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JOINT COMMITTEE ON COMMUNICATIONS, MARINE AND NATURAL RESOURCES debate -
Wednesday, 28 Jan 2004

Line Rental Charges: Presentation.

We are dealing with the recently sanctioned line rental charges by Eircom. Today we will hear presentations from the Consumers Association of Ireland, ALTO, ComReg and the Minister for Communications, Marine and Natural Resources, Deputy Dermot Ahern.

I welcome Mr. Dermott Jewell, chief executive of the Consumers Association of Ireland. Before I ask Mr. Jewell to begin, I draw everyone's attention to the fact that members of the committee have absolute privilege, but the same privilege does not apply to witnesses appearing before the committee. It is generally accepted that witnesses would have qualified privilege, but the committee cannot guarantee any level of privilege to witnesses appearing before it. Members are also reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the House or an official by name in such a way as to make him or her identifiable. I invite Mr. Jewell to make his presentation.

Mr. Dermott Jewell

I thank you, Chairman, and the committee for giving me the opportunity to make a presentation today. This is an extremely important issue, particularly for the Consumers Association of Ireland and for consumers who hold fixed line rental. I have already submitted a paper to the committee. We have tried to put it in the simplest terms because that is important. It is likely that as the debate continues and more submissions are made emphasis will be placed on points which are arguably not totally relevant. I will begin by looking at the background to this issue.

Eircom introduced a 7.9% increase on line rental in March 2003. Two months later in May it compounded that increase with a further increase of 6.35%. The effect of those two increases brought the then line rental charge of €19.60 up to €22.40 a month. The most recent increase of 7.5% further compounds those two increases and it presents a third increase in a 12-month period. That brings the monthly line rental charge to €24.30 or €291 a year. The important element is that there were three increases within a 12-month period which had the effect of applying a 25% increase to the fixed line rental charge.

Some 1.6 million consumers pay fixed line rental. They do not have any choice as there is no competition. They cannot shop around and take their business elsewhere. The best they could do would be to cease their line rental and take a mobile unit. That is not good enough. It does not provide the answer for the majority of the 1.6 million consumers. That is why they have the fixed line rental. There is a lack of competition and, thereby, a dominance in the marketplace. Eircom has maintained this area which means it is outside the reach of other competitors. They cannot contribute to it in the same way as they can in the other areas which have been deregulated. Eircom's dominance in the market is being used to increase the price beyond what is affordable for many of the 1.6 million consumers and what is acceptable under the terms of lack of competition and dominance.

We would defy anyone to suggest that any consumer could have budgeted for an already difficult price control situation. It would have been impossible for them to budget for three increases, let alone two in one service in one year. It is beyond belief and beyond people's capacity to budget under those terms. That is why we believe it warrants the investigation this committee has initiated.

ComReg has failed the consumer in this instance. This is the third increase within 12 months. ComReg failed to note the effect this would have on consumers with fixed line rental. There is an agreement that none of the increases in the Eircom package of goods shall exceed the level of inflation, which is reasonable. However, we suggest that ComReg did not pay considerable attention to this product. The price increase came under the cap, but it still permitted a 25% increase on one of the products and a third increase on that one product within the package, which defies logic and makes it impossible. It is extraordinary that ComReg missed that. That is why it has let down the consumers. The previous two increases were not readily acceptable to consumers, but the third one is an insult too far.

We believe it is particularly regrettable that the consumers who supported Eircom for many years have been ignored and continue to be ignored. There are approximately 1.6 million of them, which is a significant section of the population. More important, what seems to be overlooked is the fact that many of those consumers paid to have the line installed, will remember the person who installed it and the day it was installed. They will remember how difficult and how expensive it was for them to have it installed. Now, to have to maintain it at this level is unacceptable.

The argument will come from Eircom that it comes at a reasonable price within the overall basket. The overall basket does not apply to every consumer in Ireland. A great many consumers only want the line in their home. They consider it a lifeline for themselves and their alarm may function through it. The line is a specific requirement and they do not want the basket of goods. They simply want a line rental. They have cut down on their costs and kept their calls to a minimum but this price rise confounds them and acts against them. It does not allow them to budget, with what for many is a restricted income compared with that of recent years.

ComReg accepted the increase on our behalf, based simply on the terms of an agreed price cap. From this example, those terms are clearly inadequate. They are unworkable and are set in a manner that has made it possible for the price of this simple service to be increased three times in 12 months. There is no going away from that fact. The increases have been applied in a 12-month period and they hurt.

Consumers deserve better and must demand better. That is why we hope the committee will consider our submission and comments, will agree with our views and will recommend to the Minister for Communications, Marine and Natural Resources that he use his powers to reverse this decision. Finally, we request that the structure which gives competence to the existing pricing regime and the regulation of it be reviewed.

Mr. Jewell, I thank you for your colleagues' presentation on mobile telephone charges a couple of months ago. The committee spent a whole day considering that matter. If ComReg's statement of yesterday is correct, it appears that telephone charges are extremely high in Ireland. The joint committee expressed concern about this on that previous occasion and one of the mobile telephone operators, O2, has responded positively by reducing prices. We have yet to hear from Vodafone regarding a reduction in charges. We will not ask Meteor to reduce their charges because if they did they would go out of business. Their charges are very cheap. I thank your association for help in that matter. We will hear more from ComReg at 2 p.m. about its analysis of charges.

According to ComReg's price cap decision notice, your association did not formally respond to its consultation process. Other representative groups, such as the Dublin Chamber of Commerce and IBEC, did so. I have a list of those who responded to the consultation process. It includes Conduit Ireland, ALTO, Eircom, Nevada Telecom, IBEC, Meteor and NTL. Your association did not respond. Can you advise the committee why you did not?

Have telecommunications prices, in general, come down in the last number of years? Do you support the Eircom low use scheme and are you promoting it in any of your literature?

Mr. Jewell

We continue to have a strong and positive working relationship with ComReg. We have had numerous discussions with it in a variety of areas and have made various direct submissions to it on telephone charges. Given that we have had such regular contact with ComReg and that our position on a number of matters is known to it, we did not make a formal presentation on the price cap at the time.

We did not anticipate the manner in which this cap has been applied or that one of the elements would increase again and again. This is why we now find ourselves in the position of having to argue that the price cap be reviewed, particularly with regard to its lack of effect for many consumers.

A consultation paper on a review of the price cap was issued by ComReg on 10 November 2003. The Consumers Association of Ireland had an opportunity to put forward its views. You are now advising the committee that you did not do so. When these matters are being reviewed in the future it might be prudent for your organisation to put forward your views so that they are on the record, rather than commenting after the increases have been agreed. I make this point because it interested me as I read the ComReg report on the price cap.

Have telecommunications charges come down in the last number of years, in your view?

Mr. Jewell

Some charges have come down. Deregulation of the market has assisted to a great degree in bringing about reductions and affordability for many consumers who would not previously have had that. However, there is extraordinarily high usage among Irish consumers. As many as 3.1 million consumers have mobile telephones. Irish consumers are second only to the Japanese in their usage of mobile telephones, so we generate a significant amount of income and revenue for the telephone companies. Considering their usage, Irish consumers could expect that prices would be less for them. Prices have come down but there is room for them to come down further.

We will be advising our members about the Eircom low use scheme in a forthcoming edition of Consumer Choice, the magazine of the association.

Is it correct to say that the combined effect of three price increases in the last 12 months is that Irish consumers will be paying an extra €90 million per year for the privilege of having a telephone in their office or house, before paying any bills for using that facility? In the view of the Consumers Association of Ireland, what impact will this have on Ireland' competitiveness and on the consumer?

What action does Mr. Jewell recommend the Minister or ComReg should take to address the fact that there is no competition in the provision of a telephone infrastructure into people's houses? In the areas where there is competition, for example, the provision of services, competitors can lease lines at wholesale prices, which has driven down the price of fixed line telephone charges. A monopoly exists in the area of fixed line rental because there is no competition.

Whether Eircom is making money from its fixed line business, including the cost of upgrading and upkeeping the network versus the return it gets on line rental, is not relevant to consumers. Consumers want the lowest price possible, including quality and choice of service. Perhaps Mr. Jewell will outline how the Consumers Association of Ireland feels the regulator and the Minister, in particular, who leads policy can address the issue.

Is there the possibility of an Eircom flotation this year? Is the strategy of line rental increases, which is guaranteed money since Eircom which has a monopoly in this area, an attempt by Eircom to increase the value of the company in anticipation of a flotation so that it can maximise the return for its shareholders and investors?

Mr. Jewell

Yes is the answer to the first question. Some €90 million is the extra amount that would accrue in one trading year as a result of these three increases. Some €58 million was brought in from the two previous increases in March and May. This proposed additional increase will bring in a further €32 million. This will be particularly difficult for already cash-strapped consumers who have no choice.

The impact on consumers is very real. The inability to choose makes it extremely difficult. Because there is a reliance on fixed lines by a significant number of the population, it eliminates any possibility of making a choice other than to pay the extra charge. This causes hardship and difficulties in other areas. I am not referring to all consumers.

There appears to be a belief that all consumers in Ireland are wealthy, have more than sufficient cash and can easily cope with all increases. This is not the case. There is a growing level of debt in Ireland, which is coming to a critical stage. Most consumers have difficulty making ends meet and this adds to the problem. They believe they must fund the increase, which means they cannot fund other more important requirements. It does no good to competitiveness and it does not make us look well compared to other European member states. Our line rental charge is currently well above that in other member states.

What is the average rental price in Europe?

Mr. Jewell

I do not have the figure at this time. However, it was pointed out to me by some of our researchers that it can be 50% less than we pay, which is significant.

I understand from the ninth report on the implementation of the regulatory package commissioned by the EU that the line rental average is approximately €16.20 per month. As at August 2003, Eircom's charge was €22.49. I will get a copy of the report for members later. I got the figures from the report which I read in recent days.

Mr. Jewell

It could be recommended that the lines should be opened up to other users. There is a need to make them far more freely available so that there is an element of choice. While Eircom may present a package which has one fee for line rental and another fee for other call costs, if the package was opened up to other suppliers they may be able to balance costs and take a view from their financial perspective that would allow them to provide a service. Because there is such a significant number of members, these companies will be able to provide the line rental at a reduced rate compared to what is proposed and charged by Eircom. If the basket of proposals is to work, others will be able to make adequate and reasonable profits from the sale of the other services within the package. They will provide the line rental at an affordable rate to a market guaranteed to be in excess of one million consumers. There is an opening for competition in this respect. As long as Eircom retains a monopoly and lines cannot be leased efficiently or effectively, competition is being stifled. If the Minister encouraged the opening up of the market it would help significantly.

On the flotation, the view from the Consumers Association of Ireland, which is shared by many consumers, is that there is a strategy to increase the value of the shares. Any market looking inwards will see that element as being very important and a good selling point.

Is Mr. Jewell saying that consumers are paying for a strategy which will increase the value of Eircom in preparation for a flotation?

Mr. Jewell

In blunt terms it is what I am saying and they are paying dearly for it.

Approximately €90 million more this year than last year.

Mr. Jewell

Some €90 million more than in the previous year. There is nothing to say that if this is allowed to continue it will not happen again, which is not acceptable.

I welcome Mr. Jewell. This meeting is useful because it will allow us to get some ammunition for the arrival of ComReg and Eircom later today.

Perhaps Mr. Jewell will expand more on the 2% cap, while there is a 25% increase on line rental, which I do not understand. Does it mean that the whole basket of products, including line rental, local calls, trunk calls and international calls, can be increased by just 2% if by increasing line rental by 25% it remains within the 2%? If that is the case, it appears that €90 million is approximately 2% of Eircom's turnover. This suggests a turnover of €4.5 billion, which I do not think is the case. Perhaps Mr. Jewell would clarify that aspect.

On line rental - the Chairman gave the average cost of line rental throughout Europe - would the Consumers Association of Ireland know if any of our partners in Europe, or perhaps further afield, include free local calls in the line rental? Has Mr. Jewell any information on how the leased lines system operates? Are other operators allowed access to their lines through a leasing arrangement?

Mr. Jewell

All the services provided are capped so that whatever increases take place cannot have the overall effect of one increase being above the rate of inflation. The whole package of goods is calculated so that there will be pluses and minuses in the products provided. That is reasonable and it is the best way to do it.

The difficulty is that not all consumers want or will ever use or need all the ingredients in the basket. A significant number of them will only want one or two of the products. The difficulty arises when they cannot shop around for a better rate for one component such as fixed line rental. When that element continues to increase and they do not want the other products in the basket, then it is acting against them. The situation becomes impossible when it compounds several times within a 12-month period. They have not budgeted for it because they could not have anticipated it. They then become worried that the pattern will continue and that they will have no control over it. The difficulty arises because they only want one item from the basket and that item is running out of control in terms of their budget.

I am not sure if other member states provide free elements with line rental. I know that is the case in certain parts of the United States where local calls are free.

I provided Members with the figures in this regard. The figure of €16.20 is an average rental charge for August 2003 and €22.49——

So one is not getting anything free?

Mr. Jewell

We are not aware of any free elements within the EU, though some may be given in other international markets.

The system is a long-established one and it is acknowledged that it requires maintenance to keep it up to the standards expected by consumers. With these rates of increase, there is more than sufficient generation of profit and income to provide adequately for that upkeep and therein lies the difficulty. That gives the distinct impression that this one non-competitive element is pretty much a cash cow and it is being used in one form or another to make the company and the service appear profitable.

On the EU Commission Ninth International Report on the relative price of telecoms internationally, Eircom's charge of €24.30 line rental is way above the average of €16. No other country charges more than €20. I would like some clarification on that point. Our immediate competitors, the UK, charge approximately €14. I may be incorrect on that point but I am quoting the figures in the report. America charges approximately €16; Finland, a country comparable to ours, charges €14. What is remarkable is not only are we above the average, we are alone. Every other country comes within a tight margin of between €14 and €18. Our line rental charges are through the roof in comparison with other countries.

I would like to put a crucial question to Mr. Jewell, as representative of the consumer. It appears that such strategy hits, in particular, the poorest or the low income sections in society. A person on low income is on a tight budget and does not make extensive use of the telephone because it is expensive. Such people suffer from strategies such as very high fixed line rental charges. Reducing the marginal cost of every call does not affect them. The proportion of their budget spent on fixed line rental is far higher than that paid by someone on a very high income who uses the telephone a great deal and who can balance things out such that the overall increase is not so great. This affects those on low incomes, like so many other things in our society such as the introduction of fixed cost stealth taxes, which to a person earning €50,000 or €100,000 per annum are not a big cost but are crucifying to a person earning €20,000.

Only 400 users have signed for the low usage, low cost scheme agreed by Eircom and ComReg. Given that that scheme has completely failed, is not this a strategy which cripples the lower income sections in our society? I would like to know if Mr. Jewell agrees with me on that point.

Mr. Jewell

I do. That is exactly what it does. The reality is as the Deputy outlined. It brings us back again to the basket and the suggestion that one must examine overall rates and how they are presented. That is not the way to look at this. We should examine it from the point of view of whether we are competitive. We are not - we are excessively uncompetitive.

This is hurting a significant number of the populace who are poor and on the borderline. What is worse is that they cannot find a way around this. The only option open to them is to pay the charge or give up the telephone. For many, giving it up will cause more difficulties than can be imagined. In a market that has been significantly deregulated and that should be trying to make its service affordable to all consumers, Eircom has failed miserably. If rental charges continue to increase the situation will worsen.

I welcome Mr. Jewell. Is ComReg misleading us when it states that overall telephone bills have decreased by €30 over the past four or five years? Does research illustrate that bills are significantly lower now than five years ago? Eircom also makes the point that average bills are lower. My experience is that neither proposition is true and that the opposite is the case. Has the association undertaken research on whether those claims are true?

Some years ago I wondered whether customers should be charged for line rental, given that there is minimum maintenance on telephone lines and the charge is a type of levy on consumers. Would Mr. Jewell regard it in that light? Does he agree that it considerably exceeds the maintenance or even development cost of lines? Eircom may be aware of significant problems in that regard that require considerable investment at a time when it appears to embark on a flotation.

We have heard promises for years about wholesale line rental and single billing. However, we seem very far away from the basic point of having competition in the fixed line market. Approximately 20% of households do not have a fixed line. Does Mr. Jewell believe the issue of high line rental charges is a factor in this? In lower income households, people tend to get a mobile phone. This may cause problems with the implementation of broadband, as such households are not linked to the national telephone grid in the first place.

Eircom would make the case that in the period from 1999 to 2004 customers' bills have reduced on average by about €2 or €3. If its charges had increased in line with inflation in that period average bills would now be considerably higher at about €61. I am sure Eircom will make that point in the afternoon. How does Mr. Jewell react to that? Has CAI's research shown this to be the case? If bills have reduced while the cost of line rental has increased, has the number of calls per person reduced in the period?

Mr. Jewell

In the case of what is described as "the average user", for a long time the suggestion has been that the costs have come down and of course everybody is benefiting. Some of the costs have come down. For years consumers and the Consumers Association of Ireland have tried to demand 'per second' billing. This took a long time to achieve, as the costs were not coming in that fashion. It was still being done on a 'per minute' or part of a minute basis and still at high rates. It was only the competitive element from other providers that started to reduce costs.

However, the CAI contacted a number of its members over a period of time and asked the same question as the Senator has raised as to whether call costs and bills in general have come down. The answers that came back generally indicated that consumers' overall outlay had not come down significantly.

It has long been argued that the line rental was a burden and continued to increase. Of course there is a VAT element in that, but the reality was that the cost of line rental never came down. Those trying to work within that fixed system cannot work out of it. They have to work to best accommodate it into their lifestyle. That is the biggest problem. As long as these increases keep coming, it is not going to work.

A point was made about the development costs for other providers. People often ask why others will not enter the market and provide line rental. The amount of money that would have to be put into the system and the devastating road works that would be required for any other company to attempt to introduce new lines in the system would defy belief. We need an alleviation of access. In other words, everybody should be able to access those lines and offer them on whatever reasonable terms they want, but in competition with each other. There is no competition there and we will never have that so long as this exists. We are here today because of the serious increases in the one element that has never reduced and does not appear ever to have the likelihood of doing so.

Single billing is getting there. It is the only way forward. It is definitely one of the biggest elements. That particularly is favoured by users of mobile phones. Mobile users get predominance. Most markets try to best serve mobile users. The fixed line users are not getting the best deal, as has been proven by recent actions. The regulator has missed out there. Our submission stated it completely missed the point that three increases were due to come through in 12 months. Line rental has regularly increased and goes against those who through every best effort simply cannot reduce their outlay. It is just increasing against them. They reduced their calls. They do not want to know about the basket.

There has been a movement away from fixed line by some people. Some of our members have commented that they simply were not prepared to pay the increasing line rental and so moved away from it.

How will increasing access to Eircom's lines and providing more competition for customers drive down the cost of line rental? It will drive down the cost of usage. Companies with access to Eircom's lines provide competition regarding charges for usage. However, there is still the cost of maintaining the lines and providing new lines to new housing estates and single houses. While I am not making the case for Eircom, the reality is that if Eircom owns the lines and has a universal service obligation to roll them out to houses and business, regardless of where they are built, and if it is losing money on maintenance and rollout versus the income it gets from line rental, it will make a case for an increase in line rental. I do not believe the CAI's proposal to increase the access to Eircom's lines to further competitors will reduce the line rental prices. People will still have to pay line rental to Eircom and will find the company providing the cheapest usage prices.

Is the structure of the market wrong? Based on the submission from ComReg to be presented later, with the possible exception of Luxembourg, Ireland is the only country in Europe were residential users spend significantly more on line rental than on usage. It is slightly more than €24 per month on line rental and €20 on usage.

In all other countries, the higher charge is imposed on usage and the lower charge on line rental. What is the difference between the Irish marketplace and that of every other country in Europe? There must be a reason for this difference. Will we continue to see increasing competition in the areas of usage and charges for usage which will drive down prices? Will we continue to require Eircom to meet the universal service obligation to install wires in every new house? Will Ireland continue to be the exception in Europe, with people here paying higher fixed charges?

As a result of this, the most vulnerable people, for example, those who only want a telephone in their house for emergencies, must bear the brunt of a 25% increase in the past 12 months. This is not the case in other countries. Does the Consumers Association of Ireland have a view on this or on ways in which we could address the failures in the marketplace in this area?

Mr. Jewell

Yes, we most certainly do. To put the issue into context, the only way that competition will enter the market is if, for example, as a result of today a realistic approach is taken to what is an unrealistic line rental charge. In other words, current prices will have to be reduced or be halted in their tracks. If they are not, we will never be able to introduce any competitive element. We need a reasonable, affordable series of charges for a capped term, in other words, one in which prices could only be increased biannually or whatever. That would at least provide a basis from which to work and we could then offer lines to other providers for this price. Provided they accept these charges, they could lease lines and offer them at even lower rates than the purchase price, while offering other elements of the famous basket to those who may want it. This would help to change the market and its structure.

Has Mr. Jewell had an opportunity to examine the EU directives which were transposed into law by the Department and have become a policy directive implemented by ComReg? Is he aware that a number of legal challenges have been taken in other countries with regard to the composition and price structure of the basket? Is he aware that the European Union found in favour of a number of operators?

Mr. Jewell

Through our sister organisation in Brussels, BEUC, we are aware that some cases have been taken, serious debate has taken place on this issue and challenges have been made.

Is Mr. Jewell suggesting that ComReg has perhaps acted wrongly in its interpretation of the EU directives?

Mr. Jewell

No.

Is he suggesting a change at EU level?

Mr. Jewell

Yes, most certainly.

To put the record straight, is the Consumers Association of Ireland suggesting that Eircom has acted illegally or wrongly in any way?

Mr. Jewell

No, we would not dream of suggesting that, but the reality is we have an unsuitable pricing structure and strategy which is unrealistic in terms of the price cap currently in place.

The committee understands that the price cap is the requirement that one does not increase the basket of prices by more than the inflation rate, which is currently 2.9% or 2.8%. The Consumers Association of Ireland has raised some important matters which we can put to Eircom and ComReg when we meet them later. As a result of the presentation today, we are better informed and I hope we will get more answers.

I assume the Consumers Association of Ireland is following the single bill element of the new wholesale line rental system which, I understand, currently operates only in Denmark. I presume it is also in constant contact with its sister organisation in Denmark. Perhaps it could inform the committee of the benefits of this approach and whether it is working. I understand it is an extremely complex system to introduce. ComReg and Eircom will be able to advise us if that is the case. Does Mr. Jewell have any information on this issue?

Mr. Jewell

I do not have any information at this stage because the issue has not yet been addressed by the relevant organisations.

On behalf of the committee, I thank Mr. Jewell for appearing before us and sharing the concerns and thoughts of the Consumers Association of Ireland. I also thank him for his efforts and help to the committee on 2 October last, when we had a full-day session with the mobile telephone operators. I understand ComReg will give us a presentation on the analysis of mobile telephone charges which we discussed at that meeting. Perhaps it will also give us an analysis this afternoon of its statement yesterday.

We have yet to hear from Vodafone concerning the reduction in its telephone call charges, but it did commit to reducing them by 10% over a full year. O2 has responded positively by reducing its prices.

I welcome Mr. Iarla Flynn, chairman of the Association of Licensed Telecom Operators, probably better known as ALTO, and Mr. Oisin Fanning and Mr. Brian Timmons of Smart Telecom, who are accompanying him.

I remind members that ComReg will appear at 2 p.m., Eircom at approximately 2.45 p.m. and the Minister at 3.30 p.m. Before I ask Mr. Flynn to begin, I draw attention to the fact that members of this committee have absolute privilege, but the same privilege does not apply to witnesses appearing before the committee. While it is generally accepted that witnesses will have qualified privilege, the committee cannot guarantee any level of privilege to witnesses appearing before it. Members are reminded of the long-standing parliamentary practice to the effect that Members should not comment on, criticise or make charges against a person outside the House or an official by name in such a way as to make him or her identifiable. Mr. Flynn's presentation will be limited to 12 minutes, after which we will have time for questions. I invite him to begin.

Mr. Iarla Flynn

I am joined by Oisin Fanning and Brian Timmons of Smart Telecom, a member of ALTO. I propose that they begin with a brief presentation, after which I will make a brief presentation. If the committee is agreeable, we will then take questions together.

Members will be interested in hearing the views of one of ALTO's operators. A little bird in Cork told me that Smart Telecom is the first telecoms operator to take capacity on the city's new MAN system. Is that correct?

Mr. Brian Timmons

Yes, Mr. Fanning will fill in the committee on the details.

Mr. Oisin Fanning

That is correct. We fully tested the MAN in Cork last week and we expect to issue the licence today or tomorrow. We intend to light every MAN when the opportunity arises. We view this as a very positive move by the Government because it enables us, as a telecommunications company, to compete fairly in the marketplace.

How is Mr. Fanning's company backhauling the system? Will it be through Eircom or through another network?

Mr. Fanning

We have signed a contract with the ESB to backhaul through the ESB powerline. We have agreed, but not announced officially, a project in the Liberties of Dublin to provide broadband for 16 schools at our cost using powerline technology. Diageo has allowed us put an aerial on top of its visitors' centre and, when we have completed testing, we will beam broadband into the schools. They will avail of it through the sockets and therefore they will not have to be rewired. It is quite innovative. A Swiss company called Ascom and an Irish company called AcTechhelped us on the project.

For Mr. Fanning's information, the joint committee agreed the ICT report on broadband just before it went into public session. Our report is now being sent to the printers and will be published and launched in the coming weeks. I will not give any more away other than to say that there are 12 recommendations by the committee on development of broadband in Ireland. Mr. Fanning is probably aware that we have been deliberating on this issue for over a year and we have had five full days of public hearings. We have had presentations by 45 different groups and 700 pages of transcripts, all of which will be printed and bound. To make it easier for people to access, we will make the information available on CD-ROM.

The committee is delighted to hear the MAN in Cork was the first to be completed. Deputy Coveney and I are Cork Deputies. It is good news to hear that a telecoms operator has taken capacity on the network and it will be interesting to see it rolled out. How many pairs of fibres were taken?

Mr. Fanning

We have taken four pairs initially and have the ability to build this up. Our first customer is providing broadband to 200 customers himself and has been trafficking with us since last Saturday. We are very pleased.

That is excellent. Are we ready for the presentation?

Mr. Fanning

Mr. Brian Timmons is a former director of AIB Capital Markets and obviously has much expertise in reading balance sheets and bond documents. I hope he will enlighten the committee on some of the things we have discovered in recent weeks.

I will give a very brief overview of Smart Telecom. It is now the third player in the Irish residential market and has been in existence for three years. It is aiming to be the second player by the end of the year and we are certainly in a position to become a significant operator in the corporate broadband voice, data and Internet access markets. The company is already a significant player in the payphone and card marketplace. In the past two years, we have significantly increased our number of employees from 20 to 180. Over the MANs, we are deploying new-generation telecommunications infrastructure and we are using IP-based MPLS technology. This is the newest available technology given that we do not have any prior infrastructure costs.

We have signed a deal for 20 years for a 120 km fibre ring in Dublin and we intend to light up every metropolitan network - all 18 or 19 of them - when possible. As I stated, we have a contract with the ESB for backhaul to Dublin, Limerick and other cities.

This investment in jobs and infrastructure is against a serious imbalance in the way the market is being regulated at present. After six years of deregulation, the balance is still tilted in favour of the incumbent Eircom and decidedly against the interest of the customers, economy and competitors of Eircom. Mr. Timmons will provide evidence of this.

