Romania's mobile interconnection game

The tariff level at the end of this process path will reach US$0.0628 per minute (as compared to US$0.1017 per minute at present) and will cover effective costs, while allowing for a reasonable rate of return on investments.

First interconnection proposal: lower tariffs by 14.8%

The background here is that in early 2004 ANRC originally announced its intention to impose interconnection tariffs on GSM900 mobile operators (Vodafone Romania and Orange Romania) using the Long Run Incremental Cost (LRIC) technical-economic model. It was postponed in 2005 and 2006. Finally, on April 6, 2006 ANRC proposed new interconnection tariffs with which GSM900 operators would replace the existing US$0.1/minute tariff. According to the results of the cost calculation model established by ANRC, the tariffs for interconnection with Vodafone Romania and Orange Romania must diminish by 14.8% each year until 2009, in order to reach a level that reflects the costs.

To calculate the interconnection tariffs ANRC developed LRIC, which takes into account the costs of installing, operating and maintaining an efficient mobile public telephone network, supported by the UK?s Ovum Europe. According to ANRC: ?Orange and Vodafone did not observe the legal obligation to make available for ANRC their own costing models so that they could be compared and reconciled with the model elaborated by ANRC.

Under these circumstances, ANRC decided to use its own model exclusively, while agreeing to participate in an extended bilateral consultation during which the two operators had the opportunity to reasonably request model adjustments. The volume of data made available by the two operators during the bilateral consultation was reduced and bore a relatively limited impact on the model results. Therefore, ANRC decided to launch public consultation, during which both operators and all the interested parties could send comments on the model and on ANRC's draft decision.

Let us remember that by the end of March 2006 GSM900 mobile operators had sold about 13.48 million SIMs into a market of about 14.1 million, i.e., a 95.4% market share, ?which confers enormous market power upon them?, according to ANRC. Exactly how this market share is broken down is shown in the graph.

ANRC's proposal was in fact publicly contested on several grounds:

The proposed tariffs were not calculated based on Romanian mobile telephony input data, as the GSM900 operators declined to provide input data for the LRIC model. For this refusal the operators had to pay a US$508 penalty for every delayed day. This meant US$190,500 per year or about 0.02% of a company?s turnover in 2005! Not bad at all, if one takes into consideration the effects of much lower tariffs based on costs:

• ANRC was proposing lower tariffs compared with the LRIC model, e.g., US$0.0899 instead of US$0.0622 for 2006! This could mean that they were not so confident in their computations;
• ANRC was proposing a constant yearly reduction of 14.8%, which could be considered the result of an empirical approach, maybe due to the input data which was missing from Romanian mobile telephony; and
• what was proposed actually postponed the enforcement of tariffs which would have fought against market saturation! This has been going on since 2004 and will continue until 2009! ANRC originally promised to impose interconnection tariffs on GSM900 (Vodafone and Orange) with costs based on the LRIC model back in early 2004 - but was now postponing it toward 2009.

Second interconnection proposal (June 30, 2006): reduce by 12.5%

On June 30 this year ANRC changed its mind and increased interconnection tariffs, once again delaying their enforcement. The actual tariffs were as follows:

The points to note here are that ANRC was insisting on delaying tariffs, an action which helped produce market saturation, and which could also deter competition (especially from newcomers) not to mention preserving the GSM900 duopoly position. One final aspect was that the first step was even then delayed to September 2006, instead of July!

ANRC was coming back in to the debate and proposing a lower reduction in the rate by which interconnection tariffs were to be reduced - 12.5% instead of 14.8% at a time when 14.8% was already considered too small for Romanian telecommunications. It was also an empirical rate.

The press release for this stage declared: "following today's discussions at this final consultation stage by the Consultative Council, ANRC will communicate to Orange and Vodafone during July 2006 the maximum level of tariff these companies may charge on other operators for calls carried out within these two companies' mobile networks."

Third interconnection tariff (July 10, 2006): reduce by 11.3%

And so, on July 10, 2006 ANRC again reduced interconnection tariffs, now to 11.3% while maintaining the postponement of new interconnection tariffs aimed at heading off market saturation.

This third round of new interconnection tariffs, enforced by ANRC?s decisions 436/2006 and 437/2006, has triggered a reaction from the GSM900 operators, Vodafone Romania announcing its intention to take ANRC into the court. According to Vodafone: "As there is no institution that can mediate between the ANRC and operators, Vodafone Romania is forced to defend its rights in court. The decision is motivated not just by the negative impact on the company's revenues, but also because the calculation model developed and imposed by ANRC contains many errors that lead to erroneous conclusions".

What about other countries, like Hungary?

According to the Dow Jones Newswires service of June 29 this year, NHH (the Hungarian regulatory body) announced the reduction of interconnection tariffs by mobile operators in three steps: on January 1 in each of 2007, 2008 and 2009. T-Mobile, the local market leader with 45% market share, has to cut its interconnection tariffs 14.74% yearly to reach US$0.075 in 2009. Panon GSM, the second celco (33% market share) has to reduce tariffs 16.99% yearly to reach the same level in 2009, while Vodafone, the third mobile operator with 22% market share, has to cut tariffs 19.77% yearly.

A programme of reduction similar to Romania's! Where it differs is in the fact that mobile telephony in Hungary is approaching saturation; 92% penetration by year-end 2005 compared with 62% in Romania, together with a much more balanced competition (highest/lowest market-share ratio is 45/22=2.05 (the ideal is 1) in Hungary but 50/1.9 (25.8) in Romania. One must also remember the economic differences between Hungary and Romania: GDP per capita US$11,049/US$4,6868=2.37, average wage US$762 / US$330=2.31, which also influence overall prices, and thus telecommunications tariffs. Tacking into account economic differences, interconnection tariffs in Romania could be US$0.074/2.3=US$0.0323, half the ANRC proposal.

And how does Russia cope? Increase tariffs

A TeleGeography news item from July 11 this year announced that Russia's three largest celcos: MTS, Vimpelcom and MegaFon, which combine to make up 86% market share, have increased interconnection tariffs for regional mobile operators from US$0.01/minute to US$0.04/minute. Interconnection tariffs between these three major celcos will be also increased to US$0.035/minute! From an economic point of view (GDP, wages) Romania is not too far from Russia.

In Romania it's higher expenditure (capex and opex) for mobile telephony and lower tariffs. Despite the lower costs associated with mobile networks (capex or opex) when compared with RomTelecom's fixed telephony network, mobile tariffs were high and remain high, despite ANRC's LRIC model.

Conclusions

Imposing mobile interconnection tariffs on costs could be a chance to re-launch competition in Romanian mobile telephony. Otherwise, one can expect to continue the limiting of intra-networks traffic, the preservation of high market shares for GSM900 operators, and difficulties for smaller players to reach a market share which can permit a lucrative business.And so, according to the 2005 Guide to Romanian Telecommunications in the medium term GSM900 operator turnover could represent two thirds of Romania?s telecommunications turnover, compared to one half today. Or in other words, we could be replacing the former RomTelecom monopoly with a GSM900 duopoly. Which should not be the objective for a regulatory body!