Cellphone Interconnection Rates: ICASA briefing; Committee approval of ICASA Councillor appointment

Meeting report

Committee Report adoption
The Chairperson read out the Portfolio Committee’s Report on the request by the Minister of Communications for the appointment of Mr Williams Stucke to the Council of the Independent Communications Authority of South Africa (ICASA) in terms of section 5(1) (b) of the ICASA Act, noting that the Committee had approved the request. It was agreed that the Report be adopted and sent to the Office of the Speaker of Parliament for processing.

Mobile Interconnection rates: Independent Communications Authority of South Africa (ICASA) briefing
The Chairperson noted that the Committee had invited ICASA to brief the Committee on what ICASA saw as the processes or the steps and the measures to be taken in future to regulate the interconnection rates in South Africa. The Committee had been aware that over the past few weeks, ICASA had been busy with an informal process, which they called a “moral suasion process”, to try to nudge the operators into a voluntary agreement to reduce the interconnection rates.  It seemed that, by last Friday, this “moral suasion’ process had not yielded any results, and now, according to the media, the process seemed to have collapsed.

In the course of the Committee’s own public hearings, all the stakeholders who participated had been unanimous in their view that regulation of the mobile termination rates was principally a responsibility of ICASA, and that the regulation of this sector fell under the fundamental responsibility or core competency of ICASA. The Committee had expressed serious concerns that over the last three or four years, ICASA had not succeeded in completing the various processes that were set out in Chapter 10 of the Electronic Communications Act (ECA) which was the reason for the problem. The Committee wanted to understand from ICASA exactly how they saw this process unfolding, in terms of their own work programmes and schedules, and asked at what point the Committee would see a conclusion to this process, after which there would be a more scientifically based interconnection rate in South Africa.

ICASA briefing on the measures instituted to regulate mobile interconnection rates
Mr Robert Nkuna, Councillor at ICASA, introduced the delegation, which comprised the Chief Executive Officer, Mr Karabo Motlana, Councillor Thabo Makhakhe, Councillor Fungai Sibanda, Councillor Marcia Socikwa and Councillor Brenda Ntombela.

Mr Thabo Makhakhe, ICASA Councillor, gave a presentation to the Committee. The presentation spoke in brief about what governed interconnection rates under the Electronic Communications Act. It also explained the mobile termination regulation (MTR) process in technical detail and the MTR price trends over the past few years. The presentation also looked at the history of regulation and current initiatives.

There were three areas that were governed by the ECA, with respect to interconnection rates. These were, firstly, regulations facilitating interconnection but not price, in terms of Section 31. Pricing principles did not mean pricing controls. Transparency of network component, non-discrimination, equivalent pricing of services and other such issues were really what were referred to as pricing principles.

Secondly, there were also interconnection pricing principles in terms of Section 41 of the Act, which provided that ICASA could prescribe a framework of wholesale interconnection rates to be charged for interconnection services, taking into account the provisions of Chapter 10. It was important to emphasise that a framework provided a base or a context in which one did things. It was very important, because the key word was “framework”.

Thirdly, there were pro-competitive remedies. The outcome of market review and regulations under Section 67(4) would then lead ICASA to specific price control. There were other remedies in terms of Section 57(7) that could be applied. These included fairness, reasonableness, transparency, and accounting separation, which then touched on other issues.

Councillor Makhakhe explained the diagram on Page 4 of the slide presentation, saying that this was a generic picture for all the networks, and that it was the technical reality in this industry. He submitted that origination and termination were equivalent services and that the cost of origination was normally greater than the cost of termination, and this was generic across all the networks because of the network configuration. Operators also wanted to capture and keep their customers so they always made it a point that their calls within the network were cheaper.

Where calls were made to another network there were other factors that came into play. Interconnection amongst the different operators tended to be expensive, and call termination rates were high. This of course meant that there were other charges such as access, being monthly network interconnection fees and excessive terms and conditions, which could be charged on top of the termination rate.

Councillor Makhakhe submitted that ICASA had only had the power to determine principles for interconnection agreements on issues such as transparency of pricing, dispute resolution, and fault line reporting. ICASA had no price control powers, and would not have them until the completion of Chapter 10 of the ECA. In terms of the Telecommunications Act (TA), there had been certain actions that could be taken. However, in terms of the new ECA, they had to follow certain procedures, which were encapsulated in Chapter 10. The Committee was shown the price trends since 1994, which worryingly revealed a 515% increase in four years, from about 1998 to 2001.

ICASA had a two-pronged approach to handling interconnection issues. The first approach was the competition framework, which addressed the issue of price controls amongst other matters. The second approach would be the interconnection regulations. An enquiry had been undertaken in 2007, which had revealed that all the networks had significant market power. At the same time, as far as interconnection was concerned, the draft interconnection regulations were released in terms of Section 38 of the ECA.

