Eircom defends new basic line rental hike

29 Jan 2004

Eircom has defended its recent decision to bring line rental charges up to €24 a month due to rising costs of maintaining its access network being driven higher by a trend towards one-off housing in Ireland. The company said it believed that Eircom phone bills have reduced more in cost than any other domestic bill over the past five years as well as confirming its plans to become a mobile operator once again.

At an Oireachtas Committee on Communications, Marine and Natural Resources convened as a result of its recent 7.5pc price hike on line rental – the third in the space of a calendar year – Eircom maintained that the increase was in line with inflation and that overall Eircom phone bills fell by 25pc in real terms across the board over the last five years and were the best performing utility for consumers in Ireland.

Eircom chief executive Dr Philip Nolan (pictured) confirmed that Eircom was planning a return to the public markets as well as harbouring plans to become a mobile operator once again. “In terms of our company strategy, I do not wish to comment on the IPO. I believe that in terms of the long term future of Eircom, there are strong economic ties to the public market. This is a utility company with a future through DSL broadband and a return to mobile.” Earlier Nolan acknowledged that mobile companies were eagerly pursuing the market of fixed line telecoms companies.

His colleague, Eircom commercial director David McRedmond commented: “We are delivering value and make no apologies for keeping our margins tight.”

Eircom denied that the company had made three price hikes in the space of one year, but said instead it had made two price increases over two years, in line with “rebalancing” proposals approved with ComReg that were below inflation, in line with consumer price index (CPI) and even still below the cost increases of other utilities providers in the Irish market. The company said that in total terms the line rental increases were 15pc (2003) and 7.5pc (2004).

ComReg chairman John Doherty acknowledged that the regulator was aware of Eircom’s rebalancing approach and argued that telecom prices in Ireland have fallen by 40pc since 1997, “which means a reduction for consumers of €30 on the average bill.

“ComReg does not foresee any further increases in line rental in 2004,” Doherty said.

In its defence before the Oireachtas Committee, Eircom tried to explode the myth the company had no competition in the Irish market. In the fiscal year 1993-94 the company had 100pc of the Irish telecoms market. However, by 2004, the company had 47pc of the Irish telecoms market, followed by Vodafone with 23pc, O2 with 16pc, Esat BT with 8pc, Meteor with 4pc and others with 4pc. Eircom also quoted recent annual ComReg market research on Ireland that proved that the Irish residential and business bills were below the European average.

In recent weeks, Eircom has been accused of “fattening the goose” ahead of a potential IPO and various groups such as the Consumers’ Association of Ireland and Smart Telecom unveiled conflicting information at yesterday’s Oireachtas Committee on Communications that indicated that Eircom stood to gain anything between €90m and €150m per annum on foot of the recent price hikes. According to a bond issue document published on behalf of Eircom by various banks last summer, the venture capitalists that invested €900m in the company in 2001 stood to see a return on investment of over €2bn within two years. The Oireachtas Committee on Communications chairman Noel O’Flynn TD argued that the price hike was being driven to assuage both Eircom’s existing shareholders such as Valentia as well as the Eircom staff members who had a share in the company under ESOP.

In his defence on these points Dr Nolan argued that some 1,700 jobs have been cut since Valentia’s acquisition of Eircom in 2001 without any industrial action and that 23pc of jobs have been cut in the past five years. Quoting Deutsche Bank’s “Telecoms Outlook” published in December, Eircom’s capital expenditure as a percentage of sales on domestic fixed lines stood at 12.6pc, slightly above the EU average of 12.4pc.

The company also argued that the cost of the average phone bill in Ireland has reduced more in cost than any other domestic bill in the country. Excluding Vat, it said that the average bill in 1999 was €50.30 and in 2004 stood at €47.99. If the price increased in line with inflation, it said, the average domestic bill in Ireland would have been €61. On a European level, Eircom bils were below the European average, less than the Netherlands, Germany, Italy, France, Spain, Greece, Belgium and Portugal.

Nolan said that the Eircom phone bill was still below the price of inflation, unlike ESB which was 5pc above inflation in January last year, RTE which was 40pc above inflation in January this year, NTL which was 6pc above inflation and Bord Gais, which was 9pc above inflation since April last year.

Despite this, chairman O’Flynn argued that at €24.20, Eircom’s basic line rental was still €9 higher than the European average.

Nolan countered this by indicating that while Ireland’s core national and international network, which was mostly fibre and comparably state-of-the-art with the rest of the world (and covered in cost by call charges), the access network (lines connecting the local exchange with the home) was covered by line rental charges. Because of Ireland’s low-density population as well as its trend towards once-off housing in rural areas, the cost for connecting new users to the network was spiralling. On this front, Eircom said that while the costs of terminating and making calls on its network were amongst the lowest in Europe (one-third that of Finland), the company made a loss off €159m on its access network between 2002 and 2003. As an incumbent required by national and EU law to recover costs on its access network, the company said that the line rental charge increase was inevitable.

In an earlier presentation to the Oireachtas Committee on Communications, Smart Telecom indicated that Eircom’s investment in its network fell steadily from €504m a year in 2001 to €197m in 2003. Dr Nolan defended this investment decrease on the grounds that when Eircom was investing €504m in 2001 it was doing so with the inclusion of Eircell’s (now Vodafone Ireland) annual network investment at the time and the committee had to take into account the changing telecoms landscape that saw over €3 trillion wiped off the value of telecoms investment. “The fact that we are capable of investing €200m a year, a lower level than in the past”, Dr Nolan said indicated that Eircom was weathering the storm.

By John Kennedy