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=DJ UPDATE: Ofcom Targets 3G Termination Rate Regulation

(This updates an item published at 1247 GMT with additional company and analyst comment.)

By Nic Fildes
Of DOW JONES NEWSWIRES

LONDON (Dow Jones)--U.K. telecommunications regulator Ofcom Thursday proposed imposing new controls on prices cellphone companies charge each other for connecting calls between third-generation wireless networks.
In 2004, Ofcom's predecessor, Oftel, started regulating the so-called termination rates operators levy to connect calls between conventional networks. The aim was to protect consumers from excessive prices for calls to mobile phones, but 3G networks were exempted because they were in development and didn't carry a large amount of traffic.
Termination rates generate GBP2 billion in sales annually, making them a significant revenue source for the industry, Ofcom said.
The price limits were put in place until March 2007, but Ofcom said Thursday it will continue to regulate the rates after that date, where there is evidence of market dominance, and it will apply controls to 3G networks.
Ofcom said all mobile network operators have significant market power in setting the fees.
Vodafone Group PLC (VOD), Deutsche Telekom AG's (DT) T-Mobile International AG (TMO.YY), France Telecom SA's (FTE) Orange unit, Hutchison Whampoa Ltd.'s (0013.HK) 3 UK and Telefonica SA's (TEF) 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.
Bear Stearns said in a note that the move highlights the regulatory risk facing the European telecoms sector, which it rates at market underweight. The U.K. already has some of the lowest termination rates in Europe so the prospect of further reductions will increase pressure on other European Union countries to follow, Bear Stearns said.
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 Hutchison Whampoa's 3 could suffer the biggest impact from the proposals because the company isn't currently subject to regulation of its termination rates because it only operates a 3G network.
However, a spokesman for Hutchison's 3 UK said that "3 has not been designated with significant market power." In 2005, the Competition Appeals Tribunal withdrew Ofcom's designation that 3 UK had significant market power after the company appealed.
Ofcom said Thursday that "excessive revenue" generated by unregulated 3G termination rates may be used to compete in the retail market. The 3G 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 3 UK spokesman said that WePay isn't funded by termination rate revenue. "The proposition funds itself," he said.
Dresdner Kleinwort Wasserstein analyst Robert Grindle said that while the regulation is negative for Hutchison's 3, it is in line with expectations.
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.
Ofcom added that if regulation doesn't change, other operators could adopt the same approach.
A Vodafone spokesman said the company is studying the proposals and will respond in due course.
O2 and fixed-line operator BT Group PLC (BT) both said they are pleased that Ofcom has recognized that regulation should apply to all operators.
Company Web site: http://www.ofcom.org
-By Nic Fildes, Dow Jones Newswires; 44-20-7842-9264; [e-mail]

(END) Dow Jones Newswires
03-30-06 0936ET
Copyright (c) 2006 Dow Jones & Company, Inc.