Competition is a key driver of the information age. The influences of
competition have yet to be felt directly in Hull. BT is currently not able
to operate systems in the Hull area. No operator has yet to bid for the
Hull broadband cable franchise and no fixed radio access operator has rolled
out its systems in Hull. However, the Hull telephone market (in which Kingston
Communications is dominant) is not and cannot be static and isolated from
the competitive new world of telecommunications.
European legislation, in the form of Directives, has already changed
many of the regulatory rules for Kingston Communications (as for other
UK operators) to facilitate competition. This Review proposes further changes
to Kingston Communications' (and Hull City Council's) licence. All of the
proposed modifications are designed to deliver the benefits of the information
age to consumers in Hull and to achieve for them the goal that I have set
for Oftel:
"To provide the best possible deal for the customer in terms of quality,
choice and value for money".
DON CRUICKSHANK
Chapter 2 A brief outline of the telecommunications market in Hull
Chapter 3 Why this review is taking place
Chapter 5 Changes to Kingston's licence
Chapter 6 Kingston's interconnect arrangements and network charge control issues
Chapter 7 Other regulatory changes to secure market opening
Annex A Economic Analysis
Annex B Changes to Kingston's interconnection Condition
as a result of the ICD
Annex C Other proposed changes to Kingston's licence
Annex D Glossary
Neil Buckley
Oftel
50 Ludgate Hill
London
EC4M 7JJ
Written comments will be made publicly available in Oftel's Research and Intelligence Unit except where respondents indicate that their responses or parts of them are confidential. Respondents are therefore asked to separate out any such material into a confidential annex which is clearly marked as such. In the interests of transparency, respondents are requested to avoid confidentiality markings wherever possible.
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In this document Oftel:
1.2 This new age is being fostered by a number of developments. One is digital technology, which increases spectrum availability, allows for the proliferation of network capacity and thereby results in lower costs. Another change is the ability of the customer to control the information being delivered over the network, for example in relation to timing or destination. Of equal importance is the convergence of technology, so that different networks are able to carry similar types of services (for example Internet telephony), and the coming together of apparatus, so that a PC can be used to watch television or a television can be used to receive e-mail or access the Internet.
1.3 The result of these developments will be the emergence of new services providing opportunities for jobs and economic growth. The European Green Paper on Convergence Towards an Information Society Approach, published in December 1997, emphasises that these communication services should: "enhance the quality of European citizens' lives by increasing consumer choice, facilitating access to the benefits of the Information Society and cultural diversity."
1.4 In order to take advantage of these new technologies, considerable investment is needed. Indeed, across the UK as a whole there has been a massive investment of billions of pounds a year in the construction of new infrastructure and the upgrading of older networks. The cable industry has now passed approximately 11 million homes, allowing a choice of local access telecommunication operator for millions of customers (as well as providing cable television). Fixed radio access telephony is being rolled out in many parts of the country which, in time, will result in a third local access operator. There are also many PTOs that have invested in building networks, with hundreds of service providers using these networks to provide a range of both traditional and new services. The developments in telecommunications are mirrored in the broadcasting sector. 1998 will see the advent of digital television with the launch of digital satellite television followed by digital terrestrial and digital cable television.
1.5 Against this background of dynamic change, Oftel seeks to ensure that the regulatory framework allows maximum customer choice, with best value for money, for all telecommunication consumers throughout the UK. As set out in Chapter 2, the telecommunications market in Hull and its environs has had a different history from that of the rest of the UK and some of the developments mentioned above have yet to reach Hull. Oftel aims to ensure that the many benefits which are to be gained from the Information Age are available to the people of Hull as in the rest of the UK.
1.6 Two factors will be especially important in facilitating the provision of new services in the Hull area: investment and competition. The provision of infrastructure and the development of new services are dependent on companies investing considerable sums in new technologies. Kingston, as a local authority owned company, is subject to certain statutory financial constraints outlined in Chapter 2. The financing of investment by a local authority owned company is outside the scope of Oftel's responsibilities.
1.7 The other important element in encouraging the availability of new
services is competition. A competitive market is much better than a heavily
regulated one, especially in the long term, at ensuring that consumers
reap the benefits of technological improvements and management efficiency.
Moreover, the Director General is under a statutory duty, set out in the
Telecommunications Act 1984, to ensure that effective competition is maintained
and promoted. This is why two of Oftel's high level objectives are the
promotion of fair, efficient and sustainable competition in networks and
in services. This review therefore aims to ensure that the regulatory framework
supports the development of competition in the Hull area and thereby promotes
Oftel's goal for consumers in Hull (as elsewhere in the UK):
"To provide the best possible deal for the customer in terms of quality,
choice and value for money".
2.4 Kingston has in recent years diversified from its core activity of providing telecommunications to the people of Hull. Kingston now has a number of trading subsidiaries in addition to providing telecommunications in Hull. Kingston's trading subsidiaries include Torch, which is a Public Telecommunications Operator. Torch is licensed to provide services nationwide and has a regional base in Yorkshire with its main office in Wakefield. Torch was originally a joint venture with Yorkshire Electricity but is now 100% owned by Kingston.
2.5 Kingston SCL (also 100% owned by Kingston) is a telecommunications software company based in Edinburgh; the company also has offices in Port Glasgow, Paris, Munich and Hong Kong. Kingston SCL employs 340 people, over a fifth of Kingston's employees. Another subsidiary, Kingston Satellite Services (95% owned by Kingston with British Aerospace having a 5% holding), provides satellite services for a variety of customers including Camelot (for the National Lottery). The company has a satellite facility near Bedford.
2.6 Kingston, in its licence, was given rights and obligations (for example "universal service") within the Hull area which are in many respects similar to those applied to BT in the rest of the UK. The area in which Kingston is licensed is excluded from the area in which BT is currently licensed to run systems. BT is at present therefore not authorised to operate telecommunication systems in the Hull area.
2.7 PTOs (other than BT) which are licensed to provide services nationwide are under no regulatory restrictions preventing them from operating systems and entering the market in Hull. However, aside from the provision by Kingston of national and international calls via BT, C&W and Torch and a small number of businesses that are connected to C&W, no operator has chosen to offer services directly to consumers in the Hull market. No cable operator has asked the ITC to advertise Hull as a franchise area for the local delivery operator licence (providing broadband cable television and telephony services). Ionica has not yet rolled out its fixed radio systems in this area.
2.8 The market for telecommunications in Hull is considered by Oftel to be a separate economic market from the market in the rest of the UK (as explained in Annex A), and the influences of competition have had less direct effect. The reductions in telephone prices in the UK for national and international calls have however, largely been mirrored in the Hull area (because Kingston has pursued a policy of pricing such calls at BT's and C&W's normal national tariffs) and so competition elsewhere in the UK has had an indirect impact. However, the Hull telephone market is not and cannot be static and isolated from the competitive new world of telecommunications. European legislation in the form of Directives has changed the regulatory rules for Kingston (as it has for other UK operators) in order to facilitate competition and interconnection. Kingston has responded by planning to introduce new access arrangements for national and international calls from 1 April 1998. These plans are discussed in detail in Chapters 3 and 5.
3.2 The regulation of telecommunications in the UK now operates within
a framework of European legislation (Directives). The aim of these Directives
is to ensure an open and competitive market for telecommunications networks,
services and apparatus throughout the whole of Europe. In the most recent
Directives there is a distinction in the level of regulation imposed on
those operators without market power and those operators who are determined
by the Director General as having 'Significant Market Power' (SMP).
3.3 In November 1997, Oftel published a consultation document Identification
of SMP for the purposes of the Interconnection Directive (ICD). The document
explained why Oftel considered that Kingston had SMP under the ICD. Kingston
questioned Oftel's analysis but, having taken due account of the representations
by Kingston and other respondents, the Director General determined on 23
December 1997 that Kingston (and Hull City Council as dual licensee) was
an operator with SMP under the ICD in the fixed and leased lines interconnection
markets. At the same time, Kingston was also determined to be an operator
with SMP in the leased lines market under the Amending Leased Lines Directive.
