic steering.

Another proposal which was suggested by one operator in its response to consultation includes a wholesale cap of €0.45 and a retail average cap of €0.55. This cap would apply to operators who agree to steer 80% of their traffic to that operator. It claims that this would immediately bring about a decrease in IOTs for the smaller operators and allow for competition based on volume discounts for the larger operators. The proposal also suggests that this offer could be made on a reciprocal basis to operators in third countries thus ensuring that WTO/GATS concerns are mitigated.

Option 3 – Co-regulation

The co-regulation approach implies a regulatory framework in which the overall objectives, the deadlines and mechanisms for implementation, the methods of monitoring the application of the legislation and any sanctions are set out. The regulator also determines to what extent defining and implementing the measures can be left to the concerned parties. Such provisions, for example sectoral agreements, must be compatible with Community law and must be in the interests of the public. Co-regulation must be transparent. Members of the public must have access to the act and to the implementing provisions.

Sectoral agreements and means of implementation must be made public in accordance with arrangements that have yet to be defined. The parties concerned must be considered to be representative, organised and responsible by the Commission, Council and European Parliament and according to the IIA they must be ‘recognised in the field’ (such as economic operators, the social partners, non-governmental organisations, or associations).Co-regulation combines the advantages of the binding nature of legislation with a flexible self-regulatory approach to implementation that encourages innovation and draws on the experience of the parties concerned. A drawback is the need to set up monitoring arrangements.

In the context of international roaming, such an approach could mean that a Regulation would set out broad parameters with perhaps targets for price reductions to be achieved. It could also include a regulation at wholesale level with additional co-regulatory elements such as industry agreements to increase transparency or to monitor prices. Clearly any collective industry action or agreements in relation to prices could raise competition concerns. The potential effectiveness of such approaches is considered later in this document.

Option 4 – Soft law

Under this approach, the Commission could issue a Recommendation to Member States or operators, possibly under Article 19 of the Framework Directive, on the appropriate prices that should be charged by operators for international roaming services. These prices could be based on benchmarked best practice prices applicable in the EU. Such an approach would not bind Member States or operators but would rather act as a form of encouragement or target to be achieved. Such benchmarking would also increase transparency by highlighting the extent to which operators’ prices are out of line with best practice prices in the EU.

Option 5 – Targeted regulation

If other options are deemed to be insufficient, then it would become necessary for a regulation to bring about the desired objectives set out in this impact assessment.

Regulatory intervention could take the form of measures designed to stimulate further competition or focus on prices. Currently users are forced to buy roaming service from their operators. Therefore one could consider remedies that would open the roaming market to greater competition, for example, using measures comparable to the preselection concept in fixed networks. Technically that would mean that access to the registers of connected users that are used in GSM to route roaming calls would need to be amended so as to allow for another (roaming) operator to handle the calls of a roaming user. Opening up the core signalling infrastructure is an option, but could require a change in signalling standards and implementation in the signalling software of all operators. Whilst not impossible, this would take time (probably in terms of years) and such measures could well be overtaken by other technological developments. In that context, if regulation is required, it would appear that it would be more effective if directed at the obstacles to the internal market.

A number of options would therefore need to be considered. In the context of international roaming the first question that needs to be addressed is whether any regulation would tackle wholesale prices, retail prices or both. If wholesale regulation is necessary it would then have to be decided whether to opt for a wholesale regulation based on cost orientation or a price cap. From a retail perspective, there are again a number of options that could be used. For example prices linked to home pricing, visited country pricing or a cap on retail prices (based on the regulated wholesale rates).

These options are illustrated in the graph below:

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In the second phase consultation the Commission proposed a possible option for discussion called the ‘home pricing principle’. This approach includes regulation at both wholesale and retail levels.

Option 5.1 – Wholesale regulation only

In its submission, the ERG said it believed that wholesale roaming charges (inter-operator tariffs for handling roaming calls) paid by one mobile network operator (MNO) to another should be controlled by means of a uniform European price cap.

The cap, under the ERG proposal, would be set at twice the level of the 75th percentile of the national average rates for mobile termination. The current rate would be about €0.30 per minute. ERG has chosen this benchmark as it considers that it is an effective proxy for the cost of provision of wholesale international roaming services.

ERG also proposed the construction of a robust and authoritative index of retail international roaming charges so as to allow movements in average charges to be monitored over time. In particular, this would permit transparency as to whether wholesale price reductions were being passed through to reductions in retail roaming prices.

