November 1998
This is a draft statement which Oftel proposes to issue in December. This statement sets out how Oftel is minded to require BT and Kingston to recover the costs of implementing carrier pre-selection.
You will see that Oftel has revised the proposals it initially set out in March. In particular, it is now proposed that BT’s system set-up costs should be recovered through a surcharge on all relevant call minutes originating on BT’s network.
In order that interested parties may comment on Oftel’s proposed approach prior to its formal adoption, this document is only a draft and we welcome any comments you might wish to make – please feel free to disseminate the paper more widely to others who you feel may wish to express a view.
It is the need to formalise arrangements for cost recovery within a reasonable timescale, so that the CPS process group can complete its work, which prevents a more formal consultation. In particular, BT is anxious to have a final decision on cost recovery so that it can make arrangements to modify its billing systems.
The CPS commercial group has agreed that a period of 4 weeks should be sufficient time to gather comments. Please would you ensure that you get any points you wish to make to us by Wednesday 17th December at the latest. We shall consider any responses received and where appropriate we may amend our proposals. Thereafter we propose to proceed to a formal statement by the end of December.
We look forward to hearing from you
Sally Trebble
Oftel
50 Ludgate Hill
London EC4M 7JJ
Email: netcomp.oftel@gtnet.gov.uk
Fax: (0171) 634 8924
Written comments will be publicly available from Oftel’s Research and Intelligence Unit except where confidential. Respondents are therefore asked to separate out any confidential material in a clearly marked annex. In the interests of transparency, respondents are requested to avoid confidentiality markings wherever possible. Appointments to view written comments in Oftel’s Research and intelligence unit must be made in advance (tel: 0171 634 8761, fax: 0171 634 8947).
Oftel would like to set up a link between this document on Oftel’s web site and any responses placed on respondents’ own Internet pages. Please contact Lauren Ryner at Oftel on 0171 634 8753 or by e-mail: web.oftel@gtnet.gov.uk to arrange this. Confidential responses should not be sent via the Internet.
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Oftel’s revised proposals on cost recovery for BT
Conclusions on cost recovery for BT
Recovery of CPS costs for Kingston Communications
Annex A Respondents to cost recovery consultation
This statement sets out how BT and Kingston will be expected to recover the costs of introducing CPS.
In July 1998, Oftel consulted on the proposed service description for CPS as set out in the draft Functional Specification, and on how it was proposed that BT and Kingston should recover the costs of implementing the service. Having considered the responses to the consultation on the Functional Specification for CPS, Oftel adopted the Functional Specification and referred it to BT and Kingston for implementation. However, discussion with the industry and written responses on the issue of cost recovery have led to changes in Oftel’s thinking on system set-up costs. Oftel’s revised thinking is set out below
Statement on Cost Recovery for CPS
Introduction
1 In December 1997 the Director General determined that BT and Kingston should be considered to be operators having significant market power (SMP) in the market for fixed networks and services, for the purposes of the Interconnection Directive (97/33/EC). The Numbering Directive (98/61/EC) requires Member States to impose an obligation on all operators with SMP in fixed networks and services to provide carrier pre-selection (CPS) by 1.1.2000. To comply with their obligations under EU law, BT and Kingston will incur substantial costs. In order that CPS should make a positive contribution to competition, and to ensure a fair result in the interests of consumers, Oftel believes that some of these costs should be recovered from other operators and proposes to apply the 6 cost recovery principles developed in the context of number portability to decide how cost recovery should take place.
2 In May 1998 Oftel presented a paper setting out the cost recovery principles at a workshop on CPS, and explained that it expected to follow these in deciding how the costs of implementing carrier pre-selection (CPS) should be recovered. The paper examined the 6 principles as they might apply to CPS and set out an initial view which Oftel might adopt. In addition to the May workshop, written comments were invited in Oftel’s consultative document Carrier pre-selection in the UK, published in July 1998. A list of those who provided written comments appears at the end of this statement.
3 Oftel has given careful consideration to the points raised by operators and to the initial views put forward by BT. Whilst there was a broad consensus on the method of recovery of per operator and per line costs, strong arguments were advanced on both sides of the debate on the question of system set-up costs. BT attached particular importance to how the cost causation principle should be applied.