3.4 The February Statement Identification of SMP for the purposes of
the Interconnection Directive set out comments on the responses to the
November Consultation Document (with the same title) and gave a further
explanation of the Determination. The main reasons for the Determination
under the ICD were that:
(1) accounting separation between its interconnection services and other
activities
(2) cost-orientated interconnection tariffs
3.6 Later this year the Department of Trade and Industry will publish draft Regulations to implement the Amending Voice Telephony Directive (AVTD) which supersedes the Voice Telephony Directive (VTD) which already applies to Kingston. Some of the AVTD's provisions apply to all operators offering publicly available telephony services. The AVTD, unlike the VTD, has an SMP test (similar to that under the ICD) which triggers the application of some of its provisions. Oftel will publish a consultation document identifying those operators it proposes to determine as having SMP for the purposes of the Directive. Oftel expects to propose that, subject to consultation, Kingston should be determined to be an SMP operator for the purposes of the AVTD.
3.7 If Kingston is determined to be an SMP operator, the AVTD will impose a number of obligations, including retail accounting separation. The AVTD will also regulate aspects of Kingston's Universal Service Obligation. The ICD and the AVTD both involve considerable changes to the way in which Kingston's business must manage and account for itself.
3.8 The conditions incorporated into Kingston's licence by these Directives
apply directly to Kingston, and are not currently integrated into their
licence. As part of the second phase of the implementation of the Licensing
Directive, all such conditions will be incorporated into the body of the
text of the licence. This modification, which will be undertaken by Statutory
Instrument, is required to be in force by the end of 1998.
Changes to Kingston's national and international access arrangements
3.9 In February of this year, Kingston announced plans to change its access arrangements for national and international calls. As set out in Box 4, the current system differs from that in the rest of the country. However, from 1 April 1998, the access arrangements will be altered. For out of area calls, customers will no longer, on a call by call basis, choose how Kingston routes those calls (through BT, C&W or Torch - with a default to BT). Kingston will offer long distance calls in the same way that BT does in the rest of the country. Customers in Hull will be able enter into direct contractual relations with an indirect access operator which enters into an interconnection agreement with Kingston.
3.10 The transition to these new arrangements is being carefully monitored by Oftel to ensure that the people of Hull are fully informed of the change and the choices that will be available to them. Oftel is concerned particularly to protect customers from any anti-competitive activity and will take any action necessary to stop such behaviour.
4.2 Three distinct telecommunication markets have been identified for
the Hull area. These are:
4.4 Oftel is aware that Kingston questions Oftel's view that telecommunications in Hull constitutes a separate market for economic analysis nor does it consider that it is a dominant operator. Counter arguments to Oftel's assessment that Kingston is dominant include: its limited geographic coverage, the strong influence of BT as the dominant national operator (even though BT is not allowed to operate systems in Hull) and Kingston's limited size and access to financial resources resulting in an alleged inability to behave independently of BT. Oftel has considered these arguments but believes that Kingston's control of access to almost 100% of customers in the Hull area, in the presence of significant barriers to entry, means that Kingston is dominant in its licensed area. Oftel therefore considers it appropriate to maintain regulatory controls on Kingston commensurate with its market power.
4.5 Oftel recognises that the controls appropriate to a small company with a dominant position in a limited geographical area may not be exactly the same as those applying to a huge global company such as BT. It is also the case that market definition and the nature of competition can change quickly, particularly in a market as dynamic as telecommunications. If another operator or operators were to make significant inroads into the Hull markets, Oftel's view that Kingston is dominant could well change. Although Significant Market Power is a different concept from dominance, changes in market conditions might require not only Oftel's assessment that Kingston is dominant to be reassessed but also the notification of Kingston as an operator with SMP under various Directives. In any event, there will be a general review of SMP status during the course of 1999.
Question 1
Do respondents have any comments on Oftel's analysis that the geographical
area served by Kingston encompasses various distinct services markets for
the purposes of economic analysis?
Question 2
Do respondents have any comments on Oftel's view that Kingston is
dominant in the market for exchange line access in Hull, the market for
all types of calls originating in Hull and the market for calls terminating
in Hull?
5.2 Oftel also considers that Kingston's licence needs to be modified to take account of other changes in the market and the regulatory environment since 1984, taking into account Oftel's view that Kingston is dominant in the Hull telecommunications market. Kingston's licence, unlike BT's or Mercury's licence, has not had a thorough overhaul since 1987. Kingston and Hull City Council need a licence appropriate for the new century, not one designed for the very different circumstances of the 1980s. A list of conditions that Oftel proposes to modify is set out at Annex C.
5.3 In addition, there is a need to review the regulation of Kingston to take account of the wider outlook of telecommunications operators, including Kingston, in the late 1990s. There has been an increasing trend among telecommunication companies to amalgamate, diversify, and to form alliances to take advantage of new markets and new investment opportunities. Kingston themselves have made a number of investments in telecommunication activities which extend beyond Hull, in particular Torch, Kingston SCL and Kingston Satellite Services.
5.4 The modifications outlined in this consultation document would normally be made under Section 12 of the Telecommunications Act 1984. DTI and Oftel are however, currently considering to what extent the proposed changes may be required under the Licensing or other Directives. The Section 12 procedure requires statutory consultation and either the consent of the licensees to the proposed modifications, or a reference to the Monopolies and Mergers Commission. The process of licence modifications to implement the Directives referred to above is different, as such modifications will be effected through Statutory Instruments (made under Section 2 of the European Communities Act 1972) to give effect to rights and obligations under EC legislation and such changes do not require the consent of the licensee.
5.5 After the completion of the consultation period in relation to this
document, Oftel will issue a further Statement detailing the modifications
which Oftel proposes to make to Kingston's and Hull City Council's licence
and the process for making the modifications.
Accounting Separation, Regulatory Accounts and Controls against
Unfair Cross-Subsidy
5.6 Accounting separation is an essential regulatory tool for dealing with companies with market power in one market which also operate in related markets. Kingston's 1987 licence includes, at Condition 19, a basic requirement for separate accounts for certain activities. Separate accounts are designed to meet regulatory needs, they do not impose any particular organisational, managerial or operational structures on Kingston. The regulatory accounts required under Condition 19 are relatively basic and are not broken down. Oftel and other operators are therefore not able to establish the cost of certain individual services provided by Kingston.
5.7 The regulatory requirements in relation to accounting separation have changed as a result of the European Directives on Interconnection and Voice Telephony. The information derived from the introduction of the accounting separation requirements under the VTD/AVTD and the ICD is designed to ensure that Oftel is able to check that the tariffs (ie retail prices and interconnect charges) offered by operators with SMP are cost-orientated and unbundled.
5.8 The general accounting separation requirements imposed on operators with SMP under the ICD are set out in the licence condition included in Kingston's licence as part of the implementation of the ICD. It is Oftel's responsibility to ensure that the practices and procedures adopted by Kingston in relation to its separated accounts comply with the ICD. The regulatory accounts have to provide the information to enable Oftel to identify any cross-subsidies; to check that the charges are cost orientated and ensure that, in its internal accounting arrangements, Kingston charges itself the same price for interconnection services as it charges other operators. The system put in place by Kingston must be capable of identifying detailed data on the cost of underlying components and of the services themselves to the satisfaction of Oftel.
5.9 In assessing what accounting separation arrangements should be followed by Kingston both for the purposes of the ICD and to meet Oftel's concerns to ensure fair trading, Oftel has taken account of the Commission's draft ONP Guidelines on accounting systems. These guidelines provide a yardstick for what is appropriate for SMP operators. Account also has to be taken of the particular circumstances of Kingston and the need for proportionality, whilst ensuring that the system satisfies the obligations imposed on Kingston by the ICD.
5.10 Oftel's first requirement is to define, for regulatory purposes, the separate businesses for which there should be separate regulatory accounts. So far as the main divisions of its businesses are concerned, Kingston has indicated that it would wish to divide its operations (for regulatory purposes) into seven businesses; Oftel has agreed to this request. BT's main regulatory businesses are further divided into 'activities' for which separate regulatory accounts have to be provided. Oftel would welcome respondents' views on whether there is any need for Kingston's regulatory accounts to be subject to this further level of dis-aggregation.
5.11 The next step is to define the basis on which the regulatory accounts are to be drawn up, audited and published (which should be at least once a year). The key features of these requirements are also covered in the ONP Guidelines. Oftel anticipates that the requirements will be similar to the provisions of BT's Licence Condition 20B, simplified and reduced in detail where appropriate to meet the principle of proportionality. Oftel considers that the regulatory accounts should include a statement covering the cost of interconnection components and a statement of the cost of interconnection services. These accounts will provide data on the costs which underlie the charges paid by other operators for the use of Kingston's system. It will be important to ensure that this information is available to all interested parties as soon as possible and by the most appropriate method.