The ERG noted that market forces may prove insufficient to guarantee a substantial pass-through of wholesale reductions to the retail level within a relatively short period. Therefore, a form of retail price control could eventually be necessary at a later stage. The ERG proposal is a price cap per minute on every roaming call, set at different levels for making and receiving calls. The ERG proposes that NRAs should then be given discretionary powers to impose a lower cap on their national MNOs in accordance with national circumstances.

Option 5.2 – Retail regulation only

The impact assessment will analyse whether such regulation at the retail level could bring about decreases in prices for consumers and whether this could be a workable solution. The impact assessment therefore needs to analyse whether wholesale prices are in effect low and whether the retail margins of operators are such that retail-only regulation would bring about a decrease in retail prices without creating price squeeze for certain operators.

Option 5.3 – Wholesale and retail regulation

Assuming that regulation at wholesale level only or retail level only are not sufficient to achieve the objectives set, then it will be necessary to consider regulation at both levels. This Impact Assessment analyses three different approaches to wholesale and retail regulation, namely the home pricing principle, the visited country approach and the European home market approach.

Home Pricing Principle

The home pricing approach was proposed as an option for a regulation on roaming calls, in line with objectives of transparency, comprehensibility for the consumer and parallelism with home-country prices. The proposal was that of ‘pegging’ retail roaming prices to the customer’s home prices for comparable domestic mobile services.

Under this ‘home pricing’ approach, a Belgian customer, for example, roaming in Spain and making a local call (i.e. a call to a Spanish number) would be charged a rate not exceeding the rate (as charged by his or her home network) for a local call in Belgium. The same customer roaming in Spain and making a call home to Belgium (i.e. a call to a Belgian number) would be charged a rate not exceeding the rate (as charged by his or her home network) for an international call to Spain from Belgium.

Under this approach to retail regulation, action would need to be taken in parallel to ensure that prices for the services provided by the visited network (‘wholesale’ prices) were also regulated, otherwise market distortions could ensue. It was envisaged that under this approach, wholesale regulation could take the form of cost-orientation obligations, in particular to calls assimilated to local calls in the home country, or a capping mechanism, possibly on a transitional basis until regulatory authorities have developed the cost models and enforcement mechanisms to verify and implement cost orientation.

The approach under the home pricing principle is also that of abolishing charges to consumers for receiving calls while roaming in another EU Member State.

Visited country approach

An alternative to the home pricing principle at retail level could be the visited country option. Under this principle, consumers would be treated as if they were customers in the visited country. This would mean that they would be charged the actual domestic rate for making a call within the visited country and an international rate equivalent to what a subscriber in that country would normally pay to make an international call.

This option has also been proposed by CMT, the Spanish regulator, which sent a separate submission from the ERG. CMT notes that “the best approach would be to apply retail prices as set out in the visited country for services analogous to international roaming services.

For originating calls:

Home country calls from the visited country

National calls within the visited country

Calls to third countries from the visited country

(Maximum international roaming retail price = average retail price in the visited country + margin)”

CMT proposed that this formula implies less distortion than the “home pricing principle”, regarding the non-discrimination and proportionality principles. The price structure proposed by the Spanish regulator is similar to the home pricing principle, although applying the prices of the visited country principle instead of those of the home country.

European Home Market Approach

In order to ensure that European consumers have similar experiences in terms of mobile call costs while at home or abroad a development of home pricing – the European home market approach – could be put in place which would mean EU-wide roaming at rates comparable to those paid at home. In line with the home pricing principle, the starting point of the system would be the national mobile termination rates (MTR.) A system of limits at wholesale and retail level which are reflective of pan-European prices could be put in place in order to fulfil these objectives. Under such a system, ceilings for prices would be set at wholesale and retail level for calling within the visited country and for calling home/within the EU 25.

The Commission services see merit in this principle but believe that an average EU MTR provides a better basis for a pan-European internal market approach. Equally, the Commission Services believe this approach could be further refined by introducing separate wholesale price limits for calls back home/to another EU country and within the visited country. A limit of twice the MTR would be applied to wholesale prices for calls within the visited country and three times the MTR could be used for calling back home/to another EU country. This differentiated approach reflects better the additional costs involved in calling back home and the actual market approach by operators which is to charge different wholesale prices for different call types.