4 The call types to be available under CPS were confirmed in the Functional Specification referred to BT and Kingston in August. This specification adopted the consultative document’s proposal that the CPS service should comprise the following:
Option 1: International calls
Option 2: National calls
Option 3: All calls – covering international, national, local, mobile, specially tariffed services, personal numbers and paging but excluding emergency calls, operator services, directory enquiries and other network-specific short codes
A customer can select any Option individually, or a combination of Options 1 and 2 (with either the same operator or different ones). BT and Kingston are not required to offer any other combinations.
5 The CPS service will be introduced in two phases, with the International and National options available first, in Phase 1. The UK recently made a formal request to the European Commission for a deferment of CPS introduction until after the 1.1.2000 EU deadline. In its July consultation document, Oftel set out its hope that CPS Options 1 and 2 would be introduced by Autumn 2000. Although Oftel will continue to press BT to introduce CPS as early as possible, the UK has requested that the deadline for the introduction of Options 1 and 2 should be deferred to the end of December 2000 and the end of 2001 or shortly thereafter for Option 3. Oftel proposes to publish its submission to the Commission (subject to issues of commercial confidentiality) when the terms of any deferment granted have been received.
6 Oftel has identified three broad categories into which the costs of making available the CPS service will fall:
System set-up costs, which are the costs of developing and implementing the software needed for the capability to provide CPS and the cost of modifying support systems
Per operator set-up costs, which are the costs of enabling CPS for any individual operator, including activity similar to a data management amendment and the setting up of commercial arrangements for the electronic transfer of customer orders
Per line set-up costs, which are the costs of implementing CPS for individual customer lines.
7 Most of the costs of implementing CPS are likely to fall in the category of system set-up. The actual costs of introducing CPS have yet to be established. BT and its suppliers have provided the following initial costs estimates, which should be considered to be indicative at this stage:
| £ million | |
| Data build, network implementation, inter-operator testing and associated costs | 25 |
| Exchange software upgrades | 10 |
| Operational Support Systems (OSS) | 4.3 |
| INCA development and associated interconnect systems | 0.5 |
| Total | 39.8 |
It will be possible to have a clearer idea of the costs of modifying BT’s OSS and INCA when the work of the industry’s CPS Process Group is complete and a way forward has been agreed on what modifications will be necessary.
8 In addition to the costs set out above, the inclusion of local calls in the CPS service is likely to force BT to invest in extra capacity at the tandem layer. Investment will take place against traffic volume forecasts. Processes for forecasting are being agreed by the CPS Process Group. The cost of extra capacity should be recovered through interconnection charges. This means that increased network capacity will be paid for by the increased traffic within the current network charging arrangements. Therefore, no allowance is made for recovering these costs as part of BT’s system set-up.
9 The 6 cost recovery principles may be briefly described as follows:
| cost causation | costs should be recovered from those whose actions cause the costs to be incurred at the margin |
| distribution of benefits | costs should be recovered from the beneficiaries especially where there are externalities |
| effective competition | the mechanism for cost recovery should not undermine or weaken the pressures for effective competition |
| cost minimisation | the mechanism for cost recovery should ensure that there are strong incentives to minimise costs |
| reciprocity | where services are provided reciprocally, charges should also be reciprocal |
| practicability | the mechanism for cost recovery needs to be practicable and relatively easy to implement |
When applying these principles, it is generally sound to start with cost causation on the grounds that economic efficiency is enhanced by requiring parties to pay for costs which they directly cause to be incurred. The other principles are then considered, to see the extent to which the starting point may require modification.
10 Oftel’s initial view was that there is a sound case for recovering per line and per operator set-up costs from CPS operators. This was principally due to the compelling weight of the cost causation principle: the activities of CPS operators would cause per operator and per line costs to be incurred and consideration of the other 5 principles did not suggest an alternative conclusion to be preferable. As for system set-up costs, Oftel did not take a firm view of the most appropriate method of recovery. This is because the view was taken that the cost causation principle does not give a clear indication of how these costs should be recovered and arguments can be made in several ways on the application of the other principles. In the absence of strong guidance on cost causation, Oftel considered that the arguments were fairly evenly balanced and that none of the principles gave a compelling indication of how the system set-up costs should be recovered.