Mr. Timmons

I thank the Chairman for the opportunity to make this presentation. I wish to consider the numbers behind the Eircom performance in the market and what they tell us about the market and competition being regulated and managed by Eircom. My information is taken from the offering memorandum that Eircom published last July. It is a sales document provided to financiers, venture capitalists and very often, as in this instance, banking financiers. It tells the story of how Eircom is doing and it is highly accurate. Every line of the 400 pages in the document is verified by lawyers, and boxes of verification material are stored away that would fill this room. Therefore, we can rely on the information. I have extracted the critical information that gives a picture of how Eircom is doing and it is quite different from the picture presented by Eircom in public when it comes to justifying increases.

I have a document which Mr. Timmons has provided to the committee. It is an offering memorandum, subject to completion, dated 12 July 2003. It is for €1 billion. I presume it is a loan note. Was it prepared by Deutschebank?

Mr. Timmons

That is correct.

It also lists all the other banks involved. Is Mr. Timmons extracting from this document information on the purpose of Eircom and reasons why the company is increasing its bottom line? Will he outline the reasons behind the proposed share offering, on which Deputy Coveney touched earlier?

Mr. Timmons

That is correct. Valentia, the major investor in Eircom, is extracting very large profits and dividends from the Irish market. The pack I circulated contains three schedules, the first of which gives a review of how well Eircom is doing. I will refer to an Eircom revenue analysis. The information memorandum gives and is required to give detail to the financiers on where the company generates revenues and what costs it sustains. This is outlined in schedule two.

Are schedules one, two and three included in the report or are they separate?

Mr. Timmons

They are separate.

I presume Mr. Timmons is offering this information to show the parent company's strategy.

Mr. Timmons

Yes.

I presume he is not against companies making profit.

Mr. Timmons

I am very much in favour of companies making profit and I am trying strenuously to enable our own company to make profit. I will explain why this tends to be difficult. The third schedule is a schedule of broadband prices in Ireland that demonstrates that amongst a range of international markets, Eircom is either the most expensive or the second most expensive. This is very significant because there is such a drive in course at the moment, attempting to upgrade the competitiveness of Irish industry to enable it to compete in the world. The telecommunications industry has a really important role to play in that. That is relevant to this discussion and I will demonstrate why.

On Eircom profitability, the key point arising is that Eircom generated operating profits of over €550 million in the year to March 2003. That is the last period for which accounts are disclosed in the information memorandum. That €550 million is up 18% on the previous year, and marginally up on the year prior to that. This operating profit is referred to in the document as EBITA - that is, earnings before interest, tax and depreciation. It is a measure commonly used by financiers to indicate the capacity of a company to pay dividends and interest, and to fund capital expenditure.

The sum of €550 million, in any event, represents a margin of 33% of turnover. For every euro that consumers, including business customers, pay, 33 cent is the surplus arising as operating turnover. It does raise an issue that was touched on in the previous session. The bottom line is that an operating margin of 33% is made. If it is the case that access costs are generating a loss for Eircom, then obviously something else is generating an enormous margin. The company probably does have a degree of discretion as to how it allocates its costs to make its case.

In any event, this profitability has enabled the US venture capitalists - who invested in the company and took a risk two years ago - to be repaid handsomely. Some 75% of the investment has already been returned to those investors. We have a quote on the slide from a Mr. Salen, managing director of Providence, the largest shareholder in Valentia, who says: "Now we are getting back three quarters of our capital after 19 months. Yes, it is possible to do well in this space."

I will move on to suggest that the proposed IPO at a valuation at the upper end of the range that has been reportedly suggested by Goldman Sachs at €4 billion, will net shareholders a further significant payout. I have shown this under "Valentia profit potential". I stress that I am very much in favour of profits but I am also in favour of fair competitiveness in an industry. I have estimated the investment in Eircom at around €900 million. I do not have a disclosed figure of what the net equity investment was at the time of purchase but it is of that order.

There was a dividend paid from the sale of the Golden Pages in 2002 of €192 million. A further dividend was paid at the time of the bond refinancing last July of €512 million. So the total dividends paid were €700 million, against an investment of approximately €900 million. If we assume an IPO valuation at €4 billion, and if from a review of these numbers we assume that the total debt associated with the business is €2 billion - it should be less because the company is being run for cash now, and we will look at that in a moment - then there is a surplus arising of approximately €2 billion for investors. The Valentia share, at 70%, is €1.4 billion and that gives rise to a total payout within two and a half years of €2.1 billion. There is a slight error in the slide.

I would also make the point that the 30% balance belongs to the employees via an ESOP. The employees have a very significant vested interest in the value of Eircom and the flotation of the company.

Is it your view that Valentia is preparing for an IPO in the next month or two?

Mr. Timmons

It is my view, based on the speculation we have observed and based on what I know about how a company goes about preparing for a flotation, and the amount of work and the advance notice that is required to do that. It is not something that happens in a short space of time. These exercises are huge and involve an awful lot of resources.

In addition, this return has been generated by these investors because of the extraordinarily positive performance of Eircom. That performance is a great credit to the people who run Eircom and run it very well. There are other factors also that are involved in the generation of these returns and we will look at them. Despite all the talk about reductions in call costs, including a 36% reduction in the cost of a call to Paris or Timbuktu, Eircom has actually sustained almost no reduction in its usage revenue. This is shown in schedule 2. Usage or call revenues, therefore, have been maintained, while at the same time minutes trafficked have declined. So the rate of price change is very slight - of the order of 1% to 2% - when averaging out caller revenue across the board.

On the other hand, revenues have increased very substantially over the last four years, looking ahead to the year we are now heading into. We will look at that as well. In addition, Eircom has cut costs in the three-year period that is outlined in the information memorandum. Eircom's total overheads have been cut by 11%, from €726 million to €650 million. Their total overheads are not an awful lot higher than the amount of revenue that will be generated next year from line rentals, which is €480 million. If one attributes the entire cost of Eircom to line rental, there would certainly be a loss of €100 million to perhaps €200 million. However, there is also the usage revenue, which is higher still than the line rental revenue at the moment. Let us go straight to the bottom line, it is pure profit. Obviously, that does not make sense but it does demonstrate that one has to be careful in how costs are attributed to access versus call charge operations in arriving at an argument as to whether a line rental increase is justified.

A fourth issue that has aided profitability is that Eircom has cut investment significantly, and we will look at that. I would make the point that the returns have been facilitated significantly by the regulatory price cap that Eircom has succeeded in negotiating with ComReg and imposing upon the market. The committee discussed that matter in detail in its previous session. That is not just my view. A press article made a very complimentary comment about the CEO of Eircom, which we all have to agree with, stating: "Dr. Philip Nolan's real coup was to negotiate a dismantling of the price cap with the regulator. Under this new formula, Eircom has been able to push through its three controversial line rental charges."

I would like to hear from Dr. Nolan on that instead of taking second-hand statements, especially as printed in that particular newspaper. For the purposes of the committee, I would prefer not to depend on newspaper articles of any description.

Mr. Timmons

Very well. The impact of the site plan in February 2003 has, in fact, placed a floor on the total bill that Eircom charges its customers. This arrangement effectively grants Eircom a veto over any further decreases in prices to customers. I will refer to that in a moment.

How did the profitability increase happen? A major contributor was what happened on the revenue side. I said already that costs were reduced by 11% in the period under review. By the way, the document also makes reference to a further reduction in employees of 18% over the next three or four years. There is a sustained decrease in costs planned by Eircom matched by an increase in revenues. In the three years to March 2003 - it is set out in the slide how that happened - Eircom call revenues decreased from €676 million to €651 million, which is a decline of €25 million. Minutes trafficked fell marginally, so the underlying price decline was actually 2.2%, if one looks at the total revenues from Eircom call traffic. On the other hand, line rental charges increased from €330 million to €400 million, which represents a 21% increase of almost €70 million. If we project through to next year, the impact of the three price increases that have occurred in the last 12 months - because it takes time for them to roll through - other things being equal, the line rental is set to increase to €481 million next year. The outcome of the price rebalancing, as Eircom refers to it, is a four-year increase in line rental per annum of €150 million. What is happening is that Eircom is taking out of the market an additional €150 million on the basis of the existing price rentals, and that is not including the next one. It is equal to an increase of 45% over the period, it goes straight to the bottom line and there is no increase in service offered for that.

We do not want to go through every single page of the document and members of the committee will want to ask a number of questions. Are you laying a charge against ComReg for allowing this price cap, given the way these negotiations were dealt with, to allow for increases in fixed-line costs because of the fact that the incumbent has a monopoly on fixed line, unless companies such as yours roll out their own infrastructure?

Mr. Timmons

I am suggesting——

Are you making an allegation against ComReg regarding these matters?

Mr. Timmons

I am not particularly interested in making allegations against anybody. I am merely making observations on what has actually happened, which is that Eircom has negotiated a price cap regime that enables it to set a floor on its billing of customers. Any reduction that occurs in the price cap is compensatable by Eircom in a line rental increase. So if we give customers a price cut, Eircom claws it back in a line rental increase.

Am I correct in stating, as I said earlier, that ComReg is following an EU directive as regards a basket, and that there have been legal challenges to this matter by other countries in Europe?

Mr. Timmons

What this demonstrates is that ComReg has agreed to a mechanism which does not work and needs to be reviewed.

By the EU?

Mr. Timmons

I do not know but preferably by ComReg itself. I would refer you to one further statement in the memorandum. Eircom itself has said in relation to the price cap, "We expect this price cap to remain in effect for three years, although ComReg may revisit the price cap earlier if it believes it would be appropriate to do so in order to regulate the market." My view is that it is manifestly the case that it is appropriate to review the price cap and change it. There is no question about that.

Are you saying that because of the facilities in the agreement, Eircom can continue to increase the line rental because it has no competition, and it can add to the bottom line in the way you have demonstrated, but at the same time it will stay within the basket?

Mr. Timmons

Yes.

Eircom will keep reducing its prices to compete with the wholesalers. You are obviously taking capacity on Eircom's system.

Mr. Timmons

Yes.

Eircom will keep reducing its prices so it will stay within the basket. Is that it?

Mr. Timmons

Yes, and I would add that the fixed mobile business is included in the basket. Therefore, if pressure reduces fixed mobile prices, which is what everybody wants, Eircom will be entitled to put the line rental up to compensate for that.

Your bottom line is that the line rental should be re-negotiated by ComReg. I am sorry for cutting you short but we want to try to absorb all the information, although it is impossible to absorb this 400-page document today. Before calling Deputy Eamon Ryan, am I correct in stating that the vice-chairman of Valentia, Mr. Con Scanlon, is the secretary general of the Communications Workers Union?

Mr. Timmons

He is, indeed.

Is he also the chairman of the ESOP?

Mr. Timmons

I believe so.

Then we have Paul Carroll, John Conroy, Nicholas Gabran, John Hahn, Jonathan Nelson, Paul Salem, Ramez Sousou, and Mr. Subernan. They are all directors of Valentia, according to that document is that correct?

Mr. Timmons

Yes.

The information being provided to the committee is remarkable material. It will obviously take a while to take it all in because there are a lot of figures here. Mr. Timmons's figures are coming from the offering memorandum that Eircom issued, and Deutschebank prepared for them, on 12 July 2003. Has that source been made public before or can Mr. Timmons say how he got it? Can we be satisfied that the figures in this document are those as presented to the New York bond market? Will Mr. Timmons confirm that, saying where he got the figures from and whether we can take them as being reliable?

Mr. Timmons

The committee can certainly take the figures as being reliable. I am not exactly sure of the status of their publication. Clearly, Eircom does not wish these numbers to circulated publicly - they are intended for investors and bankers. Eircom would prefer if they remained with investors and bankers. I am sure that Eircom would be only too happy to oblige in presenting the committee with a certified copy of same, if the committee wanted to be absolutely sure. I doubt that it would be the slightest bit different from the version the committee has.

None of the newspapers or other media have them? These figures were not publicly available before this morning?

Mr. Timmons

No.

Can the committee take a copy of what the Chairman has at his right elbow?

Mr. Timmons

Yes.

As a financial officer, obviously, Mr. Timmons is not neutral but perhaps he can explain the situation and provide us with his view. If I am correct, it seems that what he is saying is that to a certain extent the financial or business strategy we are seeing in place is where one has investors who put in a relatively small amount of their own money. Fair play to them; thankfully, we live in a free enterprise world. It is about €900 million and could be €100 million one side or the other. They also raised €200 million in bonds originally.

Mr. Timmons

Yes.

It is not a junk bond that Mr. Milken would have used - these were very solid bonds. They used that bond and equity mix to buy the company. To a certain extent they have a very profitable business which is paying off those bonds.

Mr. Timmons

Correct.

That is paying off the debt, in a sense. While the figure stated in public in the accounts is showing a relatively low profit margin, it does not show the huge growth margins which can pay off the debt that they raised to buy the company. Is that a fair summary?

Mr. Timmons

That is the point. It was purchased as a highly leveraged operation so when Eircom presents it case it deducts the interest being paid to the bankers who enabled it to acquire the company for €900 instead of paying for it all. That is why I focus on the operating figure. It is the important one because there was virtually no debt in the company before Valentia acquired it. There was approximately €100 million which ballooned to over €2 billion. Eircom existed without debt and its profits were available for investment and for dividends. Now the cash flow is being used to pay down debt.

There is sometimes controversy about the use of eBid as an analysis tool. I can understand that for the ordinary punter because one gets it after interest and tax and that is the important point. If it is a private company which Eircom is, eBid is a very interesting figure because it is paying off one's equity interest.

One of the figures I do not understand is how Mr. Timmons arrives at 33% operating profit on an eBid basis. He estimated it had €551 million in 2003 - I presume that is to the end of March 2003. The total basic voice turnover is €564 million, line rental at €423 million, approximately €1billion in total. Are there other revenues not taken into account there?

Mr. Timmons

There are transmission revenues of approximately €400 million to €500 million. The gross revenues are approximately €1.67 billion. The €550 million represents 33% of that.

There are three main streams of revenue for Eircom - voice, line rental and data.

Mr. Timmons

Yes.

Mr. Timmons has not presented us in any of the schedules with costs or figures. This cannot be easy for Eircom in that it does not want to see its competitors looking at its cost figures. Does Mr. Timmons provide those in his schedule?

Mr. Timmons

I tried to limit the amount of material I put into the schedule for the reason to which the Chairman referred. It is difficult to absorb too much but the figures are available here and I can point them out to the Deputy. Eircom has reduced costs from €726 million to €650 million, that is, an 11% decline in the period to March 2003, and it has referred in the memorandum to a further planned cut in employee numbers of 18% from 8,500 last March to 7,000 at the beginning of 2006. The company is in cost-reduction mode at the moment. One would come to the conclusion that the operating profit will increase quite steadily on current trends over the next few years.

We have yet to hear from Eircom whose representatives here should receive a copy of the Smart presentation to consider over lunch. Am I correct in saying that it is Mr. Timmons's interpretation that the strategy of the company Valentia through Eircom was to beef up its bottom line by increasing its line charges and agreeing that with ComReg so that it could increase the profitability on the bottom line and prepare for the share offering and the Irish consumer is paying for and increasing that bottom line? According to the EU document which I have here and have circulated to the members, the average EU rental is €16.20 and as at August 2003 it was €22.49 for Eircom. Am I interpreting Mr. Timmons correctly? This will help us to put the correct questions to the company this afternoon.

Mr. Timmons

That is correct. It is what venture capitalists do.

It is important to make that point. That is what venture capitalists do and they are doing a very good job in this case but it is our job to look after the interests of the consumer without unfairly criticising Eircom. They are in it to make a profit - that is why Valentia was set up. From the figures we are seeing today it would succeed if it floated.

I am slightly confused about the cap figures agreed. When were they agreed and when did that begin to be implemented? Surely the increase in line rental figures that we see here of 25% in the last 12 months is pushing the overall cost that it is charging the customer well above the inflation figure. From when is ComReg imposing the cap figure, or the negotiation to which the Chairman has forbidden us to refer again and the deal that Philip Nolan negotiated? We are aware of the comment to the effect that he negotiated a very good deal on the cap figure. Could Mr. Timmons clarify what deal has been negotiated on cap figures and why there is a 25% increase in line rental? Why is that not breaking the cap figure agreed that the overall charges cannot go above CPI which is 2.8%? I am missing a point here and I would like Mr. Timmons to clarify it for the committee.

Mr. Timmons

The critical point is that previously there were sub-caps in place. There was a basket but the individual items in it could not be increased. The sub-caps were abolished so that the basket exists only——

I understand that point. Eircom reduced its usage charges to be competitive with various competitors using its infrastructure which is successfully driving down the price of usage. For Eircom to be very competitive it can compensate for that by increasing its fixed line charges. Has it not increased its fixed line rental charges so much that it has actually over compensated by more than CPI? Is that not the case in the figures that Mr. Timmons has given us?

I want to understand how it could have done that even when there is a basket cap figure in place of the 2.8% or 2.9%. The line rental charge increases have been very high, at up to €90 million extra to the consumer over the last 12 months. Has that not over compensated for any reductions in usage charges above the cap figure?

Mr. Timmons

I surmise that it has but I do not have access to the information that Eircom has presented to justify the line rental increases. Eircom and ComReg can answer that but certainly it does look surprising.

Based on Mr. Timmons's figures it is not even close. I understand the principle that it is raising line rental increases, reducing usage costs, to be more competitive and compensating for one with the other. The social problem for the household is that the fixed line charge is a very blunt way of increasing the costs for everyone and it is a guaranteed addition to the bottom line for Eircom. We need to understand this. We have talked a great deal about the cap figure within which ComReg must work.

Does Mr. Timmons fully understand this? If not, I would prefer ComReg to explain it to us at 2 p.m.

What does Smart say the cap should be?

Mr. Timmons

A sub-cap should be imposed on line rental for a start to obviate a compensatory effect. If a price cap was previously in place of minus 8%, how come Eircom's total revenues went up as between a combination of line rental and usage charges in the two years to 2003 when there was supposedly a cap in place to generate price reductions? The evidence from Eircom's own figures is that its revenues increased by €44 million. I do not understand how that happened.

That is the question.

Mr. Timons

I have no idea how that happened. Some genius in Eircom may have devised a strategy to create that result. I am full of admiration——

We have to be fair to the company. I cannot allow anyone to suggest anything in this forum unless they have facts to fall back on. It would impact on the credibility of the committee. Unless there is specific information to assist the committee as to how the cap was derived and Deputy Coveney's question can be answered we will ask ComReg and the company. If necessary we will ask the Minister for Communications, Marine and Natural Resources, Deputy Dermot Ahern, and if we do not get the answers we will find out for ourselves. Did Deputy Coveney want further clarification?

I want to be absolutely clear in what I am asking. It is summed up in the quote which says Eircom has negotiated a dismantling of the old price cap regime. This had many sub-caps in different areas, which is understandable because it is a more equitable way of imposing caps. It has replaced that with a new regime which is basically a cap on the overall basket of telecommunications charges. Three controversial line rental charges have been negotiated under the new regime, which is an extra €90 million. There has not been a reduction in usage charges which would be the equivalent of €90 million or anything close to that. There is an over-compensation here. Would Mr. Timmons agree and how does he explain that? It is a question we need to ask the regulator, but as a figures man, which he clearly is, could he give the committee an insight into this so that more accurate questions may be put to ComReg? As someone who has clearly indicated that Eircom is planning a flotation, in which quarter of the financial year does he anticipate this will be announced?

Mr. Timmons

I am not privy to information as regards the timing of a flotation. Market conditions have a major impact on it and there are windows of opportunity. Eircom's advisers will make the decision on that and the investors.

On the Deputy's previous question, I was not being at all pejorative in my comments, Chairman. The presentation of information and finances from Eircom is complicated. It is a large organisation. I would say sophisticated spreadsheets are carefully put together to justify the increases granted by ComReg. Speaking as an outsider and following the advice of the Eircom spokesman to "look at the total bill", when one does that one finds it has gone up. It has not gone down. The revenues for the period covered by the information memorandum combining call rental, access and usage charges have gone up. I cannot possibly explain that.

I want to bring in Senator Kenneally and Deputy Broughan. I want Mr. Flynn to talk about the wholesale line rental and how it will apply to the single bill etc., from the viewpoint of the telephone users' group.

Most of what I wanted to ask has already been raised. I do not want to labour the sub-cap issue apart from a small question that perhaps cannot be answered. It may be a question for ComReg. I was going to ask what was there before the 2% and Mr. Timmons told the committee it was a sub-cap. Within that he said that it was minus 8% on line usage. Does he know what the sub-cap was on line rental at the time?

Can he give the committee any information as regards leased lines? Some of the members of ALTO, the Association of Licensed Telecom Operators, lease lines from Eircom. Can he inform the committee how that operates? Presumably these costs are increasing as well. I looked through this other presentation which was not made, on the single bill service. I would like some more information on that, please. I think this was a question the Chairman was asking as well.

We will let someone answer those questions. I will take Deputy Broughan first as some of the members have another meeting to attend after 12.30 p.m.

I notice that the names of a number of Valentia directors were read out as well as the board members of Eircom. Should not the chairman's Minister, Deputy Dermot Ahern, and his predecessor, Senator O'Rourke, be indicted? Was it not incredible folly to sell the national grid? This is really where we are coming to. Private companies will not dig up the roads or put in place their own network and argue they need a decent retail discount and competition on the last loop. Did we not get into this mess because a prize national asset was sold off, basically for a song? We had the debacle of small shareholders being robbed, in effect, and have ended up in a virtually hopeless situation from a competition viewpoint. It is no wonder the Minister says he will not sell the national electricity grid.

To return to first principles, it seems the fundamental indictment should be laid at the door of this Government which has been in power for the last seven years, and indeed ComReg, regarding the way things have been run in recent years. I would like to ask about the penal administration levy of €26 and inadequate wholesale line discount. Why is that set at 15%?

I am sure Deputy Broughan will have an opportunity to repeat those questions in the afternoon. Are there some questions from Senator Kenneally and Deputy Broughan that Mr. Flynn and Mr. Timmons want to share as we are running out of time?

Mr. Flynn

I have put together a slide pack. I understand time is limited. I propose to skim through that and highlight two or three key points we would like to make in terms of the general group of operators that ALTO represents. We will touch on some of the points that were addressed.

If I could give a quick snapshot, the view of new entrants is that there are two issues. The first is that a control on a monopoly service has been relaxed wrongly and that has allowed huge increases in line rental. The flipside of the coin is that we do not have an alternative service in the market. If that service was there it would effectively keep Eircom "honest", to use a colloquial phrase. An alternative can and should be introduced as quickly as possible. I am happy to give more details on ALTO if the committee wants.

At present competition for the consumer and SMEs is constrained to telephone calls. New entrants have won about 10% of the market and Eircom retains 90%. We face a number of key difficulties. One of these is that we cannot provide consumers with all their services on a single bill. The line rental stays with Eircom and that is a hassle factor for consumers. They are faced with two bills.

The other thing is that Eircom has poured massive resources into winning back customers. Some amazing figures have been released about the churn of customers. As new entrants win them, in some cases they lose 80% back within a month. Clearly competition is being stifled there. The fact that consumers are faced with two bills is a significant factor. They should be combined into one to make it easy for the consumer and make competition a little more attractive.

ComReg is working on that.

Mr. Flynn

That service is on the way.

In the afternoon ComReg will be able to advise the committee on that.

Will the line rental charges be the same?

Mr. Flynn

That depends on the costs set for the service. In theory it is possible that new entrants could undercut Eircom for line rental but that is very much a decision which is down to the regulator because it will control what new entrants will pay Eircom. The regulator will control that margin.

If they undercut on the line rental, will they not be taking a loss on it?

Mr. Flynn

No. Again it depends on the cost at which we buy the service from Eircom. If it is set at a high level, then obviously it will be very difficult to undercut Eircom but if the regulator sets our——

My point is that one can buy the line at a lesser rate than Eircom is selling it to its own customers.

Mr. Flynn

Yes, we would be buying at a wholesale rate. The point is that wholesale rate must be far enough below Eircom's normal retail price.

When this wholesale line rental is available with the single bill, will your members be reducing the line rental line charge to the first mile customer?

Mr. Flynn

There has been a huge amount of work done on that project. It is nearly ready to go. There are two outstanding issues. If they are resolved, that service will be launched.

The first issue is the margin of which we spoke. That margin has been set at 8.5% by the regulator and is not enough to get new competitors into the market. It will not happen with that margin. We need a significant increase in it.

The second big issue is that for each customer we win over, we will have to pay Eircom €24. That does not sound like a lot of money, but given the tight margin and given the rate at which we seem to be losing some of these customers, that €24 is another deal-breaker.

Is it a one-off charge?

Mr. Flynn

Yes. If the margin is improved significantly and that one-off charge is reduced, then new entrants will launch this service. We would like to undercut Eircom but it is not entirely within our control. That service can be launched within a few months, but only if those two key issues are resolved.

Have you looked at the Danish model where they have introduced the single bill? Are you studying that? Could you give us your views on that in the course of your presentation?

Mr. Flynn

I am not familiar with the situation in Denmark. I am aware that the service has been launched there. I suppose we could say that Ireland is unique in that our line rental charge is so far above that of other countries, including Denmark, that maybe there are special circumstances here where there is a definite need for this new service and maybe that same requirement does not exist in other countries where line rental is not as high.

The other aspect is that in other countries new entrants have succeeded in gaining a greater market share. For example, the best market share for new entrants in the EU is about 30% versus 10% in Ireland. It is clear that the circumstances here are somewhat different from other EU countries and that is why we think this single bill service is absolutely vital in the context of Ireland.

Do you accept the figures in the ninth report on the implementation of the regulatory package by the Commission of the EU? Did you see figures 70 and 71 where it states that €16.20 was the average monthly line rental for a residential house up to August 2003, compared to €22.49 in Ireland? Have you seen that document?

Mr. Flynn

I am familiar with that document.

Would you accept the figures in that document? We will be given a presentation by Eircom in the afternoon which will state the complete opposite.

Mr. Flynn

I am inclined to accept the figures of the European Commission, an independent body with no axe to grind. That is certainly our understanding of the situation.

This is the document. Have you seen it?

Mr. Flynn

I am familiar with the ninth implementation report. It is a published report.

Would you accept the figures in that as being fairly accurate?

Mr. Flynn

I would accept the European Commission as a reputable source.

We will move on.

Mr. Flynn

May I make one final point? When the price gap was being relaxed, ComReg specifically linked the relaxation of the price gap to the introduction of the single bill service. There is a quote in our slide pack which specifically mentions that. ComReg stated in November 2002 that the changes in treatment of line rental need to be matched by the implementation of the wholesale line rental products. It is clear that ComReg, in the context of relaxing the price gap, saw that this new service would have to come in and generate competition. What has happened is that new competition has not come in and the price gap has been relaxed anyway.

Our view at this stage is that we need to review the price gap and we should go back to the former price gap, which is, essentially, much tighter on Eircom and did not allow these large-scale increases that we have now. We would urge the committee to take up that issue with ComReg. It is very much within ComReg's powers to change the price gap if it sees fit. ComReg acknowledges that because when it set the price gap itself, it stated that it is supposed to apply for three years but may be reviewed earlier if special circumstance warrant it. I would put it to the committee that we now have those special circumstances, the price gap should be reviewed and there should be a return to the much tighter controls which would serve consumers much better and allow more breathing space for competition.

Does Mr. Flynn know what was the sub-cap on line rental?

Mr. Flynn

There was a sub-cap on all services, that they could only rise by 2% each year.

The sub-cap was 2%.

Mr. Flynn

On each individual service. There is now no sub-cap.

Therefore the sub-cap on line rental was 2%.

Mr. Flynn

Correct.

