VODACOM

1

• VODACOMS ORAL REPRESENTATION
• ICASAS PROPOSED DRAFT REGULATIONS IN RESPECT OF
  INTERCONNECTION GUIDELINES (GN59)
• 22 MARCH 2006

2

• OUTLINE OF PRESENTATION
• Introduction
• Summary of key arguments
• Legal authority, timing and context
• Legal basis for IC regulation
• Economic arguments and procedural points
• Conclusions and Recommendations

3
Introduction (1)

• Vodacom welcomes the opportunity to participate
  in the public hearings.
• Vodacom acknowledges that regulation is used in
  certain circumstances to address bottlenecks or
  areas of established competitive market failure
• Vodacom highlights the importance of ensuring
  measures and practices that promote competitive
  market forces, which balance
• the need for affordable and high quality services
  for consumers,
• and adequate returns for investors, in order to
  sustain and grow the electronic communications
  market both at the infrastructure and services
  levels
• Vodacom is willing to abide by rulings, findings
  and regulations that fall within the ambit of
  governing legislation, follow due process and are
  founded on sound economic principles

4
Introduction (2)

• As noted in previous submissions on
  Interconnection and Facilities Leasing
  guidelines, Vodacom has material objections to
  the draft regulations, particularly to the extent
  that they have incorporated the exact same text
• The legality of the regulations are the subject
  of a High Court application and Vodacom reserves
  its rights to participate in the hearings without
  prejudice

5
Summary of key arguments (1)

• The draft regulations are unlawful as they fall
  outside the authority of the current Act and even
  if applied under the new EC Act will require a
  new public process on the basis of a different
  regulatory framework
• The timing of the regulation process is
  inappropriate, given the imminent promulgation of
  the new EC Act
• The regulations seek to unlawfully confer wide
  discretionary powers to ICASA and impose generic
  homogenous remedies with potentially dire
  consequences of regulatory failure and increased
  costs to consumers
• The regulations are deemed unlawful under section
  43 (3) insofar as they fail to meet the
  requirements of section 45 of the Act
• In the absence of section 45 provisions, the
  regulations could still be subject to
  constitutional challenge (under PAJA)
• The discretionary and unsubstantiated
  declarations by ICASA fundamentally undermine the
  provisions of section 45 of the Act and the due
  process that this should entail (definition of
  relevant markets, competition assessment and
  application of appropriate remedies)

6
Summary of key arguments (2)

• The application of uniform regulatory remedies to
  all interconnection markets fundamentally
  undermines the competition law principle of
  applying the most appropriate, proportionate and
  least intrusive regulatory remedy to address
  specific competitive market failure
• In making the Major Operator distinction, the
  regulations are ultra vires in that they seek to
  categorise licensees and impose discriminatory
  regulations accordingly, without the requisite
  legal authority
• The definition of Major Operator in the draft
  regulations is too vague to have any determinable
  content, and will therefore be invalid
• The draft regulations have limited applicability
  to voluntary interconnection agreements (non-PSTS
  licensees), and ICASAs authority to intervene is
  subject to certain restrictions not honoured
• Over and above the legal challenge, there are
  compelling economic arguments to be made for a
  cautious, appropriate and proportionate
  regulatory approach

7

• LEGAL AUTHORITY, TIMING, AND CONTEXT

8
Legal Authority

• The current Telecommunications Act is the only
  legal basis for interpretation of the draft
  regulations
• The draft regulations fall outside the authority
  of the current Telecommunications Act, and raise
  further legal issues in respect of Competition
  Law, Common Law, and Administrative Law
• Interpretation under the yet to be promulgated EC
  Act is unlawful
• A new public process and draft set of regulations
  will be required under the new EC Act
• Many of the issues raised will survive the
  promulgation of the EC Act

The draft regulations fall outside the authority
of the current governing legislation. If applied
under the new EC Act this will require a new
public process on the basis of a different
regulatory framework
9
Timing

• Draft regulations were published over a year ago
• A new regulatory framework is about to be
  introduced with the new EC Act
• Regulatory forbearance is required in light of
  the changing market structure and competitive
  market dynamics.
• The current licensing framework and market
  structure are not necessarily reflective of the
  different (developing) interconnect services
  markets and are therefore not the most
  appropriate basis for regulation, which needs to
  be forward looking in the long term interest of
  consumers
• High risk of inappropriate regulation exists with
  draft regulations, which may result in market
  distortions and unintended consequences

Given anticipated changes to the regulatory
framework under the new EC Act, the approval of
regulations under the current Act is short-term
focused, resulting in unnecessary risk and
inefficiency.
10
Context

• Interconnection represents one of many access
  types
• Different types of wholesale access are subject
  to different levels of competition and thus
  require different regulatory treatment.
• Differentiation in the manner, form and extent of
  regulation is important and a one size fits all
  regulatory approach will not only fail to address
  perceived problems but will introduce market
  distortions and additional complexities in the
  future.
• Regulatory remedies must always be proportionate
  to a specific competition problem (as supported
  in section 2 of the Act).

