Price cap encourages Eircom to be efficient in a declining market

An inefficient telecoms incumbent could pass on costs to operators and consumers that would make Ireland less attractive to investors, writes Etain Doyle

Telecoms is critical to current business and social needs and even more critical to the ever increasing e-business and social inclusion needs of the future. Ireland must be a highly efficient telecoms supplier, enabling business to expand usage without crippling increases in charges.

On average, under the current price cap, every year Eircom has reduced its prices by 8 per cent below the rate of inflation. Irish voice charges have fallen to the western European average for the last two years.

Price caps directly affect prices and indirectly affect efficiency, as reducing costs becomes the prime way to increase profits. Eircom has just held costs constant and this has affected its profits, though sales of Eircell and Eircom and its withdrawal from multimedia and international business ventures has also had a substantial impact.

I am now proposing to replace the current retail price cap on Eircom from eight percentage points below the consumer price index (CPI-8) to a level in the range CPI-2 to CPI -0. This means that Eircom cannot raise the average price to the consumer of telecommunication services included in the control by more than the rate of inflation (CPI-0) or 2 per cent less than the rate of inflation (CPI-2).

I am also proposing to remove the sub-caps on the basket of services upon which the price cap is currently based.

Any new price cap is dependent on a fair and reasonably priced wholesale line rental to ensure that other operators can at all times offer a choice at a fair price to the public. The wholesale line rental product is mandated by the regulator to come on stream in early 2003.

It has been argued that the price cap should be lifted completely. However, we must not lose sight of the pressure it brings to bear on the incumbent to be as efficient as possible. An inefficient incumbent costs all of us.

In this time of fiscal rectitude, where markets are contracting and overall competitiveness is under threat, it is imperative that Eircom is efficient in terms of its capital, its resources and its services. If the company is not efficient, it could result in the passing on of inefficient costs to other operators and consumers.

This in turn could make Ireland a less attractive place to invest, with a resultant impact on sustainable job creation.

It is critical therefore that there is a commitment to ever-increasing efficiency on a par with the best of Ireland's competitors. While Eircom had 169 lines per employee in 2001, British Telecom had 261 and Tele Denmark had 325 lines.

While progress has been made, the access network appears now to be the least efficient part of Eircom's business and it is notable that the line rental (the cost most closely associated with the access network or last mile) has increased by the full CPI +2 in each of the years of the cap.

Eircom has indicated that costs are not covered by revenues on a fully allocated basis and the regulator's office accepts the principle of rebalancing to ensure that efficient costs are recovered. However, I am conscious also of the over-riding need to protect consumers in a market where Eircom is dominant, and also of the need to encourage efficiency.

Accordingly, it is proposed to include the line rental and calls in a single price cap and to tighten the compliance control to ensure that any increases in line rental are compensated for immediately by reductions in call charges to the extent that the final CPI -X formula permits.

In order to sustain competition there must be investment. While vast amounts of money have been invested over the years, it must be an ongoing process if the sector is to develop and the proposed cap allows the possibility of significant returns in the range of 11-12 per cent. This will provide strong incentives for ongoing efficient investment in the network.

The proposed price cap should be evaluated alongside other regulatory decisions and developments that will assist operators to be effective competitors. The new wholesale line rental product, the review of access network costing and the provision of partial private circuits - which should substantially reduce the cost of providing leased lines - will allow other operators the breathing space they require.

To assist the vulnerable user, Eircom has proposed a scheme where there would be no line rental charge and an equivalent of €5 worth of national/local calls for €22.50 per month, with controls to ensure that people availing of this scheme would not be disadvantaged relative to normal charging schemes. This proposal is detailed in the price cap proposal and I'm particularly anxious to receive feedback from consumer groups about this new initiative.

The new price cap proposals need to be viewed in the context of a rapidly changing sector and market, a sector that is less buoyant than when the first cap was set in 1999 and in a market where once voice was king to a market where text messaging, e-mail and internet are increasingly popular alternatives.

The cap would provide greater flexibility to the industry in terms of pricing which I would wish to see put to good use in developing products and upgrading networks. More particularly, the price cap allows Eircom to tackle efficiency issues, which will benefit user, competitor and incumbent.

Etain Doyle is director of the Office of the Director of Telecommunications Regulation

Submissions on the new price cap proposals are invited before January 10th, 2003. The full price cap proposal can be viewed on www.odtr.ie