Mr. Timmons, there were a number of questions from Deputy Broughan. If you want to venture an answer for any of those, you are more than welcome to do so.

Mr. Timons

I think some of the answers have been provided by Mr. Flynn. If there is an outstanding question, I would be happy to answer it.

In terms of the 15% which ALTO would be looking for as against the 8.5% which ComReg is suggesting would apply as a wholesale discount, can Mr. Flynn give any international comparison where wholesale rates would be close to 15%, or indeed international comparisons in terms of any fixed charges such as the €24 charge, in our case, for wholesale connection?

Mr. Flynn

I will refer to two countries. In Austria, a wholesale margin of about 15% has been offered and the operators have taken a complaint to the regulator about that. In Sweden, a margin of about 20% is being proposed. This is a relatively new service and Ireland is fairly far advanced in EU terms, but I can certainly refer to those two countries as situations where the ball-park of the margin is significantly higher than the 8.5% that is proposed for Ireland.

No doubt this afternoon Eircom will make the point that such single billing is only available in Ireland, UK and Denmark and is not available in any of the other European countries with similar regulatory systems. Has Mr. Flynn any comment to make in that regard?

Mr. Flynn

Those countries do not have the highest line rental in Europe and do not have a line rental rate nearly double the EU average. I would say that unique circumstances in Ireland require a specific response. In addition the market share of new entrants in Ireland is much lower than the market share of new entrants in those other countries. Clearly competition is not working as well as it should and we need measures like the single bill to ensure that competition gets a better foothold. I would say we are somewhat different from those other countries and we are trying to bring in this service, which is something new but which will be adopted throughout Europe in a reasonably short timescale.

Mr. Flynn, your organisation is made up of everyone in the telecommunications business except Eircom, is that correct?

Mr. Flynn

We effectively exclude dominant operators.

Is Esat BT a member?

Mr. Flynn

Esat BT is a member. Eircom is not a member. Neither is Vodafone nor O2. Effectively operators which are regarded as dominant are not members of ALTO. Our objective is about creating and boosting competition.

Explain the term "churning" again. We came across this in the insurance industry a couple of years ago. Explain how that works. You steal a customer from Eircom because it has been the provider anyway and then Eircom comes around and takes the customer back from you. How does that work? Did I see something recently about some anti-competitive practice which ComReg might refer to in the afternoon?

Mr. Flynn

When a company such as Smart Telecom wins a customer, Eircom is not supposed to contact that customer for three months. The idea is that the customer gets a chance to experience the new service. We have strong suspicions about Eircom using misleading information and various scare tactics to win customers back. The ruling to which the Chairman referred issued from ComReg yesterday. It found that Eircom had breached price control rules in order to win back customers from one company, Synergy Telecom. That is proof of the kind of issue about which we are concerned. We are not surprised by what the regulator found. These matters need tightening up or new entrants will be slowly but surely pushed out of the market. The end result will be that consumers have no competition for telephone calls.

On the technical side, are there restrictions on Eircom or the infrastructure provider? How frustrating is it to deal with Eircom in that area? I hope Members forgive me for using my company as an example, but it is a company which has moved to a different telecommunications supplier. Is there a difficulty in that situation with getting one's line fixed or a problem rectified? On Monday I thought the gremlins were in my system because the telephone lines in my constituency office went down. However, Eircom responded quickly and positively and got me back on line.

Mr. Fanning

As the CEO of an operating telecommunications company, I affirm that any time we have reported any customer fault or difficulty, Eircom employees have bent over backwards to help us. At ground level we have no difficulty with Eircom. I am convinced that when wholesale line rental is introduced, Eircom employees will react as rapidly as if it were their line. That has been our experience on the technical front from day one with Eircom.

I am delighted to hear that. Have members any further questions?

Mr. Fanning

May I make a comment on what Mr. Flynn said? The churn rate across Europe is usually about 5% in the industry, but the churn rate in Ireland is closer to 35% to 40% for telecommunications companies. This begs another question.

I thank ALTO and Mr. Timmons for the information they brought to this committee. Is Mr. Timmons's company about to make another announcement about jobs for Cork? Is it true that 100 jobs are to be created in Cork in January?

Mr. Timmons

That is indeed true.

I believe it will be announced in the Cork Evening Echo today.

I wonder what side of Cork city those jobs will be.

They will be in Carrigtwohill, which is outside our area of influence. Is the company opening a new call centre?

Mr. Timmons

We are in the process of opening a call centre and have employed our first 20 employees in Cork. We intend to expand that number significantly in Carrigtwohill in the near future.

I got that information yesterday from a journalist with the Irish Examiner group, Thomas Crosbie Media.

May I ask a final brief question on these operators? Could it be said that the spectre haunting Eircom is the Internet protocol referred to in the presentation? Could a case be made for Eircom to maximise revenues in the run-in to development? We will only have 9% broadband by the end of this year, which is appalling. This huge spectre haunts Eircom, AT& T, BT, France Telecom and all the old incumbents.

This being the case, could a case be made for allowing Eircom to beef-up charges in the interim while it is moving sideways? For example, all the old incumbents, including Eircom, seem to be thinking of returning to the mobile market. Could ALTO understand Eircom doing this considering ALTO's own experience in the business?

Mr. Timmons

We can understand that would be Eircom's intent and that it would argue that should be the case. However, we are one of the companies introducing the IP based protocol and can provide a very low cost service to industry. The committee can understand that Eircom would wish to keep us busy dealing with win-back customers in order to inhibit us from rolling out our broadband network throughout the country.

This goes back to what I said earlier in terms of access to the material presented today. If, for example, a journalist is looking for access to such material, the request could go directly to us or to the committee. Is there a difficulty in that regard? It is fair that Eircom should be able to come back and comment this afternoon regarding the material such as the Deutschebank material which has been presented to us. Is there a restriction in that regard or how should we handle the material which has been presented?

I will ask the Clerk to get advice on this. This is a document which was in free circulation in the banking community. I am not sure whether the committee is entitled to do anything with it. I presume we would not dream of publishing such a document until we get advice from our legal advice service.

Was it freely available in the banking community?

Mr. Fanning

It is freely available in the banking and stockbroking community. We are aware of journalists who have already had a copy of it for over a year.

I will have to get advice on the matter for the committee. I thank Mr. Iarla Flynn and Mr. Fanning from ALTO and Mr. Brian Timmons from ALTO and Smart Telecom for sharing their views with the committee and for assisting us in understanding the difficulties emerging in the area of fixed line telecommunications costs.

I remind members that ComReg will make a presentation at 2 p.m. and I ask them to return at that time. Eircom will make its presentation immediately afterwards. We may have to invite ComReg back then to answer any questions that arise from the Eircom presentation. The Minister is scheduled to appear at 3.30 p.m. but that time may have to be pushed back somewhat. We would like to complete discussion on this matter and get the answers today. I hope that at the end of our deliberations we will have a firm commitment from Eircom not to increase line rental charges further over the next two to three years.

The witness withdrew.

Sitting suspended at 12.48 p.m. and resumed at 2 p.m.

I welcome Mr. John Doherty, chairman of ComReg, who is accompanied by Ms Isolde Goggin, Mr. Donal Leavy and Mr. Sion Jones. We will hear a presentation which will be followed by a questions and answers session. Before I ask Mr. Doherty to begin, I draw the attention of witnesses to the fact that while members of the committee have absolute privilege, this same privilege does not extend to them. While witnesses are generally accepted to have qualified privilege, the committee cannot guarantee any level of privilege to witnesses appearing before it. Members are reminded of the long standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official in such a way as to make him or her identifiable.

I am not sure if Mr. Doherty has been briefed by his officials on a number of issues which have been raised this morning. A number of allegations were made about ComReg and Eircom and the way in which the price cap came about. I do not have a transcript of the debate at this early stage but the question was raised whether agreements were made with Eircom on this matter. Were you briefed on that by your officials before lunch, Mr. Doherty?

Mr. John Doherty

Only in the generalities, Chairman. The price cap consultation was one of the most significant pieces of work undertaken by ComReg in 2002-03. It required three separate public consultations. It had inputs from economic and engineering experts both externally and internally. It was the decision of the commission in totality which finally put the price cap in place. It was a very significant body of work undertaken by the commission and I believe that answers the particular allegation being made.

Will you expand on that point during your presentation? Is it the practice for your organisation to communicate with telecoms companies if they telephone with queries?

Mr. Doherty

We deal with all the industry all the time; it is our bread and butter. We are only the regulator at the end of the day. The industry consists of the people who do the telecommunications work. Whether it is arental discussion, a discussion on CPS or, like yesterday, a breach of the code of practice, we communicate on a daily basis with the industry across the whole spectrum of ComReg.

If, for instance, a telecoms operator telephoned the commission last week or the week before to speak to you or your officials, I presume there would be no difficulty in speaking to you.

Mr. Doherty

We have a completely open door policy. I receive telephone calls from consumers through to chief executives of companies. My colleagues and I meet people at all levels across companies and organisations.

Thank you. I will ask you to begin the presentation.

Mr. Doherty

On behalf of ComReg I thank the committee for the invitation to attend here today. My fellow commissioner, Ms Isolde Goggin, and I wish to make the presentation to the members and then deal with any questions that may arise. We are also accompanied by my colleagues, Mr. Donal Leavy, director of finance and regulatory accounts and Mr. Sion Jones, manager of competitiveness and pricing.

I wish to set out the background to our present position, some recent developments that have taken place, outlining the objectives and obligations of ComReg and where the setting of a price cap fits into this process. The consideration that we, as the national regulatory authority, need to factor into our decision making process will include how to balance the promotion of the interests of consumers and the promotion of competition and how it is envisaged to protect vulnerable users or those with low usage where line rental forms a large portion of their bill.

I will outline the first part and Ms Goggin will then outline the process and specific challenges faced by ComReg in setting up the 2003 price cap. She will outline the issues faced with regard to line rental in this context and the steps we have taken. I will conclude our presentation by outlining the progress that has been made and the activities envisaged which we believe will result in further enhancement of competition and the protection of consumers.

I will set out the context for the present in order to give the full picture. In terms of competition and our roles, we regulate where competition does not solve the needs. For instance, international calls are not regulated in some cases by ComReg because we believe the market is competitive. We regulate in other areas and this has resulted in lower prices for consumers. We believe that competition and choice are the foundations on which a modern, high-tech economy like Ireland's must be based. It is no longer a question of looking backwards and discussing what was not available in the past. Given the EU requirement, the type of economy and the companies currently operating in Ireland, this degree of choice, price, competition and quality is required. In terms of consumers and the broader economy, this liberalisation and regulation has worked. Telecom prices have fallen 40% since 1997, which means that bills for the average user are €30 cheaper than they would have been if there had not been the various price caps and regulations in place. In terms of the price cap for the future, we have had the benefits of the past and the price cap is currently set at a rate which is below the rate of inflation in practice. In the context of where we were in terms of price cap, there was only one price cap increase per year for each of the last two years rather than the headline statement that there have been three price caps in one single year.

Due to the price cap, telecom prices have been maintained at a low level. ComReg does not envisage any further line rental increases in 2004. In the context of liberalisation and regulation, service and quality standards today have improved immeasurably from when there was a monopoly provider called Telecom Éireann. As an IDA employee at the time, I remember trying to explain to companies why it would take a year to get a leased line and perhaps six months to get a telephone. Those elements of liberalisation have really moved the process forward. Unlike other countries we are still in the first quarter of the match. For instance, liberalisation has been happening for 19 years in the UK. We are only entering the fifth year in Ireland but considerable progress has been made. Prices are lower, quality is higher. I would be the first to admit that ComReg is a major critic of Eircom with regard to its efficiency and a major critic of Eircom in terms of the openness of its wholesale network to allow enhanced competition. I equally recognise that progress has been made.

In terms of the overall liberalised market, ComReg is the national regulatory authority and has specific objectives and obligations in mind. The graph which is displayed on the screen shows the evidence of what I have been describing. The red line indicates the CPI level. The blue line shows other utility services and looking at the dark blue line it can be clearly seen that the Irish consumer has benefited from liberalisation and price control. ComReg's decisions and actions clearly have to be frameworked within both national and European laws and clearly reflect the objectives outlined in the various policy directions it has been given.

The key consideration to be factored in when making our decision is the promotion of competition. We genuinely believe that the promotion of competition is in the best interests of Irish consumers in the long term. It underpins prices, quality of service and it is the best guarantee for Ireland in the future. ComReg has obligations to protect consumers and to encourage efficient investment in infrastructure. In a national debate on broadband roll-out, we need to realise that an efficient broadband roll-out to all parts of Ireland is required and that will cost money to achieve. As the national regulatory authority, ComReg has a responsibility to ensure that the investment climate is commensurate with the roll-out of that efficient network.

The steps we take to ensure these measures are achieved can sometimes conflict. It is fair to say that the interests of all those pieces we have set out, such as the rule by which the EU regulations require that SMP or dominant operators separate outline rental costs or access network from their call costs, can conflict with other elements to be addressed such as consumer protection, supporting competition. It must be recognised that a price cap throughout Europe is regarded as the best practice for meeting those objectives of promoting competition, protecting consumers, encouraging investment and complying with national laws. We are trying to ensure consumers and competition can benefit from the creation, by means of a price cap, of an environment whereby competition has sufficient margin on the products to be able to sell and provide what consumers want to have. This can be achieved by having a CPI minus. In that way, inflation protects consumers. We also have to be able to provide that an efficient operator, or an incumbent, is able to further invest in infrastructure which will be critical if we are to achieve broadband roll-out. Another aspect which has been missed in the debate on the price cap so far, is that the price cap also seeks to incentivise the incumbent, in this case Eircom, to be efficient. Part of what we do with the price cap is to try to enhance efficiency.

Which debate are you talking about? Do you refer to the debate here or a debate outside this House?

Mr. Doherty

I refer to today's debate at this committee.

What has been missed today? You are not referring to a debate outside the House?

Mr. Doherty

Not at all.

Something has been missed here today so far.

Mr. Doherty

I misheard the Chairman. I am referring to the broad general debate outside this House.

Do you refer to the debate in the media?

Mr. Doherty

I was referring to the general debate, such as in people's conversations. That particular element seemed to come up.

I thought you were referring to this committee.

Mr. Doherty

No. I extend my apologies.

We will speak to you in a moment about the feelings of consumers, not about the feelings of the media.

Mr. Doherty

We have obligations to allow Eircom to rebalance. We have to allow competition. One way of trying to demonstrate that is to examine the price cap decision we took in 2003. It was an attempt to bring together the various elements that combine to consider the price cap. I invite my colleague, Ms Isolde Goggin, to take over at this point.

Ms Isolde Goggin

When taking the decision to impose the price cap, as Mr. Doherty has explained, we had to put together a number of different aspects and a number of different ways of examining it, all of which represent objectives or legal requirements with which we have to comply. In general, when taking such a big and complicated decision one has to achieve some kind of balance, or follow some kind of middle course, which enables one to do the best one can to achieve all of these objectives, certainly without conflicting with any of them. In that area I would put all customers into the mix of the whole market that is out there for telecommunications services, both calls and access. In particular, we would put in what one might call the low user customer or the vulnerable customer - people who perhaps do not make many calls. Telephone companies will not make a truckload of money from such people, for whom a telephone may represent an important lifeline. Another objective of ComReg is to achieve sustainable competition within those parts of the market, where possible.

Mr. Doherty spoke about rebalancing. We have to ensure that each element covers its costs. The fact that this has not been the case traditionally is evident if one examines the position in the 1980s when I worked in Telecom Éireann. Before competition was introduced, calls subsidised access. Calls were more expensive than they would have been in relation to costs, but that was used to subsidise the access network. That is no longer an option as a consequence of the EU legislation with which we have to deal.

This is a very thorough and extensive consultation process, as Mr. Doherty said. We put our arguments in the public domain and we invited people to write to us to make their views known. That is the process. If people want to make their views on the price cap known, they can send in submissions in response to requests for consultation. The press can inspect the documents. We also publish a summary of the submissions when we publish the final document. We are normally disappointed by the level of response from consumer organisations in particular. We made a particular effort in the context of this process because we thought it was a big deal for consumers. Our PR person at the time made a big effort to contact consumer groups and to try to get them to come in to make their views known. As I have said, we were somewhat disappointed by the formal response. The order was laid before the Oireachtas, as it has to be in compliance with legislation.

There are other obligations in addition to the price cap decision process. For example, Eircom must base its line price on efficient costs. It has to meet this obligation, which derives from separate European legislation, regardless of the price cap we put in place. The question of what constitutes efficient costs is a big matter of debate and a point of disagreement between ComReg and Eircom. Our view of an efficient cost is very different to that of Eircom.

I would like to make a few points about the cost situation in Ireland. We have a low population density and a reasonably dispersed population. Our population tends to live in one-off housing and not in clustered villages. There is no doubt that these matters affect costs. If one examines the patterns of the local, national and international calls that are made, one will see that costs tend to be decreasing on the parts of the network that deal with them. They are getting more efficient and the capacity of the equipment is increasing. One can see why the costs are decreasing. We do not think that the same dynamics necessarily apply on what we call the access network, which is the local loop in effect, or the copper mile between the exchange and one's home. Labour costs have increased considerably. At one stage, the rate of construction inflation was about 12%. Although it has decreased in recent years, it is still reasonably high. As Mr. Doherty mentioned, there is an incentive to invest in broadband.

All those things are saying that the access network, which is where the line rental comes from, involves holes and poles. It is not high-tech. It involves digging up the roads and putting tarmac back on the surface. It is quite labour intensive. There is not a big element of costs going down in this area. As I have said, we have had significant disagreements with Eircom about the level of efficient costs, even while acknowledging the specific elements of the circumstances in this country. There is no doubt that one will have limited access based competition in the local network. It is unlikely that somebody else will dig up the roads and provide holes and poles. The networks are generally put in place under monopolies.

Although the prospects for infrastructure based competition are limited, one can have a sort of virtual competition which is made possible by the wholesale line rental product, which was mentioned this morning. The idea behind this product is that it enables a competing operator to present itself to the customer as if it were doing the whole shebang - as if it were doing the line rental and calls as well. We have found ourselves intervening in this product to a greater extent than we normally would. Most of the products with which we deal are inter-operator products. One puts the boys in a room together and lets them at it to decide what the product specification, etc., will be. In the case of this product, however, we have found ourselves getting involved in developing processes and the manuals that will support it. This has happened for various reasons, mainly because some of the other operators have had financial and resource constraints. It has turned out to be necessary to intervene in this way. If it has to be done, we will do it.

Denmark is the only other European country where the wholesale line rental product has been introduced by the national regulatory authority, or the equivalent of ComReg. It does not have the same degree of functionality. It is very important to get this right because it is customer facing. Many products are of an inter-operator nature. The products may not work fully on the first day, but if they work 80% it may be possible to sort things out over the next few days. Operators use this product to present themselves to end users. It has to work 100% from the first day. If it does not work fully, the customer will be lost and will not come back.

Can you explain a little more about how it is working in Denmark? Can you expand a little on how it applies?

Ms Goggin

Yes. Perhaps I will ask Mr. Doherty to speak on some aspects of this matter. It does not cover all the things that our product covers. Our product covers the ISDN, for example, but the Danish product involves the more high speed lines as well as the basic plain old telephony service.

Mr. Doherty

This product was introduced almost by agreement in Denmark as distinct from through negotiations. It was the original wholesale line rental product, but it does not have approximately 40% of the features that we have in the wholesale line rental product here. It includes analogue services only as distinct from analogue and digital going forward. The process is exactly the same from the conceptual point of view. Another operator can go in to make a sale on calls and line rental and thereby provide that customer with a single bill. That is what we are trying to do in the Irish market. Moving on from where Denmark was, it was clear in the Danish area that they had exceptions on call barring and fault repairs, for example. With hindsight, I think they would like to have such exceptions in the Danish product, just as we have built them into the Irish product at this stage.

Ms Goggin

The other point I would like to make about the wholesale line rental product is that the end of March 2004 was always the date for which a fully automated product would be available. We have tried to put a manual product that would be suitable for smaller numbers of customers in the market before then.

I have shown the joint committee a comparison of the overall basket of fixed telephony prices. It shows the average monthly expenditure for residential users and the next one shows the average for business users. Ireland is in there. The line rental is high. These are post-VAT prices so they include some variation in VAT rates over different member states. On the other hand, the amount we pay for calls is not as high. We are not as near to the bottom of the graph as we would like to be, but we are in the middle range, in which there is not much variation. On the question of business users, the line rental forms a smaller component of their costs.

Over time, although the cost of line rental has increased, customers have benefited from an overall reduction in bill size. The bundle of calls and access have gone down. We have a rebalancing requirement. The Commission has taken proceedings against one member state and one incumbent operator for not rebalancing. The Kingdom of Spain was taken to the European Court of Justice because it had put controls on line rental which did not allow the incumbent operator to rebalance and the action succeeded. Similarly, Deutsche Telekom was taken to court last year and fined because it was selling a retail product - DSL line rental - at a lower price than the wholesale product. It had not rebalanced sufficiently and this was creating competitive distortions in the market. The line rental component of DSL was being charged for at a higher rate than the cost of the line rental wholesale.

Who took whom to court?

Ms Goggin

The European Commission took Deutsche Telekom to court.

Is there a regulator in Germany?

Ms Goggin

Yes, but the abuse in that case was abuse of dominance because the company was selling below cost. It was the company which had infringed the law, whereas in the case of Spain it was the regulator and the State.

Could you explain the Spanish case again? I presume it refers to Telefónica.

Ms Goggin

Actually it was the Kingdom of Spain.

The Government?

Ms Goggin

Yes.

The Government took whom to court?

Ms Goggin

No, the European Commission took the Government to court because it had put a cap on line rental. Initially it told them what price to charge for line rental——

It told whom? The regulator?

Ms Goggin

I beg your pardon, Chairman, I am not explaining this very clearly. The regulator told Telefónica what line rental to charge initially. Then, the following year, it made it part of a price cap but with a sub-cap on the line rental which was CPI plus 9%. The incumbent argued that this did not allow it to rebalance sufficiently to enable them to recover their official costs on the access network - the last mile of the telephony network before a home. It complained to the Commission, which took up the case and agreed that this was distorting competition because the company was being forced to charge below its efficient costs for that element of the network. Spain was taken to court but because it is a member state infringing the EC treaty, it is not a case for the imposition of fines.

For the benefit of the members, can Ms Goggin confirm that it is illegal to put a price cap on line rental?

Ms Goggin

It is not illegal to put a price cap on line rental but it is illegal to put a price cap which would prevent the incumbent from recovering its efficient costs. It would be illegal to establish a price cap which forced the company to sell below cost.

I see. We will continue; this is becoming complicated.

Ms Goggin We are almost there. We were concerned about the impact of the rebalancing issue on consumers, particularly those who make few calls. This was why we introduced the vulnerable user scheme under which customers pay a monthly flat charge for which they receive their line rental and a certain number of calls - at the moment, €4.13 worth of free local and national calls, exclusive of VAT. The idea behind that was that if somebody is paying a small amount per month on calls and his line rental is the biggest component of his bill, a bundled product such as this will provide a better deal.

To return to the question of wholesale line rental, the objective behind that is to allow competitors to offer a full package. It is not so much that wholesale line rental in itself allows people to make a big margin on line rental, but the idea is that a company can present a single bill to the customer. It has come up in our research that it is a big deal for people to receive two bills; it is inconvenient and makes it hard for them to know how much they are spending overall on telecommunications. If they want a single bill or offer some bundle products in which they throw in flat rate Internet access or DSL at an overall price, this wholesale line rental product would allow them to do that. Prices must still be cost oriented overall. I will hand back to Mr. Doherty to conclude.

Mr. Doherty

We have a copy of the Spanish judgment; if I may, I will send it to the committee so the members may study it in detail.

Thank you.

Mr. Doherty

We are not here today to defend the Eircom position. We stress that consumers and the wider economy generally have benefited significantly from liberalisation regulation and the use of price caps. ComReg has specific obligations and responsibilities which we must factor into our deliberations. Sustaining and developing competition is, we believe, pivotal to ensuring the best possible deal for consumers in terms of price, choice and quality. The completion of an appropriately priced market for local loop unbundling, the introduction of a wholesale line rental product and the increasing roll-out of DSL will provide opportunities for both competition in the access network and protection of consumers into the future. We would not expect any further line rental price increases in 2004. We are committed to having this wholesale line rental product in place in April. We, on behalf of ComReg, will be considering all the measures open to us, including freezing the price cap, if this product is not in place by April by way of sustaining competition.

While today's discussions have focused on the line rental issue and on price caps generally, we have also introduced a whole range of measures, including the carrier pre-selection changes with no-win-back provisions, the in situ transfer of leased lines, fixed wireless access for local loop, which again provides competition for people at local area level on the access network, and port transfer so that consumers can benefit when they want to change suppliers of DSL. This is all to support the development of competition. Collectively, they significantly underpin our determination for this market to be a competitive communications sector. I thank the Chairman and the members for their time and attention.

What has Mr. Doherty to say to telecommunications customers who see, as part of the ninth report of the European Commission on the implementation of the telecommunications regulatory package, a graph showing, as of August last year, an average monthly residential rental charge of €16.20 per month across the EU? It is higher now at €22.49. A consumer who may not be using his phone on a regular basis has seen three increases in the last 12 months. Were these increases authorised by ComReg?

Mr. Doherty

There were not three increases. It is not fully understood that the price cap is running from February to January, so in that context there is a line rental increase for each of those two years. In the first year Eircom made an application for a price increase of 15%, if I remember correctly. We refused to let the full increase go through until the vulnerable user scheme - what we describe as the low user scheme - was put in place, for exactly the reason the Chairman has identified. We had identified that there were groups of people for whom line rental may be disproportionately high relative to call charges. We did not allow Eircom to increase its prices until it introduced the low user scheme. The intent behind the scheme was to militate against increases for those who would be affected. On top of that, we have worked closely with the Department of Social and Family Affairs and Eircom to protect as far as we can those who are covered under the current telecommunication allowance scheme so that the rises that might normally apply would be mitigated as much as possible. For the great body of consumers generally, I stress, telecommunication costs in Ireland are 40% cheaper than they were in 1997. As a consumer myself, there are few products and services I enjoy that have that level of price downward movement on a consistent basis.

Have you seen this document?

Mr. Doherty

The line rental chart only?

Have you seen the ninth report on the implementation regulatory package commission of the EU?

Mr. Doherty

Yes.

How would Mr. Doherty explain to the Irish telephone user a difference of €9 to the European average? How do we explain this difference in European prices to our constituents?

Mr. Doherty

We have to accept that overall prices have come down. We need to recognise that in Ireland, unlike locations such as Finland, Sweden or Denmark, we have a diverse population. It is not as if in some of those locations where there is plenty of——

Is that the same as Sweden where the average price is €12.55 per month?

Mr. Doherty

Their population makes it different. Huge parts of Sweden have no inhabitants. We have many single houses and a highly dispersed population.

We will come back to the costs later. I call on Deputy Coveney.

I welcome this first opportunity to have a discussion with Mr. John Doherty as the new chairperson of ComReg. I wish him well in his challenging job.

There seems to be a slight conflict in the information given on the increases in the last 12 months. Can we have these confirmed? Is the Consumers Association of Ireland incorrect in stating that there was a 7.9% in March 2003, a 6.3% increase in May 2003 and another 7.5% recently? Is that not factually the case?

Mr. Doherty

It is factually the case. What is incorrect in those figures is that the first two elements were a single price increase application by Eircom that ComReg refused to accept. ComReg delayed the second part of that price increase until the vulnerable users scheme was in place.

How many users are in the scheme?