5.12 The requirements of accounting separation for interconnection are underpinned by the Accounting Documents that Kingston will have to produce in agreement with Oftel which set out the principles for drawing up the regulatory accounts. Oftel is discussing with Kingston what documentation will be required. Kingston will also need to produce a written explanation of the accounting practices that it has followed in giving effect to the principles in the Accounting Documents the 'Detailed Attribution Methodology' ('DAM'). Kingston's published regulatory accounts will have to be drawn up consistently with the practices set out in the DAM. Kingston's accounts will be subject to audit to verify that the DAM is consistent with the Accounting Documents, that it has been used and that the values in the regulatory accounts fairly present, in accordance with the Accounting Documents, the results of the Businesses.
5.13 Oftel considers that licence requirements may be necessary to supplement those incorporated into Kingston's and Hull City Council's licence by the implementation of the ICD. As set out in paragraph 5.11, Oftel believes that provisions similar to BT's Licence Condition 20B should be incorporated into Kingston's licence, adapted to take account of the principle of proportionality.
5.14 Accounting separation provides some of the essential information required by Oftel to identify whether there have been any cross-subsidies between different parts of the economic undertaking. If there have, these can then be analysed to assess whether they are unfair, because they are damaging to competition. Until such time as effective competition is established in the Hull telecommunication market, Oftel considers that there is a need for regular reporting through these accounts to ensure that Kingston is not able to use its market power to engage in cross-subsidies between different parts of its businesses without this being identified and to enable Oftel to intervene, in good time, where the cross-subsidies are unfair.
5.15 Kingston's licence contains a prohibition on certain cross-subsidies (Condition 17) as well as the requirement to produce separate accounts for certain activities (Condition 19). Kingston's obligations in relation to accounting separation have been modified by the Regulations implementing the ICD. Oftel also proposes that these conditions need to be further amended to take account of:
5.17 The potential for unfair cross-subsidies by Kingston is not of the same magnitude as that possible in the case of BT. However, Kingston, because of its local dominance, does have the capability of acting anti-competitively by cross-subsiding unfairly some of its activities in order to prevent market entry by others. A condition similar to Condition 20B 15 of BT's licence could therefore be appropriate for inclusion in Kingston's licence.
Question 3
(a) Do respondents agree with the proposal that there continues
to be a need for a condition in Kingston's licence that identifies cross-subsidies
and prohibits those that are unfair?
(b) Do respondents agree that this condition should be modified
as per BT's condition 20B.15?
Kingston's proposed new access arrangements
5.18 Oftel welcomes Kingston's decision to change the access arrangements for its customers. The present access arrangements for long distance and international calls have been outlined in Box 2. Where a local loop operator has market power, Oftel believes that customers should have access to competitors via indirect access. Customers should be able to send their calls via such operators through the use of a short code and should be able to have a direct contractual relationship with such operators.
5.19 There is no need for an amendment to Kingston's licence to allow it to change its access arrangements. Under the ICD, Kingston has to offer indirect access if requested by other operators.
Question 4
(a) What view do respondents take of the changes to the Hull access
arrangements for Kingston's customers?
(b) Are respondents satisfied that consumers in Hull are fully aware
of the changes that are to take place on 1 April 1998 and the choices that
will be available to them?
Is there a need for a Retail Price Control?
5.20 The licences granted to Kingston and to Hull City Council in 1987, included a provision (Condition 23) that Kingston should notify Oftel of every price change that they proposed to make six weeks before the change was due to take effect; Oftel had a right of veto of any price changes. This veto applied both to reductions and to increases in prices (to cover the possibility of excessively low, or predatory, pricing to stifle the development of competition, as well as the possibility of excessively high prices exploiting the de facto monopoly.) The condition lapsed in 1993 and it is proposed that this condition should be removed as part of the proposed modifications.
5.21 Since 1993, Kingston has still been obliged under its price publication condition (Condition 15) to publish every price change 28 days in advance of them taking effect, but Oftel no longer has a power of veto. Publication means sending Oftel a copy of the price changes, placing a copy of the price changes in the main office of Kingston and sending a copy to anyone who requests it.
5.22 Oftel has powers under Condition 16 of Kingston's licence to take action, if appropriate, against any price change which it believes is unduly discriminatory or unduly preferential. The Fair Trading Condition (incorporated into Kingston's licence in November 1997) also allows Oftel, amongst other things, to take action against any price which constitutes an abuse of Kingston's dominant position (as well as allowing Oftel to take action against any agreements entered into by Kingston which unfairly distort or restrict competition).
5.23 When effective competition develops in the Hull market, competitive pressures on Kingston would effectively prevent them from over-pricing, while general controls against anti-competitive behaviour would be sufficient to prevent abuses such as predatory pricing.
5.24 In the absence of effective competition in certain telecommunication markets, Oftel, has applied a retail price cap regime on the dominant operator in the UK (BT) in order to provide protection for the consumer and to ensure efficiency improvements. In the rest of the UK, outside the Hull area, where BT provides services under its national licence, the progressive expansion of competition has enabled Oftel to start relaxing the detailed retail price control mechanisms.
5.25 From an economic perspective, the need for a retail price control regime on a particular set of services depends on various factors including:
(a) The extent of current competition in the retail markets.
In most of the retail markets in Hull there is only limited competition
and Oftel's economic analysis supports a contention that Kingston has the
potential to exploit its dominance.
However, prices for national and international calls from Hull have
fallen over the last few years, since they are linked to the national tariffs
of the companies which supply these services, which have been reduced under
the pressures of the BT retail price control and the development of competition.
Residential and business bills for most types of customers are lower for
a Kingston customer than for a BT customer.
(b) The barriers to entry to the relevant market
The entry costs of building infrastructure to provide exchange lines
and access to call services have historically been very high but, with
new technology, have been falling. In addition, in the call markets, indirect
access arrangements (especially after the change to be made on 1st April)
should allow relatively easy entry to most of the call markets.
(c) The profitability of the company in markets in which they possess
market power.
Measures of profitability are heavily dependent on the assumptions
made about the cost of capital of Kingston's regulated activities and the
relevant asset base on which a return is required. In the absence of detailed
and accurate information on Kingston's cost of capital, Oftel is not in
a position to judge the level of profits Kingston earns on the activities
where it has market power. Oftel currently also has insufficient evidence
to gauge the efficiency of Kingston's telecommunications operations.
5.26 Consideration of the factors outlined in the above paragraph suggests that in the absence of effective competition in Hull, there is a case for maintaining some form of oversight by Oftel of retail price changes made by Kingston. The three options that Oftel has considered for Kingston are set out in paragraph 5.28 below.
5.27 The options for a retail price control system that Oftel has considered, in descending order of interventionism, are set out below:
(a) A limited duration RPI-X price cap mechanism similar to that which
applies to BT;
(b) Reinstatement of a price control condition similar to the current
(time-expired) provision in Kingston's licence, with a requirement that
Kingston notify Oftel of any price change (both increases and decreases);
Oftel would have a right of veto over any such price variations;
(c) Reliance on the price publication condition, coupled with the prohibition
against undue discrimination and undue preference and the Fair Trading
Condition.
5.28 Option 1: It would be possible for a simple retail price cap system to be developed for Kingston. However, Oftel does not believe that this is needed. A retail price cap regime is intrusive and creates a large burden for the regulated company. At a time when Oftel is seeking to move away from prescriptive regulation, in favour of the application of general competition rules (including the Fair Trading Condition), it would be a backward step to seek to propose a price cap regime for the first time for Kingston. Moreover, Oftel also considers that a retail price cap could undermine the incentive for competitors to enter the Hull market, where average prices are already generally lower than the national average.
5.29 Option 2: This method of controlling retail prices is also an interventionist
tool which requires Oftel to examine every individual price change notified
by Kingston. Over the period during which the veto existed, it was never
exercised by Oftel. Re-imposition of the veto would be a retrograde step
at a time when Oftel is moving away from making determinations about individual
charges. Oftel does not propose that Kingston should be asked to agree
to its re-introduction.