What happened at that time was that those draft regulations contained pricing aspects, which were actually based on the TA. It had to be recalled that at that time the mode of thinking was still based on the TA. However, this should not have happened. When this was realised, another set of regulations, which this time excluded pricing, was released in 2008, in terms of Section 67(4) of the ECA.

The regulations were found to be too rigid and they pre-judged the environment. A process was then implemented and designed. What should have happened was the release of interconnection regulations that had no bearing on price whatsoever. This had been done on the process that was about to be completed. There had been a lot of talk about the Chart of Accounts/Cost Allocation Manual (COA/CAM), which had been a requirement for the operators to submit their financial accounts to ICASA in terms of the previous license conditions. These were not converged, and were the cellular licenses and others. The regulations did not address any market power whatsoever, because the TA was not designed for competition and was really a monopoly instrument to protect certain operators. These costs were nonetheless extremely important because ICASA viewed them as an input to the competition framework in terms of the ECA. In other words, they comprised very useful information that ICASA had to use in moving forward to address the issue of the cost of calls.

ICASA saw that part of the process was to show that, to date, it had had addressed an issue under Phase One, which was essentially the declaration of significant market power. ICASA had started with a market definition, in terms of those sections in the Act. In 2007, a discussion document had been released. As a result of that discussion document, there had been an engagement with the stakeholders, and the final outcome of that portion of the process had been the production of a findings document.

The next phase was to look for and evaluate any potential remedies and to decide which remedies could be applied to the various markets. For instance, if one were to take two companies, Vodacom and ECN, from both ends of the spectrum, one could find that both companies had a monopoly in terminating calls but their bargaining power was not the same, so that when applying the remedies, these factors would have to be taken into account. That was why ICASA had referred to the choice of a particular remedy to a particular operator depending on their market power.

ICASA was about to embark upon Phase Two. It hoped that it could complete this process and come up with final regulations on call termination in March 2010.This was a very tight schedule and ICASA had to be careful that it did not contravene other pieces of legislation such as the Promotion of Administrative Justice Act (PAJA). It would try its best to fast-track the process wherever it could, and had to ensure that in this mode, it did not side step the requirements of the PAJA.

Mr Robert Nkuna, ICASA Councillor, then addressed the Committee on the issue of the “moral suasion” process. He confirmed that the authority had been engaging with industry to see to it if it was possible to reduce call termination rates as a matter of urgency. This engagement had gone on until Friday of the previous week. In the engagement on Friday, there had not been any agreement reached, given the fact that although MTN and Vodacom had indicated that there was an agreement between them, Cell C had not concurred with this agreement between the two other operators. ICASA had therefore arrived at the decision that it was more proper to re-focus its energy on what had been presented to Parliament.

ICASA would not engage with the operators henceforth with regards to the moral suasion process. If there were any other processes that the operators suggested for the reduction of these rates before end of December, then ICASA would welcome them. The statements published in the print media on the Sunday following their engagement with the operators were indeed correct. There had been many figures that had been bandied about but ICASA felt that it was more appropriate to confine its energy to the Parliamentary process.

Discussion
Mr N Van Den Berg (DA) commented on the submission pertaining to what governed interconnection in the ECA. Section 41 of the ECA stated that the authority “may prescribe”. He questioned whether it was not time for the Committee to look at the Act and get rid of the use of the word “may” and replace it with “must” to make this mandatory as opposed to discretionary. ICASA’s task was to regulate and, as he read it now, they could regulate as opposed to it being mandatory for them to do so.

Mr Van Den Berg requested more information on this framework of wholesale interconnection rates. There was also another use of the word “may” with respect to “may specify price control”. It was not good enough to say “may specify”.

Mr Makhakhe responded that ICASA had taken note of the use of the word “may” in the Act.

Mr Fungai Sibanda, ICASA Councillor, responded that the first slide was very important in clearly explaining ICASA’s approach. With regard to the use of the word “may”, he commented that the Section 41 regulations were pricing principles. The Act stated that “…the Authority may prescribe…a framework of wholesale interconnection rates to be charged for interconnection services…” Pricing principles related to issues such as non-discrimination, open access and so on. However with regard to Section 38 regulations, the Act used the word “must”. These interconnection regulations were already out and ICASA had a draft that had been consulted upon. Unfortunately, operators had expected ICASA to deal with price control under the Section 38 regulations. If regard was had to the history of interconnection, it could be seen that at some point there had been a convolution of the competition framework process and the interconnection regulations process.

