Vodafone and O2 may abolish handset subsidies and raise the cost of outgoing mobile calls if the regulator forces them to reduce mobile termination rates, writes Jamie Smyth, Technology Reporter.

The two biggest mobile firms have also warned the communications regulator (ComReg) that it could breach competition law if it imposes regulation in this area.

Mobile termination rates are the fees that mobile companies charge other fixed and mobile telecoms operators to connect calls to their own subscriber base.

Last week, ComReg proposed regulating these termination charges from 2005 in an effort to prevent the Irish mobile firms from making excessive profits.

But submissions made to ComReg by Vodafone and O2 on the proposals, which have been seen by The Irish Times, show both firms are implacably opposed to this rate regulation.

O2 wrote to ComReg saying it had serious concerns about the approach described in the regulator's proposals, in particular the suggestion that the firm earned excessive profits in Ireland. This suggestion is "contrary to the evidence and is incorrect", it said.

The firm warned that regulation could cause risks for the consumer as outbound call charges may have to be raised to compensate for lower termination fees and subscription fees may rise.

In Britain, handset subsidies also decreased considerably following a similar decision by the Competition Authority to decrease termination rates. The consequences of cutting termination rates may also have implications for low users of services as they would pay more, O2 says.

O2 also argues that ComReg misrepresents the level of competition in the mobile market, uses a clear misapplication of finance theory in its analysis and some of its findings are "substantially at odds with competition law".

In its submission to ComReg, Vodafone says it also found "serious flaws" in the regulator's analysis of the mobile market.

The firm, which has 1.8 million Irish subscribers, says it can show the Irish mobile market is competitive and that mobile termination rates cannot be viewed separately from other markets.

Vodafone, in a bid to show that the market is competitive, refers to its victory in a High Court case in 2001 against another operator that had alleged its was dominant. It also notes that two-thirds of Vodafone subscribers are free to move immediately to another operator without any penalty.

The firm says it is "very concerned" that the regulator is considering different measures to regulate other mobile operators as this could leave Vodafone at a disadvantage to its rivals.

The regulation of mobile termination rates has become a major issue across Europe in recent years as the Competition Authorities in Britain force firms to cut their rates sharply. The British telecoms regulator argues this has reduced the cost of calling mobiles for British consumers.

However, in its submission, Vodafone says that the cut in rates resulted in only meagre net gains for consumers worth less than £5 million (€7.5 million) per quarter. It says that, in the Irish market, even this is unattainable. "Given that the UK market is much bigger, it is clear that the net welfare gain (after the cost of imposing regulation in the Irish market) would be negligible."

Neither submission specifically threatens legal action but it remains a possibility in the Irish market, where O2 and Vodafone are seeking to prevent ComReg imposing strict tariff regulation.

In an interview with The Irish Times earlier this year, Vodafone chief operating officer Mr Julian Horn Smith raised the possibility of challenging a different proposal by the regulator to open up its network to rivals.

ComReg is set to rule on both regulatory proposals shortly.