5.30 Option 3: Oftel believes that the existing conditions in Kingston's
licence, in particular the combination of the condition requiring Kingston
to publish any price changes and the condition prohibiting undue discrimination/undue
preference, together with the Fair Trading Condition, should be sufficient
to counter any behaviour by Kingston that is against the interests of Hull
consumers. If the market and/or the behaviour of Kingston were to change
significantly, it is always open to Oftel to consider the need to impose
a more strictly regulated regime at that time.
Question 5
Do respondents agree that the maintenance of the existing rules
whereby Kingston has to publish all price changes in advance and is subject
to the conditions on undue discrimination/undue preference and fair trading
are sufficient or do they think that the Director General should have additional
powers?
Kingston's service obligation, the Residential Limited Service Scheme and the provision of public payphones
5.31 Condition 1 of Kingston's licence sets out its service obligation within the licensed area. Kingston is required to provide voice telephony services and other telecommunications services within the Licensed Area (Hull and its surrounds) to every person that requests them (a universal service obligation). The service obligation at condition 1 is supplemented by a rural service obligation (Condition 2), although in practice condition 1 is sufficiently broad to embrace an obligation to provide services in rural areas. Oftel considers that at the present time there is no need to make any alterations to conditions 1 or 2 of Kingston's licence.
5.32 Oftel consulted on the provision of universal service in the UK (apart from Hull) in its consultation document Universal Telecommunication Services published in February 1997 and in its Statement of the same title published in July 1997. As set out in those documents, the provision of Universal Service provides important economic benefits as well as ensuring a safety net so that no one is excluded from the social and economic opportunities that modern telecommunications can provide. The gains from universal service are both collective and individual.
5.33 Oftel has not yet been able to examine fully the cost of providing universal service in the Hull area (nor whether there is a need for a universal service funding mechanism) because Kingston is currently unable to provide detailed and accurate information about the costs of providing these services. Once the accounting separation arrangements required for the VTD and ICD are in place, Kingston should be able to undertake a calculation of the costs of its obligation. It will then be able to submit this to Oftel which will subsequently assess whether it considers that there may be a need to establish a universal service funding mechanism. Oftel will consult on any proposals in relation to Kingston's universal service obligation including any proposed funding mechanism.
5.34 In Universal Telecommunication Services Oftel set out its proposal that BT should provide a cheap incoming calls only service. The Residential Limited Service Scheme (which BT market as 'In Contact') allows customers to have the benefit of a phone in their home enabling them to be contacted by friends, relatives, their GP, social services and so on. Customers avoid a debt risk because their phone is programmed to bar most outgoing calls (except free calls to emergency services, customer services, fault repair services and BT's 'Ring Me Free' service).
5.35 Oftel has discussed with Kingston the provision of a Residential Limited Service Scheme. Kingston has introduced a scheme along similar lines which it is called 'Basic Contact'. The main difference between BT's and Kingston's Scheme is that Kingston's service will be for new customers. Oftel is satisfied with Kingston's proposals and sees no reason, at present, to formalise them in a licence condition.
Question 6
Are respondents satisfied with the 'Basic Contact' service that is
proposed by Kingston which will allow new customers to have the option
of a telephone line which is barred to most outgoing calls?
5.36 Kingston's licence contains two conditions relating to public call boxes, Conditions 10 and 32, (similar to conditions contained in BT's licence). The first sets out the basic requirement that Kingston shall secure the provision of public call boxes (essentially payphones situated on streets), the second condition obliges Kingston to make special facilities available in call boxes for the hearing impaired. The supply of public call boxes in the Hull area is generally adequate, though there is currently a lack of competition in the provision of public payphones. IPM and New World, the two competing national public call box operators, have so far chosen not to enter the Hull market. There are however, a considerable number of private payphones (essentially payphones on private premises) in the Hull area; it is not possible to ascertain the precise number as anyone can add such boxes to any exchange line leased from Kingston.
5.37 In relation to the criteria for the installation of new public call boxes, Oftel does not consider it necessary to amend the current guidelines which already recognise Kingston's obligation to make provision where there is social need. Oftel does however, consider that the public call box condition in Kingston's and Hull City Council's licence should be modified. BT's public call box licence condition was altered last November to provide greater procedural flexibility in the siting and removals of such payphones, provided it consults with the relevant local authorities. Under Condition 10 of Kingston's licence, the Director General has to be consulted on the siting and removal of all public call boxes. Oftel proposes to change the condition in Kingston's and Hull City Council's licence to alter the requirement to consult the Director General (the proposed modification will be in line with the alterations made last November to BT's licence) .
5.38 Oftel considers that until such time as there is effective competition in the provision of public call boxes, there is a need to continue regulating this market through Condition 10. The requirements in relation to the hearing impaired are being consulted on separately as part of an Oftel consultation exercise on the provision of telecommunication services for people with disabilities. This exercise is also examining Conditions 3 (Directory information), 4 (Maintenance services), 9 (Priority fault repair services), 30 (Supply and connection of apparatus for the disabled) and 31 (Special telephones for the hearing impaired) of Kingston's licence.
6.1 The ICD requires operators with Significant Market Power to:
6.3 The ICD Statutory Instrument which came into force from 31st
December 1997, included a provision which amended Condition 12 of Kingston's
licence (the interconnect condition) in order to make it consistent with
the changes introduced on
1 October 1997 into BT's licence to set up the new BT network charge
controls. Similar changes were incorporated into the corresponding conditions
in other operators' licences. The modifications require that terms and
processes of negotiation should be reasonable. There is a 'fall-back' power
for the Director General to resolve disputes. Annex B shows the effects
on Condition 12 of this change.
6.4 Oftel considers that it would be desirable to supplement the conditions
incorporated into Kingston's licence to implement the ICD. The proposed
more detailed provisions will relate to:
Standard Services
6.5 Kingston, as an SMP operator under the ICD, must supply interconnection at any reasonable point in the Kingston system and unbundle its services so that, within the limits of reasonableness, other operators, when utilising Kingston's network, only have to take those services that they need. At present, Kingston provides interconnections at two selected exchanges. Other operators have no opportunity to connect their own networks at any other points on the Kingston network. In addition, under the current access arrangements, the call origination charge paid by BT, C&W and Torch is the same wherever the call starts from in the Kingston area. The charge for terminating incoming calls from other operators is also the same wherever a call terminates in Kingston's system.
6.6 The current interconnection tariffs mean that even if operators were to interconnect at points other than the two designated exchanges, there would be no economic incentive to do so as they would still pay the same charges to Kingston. Oftel proposes that Kingston should break down its interconnect charges (both for call termination and call origination) so that other operators can identify the costs of using different parts of Kingston's system. With this information, operators will be able to assess whether they might wish to seek interconnection at other points on the Kingston network. Kingston would not be obliged to provide interconnection at these points unless and until this was reasonable.
6.7 Oftel proposes that the main conveyance services should be of two kinds: those which relate to the conveyance of calls and those concerned with the setting up of points of connection. Oftel would welcome comments on the exact definition of these services. Notwithstanding the general principle of 'pay for what you use', Oftel is also considering the scope for amalgamation of some of the connection services (in the manner recently introduced by BT) and for averaging of some interconnection charges.
6.8 BT's list of standard interconnect services includes a range of specialised services that it may not be necessary for Oftel to specify as Standard Services for Kingston. Oftel would expect other operators and Kingston to come to commercial agreement on any expansion of the list of Standard Services and only to refer to Oftel for a determination when such negotiations run into an impasse.
6.9 Directory Enquiries ('DQ') and Operator Assistance ('OA') are two
standard services currently provided by BT for those operators who do not
wish to set up such services of their own or buy in from third party providers.
Oftel has defined OA services as a competitive market and is holding public
consultation on DQ services which are, at present (subject to the outcome
of that consultation), defined as prospectively competitive. Oftel considers
that in light of the competitive status of these markets, and on the basis
that BT's OA and DQ services will be available to any operators in the
Kingston area, there is no need for Kingston to be required to provide
such services to other operators, subject to any requirements of the AVTD.
Kingston can of course provide such services if it so wishes.
Interconnection Charges - minimum controls
6.10 There have, to date, been no direct controls on the charges made by Kingston for its interconnect services. There is no specific requirement in the ICD for a control regime to be established by Oftel. However, charges must be cost orientated and there is a presumption (set out in the Recitals) that the appropriate costing basis is, or will be, long run incremental costs.
6.11 There is a need to ensure that operators with power in particular
markets are not able to set charges that are either predatory or exploitative.