Mr. Doherty

I think there are 300 or 400 using it.

Between 300 and 400 in the entire country, despite the sanction of a overall 25% increase in the last 12 months?

Mr Doherty

One would have to look at the user profile of who the scheme suits.

Surely it will suit more than 300 people nationally.

Mr. Doherty

If there is a criticism to be made here, it is that Eircom was required to introduce this vulnerable users scheme. It should have propagated and promoted it. ComReg reminded Eircom of that.

It is not in its interests to do so.

Does Mr. Doherty think it is in Eircom's interests to encourage users to pay less in a vulnerable users scheme when they can be charged more for fixed line rental?

Mr. Doherty

Eircom has responsibilities and that was the particular requirement. ComReg asked for this scheme because it believed there were groups of people who might be disadvantaged because the costs of calls to line rental is disproportionately high.

How many residential lines are there in the State?

Mr. Doherty

The total is 1.6 million lines.

We are concerned that a 25% increase is the equivalent of the consumer paying an extra annual €90 million approximately for line rental. We are also concerned about vulnerable users on low incomes who may not be heavy phone users or interested in broadband access but who may wish simply to have a phone for incoming calls. Those people are being targeted unfairly. What has ComReg done to ensure that vulnerable users are informed of this scheme? Between 300 and 400 people is a miserable return when one considers the number of potential people who should avail of this scheme. If Eircom is not introducing the scheme in an effective way, what is ComReg doing to address that question?

I have not received a satisfactory answer why there has been a shift away from setting a number of sub-caps for the provision of telecommunication services across the different spectrums. Why has there been this shift to a system where there is one overall cap figure for the basket of telecommunications services? Where is the advantage for the consumer in this shift from one system to another? Are other EU member states using the basket cap figure system and linking that to inflation? Have most other countries stuck to the sub-cap system? ComReg would have much more control as regulator over the overall market structure if there were a number of different sub-caps to play with rather than the one blunt mechanism there is now. Can the committee get a detailed explanation why we have moved from the system of sub-caps to a basket cap?

Mr. Doherty emphasised that any price figure that may be applied for by Eircom would need to be based on the efficient cost of providing that service. In the case of a 25% increase in fixed land rental, has the cost of the provision of fixed line rental increased by 25% in the last two years? Are we implementing that rationale of effective cost? How does the regulator establish what is effective cost? Is it based on the calculation that Eircom is employing X number of people, building materials and infrastructure provision costs? Is it calculated by what it costs other more efficient operators in other European countries? Is the efficient cost equation based on the present costing structure in Eircom or is it based on an internationally accepted efficiency rate?

I am glad to hear about single billing. I hope ComReg takes an aggressive approach in ensuring that this will be operational by the end of March.

Mr. Doherty

I will deal with the vulnerable users scheme. My colleague, Ms Isolde Goggin, will deal with the sub-baskets and Mr. Donal Leavy will deal with the question on efficient operators.

The scheme was originally promoted but what needs to be done now is further promotion. This week we will see a palpable promotion of this particular scheme to vulnerable users by Eircom. ComReg is requiring it and it will be publicised. Deputy Coveney should acknowledge that ComReg did identify this particular issue at the time of the price cap and it set out to create this low user scheme to protect users. ComReg sought to make it as well known as it could and users then had to take it up. The lesson that has been learnt is that a more aggressive marketing effort will be needed to ensure those low frequency users know what is happening. On top of that one should not lose sight of the 300,000 users on the telecommunication allowance scheme. We have worked closely with the Department of Social and Family Affairs and Eircom on that scheme to see what we can do to protect those users. That is an ongoing and developing situation, so it is not just about low users. There are also the disabled and old age pensioners. We at ComReg have identified the issues and we have taken measures to address them.

Was that scheme not in place long before ComReg was set up?

Mr. Doherty

I am not suggesting we created the telecommunication scheme but, as the Chairman is probably aware, there have been changes to the scheme in the last 12 months, with work being done on that through our organisation and Eircom——

The scheme has been in place since before I came into politics. Before you answer some of the other questions I have more questions about the low user scheme. Is the scheme mandatory for Eircom or is it something that organisation came up with itself?

Mr. Doherty

Which?

The low user scheme.

Mr. Doherty

No, it is a scheme we required Eircom to come up with.

Is it mandatory?

Mr. Doherty

It is a requirement of Eircom to provide this vulnerable user scheme.

I am reading part of ComReg's document, "A Future Framework for the Regulation of Universal Service in the Irish Communications Market", which was published on 18 June 2003. It outlines various issues, including affordability. Section 7.1.2(2) outlines Eircom's position in its submissions to ComReg. Eircom's position was moving in the direction of such a vulnerable user scheme; they seem to argue for the introduction of such a scheme. I beg to differ with ComReg's argument that this is a great victory for the Irish public and for ComReg.

Mr. Doherty

I am sure Eircom will speak for itself but if members were aware of the sequence of events, with various public consultations, they would know that that was a requirement we introduced. Eircom clearly came back with——

I can quote directly from ComReg's document: "They [Eircom] believe that the best way to do this was to identify and assist individual vulnerable customers instead of distorting prices to a wider group."

Mr. Doherty

I will go back to the point I made, if I may. We required the introduction of a scheme that would address low users. It is not for us to develop the scheme. Eircom then came forward with the scheme which seeks to address this and that is what is reflected in the document.

It is Eircom's scheme in other words.

Mr. Doherty

It is Eircom's scheme. We do not run telecommunications schemes. All we can do is identify the issues. The issue here was low users and we required Eircom to have a scheme which addressed that. I am sure they will answer that themselves later.

The issue here is not so much whose idea it was to introduce the scheme or whether it has been introduced at all. The issue is the uptake. Everybody has to pay the increase in line rental charges and we have 300 to 400 people who have taken up this scheme. The vast majority of vulnerable users do not have a clue that the scheme exists.

Mr. Doherty

We have tried to——

Surely that is an issue for the regulator. The scheme is in place now but Eircom should be required to inform all vulnerable users that this service is available. That does not seem to be happening.

I have never heard of the vulnerable users scheme and I am not surprised that only 300 to 400 people have availed of it. If it is in place I would have thought ComReg would require Eircom to apply it automatically if a certain number of calls are made and that people would not have to apply for it or be made aware of it. It should be automatic and then those entitled to it would get it. Should ComReg not direct Eircom to proceed along those lines?

Ms Goggin

On timing, the price cap document came out in February 2003 and it was in that document that we made it a condition that Eircom introduce a vulnerable users scheme. In the previous price cap there had been an equivalent scheme, the lower quartile cap. That was put together differently but the idea was the same, protecting users at the lower end of the spectrum of use. The idea that there is an overall price cap but that within that there would be some form of protection for lower users goes back a number of years. The document mentioned by Deputy Ryan was a response to our consultations in the middle of last year. The idea was there previously and the details of the scheme are Eircom's responsibility, but we would require Eircom to have such a scheme.

I hope I am not the only member of the committee who does not understand this. When saying, "Eircom has agreed to publicise", I do not like the word "agreed". That does not mean anything. Is it mandatory for Eircom to advise customers of the low users scheme?

Ms Goggin

It is mandatory for them to advertise all their tariffs, and this is on their website, but it is pretty hard to find on the website. We will take that on board.

Can you answer the question Ms Goggin, please? You have ordered Eircom to introduce this scheme, even though it was their idea. Is it mandatory for them to ensure it is introduced?

Ms Goggin

It is mandatory.

Is it part of their agreements with you? Can you not answer the question?

Mr. Doherty

It is.

Thank you, Mr. Doherty.

Mr. Doherty

In deference to members, it is clear to me that more emphasis needs to be put on the promotion of this scheme. We will require that immediately and members will see developments in the national press over the next few days which will indicate——

I am not in your job but a bill goes to everyone's house every month. That is the way to communicate with your customers——

Mr. Doherty

Notification was given in various forms; more could be done.

—or make a telephone call to your customers. That is the way to do it. A delegation from An Post was before the committee recently. It is the greatest communicator in the country because it is at everyone's door every day but it still could not communicate properly on the postbox issue.

Mr. Doherty

I accept that more has to be done to promote the scheme. That is not at issue.

This goes beyond promoting the scheme. It is only a matter of adjusting the computer programme so that if someone's usage is below a certain level this scheme kicks in when bills go out. Why can that not be done?

Mr. Doherty

Candidly, though it may sound simple, people's usage changes dramatically. At Christmas low users——

But they would only qualify during periods when usage is low. If the computer is set it will do this automatically and the customer will not qualify when the level of usage is higher.

The bills are issued on a monthly basis, are they not?

Mr. Doherty

It is bimonthly in most cases.

Bimonthly. How does one qualify as a vulnerable user?

Mr. Siôn Jones

Users apply to Eircom to go onto the scheme. They benefit from the scheme if their call usage is approximately €11 or less per month.

So the onus is on the person to apply, in other words, if the person does not know the scheme exists he or she will never apply, for obvious reasons. Should ComReg not try to do what Senator Kenneally is proposing? If someone's phone usage is below a certain level then they either qualify as a vulnerable user or not. Does that not make sense?

Mr. Doherty

I agree that it makes sense and we will look at this point again. The challenge is that the level for the scheme is approximately €11 but if one spends more than that one suddenly moves onto standard rate calls. The package on the vulnerable users scheme contains an element of call costs beyond the normal costs under €11, bundled in with the line rental costs. If one exceeds that one's call costs suddenly spike very savagely. As we all know, at Christmas, Easter and birthdays people's patterns of usage can rise. We are concerned about applying this arbitrarily, which is something we will look at again. People could end up paying significant access standard usage call costs at particular times of the year. It is not a simple cut and paste operation. More work needs to be done on that.

If there are those different spikes at different times of the year, how can they possibly apply to be a vulnerable user?

Mr. Doherty

People know and can control their pattern of usage if they enter into the voluntary scheme. One of the elements we put into it to try to protect that spike is that if people exceed the normal amount in one month, they would have an excess premia of €1 to pay but after that, they would have to decide whether they wanted to remain in the scheme. ComReg tried to develop and define a scheme for particular users and to put as much protection in the scheme as it could. It could be promoted better.

Mr. Doherty, you might give us more detail on that.

Does Mr. Doherty know how many vulnerable low users there are? Has ComReg done that type of analysis? Does it have figures?

Mr. Doherty

It could be anywhere between 20,000 and 60,000 users.

From where did Mr. Doherty get those figures?

Mr. Doherty

They are from the Department of Social and Family Affairs and from some analysis Eircom has on this type of standard pattern of usage.

The last time ComReg was before the committee dealing with the mobile telephone market, Mr. Doherty's predecessor had not carried out a market analysis of the mobile telephone market. This is one of the problems members have with ComReg, that is, it always seems to be chasing the game. It has now done market analysis on the mobile telephone market and we got an e-mail or some information on its analysis. Is it the case that it has not done research on patterns of usage research for the line rental market?

Ms Goggin

On the mobile telephone market, it is very unlikely that one could get these types of statistics for the mobile market because there is so much pre-paid——

We will not go into the mobile market. The Deputy was just making a comparison. He is interested in line rental and telephone users.

ComReg told us it was going to do an analysis of the mobile——

Mr. Doherty

It is quite different, if I may say so, in the context of what we are looking at here. At the time the vulnerable users' scheme was introduced, one of the challenges I had was that ComReg must enable Eircom to rebalance. That is a legal obligation it has. In looking at that, ComReg had to look at the categories in the cap itself about which Ms Goggin will talk in more detail. Out of that, ComReg was able to identify that the people at risk by rebalancing were those who would have low call usage for which the line rental would be disproportionately high and the so-called vulnerable users, people who are typically or predominantly covered under the telecommunication allowance scheme. It is not pristine data in so far as it is probably not to the nearest 100 but is probably to the nearest 2,000 or 3,000. There could be anywhere between 20,000 and 60,000 people who would fall into that category. That is a mixture of data from the Department of Social and Family Affairs and data ComReg has been able to extract from Eircom.

Only 400 have signed up.

Mr. Doherty

To date.

What powers does ComReg have? It said it wants to see this scheme being made available and being taken up by many more people. If that does not happen, what stick has ComReg to ensure Eircom makes that happen? The price concessions have been given - that is history. What leverage has ComReg to ensure what was agreed, when it sanctioned the price increases, that all vulnerable users access this service?

Mr. Doherty

I need to delineate two different points. It is clear ComReg has mandated the provisioning of this service.

Mr. Doherty

It is quite clear Eircom must provide it. ComReg will require Eircom to propagate it much more rigorously than it has. ComReg cannot force end users to take it up. ComReg cannot compel Eircom to make sure people know it is available. At the end of the day end users must be informed which relates to propagation. The election to take it up is clearly a choice people will make - some will take it up and some will not. ComReg has tried to provide the tools for those who take it up. It will make sure that message is clear, loud and unequivocal in the future.

We will watch that.

I welcome the delegation, on which we will be hard. However, the public would be livid if it had the opportunity to be here. Paying €290 plus per year just for the privilege of making a telephone call has focused many people's anger about some of the rip-offs in this country. It is a sore point for the people and it is valid for us to be critical of what is going on.

Mr. Doherty

I do not mean to interrupt the Deputy but ComReg fully appreciates the concern of people. It is not as if ComReg has come here today without understanding it. Not only has it felt that particular anger but ComReg recognises it. I, too, have a line rental and pay the increases but I look at my total bill which shows that I am paying €30 less than I would have been pre-liberalisation due to a range of price caps.

Saying the situation is better than it was under the old Department of Posts and Telegraphs is not a good enough justification for what is happening given the change in technology and the costs in this area. What type of company or corporate strategy does ComReg believe Eircom is following? In its dealings with the company over the last year or two, does ComReg see it as one which is in there for the long run, looking to invest capital and to build up the assets or does it see it as some people in the media characterise it as one where the main shareholders, venture capital companies - fair play to them, they are entitled to their own business strategy - are coming in sweating and stripping the assets and looking to get out quickly? What type of strategy does ComReg believe the main shareholders are following? How has that coloured ComReg decision making?

Is ComReg aware of some of the information provided to the committee today via a copy of a bond issue application organised by Deutsche Bank which Eircom used in its bond issue in July last year and which shows, as part of the figures presented to us this morning, that the capital expenditure by Eircom has more than halved in the past three years from approximately over €500 million to under €200 million? Has that coloured ComReg's impression as to what is the long-term strategy of the company?

This is where I would come down hard on ComReg. This committee has been dealing with this issue for approximately one year, so it is not totally unaware of what has been going on. The committee has had 50 or 60 meetings on the subject and it would seem Eircom is a venture capital driven company, which is perfectly valid and which is a type of Rottweiler of the business world. It comes in, manages a company, makes its returns and gets out. That is fair enough. A Rottweiler will do what nature designed it to do. It seems that the public has a poodle protecting it from that Rottweiler and that ComReg has been far too gentle in its dealings with Eircom. That is the impression I get having looked at this issue for one year.

The Deputy is referring to the work we did on the ICT committee on broadband. It covered much telecommunications.

Yes, it covered a huge amount of the telecommunications area. I would argue - I would like to hear ComReg's defence of it - that in the review of the price gap, ComReg gave a huge amount to the company in return for a vulnerable users scheme which, even if widely promoted, may not lead to huge usage. It may be a poor scheme which, no matter how much it is promoted, will not sell.

My last question is probably the most important because it concerns the position going forward. ComReg stated in one of its consultation documents of November 2002 in reviewing the price cap that changes in the treatment of line rental needed to be matched by the implementation of a wholesale line rental product already mandated in the CPS decision of that year and that that was essential to enable competitors to continue to operate and expand in the very important CPS market. That was more than two years ago, and we are still looking forward to opening up wholesale line rental in April. We had the alternative telecommunications operators with us this morning, and they do not think that the conditions of that line rental agreement which, as Ms Goggin said, was devised by ComReg, will bring alternative operators into the market. The wholesale discount of 8.5% that ComReg is giving will not make it profitable for them, and the €24 charged for every customer whom they engage will certainly kill any likelihood of their entering that market. If we are to move towards a more competitive system, how does ComReg answer the criticisms of those independent operators who say that the deal it has done in this area is over-generous to Eircom and will not lead to competition?

Mr. Doherty

Perhaps I might deal with the first part, and my colleague, Ms Goggin, will deal with the rest. I am sorry for breaking up the answer, but I am keen to ensure that we get our message across as clearly as we can.

It is not a question of crowing about ComReg. Wholesale line rental was introduced by ComReg as a way of trying to enhance competition in what is essentially the carrier pre-selection business. We had undertaken market reviews which identified, for instance, that 40% of customers would not change because they did not like the double billing. We set out in the original November consultation what our position would be. However, if the Deputy considers the final direction on the price cap, he will see that the polarity between the delivery of the wholesale line rental and the price cap was not intertwined. We intended, as we stated from the beginning, to have fully automated wholesale line rental in place by 31 March 2004. Let us examine the margin of 8.5%. The UK, which is trying to launch a similar product, has a negative margin of 16%. On wholesale line rental, we must consider what one is trying to achieve.

The UK line rental is half what it is in Ireland.

Mr. Doherty

The figures are much closer to ours than those of Luxembourg or the average.

The price is €12 as opposed to €24.

Mr. Doherty

We are talking about two different points. Wholesale line rental was to allow other operators to introduce bundled products and services bringing together line rental, FRIACO and calls in such a way that the price point might be €50 for that package of services. It provided two advantages: it dealt with the single billing issue and it provided other operators with the opportunity to compete on a more level playing field. It enhanced the retention of customers. We have set out in the initial year with a margin of 8.5%. We intend to pursue the widening of that margin. It was a question of getting the product introduced. We too are fully cognisant of the costs involved in the order handling piece of €22, and we will obviously address those issues.

The order handling piece, in the totality of what is going on, is not the show stopper. I have met several of the CEOs of the various companies that ALTO represents. Interestingly, their concern was that we ensure that the product was perfect regarding such things as the NDD, fault repairs and handling. The difference between this product and what many of the operators are generally involved in - interconnection related products where they can be fixed at the back end - is that people like the Deputy or myself get a bill. If the bill is wrong, we can vote with our feet.

We have spent a long time developing this product. Only one other country in Europe has this product, and it is not as sophisticated as ours. We will deliver this product on time, but it is complicated. ComReg has had to do a great deal of work which is almost unique to us as an NRA. I am aware of no other NRA which is writing process manuals to support the product. We are doing that because we are convinced that this product can make a difference and - I will be candid - because the industry, for reasons of resources and finance, is not able to fund the product properly. ComReg is doing the back-fill.

A poll of our competitor NRAs around Europe would find that no one else would do this type of activity. We do it because it can make a difference, but it must be right. If the bills are wrong for the end users, that puts the business at risk. We will ensure that it is right and will be examining the pricing elements. We are fully cognisant of that. If ALTO were here, it would acknowledge that, on CPS, which is the platform for this activity, we have recently reduced the call costs, or call order handling, from €8 to €3 for exactly this reason - being able to allow wider and deeper penetration of CPS.

Mr. Doherty is saying that the product about which we are talking is not available in other European countries at the level at which we plan to introduce it. What product are we talking about?

Mr. Doherty

It is line rental. That was the question the Deputy asked.

Is that not available in the UK?

Mr. Doherty

No, they have just delayed its introduction for a third year. I do not say this in any crowing sense, but we are much more advanced than they regarding this product; only Denmark has it.

Ms Goggin

Regarding the increase in line rental, we must keep coming back to the point that the overall basket of prices is capped at the rate of inflation, and if there are increases in line rental, those will have to be matched by decreases in call charges. The question of our having a sub-cap is very much related to that. I have gone back to the diagram to show all the different factors that we are balancing regarding the price cap decision.

Five other European countries do not have a price cap. France has none, but is thinking of introducing one. Nine have one but, of those, only four have a sub-cap of some kind on line rental itself. The reason is that, if one imposed a sub-cap on line rental, to meet the requirement for rebalancing, one would have to increase it. Increasing the line rental would mean decreasing call charges. That forces the call charges down. That is the area where there are competitors. That is the competitive space in which they make their living and get their business. It is once again a question of balance. If one drives the call charges right down, one will drive the companies out of business.

Do very high line rental costs as a percentage of the overall bill not discriminate against low-use, low-income customers? Is the Irish line rental charge not exceptionally high in that regard? One is not comparing like with like when one compares Ireland with continental European countries, which have an average line rental of €16. We stand at €24 and, given the failure of the vulnerable users scheme to provide cover, has the strategy adopted not had an adverse impact on those low-use, low-income customers?

Ms Goggin

I do not accept the term "discriminate against". We have other requirements to meet. We must rebalance and ensure that the targets are in line with the costs. It is estimated - and we would not disagree - that the cost of providing a line in a rural area is about three times that in an urban area. We are stuck with our demographics. I accept the Deputy's point on the vulnerable users scheme and the publicising thereof. We could learn to work more closely with consumer groups and those who deal with them to hook onto them and use their contacts and awareness to propagate such schemes more widely. I do not see why we should do Eircom's advertising for it. Why should we pay for that?

Was ComReg given Eircom's costs based on the costs for fixed line access and operational costs for the year? How did ComReg analyse those figures, and what sort of support did it have to see if those costs were true? For example, are Eircom's costs higher than those of other telecommunications operators throughout Europe? Is Eircom top heavy?

Ms Goggin

Absolutely. We spend a great deal of time analysing that. If the Chairman does not mind, I will ask Mr. Leavy, our director of accounts, to come in.

Mr. Donal Leavy

The costs of the access network are not based on Eircom's actual costs. They are based on our view of what a modern, efficient access network would cost to build and maintain. This has been the subject of extremely contentious discussions between ourselves and Eircom which, to be honest, are not yet fully resolved but it is based on our view of efficient costs and network build.

From where did you get your figures?

Mr. Leavy

We worked with industry to design a hypothetical efficient network in Ireland as a model. We then apply input prices into that model. In fact, we have worked with industry, Eircom and other members of industry to design a network that would be suitable for Ireland on an efficient basis.

In that hypothetical industry, what would be the level of profits and turnover?

Mr. Leavy

What does the Deputy mean?

For example, would it be of the order of 33%?

Mr. Leavy

No, we allow Eircom a return on its investment of 11.5%.

To what extent did ComReg have the information presented to us this morning available to it or did it take into account the operating profits and costs of the actual company, given the extraordinary figures with which we were presented? In the context of ComReg's final decision on the cap it seems incredible that it would have agreed to the last increase had that information been available.

Mr. Leavy

The price cap is a different matter. The price cap is calculated by reference to a financial projection in which we allow for a rate of return for Eircom in the regulated services of 11.5%.

In reality the rate of return is three times that.

Mr. Leavy

No, it is not. I do not think that is true. To be clear on what we are talking about, we allow Eircom 11.5% of its capital base. I am not sure where the Deputy's 33% comes from; perhaps that is an operating measure or——

If they are paying a lot of leverage debt that the owners used to buy the company, that would not be paying off the capital base.

If we look at the total picture of the way the company is operating currently rather than looking at a virtual company——

Mr. Leavy

The original question was how we arrived at the cost of the access network, which is a key input into the cost of line rental. My answer to that is that it is not based on Eircom's actual costs but on the costs of an efficient operator.

Can we ask about the actual cost for operating its access network as opposed to its overall operation?

Mr. Leavy

Exactly.

We are aware from your presentation that there cannot be any cross-subsidisation. You mentioned the Spanish operator and the fact that the costs had to be related to the line rental increase and that is the reason the cap could not be put on. Is that correct?

Mr. Leavy

Yes.

Deputy Broughan asked about the figures for the virtual company. Is that what you were asking?

I thought we were talking this morning about real figures that were given to the stock market in respect of the performance of the company, which showed it to be an extraordinarily efficient, profitable company very well run, as my colleague said, by the venture capitalists and the workers who own it. Given those circumstances, should ComReg not be operating - forgive me if I am simplifying this - off the performance of the company rather than some virtual company? It is extraordinary that we would have gone down that road for a third time because, as the Chairman said, we are asking the questions our own constituents, who are following issues in the media, would ask. For example, the representatives say that ComReg does not foresee any further increases in 2004. Why does it not foresee any further increases? How do the representatives know that? In the information given to us this morning the company was able to say that the current price cap arrangements would last for three years.

Mr. Doherty

And so they will. In the context of that, we would see that the prices will have to be cost orientated. If we look at the CPI being 1.9%, if I am correct, in respect of the last review, we would not see scope for further increases and if there was a further request, we would be looking for it to justify that on a cost oriented basis.

This morning, consumer associations asked if there was any way this increase could be reversed. Can ComReg simply say it made a mistake and that it wants to reverse the decision?

Mr. Doherty

If I may go back to the basic principle——

Will Mr. Doherty answer that question? We were asked to——

Mr. Doherty

Part of what we do on market analysis in these areas is to look at it but we would need to look at this holistically——

Is Mr. Doherty saying he could withdraw that increase?

Mr. Doherty

It is not a question of whether we could or could not. There are conflicting issues and I ask members to bear in mind that we have legal obligations.

Do you have the power to withdraw it legally?

Mr. Doherty, with all due respect, would you please answer the Deputy's question? Is it within your power to withdraw that price increase, yes or no?

Mr. Doherty

If we could find in the market analysis there were other issues that made the decision different, yes, we could.

Mr. Doherty, it is a simple question. Is the answer yes or no?

Mr. Doherty

I think I have just answered it, Chairman.

No, you did not answer it, Mr. Doherty. When we ask you for a simple answer, please give us a simple answer. Is it within your power to reverse that price increase?

Mr. Doherty

If the market analysis data show up something different then the answer is, "Yes, we can".

Is it within your power, Mr. Doherty, to refuse an increase of a line rental in 2004? You are saying you do not forsee such an increase. I do not like the word "forsee". Is it within your power to say "no" to further increases for line rental this year, next year or any other year?

Mr. Doherty

If we believe they are not cost orientated, yes, it is.

Could Mr. Doherty not change that and say that ComReg will not tolerate any further increase in 2004? If consumers, as telephone users, were asked what ComReg does, they would not know. There is a mystique surrounding ComReg and if it showed more teeth, perhaps consumers might know what it is doing and have respect for it.

Mr. Doherty

If I may divert slightly for a moment, if the Eircom people were asked whether they believe ComReg is a pliant, easy, pushover regulator, I would be very interested to hear their answer because on products like in situ transfer, CPS and ranges of products, we are the only country in Europe which has some of these products. I find it difficult to understand——

It is the case though——

I am sorry, Deputy. Senator Kenneally was trying to get in earlier but I jumped the queue and I do not want to be accused——

I thought we had agreed the way we would proceed with the questioning. Most of the questions I had intended to put have been asked already but the last point made, that ComReg does not forsee any further increases in line rental in 2004, suggests to me that there could be another increase in 2004. I would have expected ComReg to tell us today that there would not be any more increases in 2004 or 2005 but that is not what we are being told.

Bearing in mind, as has already been pointed out, that not only is the fixed line rental above the average, it is substantially above the average - we are far ahead of other countries in the European Union - and that Eircom has to recover its efficient costs, does ComReg know what are Eircom's efficient costs? Is it privy to that information or is that part of this hypothetical sum that it does?

In answer to a previous question, Mr. Doherty told us that, as regards the cap and the increases, the year runs from February to January. That means that the three increases - two were basically one but that does not matter - occurred in March, May and January. That is within the February to January window and there was a 25% increase. On the figures extrapolated from the document before the Chairman, it would appear on my calculations that Eircom's turnover is €1.65 billion. If there is an overall cap of 2%, that means it is only allowed an increase of €33 million in a year. Those three increases give it an increase of €90 million. Are we to believe that in usage calls there has been a reduction of €57 million over that 12 month period? That would have to be the case if it stayed within the 2% cap. Perhaps Mr. Doherty might explain that to us.