The current competition framework process was new to South Africa and was also new to the regulator. The Section 38 interconnection regulations were a carry over from the TA. Whilst ICASA had been busy with the competition framework regulations, they had crossed over to the Section 38 interconnection regulations, and then included pricing issues, which they had not been supposed to do. ICASA had since gone back to the two processes of having a competition framework process, and the Section 38 interconnection regulations process. The Section 38 regulations were very critical because they dealt with issues such as obliging operators to interconnect. There had been complaints by smaller operators who had been refused interconnection by bigger operators. These regulations could not be downplayed as some operators had tended to do. They also dealt with dispute resolution issues and it was therefore very critical that these regulations must be differentiated. Price controls could be included under Section 67(4), which dealt with pro-competitive remedies.

Mr van den Berg also asked ICASA if it was sure where it stood regarding the outcome of the market review and regulations. It seemed to him that ICASA was not aware of what the exact position was, and there were a lot of uncertainties and there was some kind of inferiority complex on the part of ICASA’s councillors, who were uncertain about their position.

Councillor Makhakhe specifically addressed the issue of whether ICASA had not been aware of the position in the market. One of the slides indicated that ICASA had identified certain operators as having significant market power. Firstly, it had identified the markets, and it had concluded that all the operators who terminated calls, because they played in a monopoly environment in terminating their calls, were markets in themselves. ICASA therefore knew what was going on in the markets.

Mr van den Berg also noted that the history of mobile termination rates showed increases of 515% over 4 years. He asked whether this did not raise the question of why ICASA had allowed this to happen. He asked if it was not ashamed of having done so, as it was inconceivable that they could sweep such a matter under the carpet. He referred to the public outcry over Eskom’s proposed tariff hikes. ICASA, on the other hand, had been very silent about this 515% hike. The people of South Africa, a great majority of whom were cell phone users, would be shocked to see the figure of 515%.

Councillor Makhakhe responded that one of the slides had mentioned that ICASA had no power over controlling prices in terms of the TA. What had happened was that a branch cap had been applied on telecommunications prices. The baseline price of telecommunications had been based on what had been presented to ICASA. However, all that could happen at that time was that ICASA would receive the regulatory reports that he had alluded to earlier on in his presentation. It had no power to impose prices. These prices were commercially set.

The Chairperson asked ICASA to use language that Members could comprehend. Terms such as market, significant market powers and so on were actually meaningless to him. Perhaps it was a vocabulary that the operators and ICASA were familiar with, but Members were not.

The Chairperson asked ICASA to expand on its slides, for instance indicating exactly what it had done under Phase One and indicating whether the operators had accepted what they had done. If there was a dispute about what was going on in Phase one, and ICASA had already gone on to Phase two, then it was going to encounter a problem if people were not accepting what had been done under Phase one as legitimate.

Mr Nkuna responded that, in terms of interconnection, ICASA was saying that every licensee had to be obliged to interconnect on a transparent and non-discriminatory basis. That was the regulation spoken about. There were regulations that applied to all licensees. As soon as an operator was licensed, that operator had to be obliged to interconnect based on the principles that had been outlined. However, for those operators who were found to be dominant and anti-competitive, there would be further remedies. This was where the issue of price control would come in. In a situation where even the newly licensed VANs had an obligation to interconnect, by virtue of being licensees, it was generic and cut across the board, because ICASA believed that interconnection was very key to facilitate competition. For the big operators who operated in markets that were not competitive, ICASA added another obligation, where price control would feature. So there would be remedies that applied to all and other remedies that applied to big operators.

Ms W Newhoudt-Druchen (ANC) asked for further clarity on the first slide dealing with obligations. She noted that this had stated that regulation facilitated interconnection rates but not pricing. When detailing the history of the regulation, ICASA had said that regulation was too rigid and pre-judged the environment. It was not clear to her which regulations were too rigid and what was meant by “pre-judging the environment”. She wanted to know if this would prevent the pricing from going up.

Councillor Nkuna responded that the rigid regulations referred to were ICASA’s own regulations, which had been drafted in consultation with industry. The remedies were not aligned with a particular problem. ICASA felt that they were rigid in the sense that remedies were being adopted without aligning those remedies with a particular offence.

Ms J Kilian (COPE) commented that this presentation was similar to another one which had been made previously to the Committee in September. She was concerned that ICASA seemed to have fallen prey to concerns and their own limitations. She did not understand why this was so. The ICASA Act allowed for the calling of experts to act as consultants where there were complex processes.

Ms Kilian asked ICASA to explain how it had passed the regulations on the basis of the TA, when the ECA was already in place.  .

Ms Kilian also asked ICASA to explain its reference to “significant market power”. ICASA was indicating that remedies had to be chosen according to specific markets. However, when looking at the history of call termination rates then it became clear that there were two major players and that there had been a massive increase of more than 500%, so clearly those two were actually the reason.

Ms Kilian asked why ICASA had drafted regulations, since ICASA had the power, within that process, to come up with regulations that would open up the market to break the stronghold that these two operators enjoyed. 