For BT, Oftel has followed two key principles:
(1) No controls at all. This would mirror Oftel's proposals for Kingston's retail prices. Such an approach would rely, as with retail prices, on the obligations contained in Kingston's licence (Undue Discrimination/Preference, the Fair Trading Condition and the Prohibition on Unfair Cross-Subsidies). This approach would not however, guarantee reductions in charges over time as it lacks any built in incentive to efficiency.
(2) Modifying Kingston's licence to incorporate controls to prevent exploitation. As in the BT interconnect market, the 'prospectively competitive' safeguard cap (RPI+0%) could be proposed to limit other operators' vulnerability to Kingston's market power. This approach would be supported by the obligations against unfair discrimination and unfair cross-subsidies, but would not guarantee reductions in charges.
(3) Modifying Kingston's licence to incorporate controls to deliver efficiency. There are some markets where the development of competition may not be rapid and other markets, which are bottlenecks, where it may never be attained, for example, provision of points of connection and call termination at local exchanges. In these markets there will be little pressure on the operator to improve efficiency and reduce charges unless some such discipline is imposed by a control system. The long-established method of achieving this in the UK is through an RPI-X control.
6.13 In deciding whether Oftel should propose a control for Kingston,
there is a number of related factors which need to be taken into account.
There is an argument for treating Kingston's interconnect services as prospectively
competitive. This would be on the basis that competition should develop
in all telecommunication markets in the Hull area and its shadow will constrain
Kingston's charges in the meantime. Such a view would suggest that no licence
modifications to incorporate controls are necessary. There is however,
the possibility that Kingston might take advantage of this situation. Some
fall-back level of regulation, in the form of a safeguard cap might be
appropriate in the interim. In either case, but particularly because caps
must have clear bases to which they are applied, starting charges must
be set. As noted
6.15 If the possibility of Kingston using BT's charges as proxy charges for its 'non-competitive' interconnect services (such as call termination) is seen as a sound approach (at least initially), then this could apply to all of Kingston's interconnect services. There is a natural expectation that call termination and call origination should be on the same basis and this argument is capable of general extension at least for the conveyance services. If Kingston adopted BT's charges as proxies for all services this would ensure that all Kingston charges were on a common basis using LRIC principles.
6.16 Outside Hull, BT's charges are already used by other operators as the basis for charging BT for call termination. This is through the application of the principle of reciprocity of charges. Practical and competition arguments have combined to produce this industry-wide agreement which is founded on commercial negotiation and does not depend on any determination by the Director General. If Kingston were to use BT's costs as proxies, at least initially, there would probably be no need for Oftel to seek to modify Kingston's licence to incorporate a specific charge control on Kingston's interconnect charges; Kingston will have voluntarily adopted a regime which has an inbuilt RPI-X control, an efficiency factor for its non-competitive services and market disciplines for the services where competition is developing or established. If Kingston uses BT charges as proxies this would also resolve the problem of what should be the starting charges for the new arrangements in Kingston.
6.17 There is however, a further related question: should Kingston be able to adapt BT's charges for Kingston's circumstances and, if so, how should the adjustment be calculated. If Kingston adapted BT's charges for Kingston's particular circumstances, this could result in higher charges than BT's. There would then be a correspondingly higher risk that the Director General would be asked to review the level of charges to assess whether other operators were being charged for inefficiencies that a directly applied RPI-X control would have removed.
6.18 Oftel has set out, in outline above, some of the considerations it has identified as relevant to reaching a conclusion on whether Oftel might consider there is a need for a licence modification to incorporate a control on Kingston's interconnect charges. Consistent with Oftel's general policy of reducing regulatory intervention to a minimum, Oftel's preference is to find a way of leaving the industry to arrive at a satisfactory commercial solution of its own. Oftel does not therefore consider it appropriate to indicate any preference at this stage for any one of the approaches described above. Oftel hopes that this consultation will produce views and proposals from the industry which will lead to an industry solution requiring minimum regulatory oversight whilst ensuring fair interconnection terms both for other operators and for Kingston.
Question 7
Respondents are invited to comment on the approaches set out in
the section above on interconnection including their views on whether there
is a need for a licence modification to incorporate a control for Kingston's
interconnect charges (and if so, what that control should be). Respondents'
views are also sought on the principle of Kingston using BT's charges as
proxy charges for Kingston's interconnect services and whether Kingston
should be able to vary those charges.
7.2 One possibility is to extend the area in which BT is licensed and to make consequential amendments to BT's licence so that, for example, its universal service obligation does not extend to the Hull area. Another alternative would be to grant BT a separate regional licence for the Hull area. Oftel at present has no firm opinion as to whether BT should have a separate licence for any systems it might choose to operate in Hull or whether its existing licence should be modified to allow it to run systems in the Hull area.
Question 8
If BT were to seek to run systems in the Hull area do respondents
have any views as to whether it should be under a separate licence (possibly
containing only standard slimline PTO conditions) or under its main licence
and subject to the obligations and restrictions set out therein (with the
exception of its Universal Service Obligation)?
7.3 Number portability ensures that customers can keep their number when they transfer to a new operator and is a key issue in the development of network competition. The absence of number portability is a significant barrier to entry. Following Oftel's consultation on its proposal that all PTOs should, on a reciprocal basis with other operators, provide number portability, a condition giving effect to this was incorporated into Kingston's licence in December 1997.
7.4 Another method by which effective competition could be developed
in Hull would be for a fixed radio access operator to start offering its
services in the area, and/or for an operator other than Kingston to seek
a licence to build a broadband system providing telephony, cable television
and other communication services.
7.5 The advertising and granting of a broadband cable franchise is
a matter for the ITC. Kingston is prevented from holding the cable franchise
due to restrictions on local authority owned companies under the Broadcasting
Act 1990. Oftel understands that no cable operator has yet expressed an
interest in the broadband cable franchise for the Hull area. DTI will shortly
consult on the current restrictions on the conveyance and provision of
entertainment services in PTO licences. If the restriction is lifted at
a future date, Kingston could carry such services for a service provider
licensed under the Broadcasting Act.
Question 9
(a) What factors do respondents consider have been the main deterrents
to cable and other operators showing an interest in developing a local
access network in Hull?
(b) What regulatory changes could be proposed by Oftel that would assist cable and other operators to become interested in investing in building systems in Hull?
8.2 As set out in the consultation details at the beginning of this Consultation Document, Oftel has asked for responses to this Consultation Document by Friday 17 April 1998 with comments on responses by Tuesday 5 May 1998. After considering the responses, Oftel will issue a further Statement setting out the specific modifications which Oftel proposes to make to Kingston's licence.
A.1 In order for Oftel to be able to assess whether and to what extent Oftel's high level objectives are being met for Kingston's customers, Oftel has undertaken a review of the markets for telecommunications in Hull and the competition that exists in those markets . The starting point for any such review is the economic framework within which competition authorities such as Oftel define the markets and assess the extent of competition in any particular market. Oftel has made it clear how it approaches the subject of market definition in the March 1997 Guidelines on the operation of the Fair Trading Condition (the Guidelines) r from Oftel's Research and Intelligence Unit (tel: 0171 634 8764; fax: 0171 634 8946).
A.2 Oftel's standard approach to market definition (as set out in the Guidelines) focuses on the existence of constraints to the price setting behaviour of firms. An economic market is the smallest market that can be defined where a hypothetical monopolist could profitably sustain a small but significant price increase without causing significant numbers of consumers to switch to competing suppliers (demand side substitution) and without causing suppliers of other products to quickly switch capacity to supply the monopolist's product (supply-side substitution).
A.3 There are three aspects to market definition that are considered on both the demand and supply side: the relevant product market, the relevant geographic market and the relevant customer group. An important factor in this analysis in the context of Hull's telecommunication markets is the impact of that legal restriction upon BT has upon the geographic scope for demand-side substitution and supply-side.
A.4 Once the relevant markets have been defined, it is possible to assess the state of competition in the market. The position of the operator in the relevant market is examined in order to establish whether the operator has market power (defined as the ability to raise prices above the competitive level for a non-transitory period without losing sales to such a degree as to make this unprofitable). The type of factors which Oftel examine include entry barriers, the extent of vertical integration, market share, changes in the pattern of market shares over time, market structure, the countervailing power of buyers, the degree of effective entry to the market, evidence of collusion or price leadership and high profits.