The representatives told us that prices have increased. The Consumers Association of Ireland told us a different story this morning but we will go along with what the representatives are saying. Perhaps it is inevitable that there would be decreases because of the new technologies involved but do we have any figures to compare, going back to the 1997 figures which the representatives say are the prices that have gone down here? How does that compare to all the other EU countries? I presume prices have come down in those countries as well because of the new technologies, perhaps more than here. That would be relevant information and if the representatives have it, they might give it to us.

Mr. Doherty

I draw to the Senator's attention that part of what we were trying to indicate and contextualise on the comparative residential and business graphs was where Irish prices are on a pan-European basis. Our prices have come down by 40%. As members can note from those graphs, we are positioned in the middle of the table in terms of residential and business usage across the basket of calls.

I am not talking about usage but about cost.

Mr. Doherty

This is a proxy for cost and is based on cost.

Can Ms Goggin or Mr. Doherty respond to questions raised by the Senator? I am conscious of time and I ask whether Mr. Doherty and his colleagues are in a hurry?

Mr. Doherty

No, we are not. We can accommodate the Chairman.

We want to take the presentation from the representatives of Eircom. Would you mind waiting until after that presentation?

I wish to raise a brief question.

Will I get answers to the questions I raised?

I am in no hurry; I will be here overnight. Would Mr. Doherty and his party mind waiting until after the Eircom session in case we have other questions to put to them at that point?

Mr. Doherty

We would be delighted.

I need to ask a question prior to that.

I know. We will deal with Senator Kenneally's questions and then hear Deputies Coveney, Eoin Ryan and Broughan and Senator Finucane.

Ms Goggin

With regard to Eircom's total profits, we point out that many of its services do not come under the price cap. The services that come under it are the ordinary telephone service line rental, the ISDN line rental and various types of calls. We do not cap the profit Eircom can make. Overall it offers many services that are not included in that price cap in respect of which it can do as it wants within the confines of the legislation. In terms of Eircom's efficient costs——

Ms Goggin did not answer my question. Based on Eircom's turnover, it was only allowed an increase of €33 million but it got €90 million. Where is the other €57 million? Where did it rebalance that amount?

Mr. Doherty may not have those figures, as they were only given to the committee this morning. They were computed by ALTO and Smart Telecom and it would unfair to——

Mr. Doherty

I would be delighted to respond to them but I have not had time to see or review them. If I may just point out in the context of——

Does Deputy Coveney wish to clarify a point?

For the purposes of clarity, is it not the case that the cap figure relates to the price a consumer pays for a service as opposed to Eircom's turnover? If Eircom was to get more customers or provide a new broadband service, its turnover may well increase by far more than 2.9%. Presumably there is an equation whereby a consumer pays for a number of different facilities, whether it be for a fixed line or usage. Is that not the basis for the cap figure? If it is, we need to ask further questions. However, we also need to clarify on what the cap figure is based. Am I correct in saying it is based on what the consumer pays rather than on Eircom's turnover?

Mr. Sion Jones

Yes, it is based on what the consumer pays for each service that is in the price cap basket. An average is taken across those services which is weighted by the level of Eircom's revenue from each service.

What was last part of that sentence?

Mr. Jones

The average is weighted by the level of Eircom's revenue from each service.

Ms Goggin

If Eircom increases some prices, it would have to decrease others. If the overall CPI minus a zero cap gives Eircom a certain amount of revenue and if one increase takes it above that level, other prices would have to be decreased to bring them back within the overall cap figure.

Mr. Doherty

As I understand it, but correct me if I am wrong, the figures shown are in the context of the 2003-04 price cap. The CPI for that period was approximately 5% and there was a 7% decrease in calls, which basically accounts for where we are in terms of the current rises. Therefore, two figures established the price cap, one was the CPI, that is, the rate of inflation and the second was the CPI for the period under review, which equated to approximately 5%. Therefore, within the price cap basket, Eircom was able to increase the prices by that difference. From memory, the total value of the goods within basket is €890 million.

Sitting suspended at 3.35 p.m. and resumed at 3.47 p.m.

I apologise for the delay. The fire alarm went off and we had to vacate the building. We will spend another ten minutes on this session. I ask the members to give ComReg an opportunity to answer questions and perhaps ComReg would be concise in its replies. That will generate a good understanding at the end of the session.

Mr. Jones

The current price cap year started on 4 February 2003 and finishes on 3 February 2004. During that period we estimate that line rental increased by a value of approximately €55 million and call charges reduced by a value of approximately €10 million, leaving an average increase of approximately €45 million. That €45 million is equal to the CPI increase that Eircom was allowed to have over that period where the CPI used for the calculation would be 5%, which would have been the CPI figure in December 2002. In addition to those figures, Eircom has also announced a line rental increase for 4 February 2004, which will be the new price cap year. It is seeking to make use of the new CPI allowance for increases during the new price cap year which starts on 4 February. The CPI figure in use would be the recently announced 1.9%.

That means the figures given to the committee this morning by the Consumers Association of Ireland were wrong. The association said there was a €90 million line rental increase. Mr. Jones says it was €55 million. Is that an actual or estimated figure?

Mr. Jones

I believe the €90 million figure includes the line rental increases for this price cap year as well as the line rental increase announced for 4 February. That is not the same amount as our estimate. We estimated something a little lower than that.

Is Mr. Jones saying that the one recently sanctioned does not come into effect until the new cap year?

Mr. Jones

That is right. The recent line rental increase announcements by Eircom were for two increases. The first was on 3 February, which was the last day of the current price cap year, and the second was on 4 February, which was the first day of the new price cap year.

By what percentage did it increase on 3 and 4 February?

Mr. Jones

It was 2.5% on 3 February and 5% on 4 February.

Mr. Jones

Five per cent; it was approximately 7.5% overall, but it was split between two price cap years.

Perhaps I could get a reply to the question about Eircom's efficient costs.

Mr. Leavy

The price of a metallic local loop is €16.81 per month. We made a determination last May that the price of that loop should be €14.67. That was challenged by Eircom, but it was subsequently settled by us and we agreed to look at it one more time before making a revised determination, which we intend to do in the next couple of months. Our last public statement on the issue was that the price of a loop, which is one component to measure the cost of a retail line, is €14.67. Other costs must be added to that to get the cost of a retail line, such as retail costs and other sundry pieces of equipment.

I do not know if we got a copy of the code of practice, but it would be of interest to the members to have such a copy. As regards the recent investigation into Sinergi Telecom and Eircom following receipt of a complaint, Eircom was proved wrong. It admitted it was an administrative mistake and it was let off with a caution. It was easy for Eircom to say it was an administrative error. That justification is too simplistic. However, if a similar incident occurs in another telecommunications company, what sanctions or penalties can be imposed? It was stated that there has been a 40% reduction in telecommunications costs since 1997. Competition has dictated that as other operators have pushed prices down. Is Eircom using its reduced costs to justify increasing the line rental?

I recently decided to change to another carrier. As a result, I receive two bills - one from Eircom for the line rental and one from the other carrier. For the first time in my life I got a telephone call from a sales person in Eircom who told me about its new rates and asked if I wanted to avail of them. I said I did not because I had changed carrier. In order to end the conversation, I asked her to send me the rates. However, I did not receive a copy of the rates but a lovely letter thanking me for reverting to Eircom and asking me for a signature. It annoyed me that Eircom had the cheek to do that. That is why I want to know about its code of practice.

Mr. Doherty

We would be delighted to give the committee a copy of the code of practice. As regards the investigations, at the last CPS review we received a range of different complaints from providers and consumers. We set out to develop an incremental scale of penalties which would be embedded in the code of practice by the operators. The first stage is name and shame. We identified that Eircom had been operating outside the code of practice and had breached it. We published that and most of the industry applauded it. It has remedied that and it has told us it will not happen again. If that became repetitive, it would be an issue of behaviour and we would have to consider ratcheting it up incrementally to the stage of taking whatever redress was possible. As the Deputies and Senators may be aware, only Ireland and perhaps one other country in Europe has extended the win back period where no contact should be made from one month to three months as a way of trying to enhance consumer performance and to allow consumers to have better choice. No one should receive calls from Eircom within that three months period.

Eircom was quick off the mark and it did not know I was a public representative.

Mr. Doherty

Perhaps the Senator would be willing to share that detail with us.

Mr. Doherty

I have made it clear to my colleagues and to all the operators that we strongly believe in the code of practice and that we will enforce it. We will name and shame and we will take whatever other remedies are appropriate for breaches of the code of practice.

As regards the analysis about whether it would be possible to reverse some of the line rental increases, the Minister for Communications, Marine and Natural Resources is finally coming out of the blocks as he realises the extent of public fury about some of the increases in charges in the past year. He has spoken about reducing the costs to mobile operators. Looking at some of the figures we were given by Eircom this morning, that is a significant way for Eircom to grow revenue. If those charges are reduced, will it be possible to change the line rental increase? If Eircom gets a reduction in fixed mobile rates during the year, can the charges be altered to reverse some of the increases?

The document to which I referred earlier on the regulation of the universal service in the Irish telecommunications market, which was published by ComReg on 18 June last year, sets out some of ComReg's responsibilities in this area. One such responsibility is to ensure that services are affordable for users. There is an interesting note in the report, however, which states that the consent of the Minister for Communications, Marine and Natural Resources must be obtained. Perhaps Mr. Doherty could tell us if the consent of the Minister was obtained in advance of the recent increase.

Before I ask Mr. Doherty to answer those questions, I want to put it on the record that the Minister for Communications, Marine and Natural Resources has been to the forefront in reducing and attempting to reduce mobile telephone and other charges since he took office. I am sure when he appears before the committee today, the members of the Opposition will commend him on his efforts.

Mr. Doherty

I will share that question with my colleague, Mr. Jones. The Minister has focused heavily on international roaming calls. What is in the basket and what is affected by what is in the basket are changes in mobile termination rates, which have been moving downwards. I will ask Mr. Jones to speak about the overall basket and the implications of changes on mobile costs.

Mr. Jones

Fixed to mobile calls are in the basket. Any reductions in those prices will contribute towards the compliance with the overall cap.

Increases could be sought if there are reductions in fixed mobile costs.

It is possible that fixed line rental charges could be increased halfway through this year if fixed mobile charges are reduced.

Mr. Doherty

We will look for full justification on cost orientation on that basis. We will look at the bedrock price which comes out of the local loop on bundling and the wholesale prices to ensure they are both cost orientated. We are trying to anticipate something that is not yet in place. The opposite, in my view, would happen - with falls in mobile termination rates, there would be scope for further increases across the basket.

Under the previous price cap, when there were sub-caps, line rental sub-caps and the CPI -8% formula, there were significant decreases in the costs of calls, particularly at national and local levels. ComReg has a duty of care to the industry and to consumers to ensure there is a sufficient margin in the business allowing for a competitive market.

If it was so successful under the previous cap system, why did we change it?

Mr. Doherty

The decrease was the problem. There was a legal obligation to ensure that Eircom rebalanced. The decreases in call costs were too steep in the long term and a more even reduction in costs was needed. That is what is happening.

Did the evidence that Eircom was able to pay a significant dividend to the shareholders not indicate that it was a profitable company and such line rental increases were unnecessary?

Mr. Doherty

Eircom financing is a separate issue, it raised bonds and got money from them and had the disposable assets that were left over from the sale of Golden Pages. It then chose to disperse that to its shareholders. We are disappointed that Eircom did not invest that in broadband but that is the choice the company made. It was a financing issue, it raised the money and dispersed it in the way other companies do all the time. Presumably management decided that it could not get a correct or appropriate return on investment in the Irish market at that period.

We should wait for Eircom to appear before the committee to discuss this.

Did ComReg look for the consent of the Minister for the increases as is set out in the regulations?

Mr. Jones

The text to which the Deputy is referring relates to an obligation we have had since 25 July 2003 to seek the consent of the Minister if we want to impose a new special tariff scheme on Eircom.

It is a yes or no answer. Did ComReg seek the consent of the Minister for the raising of line rental charges?

Mr. Jones

Eircom raised the cost of line rental and we did not seek the consent of the Minister.

The regulations in ComReg's own document state that one of its responsibilities is to ensure services are affordable to users. The note to that document states that the consent of the Minister for Communications, the Marine and Natural Resources is to be obtained. ComReg knew in its negotiations with Eircom that the line rental increase was coming. Was there any contact with the Minister prior to that?

Ms Goggin

We are dealing with separate legislation and responsibilities. The price cap existed before the office was set up and was previously implemented by the Minister under the 1996 Act. The obligations to which the Deputy referred were transposed in the EU Directive on Universal Service Regulations.

Does the increase in line rental not have huge consequences for the obligation under the universal service regulations to achieve affordability? Do increases not come within the remit of the regulations and, therefore, mean that the Minister must be informed?

Ms Goggin

I would not see that they do. The ability to set a price cap and the procedures for doing so come under the 1996 Act.

Why, then, is there a section on affordability in the obligations under the universal service regulations? Line rental is a key issue in affordability. ComReg is now saying that is part of a separate regulation and does not apply to the regulations governing universal service.

Ms Goggin

The price cap is a stand alone issue because it is covered in legislation. Everything else is transposed from the EU directive so certain measures are subject to ministerial consent but the price cap already existed and would continue.

If the witnesses do not have the precise information available, I would ask them not to proceed but to come back to us. These are complicated legal matters.

Ms Goggin

Fair enough.

Under the regulations, the price cap change had to be agreed by the Minister. It is easy for us to say a bad deal was done in hindsight but the Minister had to give consent for the price cap changes. Did he do that?

Ms Goggin

The best thing to do is for us to accept the Chairman's advice and come back to the committee on this specific issue. The performance of the price cap is a function that was delegated from the Minister to the ODTR and then the CCR. We should check the precise wording and come back to the committee.

Mr. Doherty

The levy order was laid before the Houses. The decision on the price cap is for the Commission of Communication Regulations.

My questions about the switch from a sub-basket approach to the single basket have not been answered. This morning we heard ALTO calling on ComReg to revert to the previous system with sub-caps. Why has ComReg changed from one to the other? It appears there is less control now over Eircom because there is only one price cap as opposed to a series of them in different areas. What is the difference between cross-subsidisation, which is not allowed, and re-balancing?

Ms Goggin

We tried to explain that the final decision on the price is an attempt to balance all those issues. We try to protect the standard consumer bill by using the CPI - 0% formula. We also take on board the points made about publicising the vulnerable users' scheme and getting it to those who need it most. The other issue is competition and re-balancing. If you rebalance, there is no cross-subsidisation anymore.

Eircom's competitors today called for a reversion to the previous system. That suggests that the present system is less friendly to competitors. That is hardly pro-competition.

Ms Goggin

When we were arranging the price cap, a number of the competitors made submissions that we should not have sub-caps and, in some cases, argued that we should not have a retail price cap at all. There are various views in the industry. sub-caps were removed to allow a degree of competition without trying to force down the price of calls unduly while meeting re-balancing commitments. It is a balance between the four points. Many countries have moved away from sub-caps, particularly for line rental. Only four other countries in Europe have them and they are according to a CPI + formula, allowing an overall increase in line rental instead of a decrease.

Mr. Doherty

If we were to allow for our obligations on re-balancing, we would have had to have a positive CPI + 8% or CPI + 10% on line rental to achieve those two elements.

The net effect will be CPI + much more than that. It has increased by 25%.

I thank Mr. Doherty and his team for a very interesting and informative contribution to our meeting. I want to raise two simple points. Mr. Doherty stated that prices have fallen by 40% and the reduction to consumers is €30 on the average bill. That is not, however, in absolute terms. Is Mr. Doherty not stating that the figures are on what it would have been——

Mr. Doherty

Yes.

—and he is extrapolating from the position in 1997?

Mr. Doherty

Yes.

So it is again somewhat of a virtual picture. Some of the document information tends to take the most optimistic or benign view of how matters will develop. The information provided is not in absolute terms and all our bills are actually higher.

Mr. Doherty

I would have thought that all our bills are lower in absolute terms. However, the Deputy is correct that it is an attempt to provide a sound bite. It is neither optimistic nor negative, it is a question of trying to give a context to the discussion.

That change in the cap was laid in the Oireachtas Library and, I presume, also with the Department. Was Mr. Doherty expecting that the Minister would have issued another directive in this regard? Should the Minister have known that this was coming? It is difficult for ordinary members, with few support mechanisms, to be absolutely au fait on the activities of this quite large Department. Should the Department have known that ComReg’s recent decision was coming.

Mr. Doherty

This is not a recent decision. If the Deputy recalls, the price cap was established in February 2003 for a three year period. In that we set out a particular suite of things which were set to keep telecommunication costs in Ireland below the rate of inflation for the next three years. It sought to try to provide a basis on which competition could thrive and, through things such as wholesale line rental and local loop unbundling, to cap the price and provide competition. It was a three year——

However, the Department could have known that there were going to be one, two or a series of actual increases in line with inflation during the three years.

Mr. Doherty

I am not trying to dodge the question. I am simply saying that it is a three year price cap aimed at keeping prices below inflation. Eircom operates the price cap and the obligation is on it to ensure that it is compliant with that cap. We monitor Eircom's performance and if it does not achieve the objectives in the price cap we do not let it proceed. If it does comply with them, we allow it to increase the prices. It is a three year rolling programme.

Perhaps Deputy Broughan's questions might be better directed to the Minister. With regard to the basket to which we are working now and the price increases, telephone users do not really have a choice in terms of line rental because Eircom has a monopoly. However, they do have a choice whether they use their telephones. As members see it, the difficulty is that people are being asked to pay, on average, €9 per month more than the European average on rental charges. Mr. Doherty is quite correct to state that telephone call charges have dropped. However, I respectfully suggest that this could be because of the competition from other telecommunications operators in the marketplace. Perhaps telephone users would appreciate it more if they were only obliged to pay the average European rental charge per month and could then decide whether to use their telephones. This is probably the kernel of the problem. It is not acceptable to the members of the public to be paying €9 more per month, based on figures from August 2003. Mr. Doherty has confirmed that these figures are from the EU and that they are accurate. Eircom will provide a different set of figures when its representatives appear before us later.

Mr. Doherty stated that he would remain in the vicinity in the event that we might need him again. Before I call on the representatives of Eircom - I apologise if they have been waiting for a long period - will Mr. Doherty give members the good news vis-à-vis his statement yesterday about mobile telephone charges? He appeared before the committee on 2 October, as did mobile telephone operators. The message given by the committee to those operators on that date was to reduce their call charges. Does Mr. Doherty have something to add to the debate in terms of the analysis ComReg has completed?

Mr. Doherty

We have published a consultation document which considers measures to enhance competition in the mobile telephone area. We are looking forward to obtaining responses across the board about addressing the issue of enhancing competition in the mobile sector. We have suggested a number of ways this could be done. The period of reply relating to the document ends on 9 March. I am not crowing on behalf of ComReg, but it is a well worded document of over 130 pages that we have placed in the public domain to try to stimulate a debate in Ireland, following on from some of the work the committee has done, about the various issues relating to the mobile sector and what needs to be done to enhance competition within it.

Has ComReg not stated that, from its analysis, mobile charges in Ireland are too high?

Mr. Doherty

This is a consultation document. We are basically setting out that in our view at this stage——

ComReg has not finalised an analysis——

Mr. Doherty

We have a process but we need to carry out the consultation and inform the community. The document we published identified our belief that the two operators had a joint dominance in the market and that, therefore, we would be able to apply remedies in that context.

I thank Deputies and Senators for their patience. This is an extraordinarily complex issue and we have tried to work our way through it as best we can. I wish again to extend an offer to members to provide an update on the market analysis in order to show them where we stand in respect of the various markets and the process. Our annual report has been published and we would be delighted to discuss it with the committee at a future date.

I thank Mr. Doherty. The committee will accept that offer because we need to learn more about how ComReg does its business in order that matters will be clearer when we meet its representatives in the future. The message from the committee today, on behalf of the Oireachtas and the people, is that we are not happy with the increased line rental charges for the 1.6 million telephone subscribers in this country. I thank Mr. Doherty, Ms Goggin, Mr. Leavy and Mr. Jones.

We will suspend for a couple of minutes to allow Dr. Nolan and Mr. McRedmond to appear before us.

Sitting suspended at 4.18 p.m. and resumed at 4.20 p.m.

I welcome Dr. Philip Nolan, Chief Executive, Eircom and Mr. David McRedmond. We will first hear a presentation followed by a questions and answers session.

Before I ask Dr. Nolan to give his presentation, I draw attention to the fact that members of the committee have absolute privilege but this same privilege does not apply to witnesses appearing before it. It is generally accepted that witnesses would have qualified privilege but the committee cannot guarantee any level of privilege to witnesses appearing before it. Furthermore, members are reminded of the long standing parliamentary practice to the effect that members should not comment on, criticise or make charges against a person outside the House or mention an official by name in such a way as to make him or her identifiable.

I would like to inform Dr. Nolan that we invited Mr. Con Scanlan, vice-chairman of Valentia Holdings to appear before the committee today. I understand Mr. Scanlan is also director of Valentia Holdings, General Secretary of the Communications Workers' Union and Chairman of ESOP. Dr. Nolan might be able to advise the committee on his role in that regard. Mr. Scanlan responded to the committee and thanked us for our letter of 20 January 2004 stating that he believed this matter could more appropriately be dealt with by senior management in Eircom who are more familiar with the issues surrounding the subject we wish to discuss. He also said he would forward a copy of his letter to Dr. Nolan. Dr. Nolan, did you receive a copy of that letter?

I understand that Dr. Nolan is also a director of Valentia Holdings. Would you be in a position to answer specific questions about that company?

Yes, in so far as I have the information with me. Any questions we cannot answer because we do not have information to hand, we will be happy to subsequently answer.

Did Dr. Nolan receive a briefing on some of the presentations today, quite a number of which related directly to Valentia Holdings and your own company? If you need further time to respond, you can do so at a later date.

We are happy to be here to discuss these issues with the committee. Two weeks ago, we announced a 7.5% annual increase in telephone line rental which will result in the average telephone bill rising in line with inflation. Last year, telephone bills fell in real terms. This is compliant with our regulated price control which was explained by ComReg. It is also a rebalancing to reflect cost.

The resulting economic price is a prerequisite for liberalisation of the market. In the previous history of a monopoly, the distribution between fixed and variable costs did not matter because there was only one company and it was considered social pricing. Part of the move to unbundling, to greater competition and liberalisation of the market requires, as a number of people said, by law, cost reflective pricing and rebalancing.

Clearly, there is an issue surrounding vulnerable users who may be disproportionately affected. Social pricing tends to go the other way and this is taken care of by the low users scheme. We would like to try to demonstrate that Eircom delivers good value overall for consumer. We will continually come from the point of view that what consumers pay is not line rental; they pay telephone bills. Those telephone bills represent good value; there has been a 25% reduction in real terms during the past five years. In comparison with other utilities, we perform better for them than any other in Ireland. Our prices are below EU average.

At the same time, we ensure the availability of a first rate network. We have one of the most efficient core networks in Europe which we will demonstrate. We have an extensive access network for one of Europe's fastest growing and most dispersed populations. We are transitioning to a fully liberalised market. European and Irish law requires a shift to economic pricing and Eircom has developed solutions to manage the impact on customers. We spoke to the committee in 2003 about broadband. Since then we have commenced the roll-out of broadband to every town in Ireland. We have competitive falling broadband prices and our prices are now below EU average.

I would now like to comment on some myths put out there during the past week or two. The first is that Eircom faces no competition. If one looks at the telecoms market in 1993-94 one will find that Telecom Eireann held 100% of the market; that was a monopoly. Currently, in the Irish telecom's market, Eircom has 47%, Vodafone has 23%, 02 has 16%, Esat 8%, Meteor 2% and others have 4%. This is real competition. It is network competition. The major competition in the provision of voice services is by fixed and mobile networks which compete with each other.

The second myth is that there have been three line rental increases this year. This has been explained before but I will repeat it. We have been making one price adjustment a year. The first price adjustment had to be in two parts because we were still working out the details of the low users scheme. That applied from January 2003 to January 2004. The current price increase applies from 2004 to 2005. We have had two price increases over two years.

The third myth is that consumers are being overcharged or ripped off. Independent data confirm that telecom's pricing in Ireland is competitive. Ireland's average residential bill is below the EU average as is its business bill. These figures come from the most recent quarterly ComReg report which does not include the recent 7.5% increase. As we are increasing below inflation, it will not affect the positioning in this regard.

The fourth myth is that Eircom is inefficient. Eircom operates in Ireland, a relatively high cost place to operate. Eircom has consistently reduced its costs over time and has demonstrated that by reduction of head count. The number employed has decreased by 23% during the past five years and by 1,700 since the Valentia acquisition. I would point out that these reductions are not being made at the expense of service to the consumer and there has been no industrial action.

The fifth myth is that Eircom is sweating its assets. If you look at Eircom's capital expenditure as a proportion of its revenues, its investment is above the EU average; it is not massively above that average, you do not gold plate. We are investing at the average which telecoms companies are and are investing in line with our peers.

The last myth is that Eircom is stalling on wholesale line rental single billing. As pointed out by ComReg, wholesale line rental is available in Denmark. A big white blob on this map shows where it is not available. The UK had a low volume scheme in September 2002; volume implementation is planned for 2004. In Ireland, it is available for low volumes in June 2003 and the volume implementation is being finalised. Volume implementation is difficult, a matter with which ComReg dealt well when discussing this matter. Nonetheless, there are real issues to be addressed but they are policy issues which require cool headed rational analysis and not opportunist sound bites by vested interests.

I will now ask Mr. David McRedmond to outline some of the contextual background matters which will illuminate the debate. We will then be happy to answer members' questions.

Mr. David McRedmond

A fundamental point to which we will continually refer is that telephone bills have fallen in real terms. In actual terms, they have fallen from €50.30 to €47.99 between 1999-2004. That price, if it had kept pace with inflation would have increased to €61. That is the reason for the sharp 25% reduction in real terms. Telephone bills continue to be the only utility bill which do not increase above inflation - post has risen by 15.7% over the past two years, electricity by 11%, rail by 3% and natural gas by 3%, all of which are increases above inflation. Telecommunications have had a 3% fall in charges since December 2001.

The telephone bill is good value. Increases in bills continue to be below the rate of inflation, unlike most other services in the past year, for example, the large television licence fee increase, NTL cable charges, Bord Gáis and ESB charges. The Eircom bill is the only one which remains below inflation. I am not making a complaint about those other increases because those businesses, as policy makers, had reasons for the increases. However, I emphasise that the Eircom increase is the only one below the inflation rate.

The data from ComReg show the Eircom telephone bill is good value. We are cheaper than the Netherlands, Germany, Italy, France, Spain, Greece, Belgium and Portugal. Increases in line with inflation on residential bills will ensure we remain competitive. We are far below the EU average on business bills and considerably cheaper than the United Kingdom. We are also cheaper than the Netherlands, Greece, Spain, Germany, France, Austria, Belgium, Italy and Portugal. Again increases in line with inflation will ensure we remain competitive.

The issue is not the overall telephone bill but how the mix of the bill has changed. The bill which drops through the front door has reduced in real value from €50.30 to €47.99. However, the mix has changed and line rental, which was previously 25% of the bill, has now risen, since the recent increases, to 42%. Having heard the debate this morning, I believe this is the issue of concern to the committee.