At retail level a ceiling would be set at a 30% margin above the wholesale rate to ensure that savings are passed on to consumers. Such a margin provides operators with a reasonable degree of comfort while at the same time guarantees reasonable price reductions. Operators would of course be free to compete at lower margins than these levels. The use of such a mechanism will not prevent innovative packages such as bundles subject to a ceiling per minute charge calculated in accordance with this formula. This ceiling on active calls could come into effect six months after the Regulation comes into force. There is general agreement among most interested parties (except of course the industry) that with margins of at least 300% to 400% charges for receiving calls are particularly exorbitant. It is therefore clear that these levels of unjustified charging could not continue in the long term. As outlined in section 2.2.3 the real cost to operators for these calls is less than €0.10. In fact, despite the fact that regulated MTR rates have fallen gradually in Europe over the last number of years, there has been little corresponding progress on the retail rates for this service. This fact provides further evidence that charges at retail level stand in no meaningful relationship to the underlying costs. The MTR provides an excellent basis for the key cost component of receiving calls. On this basis it is proposed to set a maximum safeguard limit for the prices that operators may charge for receiving calls. This safeguard limit could be calculated as one MTR plus a margin of 30%. Such a formula will enable operators to recover their costs and receive a healthy profit margin. It will also mean very significant reductions in prices for consumers for this service.

From maximum wholesale charges to maximum retail charges

Wholesale level

The ceilings set at wholesale level can be seen as a generous proxy for the underlying costs of service provision. Maximum wholesale level prices would therefore be set by reference to a benchmark based on multiples of the average EU mobile termination rate (MTR) for operators with significant market power. As ERG has pointed out the MTR provides an excellent starting point as a benchmark for wholesale prices. The use of the MTR as a benchmark for wholesale prices is also supported by some industry players.

In the case of mobile termination costs, NRAs have developed sophisticated economic modelling tools for calculating firms’ underlying cost structures and for establishing MTR estimates. By and large, it is possible to build on these models for purposes of the present analysis and use these as a proxy for establishing the costs of roaming services.

The MTR is already regulated in the majority of Member States for operators with significant market power which provides additional transparency, simplicity and certainty. In addition further gains can be expected as the downward trend of MTRs continues. It is proposed to use the EU weighted average MTR for operators with significant market power (SMP). For illustrative purposes, in October 2005 this was 12.64 cents compared to 13.81 cents for non-SMP operators. The average MTR for all operators in the EU was 12.96 cents.

Thus, for the case of roamed calls made back to the home country, to another EU country or within the visited country, industry costs may be approximated by using a multiple of an EU average MTR for modelling origination costs, termination costs, transit costs, attributable network and common costs, and costs of capital[22]. The two principle legs of a mobile call are origination and termination. It is generally accepted that the termination cost acts as a good proxy for origination. In that case we can assume that the regulated MTR provides a sound benchmark for both origination and termination. It is therefore proposed to set a maximum wholesale price level for calling within the visited country at two times the average EU MTR.

In order to reflect some additional costs such as higher transit, as well current commercial practice whereby rates are differentiated between, inter-alia, calling home and making a local call, it is proposed to allow a higher rate of three times the MTR as a benchmark ceiling for the price of a call home or within the EU.

Retail level

Regulation at retail level under the European home market approach proceeds on the basis of this analysis and establishes safeguard limits by granting a commercial margin on top of the MTR multiples used for the wholesale level[23].

The value of the price caps is computed by granting firms a margin that is in accordance with the general philosophy of the European home market approach – namely that consumers, no matter where they geographically are in the European Union, have the same experience as at home – and with the commercial reality of the mobile industry. In a competitive equilibrium setting, the demand for roaming services for a variety of reasons (for instance transparency or consumer preferences) is likely to be less price-elastic than the demand for other mobile services such as on-net calls[24]. This would suggest that in a competitive setting the retail margin for roaming services would be slightly higher than the average retail margin for all mobile services. Similarly, seasonality effects and network bottlenecks for roaming services would suggest slightly higher retail margins than apply to services where these factors are absent.

The average EBIT margin for the European mobile industry can be estimated at 26.8% for the year 2005[25]. Adjusting this accounting measure for capital costs in order to compare it to the wholesale cost-base defined by the regulation as a multiple of MTRs, this yields an average retail margin of 23.1% on top of the cost-base for all mobile services.

Based on MTR figures from the 11th Implementation report, the retail cap of 32.9 and 49.3 eurocents for the two kinds of active calls respectively and 16.4 eurocents for passive (receiving) calls, arrived at by using the European home market approach, allows a higher retail margin than a mobile operator could expect to make for an average mobile service and thus strikes a reasonable balance between the consumer demands of the Single Market and sound commercial principle.