11 This section summarises the responses received. Key points which emerged were as follows:
BT argued that cost causation should be considered the key factor. BT also took the view that it has not been demonstrated that CPS will benefit customers who do not elect to take the service. On this basis, all the system set-up costs should be recovered from CPS and CPS override originating minutes only. Per line set up costs should be recovered from CPS operators (and work is required to define the cost elements proper to per line set-up, eg for order verification processes). BT also expressed a view that there will be per call operational costs which fall outside per call conveyance charges and which need to be factored in to the cost calculation (this would need to be explored by Oftel). The inclusion of local calls in particular will require BT to make significant investments in extra network capacity, using CPS operators’ traffic forecasts, and BT stated that the charging mechanism should not penalise its customers if over-forecasting causes over-capacity.
12 Kingston commented only on the recovery of BT’s costs. It supported the recovery of per line, per operator and system set-up costs from CPS operators, based on the principle of cost causation. Rather than piecemeal recovery through call origination charges, Kingston thinks that system set-up costs should be borne up-front by those CPS operators entering the market at the outset, with those operators responsible for recovering their own costs in the future from other CPS operators.
13 NTL believes that cost causation should be the most important cost recovery principle, and that the general competitive benefits of CPS to customers are not substantial enough to over-ride that approach. On the basis of cost causation, NTL concludes that the costs of CPS should be apportioned to CPS minutes only.
14 ENACT wishes existing BT customers, particularly those with a low call spend concentrated on local calls, to be exempt from the costs of CPS if they won’t get the benefit. SACOT believes that the costs of CPS should be borne only by those customers using the service.
15 BMP International Ltd. (an economic consultancy acting on behalf of AT&T, ACC, Energis, Racal, Scottish Telecom, Global One, Telstra UK, Worldcom, Telia and Norweb) argue for each operator to bear its own system set-up costs rather than there being a surcharge on call origination minutes. If Oftel were to decide upon a surcharge for recovery of system set-up costs, then BMP thinks that it should be placed not solely on CPS originating minutes but on all relevant call origination minutes (which BMP defines as all calls of a type available under CPS that are carried by BT or by a CPS operator; BMP’s definition excludes indirect access). This would be on the basis of cost causation and distribution of benefits arguments. BMP states that CPS costs arise not due to the activity of CPS operators, but rather as a result of the imposition on UK authorities of an EU obligation to ensure that equal access should be available. BMP also argues strongly that all BT customers will benefit from having a CPS choice, not just those who take a CPS service from another operator. In addition, stronger competition will produce more variety and lower prices. This would support the spreading of CPS costs across all originating minutes, in the pursuit of competitive neutrality, in order not to reduce the competitive benefits of CPS. In BMP’s view, per line costs should be paid by CPS operators and per operator costs should be recovered from interconnection charges in the same way as data-management amendment costs are recovered.
16 Energis, in support of the BMP submission, took the view that allocating system set up costs to CPS minutes alone would make the CPS service unattractive and limit its availability to customers in many areas of the UK. Cost minimisation in particular, makes it more appropriate, in Energis’ view, to require each operator to bear its own system set-up costs.
17 Scottish Telecom made the additional point that should system set-up costs be recovered from all call origination minutes, the supplement should apply to all relevant call origination minutes excluding NTS.
18 Core Telecommunications believe that both arguments for apportioning system set-up costs have substance, so costs should be split between CPS minutes and other minutes (in a ratio to be determined by Oftel). However, in order to give appropriate incentives for all parties to minimise costs, this ratio should only be set once the final set-up costs are known.
19 In summary, the responses received expressed broad agreement that per line costs should be recovered from CPS operators. Although there was no clear consensus on per operator costs, in Oftel’s view no persuasive arguments were put forward as to why these costs also should not be recovered from CPS operators, in accordance with the principle of cost causation. However, unsurprisingly, two clear trends emerged on system set-up costs. On the one hand, it was argued that each operator should bear its own system set-up costs, failing which BT’s system set-up costs should be spread across all relevant minutes originating on BT’s network. On the other hand, it was argued that CPS operators should bear all of BT’s system set-up costs.