Underpinning the change in prices is our network; there has been a lot of discussion about network efficiency. The two distinct components of the network are priced in two distinct ways. The core network is the equivalent of the main road between Dublin and Cork and is the main backbone network in the country. The access network links the core network to people's houses. Charges for both networks are different. The core network, of which we have almost a monopoly, is charged as call charges. It is the basis for all telephone charges in the country. The access network, in which we also have a virtual monopoly, is charged as line rental.

Eircom's core network is world class. We are careful about using the term "world class". Eircom's network is a world class national backbone fibre network managed from the network management centre in Citywest. It delivers some of the cheapest wholesale minute rates in Europe. It is because of the cheap wholesale minutes that we have so-called competitors in the market. They are the resellers, represented this morning by ALTO who came to discuss what is happening in the market. Their business is largely reselling Eircom's cheap minutes, of which Eircom has a near monopoly.

Some Deputies asked questions about the measure of efficiency. The efficiency of the core network is the reason telephone calls are cheap in Ireland. This is the only true like for like measurement of efficiency between telecommunication companies. It measures, for example, a line between Dublin and Cork and asks whether it is as cheap as a line between London and Birmingham. It is cheaper. We have the second cheapest wholesale call rates in Europe which is what other operators sell and what has become their business. They are cheap because our network is efficient. When we use the term "cheap", we mean by a multiple. They are, for example, one-third the price of the wholesale call rate in Finland.

The access network is different and the network costs are not comparable because like is not being compared with like. If, for example, we selected one part of same length of access network and compared it with other networks, our costs would be as good, if not better, than many other European telecommunications companies. However, we do not know this for sure because the data are not available.

The issue is not the cost of the access network per se but the amount of access network. This is dictated by population dispersion and the number of new connections. We are proud to deliver a universal service and to have done so over a long period, whether as Telecom Éireann or Eircom. We roll out 40,000 to 50,000 new lines a year, a rate far higher than other European countries. Full data are not available but our rate is possibly double or treble that of other European countries. We are required by EU and Irish law to recover costs. The presentation made by ComReg spelled out some of the legal obligations involved.

Eircom's regulated audited access network accounts are filed with ComReg and are publicly available on Eircom's website eircom.ie. The regulated accounts for 2002-03 show that the access network made a loss of €159 million in that year. The reason competitors have chosen not to invest in access networks is that they are uneconomic. Eircom does not make any money from providing access. Even with the recent price increases, it will still not make money from the access network.

I need to explain some of the reasons the costs are so high. Our population density is the third lowest in Europe and this is a factor. Urbanisation is low and population growth rate is high. As we have not been able to get the figures for other networks as to the amount of access network they have, we have taken as a proxy the road network in Ireland. We asked how many kilometres of road there are per person in this country, which would be an equivalent of an access network to connect houses. We were surprised by the answer which is, if we accept roads as a proxy, that it is over double the average distance to maintain and service a network in Ireland than it is in other countries. The roads proxy may not be perfect but it is as close as we can get. One-off housing drives that cost base significantly, not to say that Eircom has a view for or against one-off housing. We are proud to provide universal service, but there is a cost and that is the reason line rental is expensive to provide in Ireland.

The figures mentioned here concern local loop unbundling. These refer to the wholesale line rental rate. I have no argument with the ninth implementation report which was mentioned in an earlier session. We accept the figures in it for line rental. Those figures are for the end product, when one has gone from the wholesale to the retail rate. However, I am showing the underlying cost of the network in Ireland.

Does the line rental refer to the access? The average in Europe for monthly residential line rental is €16.20 but Eircom's charge is almost up to €25 per month.

Mr. McRedmond

That is correct.

Mr. McRedmond is taking us up and down roads explaining the difficulties in maintaining access, or the first mile as we call it. Could he or Mr. Nolan tell us whether the cost has anything to do with inefficiency or overstaffing in the company, with the fact that the staff own 30% of the company or with the fact that the vice-chairman of Valentia is also the secretary general of the Communications Workers' Union and effectively wearing three hats? Is it possible that consumers are paying for the inefficiency of the company in terms of line access?

Mr. McRedmond will answer the first part of the question and I will reply to the rest.

Mr. McRedmond

In answer to the first part of the question, we have a very low cost cheap core network and a high cost access network. When the two are blended, which is ultimately what consumers will end up paying, we are showing at both the retail and wholesale level, which is what other operators pay, that we are below the EU average. Therefore if we are inefficient, we are less inefficient than most other telcos in Europe.

Are you?

Mr. McRedmond

I think that is the answer.

Mr. McRedmond is saying we believe we have become progressively more efficient. On the fact that we have a vice-chairman of one particular sort or another, I have shown the committee the graph where we are reducing staff numbers and we have shown that we are increasing the profitability of the company. Our annual results show that the latest figures for our half year revenue for September 2002 and September 2003 fell by about 3% and our profitability increased. This happened because we are reducing costs.

A question raised earlier was what is an efficient cost. It was answered in one way and someone remarked that it was a virtual cost; almost any efficient cost is virtual by definition. The environment we work in is relatively high cost because of the demographics and the cost of our services. We buy electricity, rent property, pay wages, just like everybody else. Those costs are relatively high in this country and therefore, for that cost base I think we are relatively efficient and our prices in a European context demonstrate that.

How does the revenue per worker compare with other telcos in Europe? The implication in the Chairm an's question is that a company which is one third owned by the workers cannot be an efficient company. I would not accept that.

I think we are relatively efficient. I do not know about the revenue——

I have figures on that.

I do not have the revenue per worker. I know that many people have quoted the number of lines per worker and others have quoted the operating cost per line. None of these figures in isolation will give the answer. The comparisons of any two figures just show that the two things are different. The key question is whether the explanation of the difference is a local variation or an efficiency problem. A good example is the lines per employee and the operating cost. As far as I know from looking at BT's annual accounts, we have more workers per line than they have but they have more cost per line than us. I do not know what the answer is. It may be that they do more outsourcing than us so we count more people but they have more cost. These things have been worked through by ComReg using US carriers as benchmarks because they are particularly efficient. It is very difficult to put one's finger on what the right answer is. In many of the questions being discussed, it is not a question of a right answer but rather a question of how one draws a balance and how one makes an industry healthy. The one thing that we will have to get at the end of all this is if the telecommunications companies and industry are not healthy, then they will not be able to invest. If they do not recover their costs, it is very difficult for them to continue investing. These are the balances and judgments we have to draw.

The issue of vulnerable users has been raised. Why has your company not publicised ComReg's classification and its attempt to promote the cause of low network users and vulnerable users to encourage them to come forward? It has been a severe criticism of the company that it did not push broadband until ComReg and the Minister had to chase it up the road and now finally there are advertisements for the broadband products. Why did the company not take the initiative on vulnerable users? Why did it not have big half-page advertisements to publicise it? The committee has heard a figure of 400 out of 1.6 million households which seems absolutely laughable.

Will the company explain why its investment is falling? I referred to the majority owners, Valentia, as buccaneers who were prepared to get in and get out of the company with the maximum possible value returned to themselves. The delegation says that is a myth and the company is not sweating down the assets but why are they not significantly increasing investment particularly with regard to the broadband issue, which is what the committee is interested in hearing? The presentation did not explain why three increases were needed last year and particularly in March and June. Did the company take advantage of ComReg and pull a fast one? Perhaps one of the members of the delegation is the genius referred to by the Chairman who managed to get these vital increases in the run-in to the flotation of the company.

With regard to the access network, the housing sector is expanding at the rate of 60,000 units per year. There is an increase in the number of apartments being built and a large city is being developed in Deputy Brady's constituency and in mine over the next number of years. We have done something to ensure there will be broadband access. Will the cost per household not decrease dramatically in terms of insulation costs as time goes by?

Mr. McRedmond

There are two types of scheme in respect of vulnerable users and low users. One is a Department of Social and Family Affairs scheme which is operated by Eircom, covering approximately 300,000 users. That scheme is implemented automatically and there is a heavy uptake. We make that available to the DSFA and it informs its clients that the scheme exists. The vulnerable users scheme or the low users scheme was something we accept Eircom ought to have promoted sooner than it did. The scheme was made available last summer which was when the second increase, the two part increase, was made.

The Deputy asked why there were three increases in line rental. Effectively they are two annual increases over two years and this is an important point. It is difficult to balance the figures around the price cap. It is actually an increase of 15% last year in two parts and an increase of 7% this year going forward. We ought to have promoted that scheme sooner since last summer. It is a matter of regret and we are certainly very clear that we need to promote it now. We recognise that the impact of the change in line rental is one that is very positive - and all the Deputies have picked up on this - for people who use the telephone a lot, who are heavy users and who were classified by one Deputy as not necessarily wealthy but are heavy users. They benefit because call prices are dropping faster than line rental is increasing. The medium user, by definition, will be at the rate of inflation. It is the low user who is adversely affected by this increase. It is important the low user scheme is available. It is about to be promoted very heavily and it should have been promoted earlier.

The Deputy's second question dealt with investment. I was not in attendance this morning for the discussion about numbers. There may be a number of reasons the investment numbers are largely different. There was a demerger of the mobile company and the Eircom consolidated results for previous years would have contained the Eircell results. I would expect one of the reasons for the decrease in capital numbers is because we no longer have mobile. I have seen the document from Smart and some of the numbers in it are just plain wrong. I would be very happy to take up the Chairman's invitation to come back on those numbers.

Deputies Ryan and Coveney may have questions on that area. Let us just go through the questions as they were asked.

I will finish on this. Everyone must realise we have just come through the biggest investment binge in telecoms the world has ever seen. The figure quoted by The Economist is $3 trillion worth of investment. Every telco on the planet has dropped its investment because they over-invested in the past. It is not unusual. It is part of the business cycle of over-investment and then dropping investment. That is one reason.

The second reason is that since the drop in the boom, it is possible to buy some equipment more cheaply and therefore money goes further. There are lots of sensible reasons investment in telecoms has dropped. It is not just a question of change of ownership, or whatever; there are real logical reasons behind it. When I get the figures and have time to look at them I can give the committee a written answer to the figures produced here. Really there is a rational argument behind it.

Should Eircom not have been investing more given the condition of telecoms infrastructure in the country? Eircom has a particular responsibility as the incumbent in the fixed line market and therefore should not follow the pattern of other telcos.

If we increase investment the prices will increase because the value of the network increases and the costs increase. We are always trying to strike a balance for consumers. Consumers do not want over-invested networks because that pushes prices up. In the early years of post-privatisation, for example in the UK, the major goal of the regulators was to keep down capital expenditure because there was spare capacity and there was not a demand for it.

Are you suggesting that no other telco in Europe is investing?

No. I am saying that they are not investing at the rate they were. I was asked whether we are investing. We are investing €200 million. We are investing but we are just investing at a lower level than in the past as are all other telcos.

We will explore that in a minute.

I welcome Dr. Nolan and Mr. McRedmond. I have to declare an interest. I am a former employer of Telecom Éireann and a former member of the CWU. I agree with Dr. Nolan that we came through an extraordinary period in Eircom. As public representatives, we receive representations from all sides including private operators, etc. We are required to listen to them and put the case as fairly as we can. I am canvassing for the local elections and I find the public perception is that Eircom is ripping them off. They make the charge that the former chief executive, as I have stated on the record before, got an astronomical golden handshake for leaving Eircom and - Dr. Nolan might be able to clarify this - still has a huge number of shares in Eircom. The people are asking why they should pay for such huge golden handshakes.

I wish to ask a few simple questions.

Are they about Eircom?

Yes, they are about Eircom. The Consumers Association of Ireland referred to the huge increase in the past year and nobody would disagree. Consumers are not aware that they are paying €4 per month for a handset. I made representations to Eircom myself on behalf of some constituents and was told if they brought back the handset to the nearest Eircom office, that charge would be deleted from their bill. If that is the case, Eircom should put an advertisement in the newspapers advising its customers that they no longer have to pay this and they may return their handsets of their own free will.

Does Eircom lease DSLs to wholesalers at a rate of €54 plus VAT per line? Is Eircom currently conducting a promotion undercutting these wholesalers making it impossible for them to compete in the market?

I understand that Eircom has a "win back" team. When Eircom's customers indicate they want to switch to a competitor, they are more or less threatened that they will no longer have an account manager looking after them and if their lines break down Eircom will no longer be responsible. In many customers' perception, Eircom still has a monopoly because if they switch they have to pay one bill to Eircom and one to the competitor. Having two bills makes it cumbersome particularly for big organisations with a large number of lines to change over.

Dr. Nolan mentioned Holland. I understand that one in four lines in Holland is DSL by comparison with one in 50 here. Is this correct?

We asked some of those questions this morning of the representatives of ALTO who were very complimentary - as was ComReg - of competition and the service of Eircom's employees when it is not the telecom provider. This relates to one of Deputy Brady's questions.

To which question are you referring, Chairman? As a former employee of Telecom Éireann, I did not get any shares, so I have to be very careful about what I say.

As Chairman, it is important for me to advise the witnesses of matters already discussed in earlier sessions.

I shall take the first question and Mr. McRedmond will answer about the operational issues. The former chief executive departed before my time and I have no comment. I do not think it is sensible for us to comment; I can confirm that the departing chief executive does not own any shares in the company.

Does Dr. Nolan not think the public have a valid perception of that?

I think the public perception——

This man got millions and the public now have to pay an increase to justify his payoff.

There is no relationship between——

Deputy Brady, you should let Dr. Nolan answer the question. We will respect that some questions cannot be answered today. Our main concentration today is on the difficulty that telephone users have with the recent line rental increase. Dr. Nolan should answer the Deputy's questions to the best of his ability. If he is unable to answer some of them the committee will understand.

Thank you, Chairman. Any costs that are not appropriate are routinely disallowed by ComReg in the computation of consumer prices. I ask Mr. McRedmond to take the operational questions.

Mr. McRedmond

Deputy Brady asked about handsets. People get their money if they return handsets. They may also have their handsets renewed and a number of them do - I do not have the figures. People can get new handsets and the cost of handsets is relatively small when compared with the cost of mobile handsets.

What is the handset rental per month?

Mr. McRedmond

The rental is about €2.50 per month.

Will Eircom place an advertisement in the newspapers to advise people that they can avail of the opportunity to return their handsets?

Mr. McRedmond

I could not commit to necessarily putting an advertisement in the newspapers, but it might be possible to do so through the telephone bill. I know the Chairman mentioned earlier that we should put the low user scheme in the telephone bill, which we will do, and we will notify people about the handset in the bill. We have solutions to address members' concerns.

How much revenue has been collected from handset rental to date?

Mr. McRedmond

I am not sure I can handle that. I do not know.

One can buy a handset for €30 or €40.

Mr. McRedmond

I will have to get back to the Deputy with the information.

We propose that it is somewhat out of date to have consumers paying for line rental, handset rental and telephone calls. To resolve this issue in terms of the inequity between the high cost of rental and the very low cost of calls, we have been proposing to ComReg for some time that we should introduce bundled packages. ComReg has all the details. Bundled packages would be like mobile phone packages in terms of payment. In the case of the mobile phones a distinction is not made between the rental you pay for the handset and subscription and call charges. These packages are ready to go, but ComReg has said it will not permit us to introduce them until it feels there is a viable wholesale line rental product in the market. Nevertheless, that is the direction in which we will go. Compared to mobile phones, the prices will be a great deal cheaper. People will be able to buy a whole range of bundles.

Deputies have been questioning the vulnerable user scheme though we prefer to use the term "low user". The scheme represents the first of the bundles in question. It allows consumers to make a choice. The bundle means low users will pay the same price, approximately €19.50, which they would have paid two years ago and prior to the line rental increases. We accept the issue raised about lack of promotion. It is an example of how a bundle can deliver value for people.

Are you obliged to promote that user scheme? Are you mandated to do so by ComReg?

Mr. McRedmond

I could not answer the question as to the precise legality of whether we are mandated to do so. We are committed to doing so. I will come back on the other question tomorrow.

Are you saying you cannot give us an answer today?

Mr. McRedmond

Correct. I do not know the precise legality as to whether we are mandated.

We spent some time on this issue earlier. Should not the onus be on Eircom to provide a vulnerable users charging service rather than on the user to make an application? If people on this committee were unaware of the scheme's existence, most of the perhaps 80,000 vulnerable users who exist will certainly not know about it. We have a farcical situation in which as part of the deal to allow Eircom to increase its fixed charges it agreed with the regulator to provide a vulnerable users scheme which, to date, has proved to be no more than window dressing. Hardly anyone is aware of the scheme's existence with the exception of ComReg and Eircom. Only 300 to 400 people nationally have taken it up. Clearly, whatever publicity Eircom has conducted has not worked. Is it Eircom's intention to take the initiative and provide a vulnerable users scheme automatically to persons below the usage levels which would qualify them?

I wish to ask the same question I asked of ComReg earlier. If a user is below the cut-off point of €11, it would surely not be difficult to detect the fact with a computer programme. Can the low user threshold figure be confirmed? Once detected, a different bill could be sent to the user automatically and there would be no need to tell people about the scheme. The user would not have to apply. If it is Eircom's opinion that access to the scheme is the user's right, why not place them on it automatically?

As ComReg said, this is a more difficult issue than it seems on the surface. The consumer must have choice and be conscious of what he or she is choosing to commit to. As ComReg has pointed out, there are variable usage patterns. While I will examine this matter, a cost benefit analysis may reveal it is not as simple as it looks. While we have promoted the scheme, we accept fully that we should promote it more. We will do that and I will think about what has been said.

Did you say you had promoted the scheme?

We have. The scheme is on. There are two things.

How can you have promoted it when there are only 300 to 400 users on it?

There are 300,000 people on the DSSI scheme, all of whom are vulnerable users. Some of the low users may be owners of holiday homes. It is not given that someone who is a low user is a vulnerable user.

I wish to have clarity. You are talking about 300,000 but we were talking about 60,000 when ComReg appeared before us. Do you provide operator and other credits automatically on the bill?

I am not sure I understand.

Credits are established by computer and placed on one's bill. I have my telephone bill upstairs. I may have to go up for it to show it to you.

I think a manual intervention is involved. If there is a query about a bill, we place a credit on the next bill.

Deputy Coveney is saying that if Eircom is required to do this by ComReg as part of an agreement, then it is up to Eircom to ensure that the scheme is operational and that those who should benefit from it do so. On behalf of the committee, I put it to you that you have failed to do that since the introduction of the scheme. You need to do it and to tell the public, your customers and us how you intend to accomplish it. You do not have to do it today, but you must come back.

We will certainly.

I wish to go back to Deputy Brady's question.

My question has not been answered satisfactorily, Chairman.

That is why I am coming back to it.

I do not know what procedure you are using here, but I wish to receive a satisfactory answer before we move on. I asked about selling DSL lines to wholesalers. Eircom then has its own promotion undercutting wholesalers making it virtually impossible for them to compete. Is that true or false?

Mr. McRedmond

I am not the other operator and I do not have their costs. That is not a reasonable claim.

Some of them have provided me with costs. The figures they have given me suggest their claim is reasonable. Is it true that Eircom has a promotion which will be under way until the end of February?

Mr. McRedmond

That is correct.

Is Eircom undercutting wholesalers it has supplied?

Mr. McRedmond

That is not true. We are not undercutting wholesalers. There is a gross margin of around 30%; it could be 35% or it could be 27%. Out of that gross margin, the wholesaler has to meet its costs. One of the other operators had a promotion in place before we reduced our wholesale prices and made it available through our promotion. The difference we reduced our promotion by is less than the reduction in the wholesale price. If the other operator was able to run that promotion before, there is no reason he should not continue to be able to do so. If the operator decided for his or her own commercial reasons to sell below cost, that is an issue for him or her. We are delivering value for broadband. We make no apologies about keeping the margins tight to make broadband available. We can see the success of that approach in the take up of broadband. We have made the break through in broadband.

As a supplier selling to wholesalers, why would Eircom launch a promotion which undercut its customers?

Mr. McRedmond

We have not launched a promotion which undercuts them.

I have figures from a few operators which indicate that is the case. Perhaps they are all telling me lies and Mr. McRedmond is telling me the truth. I do not know.

Mr. McRedmond

I would be happy to examine those figures.

Will Deputy Brady communicate with Mr. McRedmond on that point? The Deputy made a valid point regarding handsets. Customers will have paid the €2.50 rental charge for handsets, which appears at the bottom of one's telephone bill, over and over again. This is a relatively new charge introduced, I understand, in the past decade. The company should examine the matter.

The charge dates back to the time of the Department of Posts and Telegraphs.

What is the position with regard to those who have never had a Telecom Éireann or Eircom handset but paid for it for many years?

Mr. McRedmond

I will have to check the historical position. A few years ago, one could only obtain a Telecom Éireann or Eircom handset.

Refunds may be payable.

The company has 1.6 million customers.

One should not hold one's breath.

I ask members to concentrate on the substantive issue before us and the purpose for which we asked Eircom to appear before us, namely, line rental charges, as well as several other matters which have been brought to our attention today regarding the future of the company.

I welcome the representatives from Eircom. I will try to concentrate on the issues mentioned by the Chairman. I am a little puzzled as to the reason the 7.5% annual increase announced by Dr. Nolan at the start of his presentation is described as such. Dates can be different and ComReg probably operates according to a different year than Eircom. I assume Eircom's statement on the annual increase refers to a financial year. Mr. McRedmond stated Eircom has had two increases in two years. The increases introduced early last year came in two phases and I accept that from Eircom's point of view, these, including the recently approved second phase, amounted to one increase. Eircom states these amount to a 7.5% annual increase and the second of them applies to 2004-05. Earlier today, ComReg informed the committee that the cap year runs from 4 February 2003 to 3 February 2004. Line rental charges increased by 7.9% in March 2003, 6.35% in May 2003 and will rise by 2.4% on 3 February 2004. On 4 February, which is in the new cap year, the charge will increase by 5%. The 7.5% cited by Eircom refers, therefore, to two different years, 2003-04 and 2004-05 and cannot both be considered to relate to one year only, 2004-05, unless Eircom is using a different 12 month period from ComReg. I ask the delegation to clarify this. If, for instance, Eircom is using a calendar year and describing the figure of 7.5% as an annual increase, it suggests the company will not seek another fixed line increase during 2004.

We do not anticipate doing so.

That is fair enough but I ask that the matter be clarified. Eircom has also given us figures on the breakdown of costs of a telephone bill. Between 1999 and 2004, the fixed line cost has increased from 25% to 42% of the overall bill. Projecting forward for another five years, the introduction of new technologies and the trend towards lower prices suggest that fixed line costs could reach 60% of the average bill. Does Eircom anticipate such a development?

The presentation also states that Eircom is keeping prices below the European Union average. If that is the case, the figures supplied to us by ComReg are wrong. Its presentation shows prices in Ireland are above the EU average. Will the witnesses explain the difference between the ComReg and Eircom figures?

Mr. McRedmond told us Eircom has competitors. I suggest this is not the case. The figures the company gave us bring the mobile market into play, yet our discussion concerns the fixed line market, an area in which Eircom still has a near monopoly. We are not discussing the overall market.

Mr. McRedmond

In terms of the increases over the different years, as Dr. Nolan stated, no other increase is planned in 2004, which is the reason the increases have been wrongly presented by those who have said they amount to 25% in 12 months. They figure is actually 15% in one year and 7.5% in the second year.

To which increases is Mr. McRedmond referring?

Mr. McRedmond

These are the price increases in line rental. They are offset by price decreases in calls which keep increases in line with the CPI. This is a complex calculation and ComReg heavily interrogates the price increase. I think the process is open in terms of seeing the CPI is met.

On the question of fixed line increases in the future, as I stated, our intention is to introduce bundles. These are currently before ComReg and we hope to have them approved. If we all accept that telephone bills overall are falling, it should resolve the major issue. The issue is the mix within the bill. In future, at the retail level, customers should not have this issue of line rental versus minutes. There will be a fixed level similar to mobile pricing. If one has a number of different packages, people will want to buy the right one and this will stimulate competition in that competitors will introduce packages. In future, this issue is unlikely to be as significant as it is now.

This does not resolve matters at the wholesale level, which is important. We still have to address the critical point, namely, that the access network loses money and cannot continue to do so. When we made a presentation on broadband to this committee last year we stated we would not sell our network below cost because it is a vital national asset. We must ensure we do not sell it below cost and for this reason we propose a wholesale price cap which is, effectively, what I understand ComReg is suggesting for the mobile market. This will mean that prices will be spread across the whole network and one will no longer have the inequity between very cheap call prices from Eircom at a wholesale level and high line rental.

There are varying opinions on the issue of competition among mobile operators. This is proved best in terms of the direct appeal to the consumer. The UK advert for O2 , which is very good, shows telephone lines coming into a house being chopped down one by one. It then asks the question, "Mobile, is this the end of fixed?" The company is coming after our customers and competing with us. Recently, O2 here has run a similar campaign with the slogan, "Fixed customers, come to O2". While I understand the technicalities of the definitions of markets, at the commercial level in the field, which is where we operate, there is competition between fixed and mobile. I agree to disagree with Senator Kenneally on the issue.

The witnesses did not answer my question concerning Eircom's statement that prices are below the EU average.

May we see the figures to ensure we are comparing apples with apples?

We received these prices from ComReg and the source is the European Commission's ninth implementation report, 2003.

May we have a look and get back to the committee?

I am not sure we can allow Eircom get away with that. We will return to the issue in a minute. The document in question has been available all morning and Mr. McRedmond has been present all morning. I will give him a copy of the report.

Mr. McRedmond

The ComReg information in our presentation is its quarterly report for November, the only report for the Irish telecoms market. We deliberately used this rather than our information to show the veracity of third party information.

Eircom's graphs refer to a total bill per month. We are referring to line rental and the Commission document. Have you seen the document?

Mr. McRedmond

Yes, I have.

Are you aware of what is in it?

Mr. McRedmond

Am I aware of what is in it?

Are you aware that the average European price per line rental for residential use is €16.20 per month as opposed to €25.

Mr. McRedmond

Yes, I am.

Like Deputy Brady, I declare an interest; I have known Mr. McRedmond for 32 years as a very good friend. I hope this will not colour my questions one way or the other. It is a pity we do not have Sir Tony O'Reilly, George Soros or any of the other directors such as Con Scanlon. As owners of the company, I would be interested to hear their views. Perhaps the gentlemen here, who are no doubt doing an excellent job for them as company managers, could set out what they believe the board of directors is setting for them as company strategy.

A great deal of publicity has focused on the intention of the venture capital shareholders to look for an IPO, for a public offering to sell some of their shareholding. Will the management representatives comment on that and outline the strategy to us? In reply they may wish to give a slightly broader response. Reference was made to competition coming from mobile. What is the company strategy in terms of responding to that? What investment strategy exists?

At lunchtime I had a chance to look through the briefing material we received this morning; the documentation was most informative and interesting. It came from Deutsche Bank, Allied Irish Banks, Bank of Ireland, Barclays Capital and Citicorp. These companies presented this information to the New York stock bond market and from the balance sheets and figures provided, the information appears to be both accurate and credible. None of the revenue figures I heard today contradicted any of the figures presented by some of the ALTO representatives. It was claimed by Deutsche Bank, AIB and Bank of Ireland that Eircom operates on an earnings before interest and taxes basis and that this year it will earn in the region of €550 million in profits. Is this an accurate estimate?

I take the point about Ireland being a dispersed country with X miles of roads and one-off housing. I agree with Mr. McRedmond that there are hidden costs involved. My experience of Eircom's investment comes from what I hear from my constituents. As he knows, I have a rural constituency, incorporating the wilds of Ballinteer, Dundrum and beyond. Why can my constituents in Dundrum or Ballinteer not get a broadband connection from Eircom? Likewise, when I rang Eircom to inquire about getting a DSL connection, I was told I could not have it. Is this due to the more than halving of the company's capital investment over the past three years as provided in the document supplied to us?