As described in section 2.2.3 lack of transparency of roaming charges has been a significant aspect of the overall problem for some time. As a supplement to the pricing proposals described under the European home market approach, additional measures to ensure improved transparency and consumer awareness of charges would be very beneficial for consumers. Operators could be required to provide their subscribers with access, free of charge to personalised international roaming tariff information while the customer is roaming. The consumer could choose to request and receive this information by means of an SMS or mobile call.

4.2. Analysis of impacts

This section presents a general evaluation of the options presented above in terms of the likelihood that each will achieve the desired goal of lower roaming charges. The tables in section 8 summarise the overall impacts under several criteria. The economic impact of various policy options may be evaluated by using an economic model full details of which are set out in the Annex attached. In the course of such analysis, the Commission’s services have focussed on three options in particular: First, the ‘no policy change / self-regulation’ option; second, the ‘wholesale regulation only’ option; and third the ‘wholesale and retail regulation’ option. The following section provides an overview of the key features of this economic model. Impacts which are less amenable to quantification are assessed analytically. Efforts have also been made to assess, qualitatively, the potential administrative burdens incurred by enterprises, public authorities, voluntary organisations and citizens in meeting the legal obligations to provide information under each of the options as required under the Commissions’ Impact Assessment Guidelines. Most options outlined in this Impact Assessment would imply some administrative burden on public authorities and/or business.

4.2.1. The economic model

Evaluating the options by means of an economic model

The model used by the Commission’s services is based on a comparative static approach and focuses on the impact of price changes on the aggregate EU market for mobile roaming services. While it is true that roaming services are offered as part of a bundle that also includes other services such as domestic voice services and data, for present analytical purposes the model seeks to isolate these effects and look at roaming services as a separate market. However, the following concise description of its basic characteristics and assumptions should be kept in mind when studying results contained in this chapter.

- First, the overall purpose of the model is to analyse the economic impact of each policy option by producing estimates for the resulting changes in total economic welfare, consumer surplus and producer surplus[26].

- Second, the model takes as its point of departure aggregate EU retail revenues from mobile roaming services which according to the GSM Association can be estimated to have reached € 8.53 billion in 2005. It also uses an estimate of aggregate EU per minute wholesale and retail prices, which is based on data provided for the purposes of this impact assessment by various MNOs and NRAs.

- Third, the model estimates the underlying cost and demand functions for roaming services by linear approximation.

- Fourth, it estimates expected retail price changes resulting from the adoption of individual policy options for three different categories of retail roaming services: active calls made within the visited country; active calls made back to the home country and passive (or received) calls.

- Fifth, for each of the policy options, the model yields results for three different elasticity scenarios, thus being able to incorporate in its analysis the effect of price changes on the demand for roaming services. The elasticity scenarios have been selected to depict a range from pessimistic to optimistic outcomes.

- Sixth, the model also takes account of substitution effects between the different categories of calls as a result of price changes.

4.2.2. Impacts

Impact of Option 1 – No policy change

Most interested parties would agree doing nothing at all is unlikely to lead to substantial reductions in roaming charges. In fact, as explained above, there has already been considerable activity aimed at achieving this goal, but with only very limited success. Therefore it is clear that at the very least existing measures such as those focused on transparency should continue. The more relevant question is whether new measures are necessary or whether there should be no policy change. This is considered below.

Technological and market forces

‘No policy change’ includes no new initiatives, which in turn includes relying on market and technological developments to solve the problem. Will competition and forthcoming technological developments such as VoIP be enough to have a positive impact on consumers in terms of prices? The offers that have been launched by the largest mobile operators in Europe over the past months are clearly a step in the right direction, but are they enough to bring about a real change in roaming prices?

The industry has taken considerable time to respond to threats of regulation with packages which aim to bring about decreases in roaming prices. Vodafone, T-Mobile, Telefónica Móviles España, O2, Orange and TIM have all announced different packages aimed at introducing key benefits to consumers. These include wholesale and retail offers, offering inbound and outbound fixed fees across all EU territories.

The issue of wholesale prices is still not addressed by most operators and while the large groups have been able to offer better prices to consumers, there is still no evidence that wholesale IOTs for the smaller operators have actually gone down.