The broad and generic regulations seek to
unlawfully confer wide discretionary powers to
ICASA and impose homogenous remedies rather than
analytically address problems in specific markets
- with potentially dire consequences of
regulatory failure and increased costs to
consumers
11

• LEGAL BASIS FOR THE REGULATION OF INTERCONNECTION

12
Legal Basis for IC Regulation Section 43 of the
Act

• ICASA purports to make the Interconnection
  regulations in terms of Section 43 of the
  Telecommunications Act.
• ICASAs authority in Section 43 of the Act is
  limited to
• Approval of lodged interconnection agreements,
• Resolution of interconnection negotiation
  deadlock on request of negotiating party.
• Prescribing guidelines relating to the form and
  content of interconnection agreements, including
  fees and charges payable
• ICASAs authority is limited to the form and
  content of interconnection agreements. In terms
  of 43(3)(c) read with 43(4)(b) and (5)(b), ICASA
  is authorised to create general guidelines and,
  as a matter of discretion, impose the charges
  determined only in such cases as when parties
  have been unable or unwilling to agree on charges.

The Act does not confer the wide discretionary
powers assumed by ICASA in respect of
interconnection regulation.
13
Legal Basis for IC Regulation Section 43 of the
Act

• Section 43(3)(c) of the Act (i.e.guidelines to
  determine fees and charges) cannot be applied in
  isolation and should be read subject to the
  provisions of section 45 (manner of determining
  fees and charges and fields of no or
  insufficient competition)
• In terms of Section 43 read with Section 45 ICASA
  is not authorized to fix specific interconnection
  charges
• The jurisdictional precondition of insufficient
  competition is one of objective fact and does
  not lie in the subjective or arbitrary discretion
  of ICASA.
• ICASA fails to provide evidence of compliance
  with section 45 in terms of making a
  determination of insufficient competition in each
  of the interconnection services markets before
  prescribing a manner of determining fees/charges.

As the jurisdictional prerequisite in s 45 is not
satisfied, the regulations are deemed unlawful
14
Legal Basis for IC Regulation Section 43 of the
Act

• If section 43 (3) were not concerned with
  competition matters covered in section 45, then
  this creates additional difficulties in the
  regulations insofar as they deal with competition
  matters relating to market definitions, major
  operator, essential services etc.
• Even if the requirement in section 45 (2) is not
  a jurisdictional prerequisite to rulemaking in
  terms of section 43 (3), there is further ground
  for constitutional objection, in terms of the
  grounds for judicial review of administrative
  action under PAJA, as well as Common Law and
  administrative law.

In the absence of section 45 provisions, the
regulations could still be subject to
constitutional challenge (under PAJA)
15
Legal Basis for IC Regulation Constitutionality

• Both sections 43(3) and 45(2) of the Act present
  fundamental constitutional problems in that they
  do not provide ICASA with adequate guidance
  regarding the exercise of its power to make
  regulations in respect of interconnection fees
  and charges
• While the courts recognise the important role of
  discretion in administrative action, it is
  necessary for the Legislature to provide
  sufficient guidance regarding its exercise
• The Act, and in particular section 43, contains
  no guidelines whereby the Authority may exercise
  powers to determine, in its guidelines, inter
  alia the fees and charges payable for
  interconnection services.
• For this reason it is doubtful that section 43(3)
  of the Act will withstand constitutional
  challenge, and if it does, it is even more
  unlikely that the vague terms of the draft
  regulations will survive constitutional
  challenge.

It is unlikely that the draft regulations will
stand up to constitutional challenge.
16
Legal Basis for IC Regulation Interconnection
definition

• Interconnection is a collective term which
  encompasses a number of underlying services,
  including origination, transit and termination
• These services differ in nature, scope, level of
  competition and even existence in different
  markets
• The broad definition of interconnection in the
  Act, and the bundling of fundamentally different
  access services in different markets in the
  regulations do not acknowledge the material
  differences in assessing levels of competition
  and imposing proportionate remedies
• The draft regulations simply declare all
  interconnection services in the 6 identified
  Telecommunications Markets to be Essential
  Services thereby implicitly declaring
  competitive market failure in all 18
  interconnection services markets

The discretionary declaration of all
interconnection services as essential
fundamentally undermines the provisions of
section 45 and the due process that this should
entail.
17
Legal Basis for IC Regulation Regulatory
Remedies

• A one size fits all, and therefore
  disproportionate, regulatory approach is adopted
  in the draft regulations
• The regulations determine that the remedies that
  would be imposed on any interconnection service
  provided by any interconnection provider include
• mandatory access to interconnection,
• transparency in interconnection charges and
  agreements,
• non-discrimination,
• retail price cap (non-Major Operators)
• cost based regulated charge control (Major
  Operators).
• No thorough market analysis has been conducted,
  or the results of such analysis have not been
  shared with interested and affected stakeholders

The uniform application of regulatory remedies
fundamentally undermines the competition law
principle of applying the most appropriate,
proportionate and least intrusive regulatory
remedy to address competitive market failure
18
Legal Basis for IC Regulation Major Operator
distinction

• The regulations and not the Act introduce the
  definition of Major Operator and prescribe
  applicable interconnection charges.
• There is no power in section 43 (3) or any other
  provision in the Act which permits ICASA to
  divide licensees into categories of Major
  Operators and others and then impose
  discriminatory restrictions on the different
  categories
• Section 96(2) of the Act, provides that
  Different regulations may be made in respect
  of different categories of telecommunication
  services, equipment and facilities and periods
• It does not provide that different regulations
  may be made in respect of different licensees or
  operators providing the same category of
  telecommunications services.