Oftel's revised proposals on cost recovery for BT
20 When applying the 6 cost recovery principles, Oftel starts by considering the implications of the principle of cost causation and then goes on to consider how the other 5 principles lead to an adjustment to the cost recovery scheme implied by the application of the principle of cost causation. It should be borne in mind that the cost causation principle may provide less clear conclusions where costs are caused to arise by compliance with a regulatory obligation rather than voluntary activity. The overall aims of the cost recovery scheme are to ensure that CPS promotes competition where possible, and that the interests of consumers are reflected in the outcome.
System set-up costs
Cost causation
21 There has been some debate about whose actions cause system set up costs to be incurred. On the one hand, it has been argued that BT incurs the costs of CPS due to the activities of CPS operators wishing to provide the service. On the other hand it has been argued that the costs arise because the EU Council adopted a Directive which requires the service to be provided. It is Oftel’s view that whilst both of these could be described as factors contributing to the costs being incurred, neither provides a firm basis for attributing system set-up costs.
22 A literal application of the cost causation principle is that the costs of CPS are caused to be incurred by BT’s actions to implement the service to comply with its obligations under EU law (as shortly to be implemented into domestic legislation). The EU Numbering Directive requires Member States to impose an obligation on all operators with SMP to provide CPS. BT is such an operator and must, as a matter of law, comply with that obligation. In doing so, it incurs costs. On this interpretation, cost causation suggests that the costs of CPS system set-up should be borne by BT since BT incurs the costs in order to fulfil legal obligations considered to be appropriate for an operator with significant market power.
23 However, because BT has no choice but to incur costs to comply with EU legal obligations, the conclusion should be viewed with caution – had BT incurred these costs voluntarily, this conclusion would be clear. In fact, the cost causation principle is not particularly helpful when deciding how the costs of CPS should be borne because the underlying economic efficiency rationale does not obviously apply in this case. Oftel’s view is that the cost causation principle does not suggest that any operator other than BT causes BT’s system set-up costs to be incurred, but that the argument that BT causes the costs to be incurred and should therefore be responsible for bearing them, is not compelling either.
Distribution of benefits
24 Oftel’s initial view was that even BT customers not using the CPS service would benefit from the competitive impact of CPS, but that these benefits may be offset by disbenefits if CPS were to weaken direct access competition in the UK. Oftel has decided that the potential disbenefits are actually part of the larger question of the UK’s call origination charging arrangements. This question is being addressed separately, and it is not appropriate to consider it within the CPS cost recovery analysis. This leaves the positive competitive benefits of CPS as the only relevant factor. Whatever the extent of these benefits, even BT customers not using CPS will share in them, and it is therefore right that they should contribute towards the costs.
25 For most consumers, these benefits will be neither as significant nor as long-term as the benefits of network competition, but in terms of reducing retail prices for calls in the short term, CPS is likely to have some impact additional to indirect access. This is particularly likely to be the case once the all calls option is available for BT customers from 2001.
26 It has been suggested that the benefits of CPS will extend to customers of other direct access operators and thus the distribution of benefits principle suggests that they too should contribute to the costs of the service. On the basis of the distribution of benefits principle alone, there may be some merit in this argument. However, it would be difficult in practice to share the costs of BT’s system set-up costs with other direct access operators who do not purchase call origination services from BT. Due to its impracticability, therefore, Oftel does not propose to allow BT to recover any of the costs of CPS from other direct access operators, save where those operators are offering CPS services to BT customers in which case they will be treated in the same way as other CPS operators.
Effective competition
27 Oftel takes the view that effective competition will be best served by a competitively neutral cost recovery scheme for CPS. A decision needs to be taken as to which type of competition is relevant – competition between BT and indirect access operators in call carriage or between indirect access operators and direct access operators with whom they are competing to attract BT customers.