A.5 If an operator is said to have market power, this is not the same as saying that the operator is dominant in that market. As set out in the Guidelines, a dominant firm has the ability to behave to an appreciable extent independently of its competitors and customers in terms of pricing and other decisions. The type of matters which Oftel would look at in assessing dominance, for example market share, are also explained in the Guidelines. The Guidelines also refer to the decision of the European Court of Justice in the AKZO case (Case C-62/86 AKZO Chemie BV v Commission [1991] 5 CMLR 215) where the Court held that there was a presumption of dominance at or above a 50% market share. Above this level the onus would normally be on the firm to establish that the specific market conditions meant that it was not dominant.
The relevant markets supplied by Kingston in its licensed area
A.6 Oftel has identified the following separate telecommunication markets
in the area in which it is licensed:
The market for exchange line access: Demand side substitution the product market
A.7 The existence of a market for provision of exchange line access is premised on the basis that customers value the ability to receive telephone calls or faxes over an exchange line even if they make no calls. It is considered that most telephone customers would value the ability to receive calls even if they could not make outgoing calls. It is therefore possible to consider the market for access to the PSTN in isolation from the market for outgoing calls.
A.8 The only close substitute to a fixed exchange line would be a mobile telephone on an incoming calls-only tariff. Currently, due to the state of mobile technology and the cost of mobile subscriptions, mobile telephones are unlikely to represent an effective demand-side substitute for fixed exchange lines to residential and small business users. For businesses that receive large numbers of intra-business calls, a private circuit local-end may provide an effective substitute to an ordinary exchange line, because it would be possible to trade off savings in calls against higher private circuit rental and connection charges. However, it is unlikely that significant numbers of firms would switch to private circuits that have not already done so, simply as a result of a small increase in exchange line rentals. It is therefore appropriate to define a separate market for fixed exchange line access for all customer groups.
The market for exchange line access: Demand side substitution the geographic market
A.9 If exchange line rentals were raised by a small but significant amount above the levels prevailing in the rest of the country for a sustained period, it would seem likely that this on its own would not lead to many residential or business consumers relocating to a neighbouring area. Telephone line rentals are a small proportion of household budgets and of firm's costs (especially compared to call charges) and the costs of moving would generally outweigh the savings in line rentals. On the demand-side it is therefore appropriate to define the relevant geographic market for line rentals as at least as narrow as the Kingston licensed area.
The market for exchange line access: Supply side substitution
A.10 It would not be possible for a supplier of another product in the Hull area or a supplier of exchange line access in a different area to quickly, and at little additional cost, switch existing capacity to supply exchange lines if Kingston were to raise their prices. Telecommunications technology is dedicated and a telephone company in an adjacent area (even a radio based operator like Ionica) would have to make a significant sunk investment to install a local access network in Hull. Supply side substitution is therefore unlikely and Oftel does not consider that it would be appropriate to broaden the above demand side market definition
The market for calls originating in Hull: Demand side substitution - the product market
A.11 It is possible to define a separate market for calls originating on fixed exchange lines as opposed to calls originating from payphones or mobiles within the Hull area. It is unlikely that sufficient consumers would switch to these alternative methods if there were a small but sustained increase in the call charges so as to make the price rises unprofitable for a fixed exchange line monopolist.
A.12 The higher price of mobile rentals and call charges mean that it is extremely unlikely that any savings could be made by switching to a mobile phone from a fixed line telephone. In relation to payphones, a customer's willingness to pay for a fixed line rental suggests that they value the ability to make calls from their own home or office instead of having to find the nearest payphone every time they wish to make a call. It would therefore seem probable that few customers would switch to making calls from payphones if there were to be increases in call charges. The relevant market on the demand-side is therefore calls made from fixed exchange lines in Hull.
The market for calls originating in Hull: Demand side substitution - the geographic market
A.13 For telephone users, calls to different destinations are typically not close substitutes. An increase in the price of long distance calls vis-a-vis local calls would not usually lead someone to make more local calls as opposed to long distance calls. A more likely result would be that customers would make fewer national calls and they may even make fewer local calls if the customer does not want the overall size of the bill to increase.
A.14 However, this does not necessarily mean that each call is in a separate market on the demand side. For this to be the case, it would have to be possible to sustain a different price for each call depending on the caller and the call's destination. Price discrimination at that level is implausible given the information requirements that it would necessitate. It is therefore a reasonable approximation to group calls together, usually distinguishing between calls subject to different tariffs, eg local, national and international calls.
The market for calls originating in Hull: Supply side substitution
A.15 As exchange line access is an essential input into making a telephone call the degree of supply side substitution in relation to calls originating in Hull cannot be greater than that for exchange lines. It could however be argued that, provided a competing operator is able to obtain access to a Kingston customer by paying Kingston a cost-related interconnection charge, other operators could re-sell long distance calls from Hull in competition with Kingston. The current arrangements do not provide for indirect access as it applies to BT in the rest of the UK. Outgoing calls via BT, Mercury or Torch are all billed by Kingston. From 1 April this year, Kingston is proposing that competing long distance operators will be able to resell calls directly over Kingston exchange lines on payment of a cost-oriented and non-discriminatory charge (as mandated by the ICD.) This should increasingly constrain Kingston's ability to discriminate on price among different call types by more than is justified by the underlying cost differences.
Oftel therefore believes that the relevant market is calls originating on a fixed exchange line in Hull.
Calls terminating in Hull: Demand-side substitution
A.16 For the same reasons as set out in the section above on call origination, it is unlikely that a call to a mobile phone or a public payphone will be a good substitute for a call to a given fixed exchange line subscriber. Call terminations on Hull exchange lines can therefore be defined as a separate market on the demand-side.
Calls terminating in Hull: Supply-side substitution
A.17 The same considerations with regard to supply side substitution, as set out in the section on call origination, also apply to call termination. Oftel therefore believes that a separate market can be defined for call termination on fixed exchange lines in Hull.
Kingston's market share
A.18 Kingston has 100% share of the market for residential exchange lines. For low-spending business customers for whom private circuits are not an economic proposition, Kingston also has a 100% market share. For high spending business customers, there is the option of having a private circuit. Oftel has no figures on how many businesses use private circuits. However, Kingston's share of this market is likely to be very high.
A.19 Kingston's share of the markets for call origination depends upon the call destination and the customer profile. For local calls and calls to the immediately adjacent areas to Kingston's licensed area Kingston has a 100% share of the market. For regional, national and international calls originating in Hull it is very hard to ascertain the precise figure for Kingston's market share as the amount of number translation service ('NTS') traffic (0800 numbers) that originates in Hull, and that is substituting for Kingston billed calls, cannot easily be measured.
A.20 It is likely that Kingston will have close to 100% market share for long distance calls made by low spending residential and low spending business customers . For higher spending residential and business customers, some of them may make use of an indirect access operator through a free-phone number. For higher spend businesses, Kingston contend that their market share for international calls is around 80%. However, it should be emphasised that competition accessed via NTS is an imperfect substitute for a direct dialled service billed by Kingston. An analysis of market share which includes shares derived from NTS calls is therefore likely to understate Kingston's market power. For calls terminating in Hull, Kingston has 100% market share.
Barriers to entry to Hull telecommunications markets
A.21 The barriers to entry to the Hull telecommunications markets can be divided into those that are technical and those that are strategic. The technical barriers include the fixed costs of installing a local switching, transmission and local loop infrastructure. The investment in installing such a network would be largely sunk as there is a low alternative use value for such assets. However, due to technological changes the technical barriers to entry facing a potential entrant to Hull telecommunication markets although still significant, are falling rapidly. The new technology with potentially the biggest impact on the scope for effective competition in the markets for exchange lines and calls in Hull is fixed radio access, which should significantly lower the fixed cost of entry in the local loop. In addition to the cost of the network, a new operator would also need to incur the fixed and sunk costs of advertising a new service. Such costs might be substantial given that any new operator will have to compete with a low cost service provided by an incumbent operator that has a very loyal set of customers.
A.22 The strategic barriers to entry include the threat that Kingston, the incumbent and dominant operator will maintain or reduce its prices at or to a level that would not enable a new entrant to recover the fixed costs of entering the market. Oftel believes that the inclusion of the Fair Trading Condition in Kingston's licence together with the proposed prohibition on cross-subsidies should constrain Kingston's ability to act anti-competitively in the face of new entry, eg through exclusionary or predatory pricing. This should serve to reduce the strategic barriers to entry.