The draft regulations are ultra vires in that
they seek to categorise licensees and impose
different and discriminatory regulations on
different licensees, without the legal authority
of the governing legislation to do so.
19
Legal Basis for IC Regulation Major Operator
distinction

• Under the definitions in the draft regulations,
  it is not clear whether the 3 Major Operator
  criteria (a), (b) and (c) in the regulations are
  cumulative or discrete requirements, nor is it
  straightforward to apply (a) and (b) to the
  factual circumstances of the operator
• Clause 2.6 of the draft regulations allows for a
  process that could result in declaration of a
  major operator without applying any of the
  criteria in the required definition. This
  therefore falls short of the regime sought to be
  created by the regulations themselves
• Major Operators are defined in terms of the 6
  identified Telecommunications Markets, while the
  remedies applied are based on 3 interconnection
  service types, spanning 18 markets in which the
  particular operator may not in fact be dominant
  or wield market power.
• Without a thorough and coherent market analysis
  to identify and define the relevant market(s)
  where potential or existing market failure
  exists, the imposition of remedies on Major
  Operators will be ultra vires the Act

The definition of Major Operator in the draft
regulations is too vague to have any determinable
content, and will, if put in a final regulation,
be invalid
20
Unlawful extension of scope of regulation and
powers

• ICASA assumes additional power to identify
  interconnection services and to issue decisions,
  determinations or additional guidelines without
  the requisite authority in the Act (clause 21.7)
• ICASA mandates that interconnection agreements
  must provide for the retrospective application of
  its determinations to existing agreements (Clause
  21.5) without requisite authority of the Act and
  despite limitation on ICASAs authority to
  intervene in interconnection agreements
• ICASA mandates transitional obligations in
  respect of interconnection agreements (clause 12)
  which is also ultra vires for the same reasons
  outlined above

ICASA has extended its powers beyond that
authorized in the Act on a number of aspects of
the draft regulations
21
Application of Regulations

• In terms of section 43(1) of the Act, the only
  statutory obligation to conclude interconnection
  agreements is applicable to PSTS licensees
• ICASAs power is limited in providing guidelines
  applicable to (voluntary) interconnection
  agreements concluded by non-PSTS licensees, in
  that the applicability of the guidelines is
  restricted to interconnection providers, which
  exclude non-PSTS players
• ICASA is only authorized to impose terms and
  conditions including charges and fees on parties
  to interconnection agreements
• In circumstances of deadlocks where intervention
  is required and contemplated in the Act
• For compulsory interconnection agreements (i.e.
  where it is not open to parties to refuse to
  agree on reasonable terms)

The draft regulations have limited applicability
to voluntary interconnection agreements (non-PSTS
licensees), and ICASAs authority to intervene is
therefore subject to certain restrictions not
honoured in the draft regulations.
22

• ECONOMIC ARGUMENTS AND PROCEDURAL ASPECTS

23
Economic arguments (1)

• Regulation should focus on the regulation of
  markets and not individual competitors
• Regulators should focus on proportionate
  regulation based on proven competitive market
  failure rather than the delivery of anticipated
  or desired future outputs in the absence of
  appropriate competition analysis
• Regulators should be wary of imposing access
  obligations at the same time as licensing
  additional entrants
• Regulators should seek to encourage both
  infrastructure and services entry to ensure
  sustainable competition and that players do not
  merely exploit the free option of riding on
  others infrastructure, without assuming a fair
  proportion of the risk

24
Economic arguments (2)

• Regulation should attempt to mimic functioning
  competitive markets, as competition is widely
  accepted as the best means of maximising total
  welfare by
• ensuring investment and operational efficiency,
• fostering product and service innovation, and
• meeting customer needs

Over and above the legal challenge, there are
compelling economic arguments to be made for a
cautious, appropriate and proportionate
regulatory approach.
25
Market Analysis Approach Rigorous and
transparent
1
2
3
4
5
Source ITU
A rigorous and transparent regulatory process to
conduct the market and competition assessment and
to determine appropriate regulatory remedies
would facilitate compliance with the provisions
of the Act, and ensure that only areas of
competitive failure are addressed.
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Conclusions and Recommendations

• The draft regulations are invalid. It is
  recommended that the Authority should
• Withdraw the draft regulations because if
  published in its present form it will be invalid
  under the Telecommunications Act and will also be
  invalid under the yet to be published EC Act
• Wait for promulgation of the Electronic
  Communications Act
• Commission a market study in terms of the
  provisions of the new Act with a view to
  identifying markets, which exhibit market
  failure.
• Practice regulatory forbearance given significant
  uncertainty associated with the development of
  the communications market under convergence with
  the new regulatory framework introduced with the
  anticipated EC Act

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THANK YOU!