The current movement in prices announced by operators will bring benefits to their subscribers. Some still require an opt-in while others have been offered to all subscribers. However, there could be a risk of a price squeeze given that the smaller operators might not be in a position to offer better prices in view of their failure to negotiate better wholesale tariffs. Under this scenario, it will be difficult to ensure that benefits are passed through to all consumers and especially those of smaller operators. Indeed, the impact on different consumer segments will probably be differentiated. Average price reductions do not necessarily imply lower retail charges for all segments. While benefiting from some reductions, individual consumers are likely to fare less well than business customers. In short, the recent offers in the market are not sufficient because:

- They do not go far enough in terms of providing consumers with a similar experience to that which they get at national level

- Where wholesale offers are made there is often no guarantee of pass-through at retail level

- They lack specificity i.e. they generally refer to target average prices which means some consumers will continue to be offered high rates

- They are a response to the threat of regulation as opposed to genuine forces of competition which could indicate that in the absence of such a threat there would eventually be a return to higher prices.

Extrapolating current market developments and assuming significant political pressure is maintained, wholesale prices for the purposes of the model may be estimated to decrease gradually over time[27]. For this policy option, the Commission’s economic model suggests (see annex) that as a direct result of the threat of regulation, consumer welfare could be increased by approximately €1.5 billion. The precise change would depend on the elasticity scenario regarded as the most realistic one. Indicative figures for producer surplus – or industry profits – suggest this would be decreased by €0.6 to €1.0 billion, again depending on the elasticity scenario selected. Finally, total economic welfare gains could be estimated to lie somewhere between €0.5 and €0.9 billion[28].

It is also not clear whether technological developments would be sufficient in the short to medium term. There are signs that handset manufacturers are already introducing Wi-fi mobile phones which will be able to support VoIP. Operators, however, do not expect this to have a significant impact given the fact that they are in control of charging for data. Moreover, some mobile operators have also invested in operating Wi-fi hotspots; they could therefore be in a position to minimize the possible impacts on their bottom lines.

In terms of potential impact on internal market, this option does not contribute substantially to its strengthening. The absence of a pan-European approach could lead to diverse national approaches which could have negative internal market consequences. As suggested above, some roaming charges (particularly for individual consumers and/or SMEs) can remain relatively high. Given the fact that business and social interactions have increasingly cross-border dimension and mobile communication plays a key enabling role there, international roaming tariffs do influence competitiveness of EU businesses. The no policy change option could produce some positive effects in this respect, however, it is unlikely to have a substantially beneficial impact on competitiveness (also because of no guarantee of substantial price reductions for all consumer segments and business customers).

Competition law remedie s

EU competition rules allow any anti-competitive behaviour by specific operators to be tackled and the Commission may adopt decisions forcing them to cease their anti-competitive behaviours and, where appropriate, imposing heavy sanctions for having breached the rules. However, these decisions are only applicable to their addressees and have no direct legal effect on other operators who may behave in a similar way. In view of the complexity of the relevant procedures it may not be practicable to challenge the behaviour of all operators active in a certain sector such as the mobile telephony sector, where at least 78 operators provide service throughout the EU. In this regard, competition rules and regulatory measures should be seen as complementary rather than as substitutes.

Ex ante regulation

As described in the problem definition section, national regulatory authorities have already stated that they believe existing regulatory tools to be insufficient to address this problem.

Administrative burdens

It is important to note that even « no policy change » option would entail administrative costs for NRAs, the Commission and market players, namely those related to the standard process of market reviews and notification procedures set in the regulatory framework for electronic communications. More concretely, market players are obliged to provide information and data to NRAs for the purpose of market analysis (in this case, market 17 – wholesale international roaming market as listed in the Commission Recommendation on Relevant Markets[29]). NRAs have the obligation to collect data, to conduct market analysis and to notify the Commission, all of which entail administrative costs. Finally, the Commission must analyse the notifications and respond to them within the given period.

Impacts of Option 2 – Self regulation

The Commission services have not yet received any general industry proposals for self-regulation. Moreover, in principle any such approach would have to meet competition law requirements. Self-regulation would have to deliver guaranteed substantial price reductions across the board, most likely at wholesale and retail levels. Thus far, the industry has not delivered sufficient consumer benefits and this must place serious question marks over any possible self-regulatory approach.

These reductions can only happen if (1) operators acknowledge that there is a problem with roaming charges both at wholesale and retail levels and (2) operators are able to agree on common positions and solutions applicable across the whole sector. Results of the public consultation suggest that there are diverse interests of large and small operators as well as operators from North and South of Europe, which means that achieving consensus on an effective approach to self-regulation is a real challenge for the industry.

Unless self-regulation is based on broad industry consensus, the risk of patchy success exists, potentially leading to diverse approa