Assessment of Kingston's market power
A.23 Notwithstanding the decline in entry barriers due to technological
advances plus the introduction of number portability in Hull, new entrants
still face obstacles to successful entry in Hull. The combination of very
high market shares and high barriers to entry leads to the conclusion that
in all of the above telecommunication markets, Kingston is
currently dominant. The proposed relaxation in the restriction on BT from
running systems in the Hull telecommunication markets may help to change
this situation over time as would a bid for the cable franchise or the
entry of a fixed radio access operator. However, the degree of competition
in call terminations on Kingston exchange lines will be largely unaffected
by new entry into exchange line provision in the Hull area. Since the choice
of exchange line provider for a customer in Hull will be largely independent
of the call termination charge levied on callers to the Hull area, Kingston,
like any other exchange line provider, is likely to remain dominant in
the supply of call termination on its own exchange lines for the foreseeable
future.
Kingston's use of its dominant position
(a) Comparison of Kingston's and BT's tariffs
A.24 Some evidence of the extent to which Kingston may or may not be abusing its dominance may be gleaned from a comparison of Kingston's current prices with BT's, and by comparing how they have moved over time. Oftel has derived estimates of the average residential bill of Kingston's customers with various different sizes of bills. Consumers are divided into ten deciles based upon the amount of their bill. Assuming that average call durations and call numbers are the same for Kingston's customers as they are for BT's customers, Oftel estimates that Kingston's average quarterly bill for exchange line rental and calls was over 10% lower than the BT equivalent for a residential customer in deciles 2, 5, 9 and those with a median bill in Summer 1997. It is probable that the average bill for Kingston's business customers are also lower than the equivalents for BT, although this analysis is complicated by the need to make assumptions about the number of lines per site.
(b) Profitability of Kingston's regulated activities
A.25 The accounts that Kingston produces (both in accordance with the obligation in Condition 19 of its licence and to satisfy company law requirements) only provide figures for the overall profitability of the telephone network. Kingston is not currently able to provide Oftel with figures that would allow Oftel to estimate the profitability of each of the markets defined above.
Consequences of the economic analysis
A.26 Oftel is aware that Kingston does not accept the premise that telecommunications in Hull constitutes a separate market for economic analysis nor does it consider that it is a dominant operator. Counter arguments to Oftel's assessment that Kingston is dominant include: its limited geographic scope, the strong influence of BT as the dominant national operator (even though BT is not allowed to operate systems in the Hull area) and Kingston's limited size and access to financial resources resulting in an alleged inability to behave independently of BT. Kingston stress that the prices that it charges for national and international calls have always to date followed the prices charged by BT. Kingston also refer to the fact that the prices that it charges for local calls are generally cheaper than BT's prices.
A.27 Oftel has taken account of these arguments but considers that Kingston's
control of access to almost 100% of customers in the Hull area in the presence
of barriers to entry means that Kingston is dominant in its licensed area.
Moreover, Kingston has the potential to exploit its dominant position.
Kingston is therefore considered by Oftel to be dominant in all the relevant
markets in Hull. While Kingston may not to date have used this dominance
to exploit customers through excessive prices (or other means) Kingston
has the ability to do so. The existence of dominance does not necessarily
imply a propensity to abuse that power, particularly when the owners of
the business (in this case the local authority) have interests which may
closely coincide with those of local customers particularly residential
consumers.
A.28 Oftel does therefore consider Kingston to be dominant. Oftel's
approach to dominance is based on the analysis used by other UK, EU and
US competition authorities in the evaluation of markets, market power and
effective competition. Kingston contains a number of distinct markets and
in all of them it is apparent that Kingston possesses such market power
that it is dominant. Oftel bases this assessment on the very high market
share (close to 100% for certain consumer groups) that Kingston continues
to enjoy in these markets, in conjunction with the still significant barriers
to entry to those markets (particularly call termination). These barriers
to entry give Kingston a substantial incumbent advantage, which it could
in theory exploit by raising prices to customers and competitors, thereby
earning supernormal profits.
Connection of systems providing connection services
12.1 Without prejudice to Condition 3 and subject to the provisions of this Condition the Licensee shall, unless it is impracticable to do so, enter into an agreement with the Operator, that is to say any person who is authorised by a Licence to run a Relevant Connectable System, if the Operator requires it to do so:
(a) to connect, and keep connected, to any of the Applicable Systems, or to permit to be so connected and kept connected, that Relevant Connectable System and accordingly to establish and maintain such one or more Points of Connection as are reasonably required and are of sufficient capacity and in sufficient number to enable messages conveyed or to be conveyed by means of the Operator' system to be conveyed by means of any of the Applicable Systems in such a way as conveniently to meet all reasonable demands for the conveyance of Messages between the Relevant Connectable System and any of the Applicable Systems;
(b) without prejudice to paragraph 12.1(a) where the Operator is a Long Line Public Telecommunications Operator to establish and maintain such Points of Connection as will enable persons running telecommunication systems connected to the Operator's system and persons running telecommunication systems connected to any of the Applicable Systems to exercise freedom of choice as to the extent to which Messages are conveyed by means of the Applicable Systems and in routing Messages so conveyed; and
(c) to provide such other telecommunication services (including the conveyance of messages which have been, or are to be, transmitted or received at such a Point of Connection), information and other services as the Director determines are reasonably required (but no more than reasonably required) to secure that Points of Connection are established and maintained and to enable the Operator effectively to provide the Connection Services which he provides or proposes to provide.
12.2 The Licensee shall not be obliged under paragraph 12.1 to enter into an agreement to do anything if:
(a) in the opinion of the Licensee it would be liable to cause the death of or personal injury to, or damage to the property of the Licensee or any person engaged in the Licensee's business, or materially to impair the quality of any telecommunication service provided by means of any of the Applicable Systems or any telecommunications system (other than the Operator's system) connected thereto and the Director has not expressed a contrary opinion; or
(b) in the opinion of the Licensee:
12.4 Subject to paragraphs 12.5 and 12.6 terms and conditions
are permitted if they are agreed between the Operator and the Licensee
and relate to all or any of the following matters:
(a) the charges to be paid by the Operator for anything done
under an agreement of the kind described in paragraph 12.1 or as a result
of such agreement;
(b) the method adopted or to be adopted to make or maintain
the connection;
(c) the Points of Connection in the Applicable Systems at which
the Connection is or is to be made (including arrangements for determining
the point at which Messages will be transferred from one system to another
and arrangements for conveying and rerouting Messages in cases of Emergency
or difficulty);
(d) any restrictions on the telecommunication services to be
provided by the Licensee or the Operator being restrictions needed to satisfy
international obligations or recommendations applying to and accepted by
Her Majesty's Government or to which the Director consents from time to
time;
(e) the time when and period for which the Licensee or the Operator
is to be obliged to do anything or to permit anything to be done and any
arrangements for reviewing the terms and conditions of the agreement;
(f) the form and manner in which Messages are to be transmitted
or received at the Points of Connection including arrangements for numbering
and the use of appropriate call progress tones and announcements;
(g) the means of securing that any Message will be received
by means of the connection with a signal quality which is in accordance
with any obligations and recommendations of the International Telecommunication
Union which apply to Her Majesty's Government and are accepted by them
or with any other standard to which the Director consents for the purpose
from time to time;
(h) the arrangements for charging customers and others in respect
of Messages conveyed by virtue of the agreement;
(i) arrangements for Messages conveyed or to be conveyed outside
the United Kingdom;
(j) provision by the Operator of a reasonable indemnity against
any loss or damage sustained by the Licensee in consequence of the agreement
in circumstances where the Licensee provides to the Operator an equivalent
indemnity; and
(k) any other matter of which the Director is satisfied that
account should be taken in the special circumstances of any particular
case or which is agreed between the Licensee and the Operator.
