LONDON -(Dow Jones)- UK telecommunications regulator Ofcom Thursday proposed imposing new controls on prices cellphone companies charge each other for connecting calls between third-generation networks.
The fees levied on operators to connect between mobile networks - so-called termination rates - generate GBP2 billion in sales annually, making them a significant revenue source for the industry, Ofcom said.
Ofcom's predecessor, Oftel, started regulating termination rates for conventional second-generation networks in 2004 to protect consumers from excessive prices for calls made to mobile phones. 3G networks were exempted because they didn't carry a large amount of call traffic, and the technology was new and in development.
The controls were put in place until March 2007, but Ofcom said Thursday it will continue to regulate termination rates after that date where there is evidence of market dominance.
Ofcom said all five mobile network operators have significant market power in setting the fees. Ofcom added that it will need to ensure that regulation on 3G networks doesn't adversely affect prospects for investment.
Vodafone Group, Deutsche Telekom's T-Mobile, France Telecom's Orange unit, Hutchison Whampoa's 3 UK and Telefonica's O2 have until May 25 to respond to the proposals. Ofcom aims to publish a final document in summer 2006 which will then cover regulation to 2011.
Chris Alliott, an analyst at Nomura Securities, said that the proposals are the "first step" in bringing 3G termination rates down to 2G levels.
"2G is a mature market but 3G is still developing. Therefore burdening it with regulation is not the way to allow that market to develop. However, this consultation seeks to ensure that price controls are used to ensure a fair deal for 3G users," he said.
Analysts said 3G network operator Hutchison Whampoa could suffer the biggest impact from the proposals because the company isn't currently subject to regulation of its termination rates.
Ofcom noted that "excessive revenue" generated by unregulated 3G termination rates may be used to compete with other operators in the retail market. The 3G termination rates could help subsidize low call prices, subscriptions or promotions, Ofcom said.
3 UK in January unveiled a promotion called WePay, which gives subscribers a cash credit when they receive calls.
"The wisdom of that move is debatable," said Alliott. "The WePay tariff does draw attention to the potential disparity between the termination rate and the underlying cost."
Dresdner Kleinwort Wasserstein analyst Robert Grindle said that while the regulation is negative for Hutchison's 3, it is in line with expectations.
Hutchison wasn't immediately available for comment.
Ofcom also said that Vodafone is the only U.K. operator which charges more to connect a call to its 3G network than the regulated 2G network. During the day, Vodafone charges 18.8 pence per minute to connect to its 3G network compared with 7.89 pence on 2G.
The regulator said that if regulation doesn't change, other operators could adopt the same approach.
Vodafone couldn't be reached for comment.
An O2 spokesman said that competition in the market should alleviate the need for regulation, but added the company is "pleased that it has been recognized that regulation should apply equally to all operators."
Orange declined to comment.
Fixed-line operator BT Group said in an e-mailed statement that it's "good" that Ofcom has recognized that 3G should receive the same treatment as 2G.
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