28 It has been argued that the relevant competition is that between BT and CPS operators: direct access operators are not relevant because CPS operators aren’t in competition with them, since they address a different market by offering a range of advanced services as well as TV; indirect access operators can compete with BT only in the provision of cheaper calls. Oftel does not find this argument convincing. However, it is not considered that a particular cost recovery mechanism for CPS would be the appropriate way to ensure competitive neutrality between CPS and direct access operators. This broader question (also referred to above in paragraph 24) is one which Oftel is addressing separately.
29 Spreading system set-up costs across all relevant call origination minutes (ie all calls of a type available under CPS that are carried by BT or by a CPS or indirect access operator) would be competitively neutral between BT and indirect access operators, since the retail prices each could offer to customers would include the same charge for call origination. Further, if system set-up costs are recovered from all minutes, this would include CPS over-ride minutes too: this would preserve competitive neutrality between indirect access and CPS and BT-routed calls. The effective competition principle suggests that BT’s system set-up costs should be shared between BT and CPS operators.
Cost minimisation
30 The need to build incentives for cost minimisation into charging mechanisms for CPS strongly suggests that cost recovery should be over all relevant originating minutes, so that some of the costs are recovered from all parties. The cost minimisation principle can be satisfied in a number of ways so there is no direct relationship between the principle and any particular way of recovering costs. Under the current proposals, BT would have to bear a good proportion of the costs of CPS. This provides a good incentive to BT to minimise the costs which it incurs. BT would have little incentive to do this if it were able to recover all of its costs from other operators.
Practicability
31 The practicability principle suggests that costs should be recovered in a simple way which lends itself to relatively easy measurement. Recovery of CPS costs across all relevant minutes, including NTS, allows total traffic volumes to be used to calculate charges. This is reasonably predictable and unlikely to change rapidly over time, whereas the size and growth of CPS traffic volumes are very uncertain. Because of the room for error in forecasting CPS traffic, recovering costs over CPS minutes alone could lead to under- or over-recovery of costs, thus producing charges which send the wrong pricing signals to the market. Recovering a proportion of costs from direct access operators would also be impractical. Another proposal that Oftel rules out on practicality grounds is that system set-up costs are borne up-front by CPS operators. As costs would need to be shared initially among the original CPS operators, there would be a clear incentive for operators to stay out of the market temporarily and so avoid paying any costs.
Number Translation Services
32 It has been suggested that NTS originating minutes should be excluded from the cost recovery exercise. Oftel’s view is that no compelling reason has been put forward to treat NTS differently to other call types for the purposes of CPS cost recovery. Consequently, NTS will be treated in the same way as other call types. In particular, some of the practicability benefits of spreading cost recovery over all relevant originating minutes would be lost should NTS be excluded.
Reciprocity
33 Unlike the case of number portability, the reciprocity principle is not helpful in this exercise. In the number portability cost recovery exercise, the service in question was to be offered on a reciprocal basis between operators with comparable networks, offering comparable services. It was considered appropriate that each should pay for the set up of the service on their own systems. However, CPS may only be offered from BT’s network: the process and costs of BT’s systems set-up are quite different to the process and costs undertaken by CPS operators. Had the reciprocity principle been applicable in the case of CPS, there would have been an argument for requiring BT to bear its own system set-up costs. In the absence of reciprocity, the effective competition principle suggests that costs should be shared in a competitively neutral way between BT and CPS operators.
Conclusion on BT’s system set-up costs
34 Cost causation is not particularly helpful in deciding how BT’s system set-up costs should be recovered, since BT is obliged by regulation to provide the service. However, other factors, particularly the distribution of benefits and effective competition, clearly suggest that the burden of the costs should be shared between BT and CPS operators. Arguments about practicability and cost minimisation tend to support the same conclusion.
Comparison with cost recovery for other SMP obligations
35 This approach produces a result consistent with other provisions on cost recovery for costs incurred in meeting regulatory obligations. BT is subject to a CPS obligation only because of its commercial position as an operator with significant market power. Other SMP obligations such as accounting separation and measures to ensure transparency of BT’s processes are imposed to benefit the industry as a whole. Because of this, the costs which BT incurs in meeting its regulatory obligations are shared amongst the industry (and thus, indirectly, amongst customers, including BT’s), by inclusion on a non-discriminatory basis in interconnection charges. CPS will be introduced as a competitive mechanism to ensure equality of access to competing call conveyance service providers; it is therefore appropriate and consistent that BT should be able to recover from CPS operators the costs of making the service available, in the usual way.
