Modelo de la Probabilidad de Elaboración (R Petty y J Cacioppo, 1986)

8.48 EE argued that Ofcom’s proposed approach does not balance costs against benefits and therefore is not guided by the principle of proportionality. Instead, EE considered that Ofcom has taken a binary approach in respect of benefits, simply noting that in its view there are some benefits of reducing prices to LRIC (and used this to justify its position of an immediate adjustment to LRIC unless there were good reasons to adopt a glide path).335

8.49 EE considered that Ofcom should take into account that a glide path would achieve a better balance in terms of the timing and realisation of the relative costs and benefits of reducing MTRs to the new estimates of LRIC.336

8.50 Vodafone argued that having established a clear precedent in previous charge controls that there was a need to enable MCPs to adjust to an industry-wide

reduction in MTRs, Ofcom must provide a credible justification for departing from this approach. Vodafone further argued that, whilst Ofcom claimed that the impact on network investment plans will be limited given the amount of lost revenue (as against a counterfactual of a glide path) Ofcom had neglected to take into account or

investigate that MCPs face significant constraints on investment.337

Financial impact of immediate change on investment incentives

8.51 Vodafone and EE argued that Ofcom’s methodology for quantifying the impact on MCPs was incorrect and that the correct indicator to use for a measure of the potential impact on margins would be EBIT (as opposed to revenue or EBITDA). Vodafone explained that total revenue could be used if Ofcom was assessing the financial impact in relation to the reduction in total termination revenues (as opposed to the reduction in net termination revenues). EE argued that EBIT is a more relevant measure for capital intensive businesses. EE also argued that to better understand the disruptive impact of the adjustment to MTRs, net termination payments should be considered by reference to individual MCPs’ EBIT (not on an industry wide-

basis).338 339

334

EE response to June 2014 Consultation, page 33. 335

EE response to June 2014 Consultation, page 30. 336

EE response to June 2014 Consultation, page 31. 337

Vodafone response to June 2014 Consultation, page 84. 338

Vodafone response to June 2014 Consultation, page 88. 339

EE response to June 2014 Consultation, page 30.

8.52 EE stated that, in its case, the difference between adopting a one-off adjustment compared to a glide path means it receives a net revenue reduction of approximately [] based on 2013 volumes.340

8.53 []341

8.54 EE argued that, taken with the evidence suggesting that the waterbed effect may be substantially incomplete, Ofcom’s proposals would reduce the expected returns MCPs will make and, in turn, investment. Lowering the expected return on capital employed by MCPs below the levels that they are likely to have assumed in their business plans carries a strong risk of causing harm and disruption to the investment plans of MCPs. To avoid this problem EE argued that Ofcom should retain a three year glide path.342

8.55 Vodafone made reference to paragraph 8.74 in the June 2014 Consultation which stated “Moreover, the reduction from LRIC+ to LRIC in the previous control period represented a much larger reduction in MTRs in both ppm and £m terms and investment by MCPs has continued steadily.”343 Vodafone argued that the fact that investment has “continued steadily” says nothing about how investment might have continued in the absence of significant MTR reductions. Vodafone considered that the timing of the introduction of 4G inside the present charge control and the consequent need for all operators to invest heavily in order to compete in 4G provision masked underlying drivers of investment activity. Vodafone believed that there is no guarantee that MCP investment will be able to continue in the UK in the face of adverse regulatory decisions. Vodafone noted that Ofcom judged in the ALF consultation that it should behave conservatively and Vodafone argued that the same consideration applies in the case of the MTR control.344

8.56 [] argued that since it had never previously had its MTR regulated, the proposal would have a severe impact on its business and that there must be a number of other CPs in a similar position. It noted that larger MCPs have been given many years to adjust their business models to account for materially lower MTRs and that to give its business a chance of survival it was imperative to have a much more progressive glide path.345

Realisation of consumer benefits from proposed change in MTRs

8.57 Vodafone argued that (in weighing up the potential benefits) of making an immediate adjustment to LRIC, it is questionable how quickly customers will benefit. Vodafone contended that there is no axiomatic immediate reduction made by fixed CPs of fixed to mobile rates in response to a reduction in MTRs, and given that most other

charges made by fixed CPs to their customers with respect to voice calls appear to be rising at least as fast as inflation, there may be no pass through to fixed voice call customers whatsoever.346

340

EE response to June 2014 Consultation, page 30. 341

[] 342

EE response to June 2014 Consultation, page 34. 343

Vodafone response to June 2014 Consultation, page 89. 344

Vodafone response to June 2014 Consultation, page 89. 345

[] 346

Vodafone response to June 2014 Consultation, page 89.

8.58 EE made a similar point to Vodafone stating that Ofcom has recognised that fixed CPs do not pass-through MTR reductions immediately (if at all). In contrast, a one-off adjustment would have an immediate detrimental impact on MCP’s investment incentives. A glide path, by smoothing out the revenue impact on MCPs, would represent a more appropriate and proportionate approach to implementing the charge control.347

Asymmetric risk of charging below LRIC

8.59 Vodafone argued that once the 2014 MCT model had been revised using Vodafone’s corrections, the 2014/15 MTR is either not far above or equal to the 2015/16 LRIC estimate, and very comfortably below the level of LRIC+. Vodafone argued that this is a very different set of facts from the transition at the beginning of the prevailing charge control (which began from April 2011).

8.60 Vodafone and EE argued that there was a greater risk of negative consequences from setting rates below LRIC than setting rates above LRIC. As such, since Ofcom cannot be certain that its LRIC estimate is right, given the obvious uncertainties around the timing of the transition between the three mobile technologies (i.e. 2G, 3G and 4G), Ofcom needed to be cautious in lowering the MTR too quickly. Therefore, Ofcom needed to take a conservative approach to the glide path design.348 349