12.5 If after a period which appears to the Director to be reasonable
for the purpose the Licensee has failed to enter into an agreement as required
by the Operator under paragraph 12.1 then the Director shall, on the application
of the Operator or the Licensee, determine the permitted terms and conditions
for the purpose of that agreement which have not been agreed between the
Licensee and the operator being terms and conditions relating to the matters
mentioned in paragraph 12.4 above which appear to the Director reasonably
necessary (but no more than reasonably necessary) to secure:
(a) that the Operator pays to the Licensee the cost of anything
done pursuant to or in connection with the Agreement including fully allocated
costs attributable to the services to be provided and taking into account
relevant overheads and a reasonable rate of return on attributable assets;
(b) that the Licensee is properly indemnified against any liabilities
to third parties or damage to the Applicable Systems or loss arising from
such damage which may result from the performance of the agreement;
(c) that the Licensee is reasonably able in all the circumstances
(including its obligations and reasonably foreseeable obligations to permit
other Operators to provide services by means of Points of Connection under
this Condition) to finance the other services which it is required by this
Licence to provide and to recover costs which are incurred for the provision
of those other services or are necessarily incidental thereto;
(d) that the quality of any telecommunication services provided
by means of the Applicable Systems and any systems (other than the Operator's
System) connected thereto is maintained;
(e) that the requirements of fair competition are satisfied;
(f) that proper account is taken of any other matter reasonably
required for the protection of the interest of the Licensee to the extent
that no interest of the operator is unduly prejudiced, including the need
to ensure:
(v) that the Operator does not rely unduly upon services provided
by the Licensee as a means of satisfying his own obligations under the
licence;
(a) that, insofar as any freedom of choice is conferred upon
persons running telecommunication systems connected to the Operator's system
as to the extent to which Messages are conveyed by means of the Applicable
Systems and in routing messages so conveyed, a corresponding freedom of
choice is conferred so far as reasonably practicable on persons running
telecommunication systems connected to the Licensee's system;
(b) that the requirements of fair competition, including the
need for those to whom telecommunication services are provided to have
a reasonable means of learning by whom the Messages sent by them are conveyed,
are satisfied but paragraph 12.5 shall have effect for
this purpose with the omission of sub-paragraph (f)(iv).
12.7 The Licensee shall not be obliged to enter into any agreement
under paragraph 12.1 if he refuses to do so, giving his reasons in writing
to the Operator and to the Director, and the Director determines that those
reasons are proper ones having regard to the matters mentioned in paragraphs
12.5 and 12.6.
12.8 Where:
(a) an agreement has been entered into under paragraph 12.1
but for any reason (whether breach of that agreement or otherwise) anything
which the Licensee is required to do under the agreement is not being done;
(b) the Director considers that the thing ought to be done in
order to ensure that a connection made pursuant to that agreement is maintained
or that a connection is established pursuant to that agreement and that
Messages are conveyed by means of the connection in accordance with the
agreement; and
(c) the Director is satisfied that the operator is not able
satisfactorily to enforce the agreement so that that thing is done within
such time as the Director considers necessary then, if
the Director so directs, the Licensee shall do that thing subject to such
conditions as the Director determines to be reasonable in the circumstances,
having regard, in particular, to the permitted terms and conditions which
apply and to any thing which he may reasonably require the Operator to
do in order to mitigate the effects of the Licensee's failure to do the
thing which he is required to do.
12.9 In this Condition:
"Connectable System" means a telecommunication system which is authorised to be run under a Licence which authorises connection of that system to any of the Applicable Systems;
"Connection Service" means a telecommunication service consisting in the conveyance of any Message which has been, or is to be, conveyed by means of any of the Applicable Systems;
"Long Line Public Telecommunications Operator" means a public telecommunications operator who is authorised by a Licence to provide telecommunication services consisting in the conveyance of Messages by fixed links run by him over distances greater than 50 linear kilometres; and
"Relevant Connectable System" means a Connectable System which is authorised
to be run under a Licence which authorises the provision by means of that
System of Connection Services for reward to the public, or any class of
the public, not being a system:
12.10 This Condition operates without prejudice to Condition 18 but due account shall be taken for the purposes of this Condition of any charge imposed on the Operator for the purposes of that Condition.
12.11 An agreement made pursuant to this Condition shall not
contain any restrictive provision unless, before the agreement is made,
the Director has expressly consented to the inclusion of such a provision
or has determined that that provision should be included under paragraph
12.5 or 12.6 and, for the purposes of this paragraph, a provision in an
agreement is a restrictive provision if by virtue of the existence of such
a provision (taken alone or with other provisions) the agreement is one
to which the Restrictive Trade Practices Act 1976 would apply but for paragraph
l(l) of Schedule 3 to that Act.
12.12 Where the Director so directs the Crown shall be treated
for the purposes of this Condition as a person authorised to run a Relevant
Connectable System and where he does so he may also direct that the Crown
is to be treated as a Long Line Public Telecommunications Operator for
those purposes.
12.13 Notwithstanding anything in this Condition, it does not apply
to require the Licensee to establish or maintain more than one Point of
Connection between the Applicable Systems and any telecommunication systems
run by any person who is licensed to run Switched Fixed public telecommunication
systems.
Condition 10 (Public Call Boxes);
Condition 12 (Connection of systems providing connection services.);
Condition 13 (Connection of other systems and apparatus);
Condition 14 (Provision by others of services by means of the applicable system);
Condition 17 (Prohibition on cross-subsidies);
Condition 19 (Separate accounts for certain activities);
Conditions it is proposed should be deleted:
Condition 21 (Apparatus production)
Condition 23 (Prices to be charged for certain telecommunication services);
Condition 43 (Wiring etc not forming part of the applicable systems)
Broadband A service or connection allowing a considerable amount of information to be conveyed, such as television pictures.
Current Cost Accounting (CCA) An accounting convention, where assets are valued and depreciated according to their current replacement cost whilst maintaining the operating or financial capital of the business entity.
Detailed Attribution Methods (DAM) a handbook which provides greater detail of the methods employed in attributing turnover, costs, assets and liabilities between Businesses (as defined for regulatory purposes). It supports the Financial Statements (Regulatory Accounts) and the Accounting Documents.
Digital The coded representation of a waveform by, for example, binary digits in the form of pulses of light, as opposed to analogue which is the direct representation of a waveform.
DTI The Department of Trade and Industry.
Fair Trading Condition (FTC) Fair Trading Condition is modelled on Articles 85 and 86 of the EC Treaty and prohibits the abuse of a dominant market position and agreements which restrict or distort competition.
Financial Statements Documents that collectively make up, inter alia, the regulatory accounts introducing accounting separation and interconnection standard services. The statements are audited to check that they fairly represent the financial results for the Businesses which are divided for regulatory purposes (inter alia to help disclose unfair cross subsidies between and within businesses and that interconnection charges can be shown to be fairly derived from costs and applied without discrimination).
Fully allocated cost An accounting approach under which all the costs of the company are distributed between its various products and services. The fully allocated cost of a product or service may therefore include some common costs that are not directly attributable to the service.
Historic Cost Accounting (HCA) A universally recognised
accounting convention. Costs, turnover, assets and liabilities are generally
recorded at the value when the transaction was incurred and where assets
are valued and depreciated according to their cost at the time of purchase.
Incremental costs The costs that arise as a result of
the provision of the increment. In contrast to fully allocated costs,
the incremental costs include only those costs that are caused by the provision
of the increment. So long as revenue exceeds incremental costs, the company
increases its value by providing the increment.
Interconnection The connection of separate telecommunications networks.
Interoperability The ability of different distribution networks and/or apparatus to work together to provide a seamless service for users.
Kingston Kingston Communications (Hull) PLC.
LRIC Long run incremental costs. Those costs include only those capital and operating costs caused by providing a defined increment of output, typically a service.
Narrowband A service or connection allowing only a limited amount of information to be conveyed, such as for telephony. This compares with broadband which allows a considerable amount of information to be conveyed.
Number portability Number portability between operators enables a customer to transfer from one operator to a second operator and retain the same number provided the customer remains at the same address.
Open Network Provision (ONP) Committee a standing committee of member state national regulatory authorities and others (EC, PTOs and user representatives), which supervises the European Commission's development of the ONP programme. This covers measures aimed at ensuring that services which are not yet required to be liberalised in all member states are regulated in such a way as to guarantee their supply in accordance with certain standards of objectivity, transparency and non-discrimination.
PCBs Public call boxes.
Public Telecommunications Operator (PTO) Network operators with powers granted by the Secretary of State for Trade and Industry under the Telecommunications Act 1984 to enable them to install their systems on public and private land, property etc.
Universal Service (US) A provision in some Telecommunications Act licences requiring the licensee to provide certain services to all specified persons. For example, Kingston is currently required to provide basic voice telephony and certain other established telecommunications services to anyone who may reasonably request them.
