Competition watchdog set to impose swingeing price cut on mobile operators

The UK's four mobile phone operators are bracing themselves for more severe regulation than they had expected with the Competition Commission set to come down hard on the costs of making calls to mobile phones.

Vodafone, Orange, mmO2 and T-Mobile, owned by Germany's Deutsche Telekom, will all be affected by the measures which are thought to be even worse than those recommended by the telecoms watchdog Oftel some 15 months ago.

The Competition Commission will propose that the four groups cut the cost of calling a mobile phone by more than the Oftel-recommended proposal of retail price inflation minus 12 per cent a year for the next four years. That proposal, Oftel said, would save consumers £800m.

The Competition Commission, which has spent the best part of a year looking into the matter after it was referred by Oftel, will also recommend that the four groups make a sizeable one-off adjustment as well.

The proposals are contained in a secret report that has been sent to all four operators, who can remove commercially sensitive information before it is published – possibly as soon as next Wednesday.

None of the operators would comment yesterday but all are thought to be seriously concerned by the planned price caps and are considering the possibility of pushing for a judicial review.

"They [the operators] may need to do that," said one industry source, adding: "They might go for it on issues which the Competition Commission may not have actually made clear enough."

The planned price caps will come as a blow to all four groups since it was their failure to reach a compromise with the regulator on the planned price caps that forced the issue to be referred to the Competition Commission in the first place.

The mobile phone groups have persistently argued that further regulation is unnecessary since the market is already competitive and since they continue to have to make significant investments in third-generation, or 3G, mobile networks. In addition, they point out that a fifth mobile phone operator, called 3 and controlled by Hong Kong's Hutchison Whampoa, is due to enter the market this year.

But the Competition Commission ignored those pleas when it announced last summer that it was minded to side with Oftel, saying it believed that call termination charges were "not subject to effective competitive constraint" and were not likely to become so "within the foreseeable future".

Furthermore, while it said that if it did formally side with Oftel, the most effective remedy was likely to be a price cap, and it also warned then that it was considering other measures to cut costs including a "one-off adjustment".

So-called termination charges are the fees that mobile phone operators charge other telecoms companies for connecting calls on their networks. Oftel estimates that the so-called termination charge make up about two-thirds of the price that a fixed-line operator charges its customers for calling a mobile phone. The same charge, it believes, accounts for about 40 per cent of the cost of calling from one mobile network to another.

The new controls are to replace existing measures levied only against Vodafone and mmO2-owned Cellnet which, in 1998, had to cut their average charges by 25 per cent followed by a cut of inflation minus 9 per cent for three years.