Per operator costs
36 The principle of cost causation strongly suggests that these costs should be met by CPS operators, since they will only arise, by definition, because of a specific request from an operator wishing to provide CPS or CPS override services (indirect access).
37 Consideration of the other principles does not obviously suggest a departure from this approach. In particular, it is CPS customers who will get most of the benefit of the services offered by the individual CPS operator. BT customers who do not take CPS services may receive some incremental benefit as a result of an individual CPS operator offering CPS but this is not a strong enough consideration to justify modifying what is suggested by cost causation. In other words, although there may be some benefits due to the first or second operators offering CPS, the incremental benefit from the next CPS operator and the next will rapidly diminish.
38 This will produce competitive neutrality in per operator costs between BT and CPS operators in the provision of CPS services. This is because BT, in setting up its network to act as a provider of CPS override (indirect access) services, should incur the same per operator costs as if it were any other operator electing to offer such override services.
39 CPS operators have argued that individual per operator costs should be recovered by BT through interconnection charges, in the same way as the costs of data management amendments (DMAs). Oftel rejects this approach. DMAs are reciprocal, and there are therefore good arguments for spreading the costs over interconnection charges. Per operator set-up charges are not reciprocal so the same arguments do not exist. Cost causation suggests that these costs should be recovered from CPS operators individually.
Per line costs
40 Oftel considers per line costs to raise the same issues as per operator costs and that the 6 principles apply in the same way, with cost causation the overwhelming issue. Thus Oftel proposes that per line costs should be met by individual CPS operators, including BT. Should a customer change their pre-selections to re-select BT, BT would have to pay per line charges.
Conclusions on cost recovery for BT
41 Oftel concludes that BT should recover the costs of implementing CPS on its networks as follows:
Mechanisms for cost recovery
42 Oftel will want to consider with the industry which of BT’s costs are relevant to setting up CPS and how they are to be treated. Oftel’s view is that these costs (calculated on an incremental basis) should be treated as capital investment written off over the economic useful life of the assets. A CPS set-up charge, in the form of a supplement to normal interconnection charges (call origination), would be created for the period to the end of the current network charge control in 2001. The calculation of this charge would be based on relevant costs and forecast traffic volumes, subject to Oftel’s approval. A reassessment of the charging method beyond 2001 will be incorporated into an overall review of the network charge controls.
43 CPS operator set-up and line set-up are expected to become new services on the list of standard services. Oftel would expect charges for CPS to be based on long run incremental costs, consistent with existing network charge controls. Oftel would be interested in views as to whether starting charges (P0s) should be set by Oftel since CPS is a new service, or whether BT should be expected to propose charges which Oftel might investigate if necessary. Oftel would also welcome views on whether the supplement on call origination should reflect the costs of all 3 options from the date of introduction of the service, or whether in the first year, only the costs of Options 1 and 2 (national and international calls) should be recovered with the costs of Option 3 (all calls) added in when that service becomes available.
Process for identifying and recovering the relevant costs of CPS provision
44 Because different rules will apply to cost recovery for per operator/per line costs and system set-up costs, decisions will need to be taken about which cost category individual heads of cost should fall into. This process can begin when detailed information becomes available about the incremental costs which BT will incur in introducing the CPS service. In some cases the process will not be straightforward. It will be necessary to consider whether a particular cost is properly attributable to CPS at all. It may be appropriate in such cases to apply a cost causation test: would BT incur this expenditure independent of any identifiable demand for CPS service? It will also be necessary to consider whether a particular cost is independent of operator demand. If it is a genuine CPS cost, but is not dependent on an individual operator’s demand, it should be treated as a system set-up cost. Where costs can be related to particular operator demands, they should be deemed to be per operator or per line costs as the case may be. Oftel would welcome comments on this approach.
Recovery of CPS costs for Kingston Communications (KC)
45 Kingston have made representations to Oftel about the expected cost of introducing switch-based CPS functionality in the Hull area. They argue that the differences in economies of scale between BT and Kingston mean that a switch-based CPS solution in the Hull area would be a far greater burden to KC customers than its equivalent for BT customers in the rest of the country.