My final question relates to low call volume users. Mr. McRedmond gave us examples of different types of users. One such was a Mrs. Smith, a retired widow on a low call volume. Eircom's document admits that her phone bill has increased by 20% at a time when inflation is no more than 3%. We heard earlier from ComReg and others that in a full year such price increases for the Mrs. Smiths of this country will bring €90 million into the coffers of Eircom.

Where is Deputy Ryan getting his figures?

The sum of €90 million is the figure quoted by ComReg as the increased revenue to Eircom from the 25% line rental increases over the past year. ComReg backed this up. Eircom's justification for increases in the fixed line area is that it will allow liberalisation of the market and that Eircom will be able to operate more easily on a wholesale basis. In effect, this is saying that liberalisation has to be at the expense of the low call volume user.

In summary, the four questions are, what is the strategy of the company and, is it intended to go to an IPO? Are the EBIT figures, as presented in the report we received from the company's bond offering, correct? Why can I not get Internet access from Eircom? Is it the strategy that low call volume users will have to pay for the cost of liberalisation?

Will Dr. Nolan answer these four questions rather than Mr. McRedmond, as he is known to Deputy Ryan?

I will answer three of them. I will have to ask Mr. McRedmond to answer the one on why Deputy Ryan cannot get a local DSL because he is more knowledgeable in that area.

On company strategy, we are publicly quoted and we have bonds out there that are sensitive to commercial information. Accordingly, I do not wish to comment on a possible IPO.

Is the memorandum document a public one?

Yes, I will talk about the memorandum.

Is this a public document? Can we publicise it?

Which document? The bond memorandum?

Yes. Have you seen this document before?

Is this the offering prospectus for the bond?

The offering prospectus for the bond is a public document.

Have you seen this document before?

Is this a public document?

I understand it is a public document. It has been lodged with the exchange.

If the committee wishes to publish, can it do so?

I cannot answer that question. It is a legal question and I will have to take advice on it. I know it has been made available in the public domain to people who wish to subscribe to the bond document and it has been lodged with the different exchanges.

In that case it is a public document.

I can only repeat what I said in the past in regard to an IPO. I believe the long-term future of Eircom lies in a return to the market with shareholders who have a long-term view and whom we can promise a sensible dividend. This is a utility type company with some growth through DSL and possibly a return to mobile. That is the strategy we have set out. We have said the base part of our strategy is to continue to try and provide a very efficient service for consumers in Ireland. We want to roll out broadband, consider going back into mobile and become an efficient company giving good customer service. In terms of ownership, I agree that in the long-term I would like to see the company going back to the stock market.

On the strategy set by the board, does Dr. Nolan agree that, if the board strategy is to exit quickly from the company, and if that has been the strategy for the past year or two, it will be different from one that wants to be there for the next five or ten years? A board that is looking to get out in a year would set a strategy to maximise profits in the short term, cut down costs, cut down investment and try to get the highest possible return before doing a bond issue. Would that not be the best strategy for the company?

The best strategy for any company is one which balances the long-term and short term interests of the company. In running a company, one reports on a quarterly basis to bond holders. The biggest holders in Eircom are bond holders who hold things for the long term and banks which have their debt which is amortised over a certain period. They are long-term holders and we hope they will be there for the long term. I have a fiduciary duty to have a strategy which balances these two things. Twenty years is 80 quarters. One has to keep producing the performance.

One cannot say one will embark on a project that has as its time horizon a date only six years from now. In 1995 nobody imagined the telecoms sector world would look anything like it does today. One manages a company on a mixture of the long term and the short term. The most important thing is to turn around the performance of the company, which is what we have been concentrating on to date. Second, one has to have a clear focus on where one wishes to take the company in the future. We believe the fixed telecom industry is migrating mainly to a broadband type environment, that voice is migrating to mobile and that there will be convergence between fixed and mobile. We have set out our stall pretty clearly in the bond document and the presentations we made in respect thereof. Our strategy would be exactly the same if we had a different shareholder group.

Furthermore, €550 million is an accurate figure.

Given that the long-term interests of the company are being borne in mind under the present strategy, what has been the rationale of the investment strategy over the past three years? Investment has decreased from €504 million in 2001 to €312 million in 2002 and to €197 million in 2003. Therefore, the company is investing less than half what it has been investing in the network. Are these figures correct? If not, Smart Telecom has given us incorrect figures.

There are two things to be considered. As I understand it, Eircom was a fixed mobile company in 2001 and therefore there was investment in the fixed network and in the mobile network. I will have to get the figures and make sure we are comparing like with like and to ascertain whether the investment is just in the fixed network.

It is quite clear that Eircom, between 1998 and 2002, undertook a very large investment programme in the core network. This programme has come to an end, we have spare capacity and there is no requirement to invest further. I also know that over that period, Eircom invested in a number of businesses that were outside the core telecoms area, most of which have been closed. The Deputy can argue that this investment should not have been made but I assure him it is investment that will not be made in the future.

There has been a reduction in the number of costs and a slow down in the demand for circuits, etc., from other telecoms because there has been a slow down in the industry.

Is it the case that the need to make investments in the network is reducing? Has there not been a steady reduction between 2002 and 2003? If so, why are we seeing a significant increase in line rental charges, which is presumably to pay for investment in and the upkeep of the network? One graph is going in one direction and another in the other direction.

It is not intuitive but it is perfectly understandable. As I said, the investment was in the core network. The core network is what drives the cost of minutes, not the cost of access. Most of our investment is now in the access network. Furthermore, it is not just a question of the new investment; the old investment must be recovered. The more one invests, the more prices will increase. One should remember that we were pricing in an unbalanced way over the period of all the price reviews to date. When liberalisation was introduced, it was introduced with a big bang. CPS was introduced in a similar manner very early. The regulatory regime here has been extremely aggressive. When it was introduced, there was insufficient time and the sub-caps stopped any rebalancing in terms of setting economical prices. The rebalancing should have happened earlier but it did not. It should happen because we have to price reflectively and it becomes increasingly important as one unbundles. Otherwise, the person building the network will not get the return to reinvest in it.

With all due respect, I find it difficult to accept what Dr. Nolan is saying because there is a drop in the voice sector of about 2%. Line rental percentages have increased by 20% in two years. These are figures from the memorandum. If one takes a four year overview, one will note a 45% increase in line rental or a figure of €450 million.

I do not recognise a 45% increase.

This is over a four year period. Does Dr. Nolan want me to read out the documents I have taken from the memorandum because they outline the figures?

It is a very dense document, in light of which there are two points to be considered. There are some figures——

I have picked two or three pages from it with the information for prospective investors——

With all due respect, what is emerging from what we have heard all day and from the information we have - maybe Dr. Nolan could clarify it for us - is that the company is increasing its line rental because it has no competition and receiving its revenue therefrom, and it has reduced other charges because it is competing with other telecoms.

Is it true that Paul Salem, the MD of Providence, stated: "Now we are getting back three-quarters of our capital after 19 months. Yes, it is possible to do well in this space"? Apparently he said this in July 2003.

I have seen the quote. I was not there when Mr. Salem made the statement. I can ask him if it is correct and, if so, I will ask the Deputy to bear in mind that whatever the shareholders go by, they made a dollar investment in euro, and there is a big kicker from the dollar exchange rate. This certainly explains some of the return.

Did they not get a very fast return?

There are two points to be considered. The vast majority of the return shareholders got was from the selling of a business which had nothing to do with the network.

The sale of Golden Pages. There was €512 million returned to the shareholders in——

Not in addition to the €189. There was €512 million - I am reading from this prospectus and have only one page of it because the only question I anticipated was on the dividend. We repaid a dividend of €44 million, which was due in preference shares. We redeemed preference shares because they are quite expensive. The relevant figure in this regard was €66 million and the return on the ordinary shares was €402 million, which went back to the ordinary shareholders. If one considers what we did, one will note that we had approximately €200 million from the sale of Golden Pages. There was cash on the balance sheet when we came in, which we had paid for, amounting to approximately €150 million. The dividend that has been paid, apart from those things that were not taken out of the business, represents a very small return.

We sold these businesses and had some cash. This led to three questions. If one has excess cash, what does one do with it? Is there an investment case? We had an investment programme which was fully satisfied by what we had and therefore we had no rationale for reinvesting the money because the returns and demands were not sufficient. Our choice was whether to pay it on debt or to pay a dividend.

Dr. Nolan said the core network and access network were both world class. Is this the case?

Mr. McRedmond

I think Dr Nolan said the core network was world class. The access network requires a lot of investment, which it is receiving.

It has been postulated to us that it needs very significant investment. Should this not have been at least as important a call on the company as returning money to venture capitalists?

Mr. McRedmond

I sometimes sit on our capex committees and any time I have done so in Eircom I have seen some proposals turned down because they do not make sense or because they are not economic but I have never seen one turned down because we do not have the funds. Therefore, the investment of €200 million, the bulk of which is now in our access network, is the investment required to ensure we have a very serious, high quality access network going forward.

In light of my having interviewed ComReg, will Dr. Nolan state if all the relevant company documentation from recent years was available to ComReg and the Department in respect of Eircom's seeking the rise in line rental charges? Aside from normal company accounts, would it have had the full picture of the economic performance of Eircom? It did not seem to have the full picture of the structure of the 1.6 million householders with line rentals.

We made a large number of submissions to ComReg during the price cap. To my knowledge, it has had extensive information. While only commercially confidential information would not normally be available, much information supplied to ComReg is supplied confidentially.

Deputy Broughan asked about the Department. I presume your contact regarding pricing is with ComReg.

What about the €550 million for EBITDA?

It is not EBITDA. EBITDA is earnings before interest, tax depreciation and amortisation - it is the difference between your cash income and outgoings, excluding capital expenditure. If we take this, it is €550 million. What is normally referred to in the telecom industry as the EBITDA margin, the percentage of revenue that ends up as EBITDA, is 33%. This is well below the European average which is in the high 30s. Some European companies have a margin of over 40%. We are trying to compete with them.

Our profit is increasing. The most recent information I have is the half-yearly audited figures for September 2002 and September 2003. It shows revenue has decreased by €25 million, approximately 3%. We have increased our EBITDA as we have reduced costs. Some people have said the line rental rebalancing will go on forever but it will not. We will reach a position where it is cost reflective and ComReg has the power to stop us from going beyond cost reflectivity. It is interesting to note the decrease in the level of increase.

We are trying to get into a position to deliver the most efficient service we can for customers and where we can attract investors. We are trying to run a business and are not trying to run policy for the country. We must deal with the balances and the rules as we have them.

While capital investment is the same as the European average, our level of housing stock increase is probably twice or three times the European average. Our population increase is also above the European average. Eircom is losing market share and is in retreat mode. Is it fair to say that Eircom just wants to keep costs down and is gradually losing market share?

We are trying to run our business more efficiently. We are rolling out broadband across the State and have made significant investment in this. We have extensive DSL coverage and this has been done since we last met with this committee. The issue around line rental and rebalancing is taken out of context. While it is portrayed as a huge increase, it is not. The telephone bill is what consumers pay. If a manufacturer increases the cost of an engine by 20%, the consumer is only interested in the price of the car, not the engine.

I agree that there is a rebalancing issue. It is well known that when there is a monopoly, the pricing is a social pricing to take account of this. We think we have a way of doing this and we rebalance using the low user scheme to take care of the low end. Only a small proportion of the population is in the low user end. I have accepted that we did not promote the scheme heavily enough and I have given an undertaking to promote it in future.

Are you aware of the public outcry that has followed this announcement?

What about Internet access?

Mr. McRedmond

I cannot answer for specific cases. If Ballinteer and Dundrum do not currently have broadband access they will have it soon. We have said that every town with a population of more than 1,500 will have such access by the end of 2004. We have exceeded the Government's ambition for this. We have set a target of 100,000 users and we are going to reach it.

As for Deputy Ryan's particular case, while I cannot answer it, there is an issue called "carriers", namely, single lines. We are dealing with this issue. It is less of an issue that we expected in that 80% of lines in an exchange area qualify for broadband; we thought it might have been less than this. While more people are qualifying, this is not much of a consolation for the Deputy.

Will you communicate directly with Deputy Ryan on this matter?

Mr. McRedmond

I will.

What does "they will qualify" mean?

Mr. McRedmond

When we roll out broadband, we fix an exchange so that broadband can be provided from it. Broadband uses the access network. This is why it is so important that we do not sell this network below cost. The quality of the copper lines in the access network - an issue throughout Europe - dictates whether the line can take broadband. An average of approximately 80% of lines in our network can take broadband. This may be as high as 90% of lines in one area and 75% of lines in another. We believe this is a high percentage compared to many European countries.

Therefore the complaints we get are from people whose network unfortunately falls into the 20%.

Mr. McRedmond

I suggest that this might be the case.

Can I tell my constituents that DSL will be enabled by the end of 2004?

Mr. McRedmond

To be precise, we have targeted March 2005, the end of our fiscal year. However, this might be earlier as we are going at quite a pace.

Will this be available for every house?

Mr. McRedmond

It will be in every exchange.

This means my house, and 20% of houses on similar split lines, will never be able to get it.

What investment will be required to enable the 20% of lines to carry broadband?

Mr. McRedmond

The investment would be in the access network. We constantly renew the access network. I cannot answer about the specifics of the "carriers". As we upgrade and renew the access network, we are ensuring that the lines can carry broadband.

If qualifying exchanges will be enabled by March 2005, when will my home line be enabled?

Mr. McRedmond

I cannot answer that. I can tell the committee what our plans are around this.

We told the committee that we would launch a trigger programme. Under this, we would set up a website for communities with a population of below 1,500 where interested parties could register for broadband. If significant demand exists in an area we would enable the local exchange. This is an efficient way to roll out broadband.

I wish to clarify a point that was raised earlier regarding the 33%. This is not the same as the 11.5% that ComReg talked about. The 33% is a percentage of sales and the 11.5% is a return on capital employed. Based on our regulatory accounts from last year, our return on capital employed was, on average, approximately 8%. We can provide this information to the committee if it requires it.

If, as is likely, charges from fixed lines to mobiles decrease during the year, will Eircom make the case for a further increase in fixed line rental to compensate for this? Eircom has told us that it does not plan to seek any further increases this year. It said it did not plan to look for any further increases this year. If it is the case that revenue will be tightened up as regards fixed line to mobile, I presume Eircom will try to rebalance, if that is the right word, and get that money back from somewhere else, presumably fixed line rental.

Second, regarding comparisons on the delivering of first class networks and the access side of things, the witnesses have used the comparison with roads to try to give an example of just how sparsely populated Ireland is, with one-off housing and so on. I accept that argument, but Sweden is more or less the same as us, yet its charging mix on the telephone bill involves a rental charge of €15 per month versus €18 on calls. Compare that to Ireland. I have looked at the other parameters also and Sweden is reasonably close to Ireland on most of them except population growth. Yet we are almost further away from Sweden than anybody. That is not quite true, but we are a long way from Sweden in regard to their mix.

What is the difference between Ireland and Sweden? Why are we at €24 while they are at €15? Presumably they have the same costs for access and the same amount of access if compared to roads. Why have we gone so quickly from 25% of the bill on rental to 42% of the bill? Where are we going? How far is Eircom going to go with it before the rebalancing is complete?

Let us take Sweden as an example. It is pretty similar in population density, but it has a significantly more urban, concentrated population and a much lower population growth rate. In some ways it is comparable to Ireland but in other ways it is not. Obviously it is comparable also in terms of the number of kilometres of roads per person. If we look at Sweden's inter-connect rate, what it does in minutes is the European average and about 50% higher than us; its line rate is also about the European average. One of the diagrams in our submission shows that when our retail and wholesale are put together and blended, we come out at about the European average. The Swedes do not have wholesale line rental and have a different regulatory regime——

I am talking about the mix between rental versus call charges. We have bucked the trend in Europe and are very different to everybody else apart from Luxembourg. Is that because we have a different market structure or the regulator is taking a different approach? Every time you get an increase in rental it is money for old rope for Eircom compared to trying to squeeze better margins from areas where it is in competition.

Mr. McRedmond

Regarding the issue with Sweden, there probably has not been quite enough recognition today that this is one of the most liberalised markets in Europe. This is leading edge in terms of wholesale line rental coming in. Frankly, if one does not have wholesale line rental or something like that, it does not really matter what the mix is because one is only selling to oneself, then selling on to the consumer. We would much prefer a more balanced rate.

The Deputy was right about Sweden; it is a good comparison, and the interesting thing is that it probably comes out very similarly to us in terms of the overall amount that consumers pay and that wholesale operators would pay if there was line rental. We are considerably more advanced and that is forcing us to have to recover our costs on the access network.

In terms of the issue around the monopoly, I hope we have answered that charge in talking about the wholesale call minute rate being the second cheapest in Europe. We have as much a monopoly on the wholesale call minute rate as we have in the line rental, yet the wholesale call minute rate is falling. We make more money out of minutes. We do not make money out of line rental; we lose money.

Was that a Freudian slip almost, that you do not make money out of line rental?

Mr. McRedmond

No, it is true. We lost €159 million on our access network in 2003.

That is the cost of upgrading, investing in and managing the access network. If that is the case then all of your other incomes do not have any cost base against them, do they?

Mr. McRedmond

Yes, they do. Again, I apologise, Chairman, as we probably should have sent them through beforehand, but we are quite happy to send the committee copies of our regulated accounts which break the figures down in this way. It is not we who decide how things are broken down. It is very much up to ComReg to decide where costs are allocated and so on. We would gladly make those accounts available to the committee. They are publicly available on our website but we will send the committee a hard copy.

I may be alone on the committee in this but I think we must give further consideration to this matter. I am not at all happy with the presentation or that Eircom has justified its case for a line rental increase or the increases made already. We have already spoken extensively to ComReg in this regard. I hope and presume that Eircom will not be increasing the line rental for the 1.6 million customers it has in this country. They are the 1.6 million who have the first mile access, as the witnesses know, and all of it is on their network. To be honest, I see Eircom as acting in a monopolistic manner in terms of how the basket has been configured and how prices have been given to it and negotiated with ComReg.

I hope we will see no further increases in line rental. I accept that Eircom has reduced its call charges in response to competition. We acknowledge the work it has done in regard to broadband but again, and let us call a spade a spade, this was done in response to new competition entering the market, including the MAN, the ESB and all the other telecoms entering the market. We congratulate Eircom for rolling the broadband out now but, in fairness, there has been an absence of investment, which our witnesses explained to the committee some months ago in the roll-out of broadband.

I am not convinced by what we have heard today, and there is an opportunity for the company to reduce its operating costs. That is being stymied or hampered by the fact that individuals within Valentia and the company's own board are trying to serve three masters by not reducing its costs further. Another factor is that the company is 30% owned by the employees. That is playing a significant role in the fact that its costs are still very high. I am convinced, unless the witnesses can convince me otherwise, that the consumer and user of the telephone is paying for that operation. Dr. Nolan is more than welcome to respond if he wishes.

I come back to the point I made at the very beginning. We have significantly reduced costs and are significantly reducing head count. We are trying to make this company as efficient as we can, but we must take account of the costs and the environment we live in. I would not accept that our line rental is expensive because of the nature of our shareholding or the nature of the board. We have tried to demonstrate that the expense of the network is, in part, a property of the environment in which the network is constructed and, in part, reflects the costs of doing business in that environment.

With those as a given, we have endeavoured to reduce and make the company leaner. The requirement to have cost reflective pricing, the reason we have to rebalance, is that in the monopolistic days of telecoms it did not really matter what was attributed to line rental and what was attributed to calls because one company collected it all and therefore could invest. When unbundling is begun it is part of the transition of unbundling to an environment which in the long-term one hopes will be better, but there must be cost reflective pricing. We are obliged by law and by the regulations under which we operate to reflect cost in our pricing and we are rebalancing to do that. I reiterate the point I made at the beginning: the consumer deal relates to the entire phone bill, not the individual parts of it. Looking around Europe, one can see we are competitive on total cost. Regulatory regimes around Europe vary widely. The cost of line rental versus interconnect varies widely. That is because different states have chosen different ways of doing things. However, when the individual parts are put back together to obtain an average, it can be seen that from a disadvantaged base we deliver average phone services which punch above our weight.

If there is any other information Dr. Nolan can send to the committee which would change my thinking I would be delighted to receive it. When we have had a chance to look at the transcripts of today's meeting and read the presentations in more detail, we may need to obtain additional information. I thank Dr. Nolan and Mr. McRedmond.

I welcome the Minister for Communications, Marine and Natural Resources, Deputy Dermot Ahern. When I am finished perhaps he will introduce his staff. I apologise for the delay. I know he had other pressing engagements today. The sessions ran on and committee members had questions which needed answers. We have been in session since 10 o'clock this morning - the Minister should make sure he tells the Taoiseach that - and we are still going. We welcome the Minister's presentation.

He will be pleased to know that our ICT report on broadband was approved by the joint committee today and that will be published in the next number of weeks. We hope the Minister and his officials will welcome its findings. We have been working on the report for the past 12 months. We had 45 presentations during the summer and five full days of public hearings. The Minister and his officials offered to give presentations also. We have 700 pages of transcripts and a number of recommendations which we will be sharing with the Minister when the report is published.

I thank the Chairman and the committee for inviting me. I have not had an opportunity to see all of the presentation - I only saw the last few minutes - but I understand today's exercise was a good one in that the public, through ourselves, will be able to have an input into the various aspects of this issue. Equally, it is important for the various interests which have been given an audience here to put their views to the representatives of the people and to understand the feelings of these representatives about recent events and about the issue in general. Accompanying me are Mr. Eamonn Molloy, assistant secretary in the Department of Communications, Marine and Natural Resources, Ms Patricia Cronin, also of the Department, and my special adviser Ciaran Ó Cuinn.

I welcome the ICT report and thank the committee for it. It complements the thought in our Department as we contributed to the debate. I thank the committee for bringing in a school from my own area which had been successful in the ICT area to give a presentation from the point of view of the pupils. As a follow-on from that I am asking the pupils from that school to participate in a ministerial broadband conference to be held in April, at which representatives of the school will be making a presentation to EU Ministers about their aspect of broadband. The genesis of their participation in that conference was the request to come to this committee, for which I cannot claim credit, even though I was aware they had won an award.

I have come to speak about telecommunications policy, particularly the issue of the recent line rental increases. The response of the members of the public to the announcement of increased line rental is attributable to three factors. The first is the fact that price increase in line rental is well ahead of the general rate of inflation. Eircom, like many other commercial companies, has lobbied Government over the last year to reduce costs imposed upon it, particularly from local authorities, which must be passed directly on to the consumer. The case being made by Eircom would be strengthened if it could indicate how these and other charges are contributing to the magnitude of the line rental increase now being implemented. The second factor is that the increases are levied on that part of the telephone service about which customers have no choice. As we have heard time and again today, Eircom is the sole operator. At the same time, prices are falling in those parts of the market in which the company faces competition.

The third salient fact is the timing and size of the rental price increase at a time when the announcement of broader financial developments in the company could reasonably be portrayed as enabling the existing shareholders to cash in their chips at the expense of the customer. This image has not been helped by the fact that the shareholders took a dividend of €0.5 billion from the company just last summer. Of that total, the ESOP owned by Eircom employees benefited to the tune of €150 million. Telecom customers can probably work out for themselves that the value of the dividend awarded by the shareholders to themselves was about 20 times the annual value of the recent line rental increase. In these circumstances it is perhaps disappointing that the leading figures in the ESOP have chosen to criticise my policies of bringing increased choice to the public, particularly in terms of accelerated roll-out of broadband in the regions. I had to put up with severe criticism from certain sectors for taking on Eircom in the matter of broadband roll-out. The roll-out over the last number of months has been rapidly increasing, which is welcome. I compliment Eircom on this. I put up with severe criticism for taking on interests which were not for the greater good of the people. The interests of Irish consumers are not served by leaving them at the mercy of private shareholders, including those represented by employees, whose interests are the corporate bottom line, even if this means higher costs for customers and slower roll-out of advanced services. The best way to ensure access to competitively priced services is to improve competition in the market. Just last week, like the committee members, I heard the views of Comreg, Eircom and ALTO on this issue. I compliment them on coming to me so soon.

Before discussing my role in this area, I should outline to the committee the legal framework under which ComReg and I operate. It was brought to my attention that efforts were made earlier to muddy the waters when people know the legal position. Lest anyone be under any misapprehension, I have no statutory role in regard to the approval of individual price increases in the telecom sector.

The Minister knew they were coming.

This is the job for the regulator, which is independent in the exercise of its functions under section 11 of the Communication Regulations Act 2002.

He was just an innocent bystander.

I will answer Deputy Broughan in due course but I did not know about it, nor should I have known. The Deputy is aware of that fact because he was a Member of the Oireachtas that passed the legislation introducing the independence of ComReg. He cannot have it both ways.

Members must let the Minister finish his presentation. There will be plenty of time to ask questions.

Deputy Broughan is trying to ride two horses at one time and it is a difficult thing to do.

The Minister sings the same song every time.

He will fall between the horses.

To promote competitive pricing in the telecom market, ComReg is empowered under statute to implement a price cap in respect of a basket of telecommunications services where it believes there is no competition in the market or where the provider of these services holds a dominant position.

On the last line rental increase, ComReg undertook extensive consultation on pricing within the telecoms sector in 2002. ComReg indicated to the committee that it was disappointed with the response to the consultation - it would be interesting to hear who participated in it - and it decided to impose a price cap of CPI -0% on Eircom for a three year period beginning February 2003. During this period, Eircom can increase the price of the basket of services by the increase in the rate of inflation. Under this price cap, Eircom has discretion in the increased supply to individual items within the basket of services, provided that the overall increase is no greater than the rate of inflation. Eircom has no leeway in this and ComReg is obliged to take remedial action if increases in the overall basket move ahead of the rate of inflation.

I have responsibility for overall telecom policy. Since entering office, my main goal has been to implement telecom policy in a coherent way using the tools available to me to improve the range and quality of services available to business and personal consumers by facilitating the introduction of more innovation and competition in the sector.

Irish macro-economic competitiveness requires us to move up the international league table for broadband roll-out. Achieving this will not be possible unless choice in the marketplace is increased. Long-term dominance of the Irish market by the privately owned operator is not in the interest of the consumer, the market or the dominant market player itself. It took the introduction of a second player in the mobile market to bring Ireland up the average European penetration rates for mobile use. Eircom did well out of competition in the mobile market until it decided of its own volition to exit that market, a decision that, with the passage of time, is not easy to understand. It is clear, however, that Ireland needs Eircom to be strong and to retain secure employment for many years to come and that will invest in its product and its network. We need that and I ask those outside to understand that.

The passage of time has not made it any easier to comprehend the extraordinary conservatism of this company in failing to appreciate the lifeline offered by broadband revenues to the fixed line service, which is slowly but surely being cannibalised by mobile communications. Some of the decisions made in recent times surprise me. Increasing line rental will allow people to migrate from the fixed line to mobile networks, something Eircom will ultimately have to address. I hope it will address involvement in the mobile market. It has publicly acknowledged this and it may happen in the near future. New services were introduced late by European standards and there were rows with the regulator over wholesale margins, astonishingly high prices and slow roll out to the regions. Even Eircom now probably regrets the fact that competition in the market did not force it to move earlier on broadband.

My message is simple - the more people who are offering telecom services, whether they are basic or broadband services, the better for everyone in the long term. There is, however, a paradox here. Low prices and, in particular, below cost selling may impede competition in the market. Prices which cover costs and margins which allow for competition to develop in a smaller market than the European norm are important for competition. I intend to address this issue in my policy directions.