Ms P De Lille (ID) asked why ICASA had taken pricing out of the regulations. She also wanted to know why, in the pre-paid market, Cell C, MTN and Vodacom had identical tariffs.

Ms de Lille enquired, on the issue of moral suasion, what had happened in that meeting on Friday and whether it was true that MTN and Vodacom had refused to mention a figure of 19%, which was their proposal for a cut in the mobile termination rates. She asked what ICASA was doing about the policy direction from the Minister.

Mr E Kholwane (ANC) raised several issues. Firstly, he questioned whether ICASA had been acting independently, as it had mentioned that it would discuss issues with the industry before doing anything. Mr Kholwane was also concerned about the issue of transparency and he felt that ICASA should not have been involved with the moral suasion process, as it implied that the regulator was also taking part in the alleged collusion by the mobile operators to fix mobile termination rates.

Mr Kholwane was also concerned that ICASA’s targets not broken down in terms of time lines, so that the Committee could understand exactly what they were doing and could exercise oversight over the process. For instance, there was no indication of a safety net in case of delays, and it seemed that, from a planning perspective, it was unclear how that process would unfold. .

Mr Kholwane also raised the concern that the presentation was based principally on the interconnection issue, but not on other issues that were not mentioned, such as number portability, the high cost of broadband services and so on.

Mr Kholwane also asked what the Ministerial policy directive meant to ICASA and how it was aligned with ICASA process.

Mr Kholwane asked if ICASA had the human resources required to fulfil its objectives. He wanted ICASA to make a commitment to fulfilling them, and to indicate to the Committee how the issue should be handled if it did not successfully achieve its stated goals and plans.

Adv J De Lange (ANC) was frustrated by the whole logic of the presentation. He stated that his difficulty was that the whole issue of interconnection rates was being treated as if it was a huge mystery how interconnection was done, when in actual fact it was a simple process involving computers, not human people who would switch people on to different networks. Up till now, nobody had explained satisfactorily to him what exactly the mobile networks were doing physically, so that interconnection could happen. He was unhappy that presenters seemed to be treating the Committee Members as fools who had no knowledge of basic mathematics and the mechanisms of market forces.

Ms Marcia Socikwa, Councillor, ICASA, responded that there were complications with interconnection. Chapter 10 was one of the most demanding chapters in the ECA. She explained that the authority had to grapple with many regulations because of the transition from the TA to the ECA and this was a laborious and lengthy process, largely because of the plethora of regulations that had to be revised, and the new regulations that had to be drafted.

Ms Socikwa also submitted that ICASA’s business plan listed 38 projects that it wanted to implement. ICASA could not change its business plan arbitrarily because of the PFMA, which contained rigid stipulations that tied ICASA to the submitted business plans for the rest of the financial year.

Ms Socikwa also noted that ICASA was a training ground for industry, and poaching was common. The authority had recently lost Mr Keith Weeks to the Competition Commission and this highlighted the difficulties faced with staff retention. The solution for this would be to spend more on human resources but funding was scarce.

The Chairperson was not satisfied with either the presentation or the responses from ICASA. He therefore proposed that ICASA should revise its presentation, to answer some of the questions asked, and should return to another session at 16:30 that afternoon.

Briefing by Mr Pieter Grootes to respond to questions and comments by members
Mr Pieter Grootes, Senior Manager, ICASA, responded to the questions raised by Members with a slide presentation, which clarified the time frames and sequencing of the regulatory process. [See document]

He submitted that in phase one of the process, ICASA would produce a position paper identifying the definition of the market, evaluating the effectiveness of competition and declaring those licensees with significant market power.

Progress was being made in this regard and there was a questionnaire on the effectiveness of competition which had been released and was awaiting responses before it would be analysed. A report would then be drafted sometime between January to March 2010 when the authority expected to have completed the entire process.

Discussion
The Committee revisited some of the issues that were discussed earlier in the day.

Mr Kholwane asked what the Ministerial policy directive meant to ICASA and how it was aligned with their process.

Ms De Lille also asked what how ICASA would align its own regulatory process with that directive.

Councillor R Nkuna and Councillor R Makhakhe responded that the authority was not compelled by the law to abide by the Minister’s directive.

Ms De Lille expressed concern that ICASA was not part of the policy-making process. She argued that if the Minister finalised the policy directive and directed ICASA to regulate pricing accordingly, then this could frustrate the entire process.

Councillor Nkuna responded that the authority would advise the minister accordingly as they were required to do in terms of the ICASA Act.

The Committee also discussed how ICASA was managing with the transition from the TA to the ECA and members also requested that they be provided with detailed information of all of ICASA’s projects.

The Chairperson concluded that the Committee now had a better idea of ICASA’s regulatory process and its time frames.

The meeting was adjourned.