46 Kingston anticipate system set-up costs for CPS in the region of £4.8 million of capital expenditure plus around £400,000 p.a. of operating costs. Kingston contend that most of the costs of developing a switch-based system would be incurred in software development (for their operational support systems). Per operator and per line costs are likely to be far less resource-intensive. Kingston argue that they do not benefit from BT’s economies of scale: thus although KC’s costs would be around a tenth of BT’s, the impact on KC customers, whether or not they use CPS, would be disproportionately larger. A CPS service involving the level of costs suggested would be unattractive to anyone considering taking CPS.
47 Oftel takes the view, having considered the costs information provided by Kingston, that a switch-based CPS service would indeed impose significant costs on KC and/or CPS operators, to such an extent that the uptake of CPS would be likely to be severely reduced. As a result, the unreasonably high costs of providing the network functionality would be very hard for Kingston to recover, unless they were passed on to KC customers generally.
48 Kingston have proposed an alternative strategy for implementing CPS on their network. This would entail the use of autodiallers – smart boxes to automatically route calls according to a customer’s pre-selections – installed on customer premises. This solution would allow those customers in the Hull area who choose to take CPS service to have the same functionality as a switch-based service, but at a more reasonable cost.
49 Oftel has considered this proposal carefully, including the cost modelling provided by Kingston. Oftel has indicated to Kingston that it is willing for Kingston to produce detailed proposals for an autodialler-based CPS service. It is to be stressed that this is because Kingston will not benefit from the economies of scale which make a switch-based service the most viable option for BT. Implementing CPS on BT’s network will still be cheaper per customer than the Kingston proposal. It will also have more network resilience. Kingston are aware that their proposed solution would have to meet the following initial conditions (although detailed rules which would apply to an autodialler-based service will be developed in due course):
50 Oftel proposes the same approach for cost recovery on Kingston’s network as that proposed for BT so that the system set-up costs of introducing CPS functionality onto Kingston’s network should be recovered from all relevant call origination minutes (ie all call types available under CPS, whoever carries them). This would include costs incurred in the design and manufacture of autodiallers with the requisite functionality. Per operator and per line costs will be recovered in the same way as for BT; that is, pursuant to the principle of cost causation and in the absence of a contrary conclusion based on the other principles, per operator and per line costs should be borne by the CPS operators who cause these costs to arise.
51 This arrangement would mean that KC’s system set-up would largely be the commissioning of a supply of appropriate autodiallers, rather than rolling out exchange software upgrades in its switches like BT will have to do. The cost of installation of individual autodiallers would appear to be either per operator or per line costs because, arguably, but for the actions of CPS operators or their customers in offering or taking up the service the costs would not arise. Under these proposals the costs of the autodialler would be borne by the CPS operator in question and not shared with KC by inclusion in interconnection charges across all relevant originating minutes. Since the bulk of the costs of making CPS available in the Hull area are likely to be incurred in the provision and installation of autodiallers, the competitive value of the service will be heavily influenced by who bears this part of the costs.
52 Because of this, in order to ensure equivalence with the method of cost recovery on BT’s network, and to ensure that BT customers and KC customers get access to a comparable CPS service, Oftel proposes that the cost of provision and installation of the autodialler should be treated as a system set-up cost rather than a per operator cost. Oftel would welcome comments on this approach.
53 This statement sets out how Oftel will expect BT and Kingston to recover the costs which they will incur in introducing the CPS service. Further work will be required on the following issues:
54 Views would be welcomed on any of these issues.
Oftel November 1998
Respondents to cost recovery consultation
Written responses to Oftel’s May paper on cost recovery were received from:
BT
Kingston
BMP International Ltd on behalf of AT&T, ACC, Energis, Racal, Scottish Telecom, Global One, Telstra UK, Worldcom, Telia, Norweb
NTL
Energis
ACC
Scottish Telecom
First Telecom
Core Telecoms
English Advisory Committee on Telecoms (ENACT)
SACOT
Glossary of terms
Accounting Separation – the preparation of separate accounts for different businesses and parts of businesses run by the same company or group of companies, so that the costs and revenues associated with each business and part of a business (and transfers between them) can be separately identified and properly allocated.
