Cellphone firms in high court tussle
Both MTN and Vodacom are engaged in a high court tussle with their regulator, the Independent Communications Authority of SA (Icasa), over whether they should be deemed "major operators" for the purpose of regulating the fees they charge for terminating calls on their networks. Icasa has proposed that any company with a market share greater than 35% be deemed a major operator.
But MTN and Vodacom have objected. They claim that Icasa does not have the power to set prices and that it has not produced an economic case for regulatory intervention.
This drumbeating may be short-lived, however. Even if the high court sides with them, the Electronic Communications Bill, which President Thabo Mbeki is expected to sign into law in the next few weeks, clearly gives Icasa the power to impose "pro-competitive conditions" – regulations that are deliberately disfavourable – on operators that have "significant market power".
Matters came to a head last year when Icasa said MTN and Vodacom had the power to set prices in the interconnection market and dubbed them major operators. This label forces them to comply with a cost-based pricing formula for interconnection fees.
The stakes are high for MTN and Vodacom as they generate vast amounts of money from interconnection. MTN generated about R5,4bn this way in the nine months to December 31, while Vodacom made R3,2bn in the six months to September 30. In the year to March 31 2005, Telkom paid the cellphone operators R6,1bn, or 14,2% of its revenue, in interconnection fees. The company received R1,3bn in return.
Cellular interconnection fees have risen dramatically – about 600% – in 11 years. These prices are currently set through commercial agreement between operators. Graham de Vries, MTN GM for legal and regulatory affairs, points out that there has not been a commensurate rise in prices for consumers. The explanation, he says, is that operators are absorbing the interconnection fee increases.
But recent research by Business Leadership SA (formerly the SA Foundation), which represents 50 of SA’s largest companies, suggests that if Icasa were to force operators to reduce interconnection fees to "cost", Telkom customers could expect a reduction of up to 15% in their bills.
The cellular operators won’t give up without a fight. Vodacom chief operating officer Pieter Uys says Icasa’s previous interconnection regulations are "unlawful", hence the company’s court action.
Uys says Icasa has no power to intervene. "The Telecommunications Act is the only legal basis for the regulation of interconnection," Uys says in a written response to FM queries. "It follows that it is of critical importance that regulation is undertaken in terms of due process and legal authority set out in the current act."
Icasa’s proposed intervention is not without precedent. UK telecom regulator Ofcom imposed direct controls on interconnection pricing two years ago after it found all five mobile phone operators – Vodafone, O2, Orange, T-Mobile and 3 – had "significant market power".
It’s clear, however, that the fight between Icasa and MTN and Vodacom is more than a dispute over pricing. It’s a battle about how much control Icasa can exert over them. By declaring them dominant players, Icasa would bring them "unequivocally within its regulatory domain", says Lucien Pierce, a lawyer who specialises in telecom and technology issues at Phukubje Pierce Attorneys.
This point was highlighted by Icasa councillor Tracy Cohen, who chaired hearings into proposed interconnection regulations last week. Cohen frequently asked parties making submissions whether they thought Icasa had the right to regulate interconnection between operators.
Vodacom and MTN say Icasa doesn’t have this power. They also say that Icasa has never produced evidence to support this. "No . . . economic analysis was done to support such a determination," Uys says.
But, says Cohen: "There is no foregone conclusion that a study won’t be done."
The fight isn’t going to end there. If Icasa does decide to intervene in setting interconnection prices, the pricing model used will be a hotly contested issue. Vodacom believes a cost-based formula may not be in the "best interest of society". It argues that money received from interconnection can be used to subsidise other services for consumers.
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