Additionally, for real competition to be introduced to the local market, it is vital that the public accepts and uses new technology platforms. Wireless technologies offer major possibilities for Ireland into the future. There have been major challenges on the planning side in certain locations over the years. While I have no doubt that industry itself has much to do to improve its planning and communications strategy, this is not the end of the story. Anti-phone mast campaigns do not sit well with policy positions which support economic development and employment generation outside urban areas, the roll-out of broadband infrastructure in the regions and the development of a competitive alternative to the incumbent in the market. When I was Minister for Social, Community and Family Affairs I remember receiving a deputation from a peripheral area that was annoyed jobs were not coming to the area. I had to ask when its members made their submission why people in the area continuously oppose mobile phone masts. How can we expect any self-respecting business person to go to an area when he cannot get a mobile phone to work?

The telecoms market has experienced highs and lows unlike any other industry in the past ten years. It has moved from the staid and musty image of the plain old telecom service to the personal communication revolution of mobile technology. It crashed from the euphoria of the dot.com bubble to the idiocy of the licence fees paid for 3G; over €100 billion has been paid in Europe alone for 3G with little or no return today. More recently, broadband has become the new hope for the industry.

For Ireland, the major lessons of the period have yet to be digested in full. There is one that is predominant in my mind. Compared to major markets in the centre of Europe, we lack scale and critical mass. For Ireland to offset scale and positioning disadvantages, it must adapt and modify policies which were originally built for more mainstream European markets. Broadband roll-out and competition are obvious areas. For this reason I have obtained Government approval for significant Exchequer investment in the infrastructure, something that was vehemently criticised by some of the shareholder interests in Eircom in recent times.

The first initiative in this area, which is well under way, is the metropolitan area network which will bring broadband networks to 19 towns by the middle of this year at a cost of €64 million. While this represents a good start, I soon realised that this would not deliver ubiquitous broadband nationwide. This is why I persuaded the Government in recent times to invest a further €140 million between now and 2007 to connect over 80 towns with a population of 1,500 or more to broadband networks.

While this investment will provide most towns in the regions with broadband, it will not solve connectivity issues in rural communities and I have no interest in perpetuating the rural digital divide. To address this issue, I intend to introduce the new group broadband scheme where local communities can pool their demands and obtain high speed connection with assistance from Government funding.

All in the communications market welcomed the announcement before Christmas of the provision of regional high speed broadband connectivity deals on the ESB telecom fibre optic network and on the Esat BT network. This will facilitate the provision of competitively priced back-haul connectivity to the regions. In addition to direct Government investment, I have also actively used legislation to drive the competitiveness agenda. To discharge its remit effectively ComReg needs to have enforcement powers with real teeth and I intend to bring forward legislation to introduce tougher fines on companies in breach of telecom laws.

The power under section 13 of the Communications Regulation Act 2002 to give policy directions to ComReg was a very useful tool to develop the market. For example, last year I used this power to introduce FRIACO, flat rate Internet access, and according to latest ComReg figures 50,000 people have availed of this service. No one believed me when I said we could introduce flat rate Internet access. Those involved and ComReg disputed whether it could be delivered. People said it would not catch on and even those who said it would not work now accept that it has worked and will continue to do so. The figures speak for themselves. Everyone now accepts, even those who were against me at the time, that FRIACO is an outstanding success. It showed that there was a significant demand for Internet access. I am working on new policy directions which will focus on the industry and will aim to address key constraints and complement the work programmes of my Department and ComReg. Additional Government funded broadband will come on stream in 2004 along with improved back-haul connectivity from private operators whose involvement I welcome. For the first time in several years a framework exists for ComReg to use regulatory and enforcement tools to drive the introduction of real competition in the telecoms sector. The most important policy direction will focus on competition and innovation as a key objective for 2004. I will mandate ComReg to incentivise the development of platform and service based competition. This will support the entry of new players and lead to new product offering from existing and new suppliers at attractive prices. In addition to the general direction on competition, I also propose to introduce directions to ComReg on broadband local loop, bundling, interconnection and mobile market. While these markets are at different stages of development and contain different competition issues, my overall aim is to set clear goals for ComReg on market development and to require it to report to me on progress.

While it would be easy and politically attractive for me to announce today that I am taking line rental out of the price basket and going to direct ComReg to introduce a new sub-cap, I have rejected this route primarily because alone it is not the most effective one. I will take a more radical approach, designed to cut line rental prices to Irish consumers by allowing telcom companies to compete against Eircom for line rental. It is designed to cut line rental prices by giving telcom companies the potential to undercut the Eircom price and will give Eircom the incentive to keep prices down. It is designed to build jobs and lower phone prices for Irish consumers which, in turn, will lead to lower inflation.

I will direct ComReg to introduce specifically by Wednesday, 31 March 2004, a wholesale line rental product for voice and data services and to insist that the margin between wholesale and retail is wide enough to drive competion. I will also direct it to insist that the product is accessible, affordable and available for telcom operators. If this product is not in place by 31 March 2004 and if it is not delivering verifiable competition and lower prices by 30 June this year, I will direct ComReg to take line rental out of the present price cap and to set a specific rental cap no greater than CPI. I expect to go to consultation on these proposed policy directions within the next week. While the development of the telecoms market depends on the input of the players, private and public, the significant investment by Government and my policy directions will signal clearly that I intend to ensure competition develops and no operator can operate non-competitive pricing strategies in any market segment. Business and residential consumers must go elsewhere if they are not satisfied with the range of services or the prices offered by individual operators.

I welcome the Minister and his officials and compliment him on his work on broadband. It is obvious from his contribution here what a good grasp he has of his communications brief, particularly his intervention on broadband. We are coming from behind on this and I shudder to think where we might be today were it not for the Department's intervention which the Minister is driving. When Eircom presented here it assured the committee there would be no further line rental increases in 2004. Deputy Broughan was agitated when the Minister said he did not know about the price increase. He referred to the ComReg presentation because when pressed on the question here it said the Minister was not informed of the price increase. Can the Minister clarify whether it is true that he cannot reverse the price increase? He could intervene in anything that might happen in the future but he is not in a position to reverse this. The margin available to other operators is approximately 8.5% which they say is not large enough to encourage more involvement in the market and create more competition. While the Minister is doing something about that he might perhaps have a view on how wide that margin should be.

He refers also to giving more teeth to ComReg but in another respect is critical of some of its recent decisions. Should more be done in that respect? It is fine to give teeth to ComReg if we have confidence in the organisation. Perhaps the general public has lost a great deal of confidence because of the decision on the fixed line rental. Can the Minister say whether he is satisfied that in giving it these extra powers it will use them and be prepared to take on these various sectoral interests?

I cannot intervene. Under the Act ComReg is independent in performing its functions, one of which is the determination of individual pricing. I can intervene on policy but not on specific price increases and how they are determined. Anyone who suggests otherwise is wrong and is not being realistic or fair in the context of the Bill that we passed in the Oireachtas. My office is in constant contact with ComReg on general policy but not on specific issues. The Senator raised the issue of the margin about which ALTO is complaining, as it has done on several occasions when visiting me, not only last week. That is an issue for ComReg and not for me to determine. On the issues of wholesale line rental that is currently available - ultimately it is not available to everyone - and single billing, for which the operators are working, there are conflicting views as to what needs to be done to ensure the availability of a competitive product to entice new operators to the dominant player. I will direct ComReg to insist that the margin between wholesale and retail prices will be wide enough to drive competition. If that is not verified by 30 June 2004, I will take another course of action.

I welcome the Minister for Communications, Marine and Natural Resources, Deputy Dermot Ahern. The committee has had a long day. The Minister's presentation has some substance and he is now taking action.

Deputy Coveney thanked the Minister this morning so he can spare us all this.

No, I believe the conversation we had was useful.

Is the Minister unhappy with the mix that Eircom has been allowed to create between income received from usage and fixed line rental? Ireland is the odd one out in Europe in this regard if one compares other European countries, although some reasons were outlined for that. How does the Minister envisage his policy directive will impact on fixed line rental prices? If ComReg introduces his directive successfully and the margin is set at 8.5%, reductions in fixed line rentals are only likely to be small. It will not have a dramatic impact, unless I am missing something. Can the Minister explain how the introduction of wholesale fixed line rental charges will reduce the cost to the consumer when it is already at a high level of €24.30 per month?

Does the Minister not see reverting to the previous capping policy as a more effective way of dealing with the issue? In that policy there were a series of different sub-caps. However, the Minister has rejected that approach. If he instructs ComReg to introduce sub-caps for different areas, it will have more precise control over different areas of charging. However, with the general basket cap approach, there is more room for rebalancing, even cross-subsidisation if one wants to be controversial, and allow Eircom to use money from one profitable area to become more competitive in another.

I know the Minister is supportive of the roll-out of MANs and his Department is eager for it to progress. I am also in favour of MANs. Does the Minister agree that more must be taken to ensure that future MANs do not replicate existing fibre in the ground and that the benefit of money spent on MANs is properly maximised? Some sectors of industry have made the valid criticism that already rolled out MANs has replicated existing fibre in the ground which could have been lit up if the regulator had the teeth to ensure it.

On the issue of mobile phone——

Can the Deputy concentrate on the substantive issue? The Minister will be back——

Will he be back on mobile phones?

He will because I am hoping that he will endorse our report on the matter. It is getting late and I want speakers to concentrate on the substantive issue.

Will the Minister outline in more detail how this strategy directive to ComReg to introduce competition in fixed line provision will significantly reduce line rental or is it being put in place to prevent further increases?

It is incontrovertible that telecoms prices in real terms have come down over recent years. The cap that was introduced in recent times was designed to ensure that there would a level rising up to CPI over a relative period, which has worked well. A balance needs to be ensured in all of this. On the one hand, one must ensure that prices do not increase rapidly and, on the other, a rate of return must be given to telecoms companies so that they invest in the communications and receive a reasonable profit. It is not for me to determine what profits or increases companies receive. That is a matter for ComReg.

In the directions I am giving, I am looking at where we want to get to in the end result. ComReg's job, under the statute, is to get us there. It is up to ComReg to determine whether there is competition in the market. When dealing with Eircom and ALTO, one company will argue that there is a wholesale line rental already in place. The other will claim it is not there because it is not viable to get into it. ComReg will say there is fault on both sides and we are trying to break that logjam. The solution to the difficulties seen over the last while is to bring in wholesale line rental which in effect is single billing. This is what the alternative operators want and I have been advised that, if it can be driven, it will lead to real choice in the market.

The idea behind MANs is not only to go into peripheral areas but also to provide choice in areas where there is unlit wire in the ground. It is illustrative that when the Government decided to implement the MANs in 19 towns and areas, the dominant player followed us into those areas to light up its wires to provide DSL broadband. This was purely as a result of Government action that the dominant player went into all the areas, bar two - Manorhamiliton and Gweedore. I rest my case.

Was Deputy Dermot Ahern the Minister for Communications, Marine and Natural Resources in February 2003?

The Deputy knows that.

Everybody knows that.

If so, how come he and his officials were not as aware as other companies in the telecommunications sphere that the price cap, as it would operate, would lead to significant increases? Was he there or was he not?

The Deputy knows I was there. I repeat that the Deputy was part of the Oireachtas which passed the legislation which-——

The Minister's speech is a series of contradictions.

I will quote it to the Deputy.

The Minister states, under section 11, that he cannot and he has no statutory role. Under section 13, he states he has responsibility for overall telecommunications policy. That certainly includes pricing policy.

It does not.

Is he not the man who is responsible for this mess in which consumers are involved? With all his efforts, with friendly journalists in the Sunday newspapers to spin his way ahead of the ball game, the mere fact he is here today proves he knows he should have been aware of this. He was aware but he did nothing.

The Deputy knows well. He talks about friendly journalists. Some of the people the Deputy tries to represent also have friendly journalists who attack me in certain media for taking on Eircom. The Deputy is trying to ride two horses. It is a fact, whether he likes it or not, that I have no role, nor have my officials any role, in pricing. That is a matter for ComReg.

Then let him tell us——

Let the Minister answer your question.

That is the case, absolutely and incontrovertibly, under the legislation. I can read the legislation for the Deputy. It states that the commission shall be independent in the exercise of its functions, one of which is the determination of pricing. That is the whole idea of opening the market and allowing an independent regulator. I am not the regulator. I do not involve myself, nor do my officials involve themselves, in the determination——

The Minister does not understand. A normal reading of this speech——

The Deputy is absolutely wrong.

We have already been told by ComReg that the wholesale price is coming. The Minister states that if it is not in place by 31 March 2004 and if it is not delivering verifiable competition and lower prices by 30 June, he will direct ComReg to take line rental out of the present price cap.

What I cannot determine is the specific pricing or the individual pricing. I cannot tell ComReg that it should not determine CPI minus this or that, or plus this or that. I cannot do that. I have no say. ComReg is independent in the exercise of its functions. Whether the Deputy likes it or not, he was part of the Oireachtas who passed this legislation.

The Minister has allowed two years to pass.

The Deputy's party are the people who espouse independence of the political process in these matters——

The Minister is ultimately responsible for policy.

—and he cannot have it both ways.

Was he a Minister in the post-1997 Government which decided eventually to sell the national grid in this area?

Is he the Minister who is rebuilding a surrogate grid over the next couple of years at a cost of €200 million?

I am. That was a good decision at the time and everyone agrees that it was a good decision to sell Eircom when this country got €6 billion, which is now invested in the National Pensions Reserve Fund for the pensioners in the future which, I might add to remind the pensioners, the Labour Party tried to raid in its manifesto before the last election.

The Minister sold the grid.

Deputy Rabbitte is making a great case on behalf of the elderly and is trying to regain the ground he lost in the last election.

The Deputy has heard about efficiencies and price rises in the case of Eircom. Is the Deputy saying that prices would be lower if Eircom had remained a public monopoly? Is he saying the inefficiencies in Eircom would be better if it had remained as a public monopoly? No, they would not be better.

The Deputy knows well that there are many people who he claims to represent who are substantial shareholders in Eircom who do not agree with anything he is saying because they know that the efficiencies driven in Eircom over the past number of years have been as a result of the company being privatised. That is a fact. Privatisation was the right decision at the time and is still the right decision, provided the sector is regulated in a correct way and that prices are not allowed to increase above the rate of inflation.

The Minister has decided that the electricity grid will not be sold with the distributor. That is what we have heard.

The Deputy is again trying to ride two horses. Again there are certain people in the unions, which the Deputy's party claims to represent but which it does not represent, who, if the truth be known, are in favour of the privatisation of the ESB. The fact is that I have made it quite clear that, as Minister, I would not favour the selling of the wires in ESB, but the Deputy is not comparing like with like in comparing Eircom as it was and ESB as it is today. If one was to sell Eircom without the wires, it would be worth nothing. If, tomorrow, one was to sell ESB minus the wires, it would be a substantial company. It would be much more substantial if the sale included everything but if one were to withhold the wires and sell everything else, particularly the power generation, it would be an extremely lucrative sale. Let us face facts. If one had tried to sell Eircom without selling the wire and to keep the wire in public ownership, one would have got nothing for it.

Deputy Broughan, you must be respectful. If you want to carry on such harassment of the Minister with such questions, you might wait to do so in the bigger Chamber.

The Minister has been in power for seven years. The information we received this morning was very illuminating. Is the Minister happy that investment in major fixed line network of Eircom seems to have been declining over the past three years - from the €504 million to €312 million and €197 million? Has he any special concerns about that?

Everything I have done since I became Minister has been designed to ensure that there is an increase in investment. One of the major initiatives which even Deputy Broughan will have to accept I have taken in this respect is in the roll-out of broadband which has been dramatic in the past number of months. That is one of the indications where Eircom, to be fair to the company, is investing heavily in its network. It is rolling out broadband at a rate of between 1,600 to 1,800 a month. I can assure the Deputy that if ComReg - as I stated to it whenever it visited me - requires extra powers, extra directions or additional legislation, I will provide that legislation if I and my officials are of the opinion that it will enable further competition and further choice for the consumer, not like what the CWU was trying to suggest, that I, as Minister, was intervening in the broadband area where they were giving out about the fact that we were implementing a MANs project. Is Deputy Broughan, like Deputy Coveney, in favour of the MANs project? Perhaps he would tell the general public.

I turned up recently——

Mr. Con Scanlon and Mr. Byrne would not agree with the Deputy.

—at the Taoiseach's Department and found the Minister in a panic, telling us he was going to take sudden actions on foot of what was, by any reading, a very critical report of his stewardship.

Not at all. That had to do with what had happened even before I came along. Again I must remind the Deputy that he did not even know what FRIACO was until I mentioned it.

I have heard this so many times. No one knew what FRIACO was because his Government had done nothing to develop it in this country. The reason no one knew what it was is that we were five years behind everywhere else.

Neither did Deputy Ryan know.

The Minister should not make that comment again; he makes it every time. It is ridiculous.

The Deputy is very sensitive.

For the record, we heard it first not from the Minister but from the website www.irelandoffline.org.

Is my gavel for bringing people to order or for striking them over the head? This will be the first time I have had to use it. I have spent almost a year and a quarter with the members here, and we have got on extremely well with Opposition members. It takes very little to rise the gentlemen.

We were opposite each other on social welfare in a previous incarnation, so we know each other.

The Minister has come in today to make a very important presentation and has made a very important announcement. Let us concentrate on the issues that we are supposed to deal with today. Can I count on you, Deputy, to do that?

Yes. I apologise, but I have heard that line so often at this stage that it threw me over the edge. It seems that there is not much new in the Minister's speech. Before me I have a ComReg document from November 2002 saying that the changes in the treatment of line rental must be mastered by the implementation of a wholesale line rental product. That was meant to be introduced a year or so ago. Although the Minister is now announcing that for 31 March, ComReg told us earlier that the wholesale line rental product was due to come on stream in April in any case. What exactly is the Minister saying? From what I have heard, it seems to me that ComReg has already, to a certain extent, decided what it thinks is the right rate - about 8.5% wholesale and €24 per user for transfer costs.

Did ComReg say that today?

I am not altogether sure.

I understood from what ComReg——

As I said, when ComReg was with me last week, it indicated that, while Eircom was saying that it was available, another was saying that it was not available at prices or connection fee rates with which they were happy. However, ComReg was saying that, while there is some fault with Eircom regarding the fact that it has not been brought in, there is also some fault with the operators themselves. I put that to them both when they came to speak to me subsequently. I am trying to ensure that a competitive wholesale line rental will be in place at specific times. If it is not, I will introduce the sub-cap.

That was not my interpretation of what ComReg said today. I would have to rely on the transcript.

My understanding was that there were certain products with which they had to get involved. They made the point that it was not usual for regulators to get involved in such detail, and that this was one product where they had got right down into the detail of what services were included. I understood that the prices had been agreed.

I cannot get into the issue of price details.

I accept that. The real question is whether that 8.5% rate will be low enough. The Minister is saying that, if the product is not introduced by 30 June, he will direct ComReg, saying that it is not working and that we must lower the price to make it attractive for operators. Will we start with that 8.5% rate and, if it does not work by 30 June, will the Minister direct ComReg to set a lower rate?

I have made this point twice already: I am trying to ensure that it will be brought in at a rate that is competitive and allows other operators to come in. I cannot be specific regarding the amounts involved. Today I have set milestones by which, if there is not verifiable competition and involvement in the market from other operators, I will intervene. Members have heard evidence already, as I did when all three groups came to me last week, that this country is ahead of the posse in Europe regarding wholesale line rental. That is seen by all as the key to ensuring competition and real choice, as has been provided in the broadband area by the MANs projects and others.

Is it the Minister's understanding that ComReg itself believes that 8.5% might not be a large enough wholesale margin to allow those companies to enter the market?

Legally I am not obliged to enter into the detail of whether 8.5% is right.

I share the view of the committee and the general public. The end game is to get more choice into the market so that competition drives prices down.

One of the universal service obligations that Eircom has and that ComReg is obliged to oversee is affordability so that low-income, low-use customers are not seriously disadvantaged. From today's deliberations, the strong impression is that those low-use and typically low-income customers are suffering disproportionately from the very large fixed line charge increases that have occurred. That is an area where the Minister is responsible. I referred to the regulations where ComReg said that it had to ensure that the service was affordable and that the consent of the Minister must be obtained. Perhaps the Minister is to issue further directions; a clear picture is emerging from our talks today that the service provided under the vulnerable users scheme is not working. That is not necessarily because of a lack of promotion, although that may be an aspect. I wonder whether it will ever be attractive, no matter how much it is promoted. Clearly those low-use, low-income customers have had a 20% increase over the last 12 months. As Minister with a role in directing ComReg to ensure that there is affordability, what does he intend to do to solve that problem?

I would do what I am doing today and take the same initiatives that I have taken recently. What I am doing today in particular will ensure that wholesale line rental will come in, and ultimately that will drive prices down. That is the answer to the problem. It is a case of common cause between ALTO, ComReg, my officials and even Eircom; they all say it. I am frustrated that wholesale line rental has not been introduced before now. However, now we are directing the job of ComReg to drive that ahead. The Deputy mentioned getting into the finer detail, but it is ComReg's responsibility to get into those details. However, what I am doing today will ensure that there are milestones to be reached, and if they are not reached, I will introduce the sub-cap. However, before I do so, it will be in the interests of both Eircom and the other operators to have wholesale line rental that will be competitive. There is a mutual benefit if they do that.

The Minister has said quite clearly that he will direct ComReg to take line rental out of the present price cap and set a specific rental cap if he feels that he needs to do so. We are here today because of three line rental increases in a row and the annoyance and outrage that that has caused among the public. Is it not the case that he could have intervened but decided not to when ComReg negotiated a new capping system with Eircom, whereby there would be one cap for the overall basket of communications charges rather than what previously existed, which the Minister is talking about reintroducing if necessary to keep rental prices down? The Minister says that he has the power to act if he wishes. If he had acted six, eight or 12 months ago, anticipating, as many people did, that line rental prices would increase, he could have given policy directions to ComReg at that stage to say that he wanted to keep a price cap for line rental to ensure that the public, and in particular vulnerable people who do not use their phones very much, would be protected. However, he decided not to do that. As a result, as was quoted earlier, "Dr. Nolan's real coup was to negotiate a dismantling of the price cap" with the regulator. Under this new formula Eircom has been able to push through its three controversial line rental charges. I accept the Minister does not have any power to influence the individual prices set, but he says he has the power to require ComReg to either keep or reintroduce a specific rental cap, if he chooses to do so. He chose not to do it and as a result Irish people now pay 25% more than they did 12 months ago for line rental in their homes and businesses. Is that not the case?

It is peculiar. Deputy Coveney——

Will the Minister please answer the question rather than commenting on me?

I just want to point out the inconsistency of Deputy Coveney's position. I think he is berating me for not intervening. It is strange: on 31 October last he issued a press release saying Government interference in the running of that new commission would be a retrograde step. He was answering in response to a suggestion from me that there would be increased ministerial input into the workings of the new commission. Subsequently he called on me to show real political leadership. On another occasion he said political interference should be avoided in any dealings with ComReg.

The Minister is being selective.

I can give the Deputy his press release.

With all due respect——

I can give the Deputy his press releases. I have them here. He was exhorting me not to interfere.

We can be here all day.

I can only go——

He actually was not a Minister then.

—on the press releases which the Deputy issued, inconsistently.

Can the committee get an answer to the question?

He even issued two press releases, if I remember correctly where he berated me one day for interfering about a direction about FRIACO, the flat rate Internet access. The next day when he saw that it was applauded by the general public - those people who understood FRIACO - he came out and welcomed it. To answer the question, as I have explained time and again, I could not intervene with ComReg as regards the decision it made on the price cap. I can intervene as regards a sub-price cap but not its specific details, not as regards any of the issues in the basket. I cannot do that and say it has to be this or that.

That is not true.

This is like something out of Myles na Gopaleen, Kafka or something.

Let the Minister answer the question.

As usual the Deputy is letting himself down with his little knowledge of this area.

I will adjourn the meeting and it will not be finished.

Provided Eircom came in under the overall price cap, independently of me and without reference to my officials as regards the CPI over the three year period, nothing could be done. Neither ComReg nor I could intervene once it was under the overall price cap brought in by the regulator. What I propose, as I am entitled to do under legislation, is to specifically direct ComReg to ensure there is a competitive product available within a specific timeframe. I am not dictating what that competitive level is. It is up to ComReg to dictate that and then, if it is not put in place, to put in a sub-price cap.

I want to put a question to the Minister.

May I ask one quick question?

The members all see red when the Minister appears before us but he does not have that effect on me. Would the Deputy finalise his question?

The Minister said that he has the power, should he choose, to require ComReg to reintroduce a specific rental cap. That is what has been removed and which has allowed the three rental increases over the last 12 months. Why did the Minister allow a situation to proceed whereby Eircom negotiated a new cap deal in effect with ComReg, which has meant a 25% increase or nearly €90 million extra annually that has to be paid by the consumer for line rental, if he has the power to insist on a specific rental cap?

ComReg said earlier that it did consultation. I understand this took nine months. The general public, including this committee, was entitled to make submissions as regards its proposals to do what it was doing. Obviously, the public consultation did not lead to any change in its view. In effect, it was allowing some flexibility to Eircom in order for the company to invest in its infrastructure as it said it would as regards broadband in particular. At the same time ComReg was insisting that the prices must not go above inflation, which they have not since that was brought in.

It is somewhat unfair of the Deputy to say there were three price increases over a 12 month period. That is not the case and was explained in the submissions made earlier to the committee. The Deputy may complain of price increases, but ultimately it is incontrovertible that in terms of telecommunication prices this is one of the most competitive countries in the EU in many areas. All the figures are available. Yes, line rental might be expensive, but in the round of things, we are one of the most keenly competitive economies in the EU. We are still trying to get elements of that pricing structure reduced and will continue to do that. However, one cannot have very low prices and at the same time expect a state of the art infrastructure, which is being provided by a private company.

I accept that.

We are trying to find a balance between allowing some profitability, not only for Eircom to invest in its infrastructure but also to generate competition, so that it can make a profit and create jobs and give the consumer choice.

The committee has made it clear we are not against profitability. Members are concerned about a monopoly situation where the line rental cannot be competed against until such time as the Minister intervenes.

The Government would be as well.

There are a number of issues to be clarified as regards ComReg. If there are issues arising from the presentations of concern to any of the presenters and misinterpretations by members of the committee, these should be clarified either by letter or e-mail to the clerk. There are a number of matters as regards legalities which Deputy Broughan raised today with ComReg. Dr. Nolan has to send the relevant information to the committee. I will appreciate it if all those issues can be clarified.

I thank the Minister for coming before the committee. I hope you are aware that it is on the front page of today's Evening Echo—

It is not on my mailing list.

Smart Telecom is the first customers on the MAN network in Cork. It will be back-hauling through the ESB comnet. Tests were carried out last week. I do not know whether the Minister had influence on this but I want to thank him on behalf of myself and Deputy Coveney, as two Cork Deputies, for the roll-out of the MAN in Cork in the first instance.

Did I not share the podium with the two Deputies?

When I referred to influence I meant the 100 jobs Smart Telecom is going to generate in the constituency of Cork East, not my own, but at least it will be for the overall benefit of Cork. It is good news to see the lighting up of the MAN and that Cork was the first to get it and complete it. I am sure we all agree that great credit is due to the Government for its intervention and to the Minister for the interest he has taken and the positive policies he has promoted concerning broadband and the roll-out of broadband since he took office. Although my colleagues can be hard on the Minister on different occasions, I hope you will find that the ICT report will reflect the work you have done over the last number of years.

The joint committee adjourned at 7.10 p.m. sine die.
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