Autodiallers – a device used on a customer line (not necessarily at the customer’s premises) which automatically inserts the desired indirect access routing codes in response to the customer’s dialed digits
Carrier pre-selection (CPS) – the facility offered to customers which allows them to opt for certain defined classes of call to be carried by an operator selected in advance (and having a contract with the customer), without having to dial a routing prefix or follow any other different procedure to invoke such routing.
Data management amendment – modification to the data in the exchanges used to route calls; in the context of per operator costs for CPS, this refers to the modification made to implement the CPS routing codes, indirect access (CPS override) codes and the data identifying a particular CPS operator which is used in the customer data
Externality – an externality arises where a decision is taken that affects others but the individual making the decision has no incentive to take account of these indirect effects
INCA – BT’s computer system used for interconnect call accounting
Indirect access – where a customer’s call is routed and billed through operator A’s network even though the call originated from the network of operator B. (It is the generic term for both easy access and equal access Carrier Pre-Selection)
Integrated Services Digital Network (ISDN) – a network based on the existing digital PSTN which provides digital links to customers and end to end digital connectivity between them. ISDN2 provides a maximum bandwidth of 128kbit/s.
Interconnection B the physical and logical linking of telecommunications networks used by the same or a different organisation in order to allow the users of one organisation to communicate with users of the same or another organisation, or to access services provided by another organisation. Services may be provided by the parties involved or other parties who have access to the network.
Interconnection Directive (ICD) – an European Union Directive which came into effect from December 1997, setting rules for, amongst other things, who has rights and obligations to interconnect and the terms on which it should take place.
Interoperability – interoperability means the technical features of a group of interconnected systems (‘systems’ includes equipment owned and operated by the customer which is attached to the public telecommunication network) which ensure end-to-end provision of a given service in a consistent and predictable way.
LRIC – the cost avoided through no longer providing the output of a defined increment; for example, the cost of call conveyance is the cost which would be saved in the long-run if this service was no longer provided
Network Charge Controls – the basis on which interconnection charges are set (from 1st October 1997)
Network resilience – the ability of a network to maintain the continuity of service in the face of faults or traffic overloads
Number Translation Services (NTS) – the process associated with the routing of a non-geographic number to a network termination point, eg, the number is translated from its non-geographic format into a geographic or mobile number to enable it to be routed to a geographic location or to a mobile phone.
Operational Support Systems – The computer systems used to support network operations, eg customer service systems, billing systems, order handling systems
Over-ride – the ability of the CPS customer to choose alternative operators to their pre-selected operator(s) on a call-by-call basis.
Personal numbering – a service based on number translation which enables a customer to be called using a single 'personal' telephone number but to receive those calls at virtually any telephone number in the UK
Premium Rate Service (PRS) – services, including recorded information and live conversation, run by independent service providers. All calls to these companies are charged at a higher rate than ordinary calls to cover the companies' costs in providing the content of the call and the operator's cost for the special network facilities needed.
Regulatory Accounts – a set of financial statements as defined in Condition 20B of BT’s licence
SMP – Significant Market Power – The Significant Market Power test is set out in various European Directives, including the Interconnection Directive, the Amending Leased Lines Directive and the Revised Voice Telephony Directive. It is used by the National Regulatory Authorities (NRA) such as Oftel to identify those operators who must meet additional obligations under the relevant directive. It is not an economic test, rather it requires a consideration of the factors set out in the test within a specified market.
Standard Service – an interconnection service which BT is required to provide under Condition 13 of its license. The list of Standard Services includes access to DAS (BT’s product database which is used to provide operator-assisted directory services), wholesale directory enquiry services and provision of phone books.
Starting charges (P0s) – these are the starting charges for interconnection services in the network baskets under the Network Charge Control regime. They were set by Oftel on the basis of long-run incremental cost plus mark-up of these services
Tandem Layer – a tandem exchange is one that routes calls between exchanges but does not have direct connection to end users; such exchanges are positioned at the tandem layer