Icasa runs into power failure

The high court's decision on MTN and Vodacom's review of Icasa's regulation of mobile interconnection rates highlights the critical role economic regulators like Icasa play in fostering competition in key sectors of the South African economy, as well as the challenges they are likely to face when they do so.

The South African competition authorities have the power to investigate and adjudicate complaints about particular anti-competitive conduct (often called 'ex post' regulation). However, Icasa has a much more far-reaching and invasive power to foster competition in the communications sector as a whole (termed 'ex ante' regulatory power).

In particular, the Electronic Communications Act (ECA) grants Icasa the power to define relevant product, geographic and functional markets, to identify firms which wield significant market power (or dominant firms) in those markets. Then, if it finds that the normal competitive functioning of the market has failed and competition is lacking, it is permitted to apply pro-competitive measures to all of the competitors in that market, to foster competition. One of these possible remedies is to set wholesale call prices (the price which mobile operators are permitted to charge each other for carrying calls across their network). The ECA clearly sets out the steps to be followed by Icasa in order to prescribe such regulations, as well as to review the pro-competitive conditions imposed from time to time.

Permitted to change
This is precisely what Icasa attempted to do in in February this year, when it published call termination regulations which provided that the mobile termination rates that MTN and Vodacom were permitted to charge from 1 April 2014 were to be reduced from 20c to 10c over three years, and the rates which Telkom Mobile and Cell C were permitted to charge were to be reduced from 44c to 40c over the same period (so-called '"asymmetric rates"). MTN and Vodacom applied to the high court to review these regulations on various grounds.

In the course of the process, Icasa conceded in its answering affidavit that it was no longer satisfied with the 'robustness' of its conclusions on the rates of 15c and 10c for 2015 and 2016, respectively, but Icasa maintained that had taken a separate and justifiable decision to drop rates significantly in 2014, and did not have any concerns about the rate of 20 which was set to commence on 1 April 2014. Icasa filed a report from a firm of independent economic experts, Genesis, which confirmed that according to its "rough estimation of likely termination costs" on the basis of the most recent annual financial statements of MTN and Vodacom, their costs in 2012 were well below the 20c determined by Icasa for 2014.

The high court's decision points out serious flaws in the approach Icasa adopted in this exercise of its ex ante power to regulate competition in this crucial sector of the South Africa economy. Icasa determined the rates – including the rate for 2014 which was part of the glide path down to 10c in 2016 – without any cost information at all from either MTN or Vodacom about their actual costs of terminating a call and "apparently also without Icasa developing a cost model for information".

Icasa had simply relied on "audited financial statements and other information" provided by the mobile operators pursuant to a questionnaire it sent to all of the operators prior to publishing draft regulations. This was despite the fact that Icasa had indicated in 2010 that it would publish regulations for operators to provide it with cost and accounting information – but it never did so.

As a result, the court held that Icasa's determination on the rate for 2014 was not rationally connected to any information before it, despite the fact that Icasa had accepted as far back as 2010 that the only objectively reasonable basis for determining future termination rates was a cost-orientated basis. The 20c rate for 2014 was arbitrary, was not based on relevant cost and accounting information and accordingly, could not be objectively defended by Icasa because it was objectively irrational and unreasonable.

Although MTN and Vodacom had a clear right to have the regulations set aside because they were unlawful and invalid, the court nonetheless exercised its discretion in favour of Icasa and suspended this order of invalidity for a period of six months, to allow Icasa to draft new regulations from 1 October 2014 onwards. This indulgence was based on the strong interest of the public in Icasa achieving the purpose of this kind of ex ante regulation in terms of the ECA, namely, enhanced competition between operators, lowered call costs and access to affordable telephony for South Africans in the long term.

The decision recognises that MTN and Vodacom have benefitted from "an unregulated pre-2011 market conditions (with no effective competition) for many years" and acknowledges "the necessity for continued cost-orientated termination rates" because there is "inefficient pricing" and high costs, particular for pre-paid calls. Effective rate regulation is required in order to reduce interconnection charges to a level approximating those in a competitive market. Icasa has extensive powers to achieve this, including the power to call for detailed cost data.

This case highlights the challenges Icasa will face when it tackles this review of interconnection rates in the next six months. Although the ECA provides some guidance on the steps to be adopted when Icasa conducts a review of interconnection rates, this task is a complex one. As Judge Mayat noted, "Icasa is burdened with the difficult task of promoting competition in the market relating to termination rates on the basis of a 'multifarious and nuanced' regulatory regime. This is particularly so as the economic debate as well as the complex methodologies debated before this court demonstrated that there are different regulatory pathways open to Icasa and they require a reasonable period to assess the market and to make appropriate determinations".

Credible model
At the heart of this exercise is the design of a credible model by Icasa to ensure that the rates that it sets constitute a pro-competitive measure which is proportionate to the ineffective competition identified in the relevant markets which have been identified by Icasa.

Secondly, in only six months, Icasa will have to determine and implement a procedurally fair process in order to set these termination rates.

Although the high court did not decide whether the process which was followed by Icasa in relation to the 2014 regulations was reviewable, it is clear that a thorough consultation process which gives all interested parties an adequate opportunity to review Icasa's model and comment on the proposed regulation is required. Although Icasa recently announced a much broader inquiry into the state of competition in the ICT sector, it needs to focus intensively on wholesale call termination rate regulation in the next few months, to avoid further successful challenges – or even worse, an unregulated environment.

This case amply demonstrates that unless economic regulators like Icasa are properly staffed and well-funded, they cannot hope to fulfil their vital statutory function in a manner which will withstand challenge from powerful, well-resourced firms with vested interests in protecting their business. To the extent necessary, Icasa should obtain assistance from expert legal counsel, economists with substantial competition law experience, specialist regulatory accountants as well as international telecommunications experts with experience of similar rate regulation in other comparable jurisdictions.

The minister of communications must support this process by allocating adequate resources to properly staff and fund the regulator and support its work – and if necessary, to defend its process It is otherwise unlikely that Icasa will be able to produce regulation which is in line with the empowering legislation, procedurally fair, and achieves its intended purpose, namely enhanced competition in a crucial sector of the South African economy. – Gadget.co.za

Heather Irvine is head of competition at Norton Rose Fulbright.

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