Guidelines for the operation of International Facilities Licence

The Department of Trade and Industry are currently in the process of carrying out a statutory public consultation on the text of the new International Facilities Licence.

Oftel intends to issue Guidelines on the aspects of the new licence, arrangements for accounting in respect of international conveyance services and Guidelines in respect of a determination that a licensee is a Well Established International Operator. Oftel welcomes responses from consultees on both sets of draft guidelines.

Representations should be sent to: Michelle Childs, Oftel, 50 Ludgate Hill, LONDON EC4M 7JJ

All representations will be made publicly available in Oftel's library. Those responding are requested to separate out any confidential material into a confidential annex which is clearly marked as such. Any confidential material should be sent to Oftel via ordinary mail, not via the Internet.

Representations are to be received by 16 December 1996. Comments (provided they are relatively short) can be sent to Oftel by filling in the Form or by sending them to the email address press.office.oftel@gtnet.gov.uk.

Oftel intends to set up a a link between this Consultative Document and any responses to this document placed on respondent's own Internet pages. Please contact Cate MacPherson at Oftel on 0171 634 8752 to organise this.

Guidelines for International Facilities licences on well established international operators

Introduction

1 These guidelines are issued by the Director General of Telecommunications ("the Director") and are intended to apply to all telecommunications operators licensed to operate international facilities in the United Kingdom. These guidelines do not form part of the licence, and they do not affect its legal scope.

2 The Director will take them into account in determining whether a licensee is a well established international operator. He would normally expect to follow them and to give his reasons if he departed from them. The Director cannot legally fetter his discretion in advance and therefore he retains the ability to depart from the guidelines where the circumstances warrant it.

3 The licence provides that certain conditions (or more onerous application of these conditions) will be triggered where the Director determines that a licensee is a Well Established International Operator. The benchmark test used in determining whether a licensee is a Well Established International Operator is whether it has a 25% market share in a relevant market. This is without prejudice to a determination by the Director that an operator with a share less (or greater) than this may (or may not) be a Well Established International Operator.

4 Oftel recognises that, on its own, this definition does not provide sufficient guidance about the circumstances in which the Director would determine that a licensee is a Well Established International Operator. The purpose of these guidelines is to set out the approach that the Director will take in making such a determination so that licensees are better able to asses for themselves when such a determination is likely to be made.

Criteria

5 For a licensee to be determined to be a Well Established International Operator it must have the ability for its behaviour to be able to have a significant effect on competition in a market or a series of markets. Oftel wishes to ensure that the relevant conditions (and those parts of the conditions) are nly triggered where necessary to control the areas where an operator is deemed to be a Well Established International Operator, leaving operators greater competitive freedom in those markets where a licensee is not well established. The definition is sufficiently broad to give the Director power to determine what is the relevant market and that a licensee is a Well Established International Operator once it reaches acertain market share, yet at the same time to take into account other factors so that market share is not a fixed test.

6 These guidelines set out Oftel's approach to market definition and to the standard indicators of market power.

Market definitions

7 Oftel set out its approach to market definition in its second consultative document (published in June 1996) on Pricing of Telecommunications Services from 1997. Oftel proposes to adopt the definition of markets set out in the guidelines to the Fair Trading Condition (of which a draft was published in June 1996). Those guidelines in turn closely follow the tests set by the European Court of Justice and European Commission in the application of Articles 85 and 86 of the EC Treaty. The tests used by UK competition authorities (ie the Office of Fair Trading and the Monopolies and Mergers Commission) are broadly similar.

8 The approach to market definition will focus on the existence of constraints on the price setting behaviour of firms. These constraints may be provided by the possibility of demandside substitution, (that is the ability of customers to respond to a price increase by switching to products, which are good alternatives from their point of view), or supplyside substitution (which occurs when firms producing other products switches resources into producing a product whose price has increased.)

9 Demandside substitution focuses on whether there are alternative products available to customers to which they could switch, without significant costs and effort, in the event that the supplier of a particular project tried to implement price increases above competitive levels. The products do not need to be perfect substitutes but do need to be alternatives which would fulfil a similar role to the good or service in question and to which customers would be prepared to switch in the immediate or short term in the event of a price increase. If such goods or services can be found, then these alternatives should be included in the definition of the relevant product market because they would constrain the pricesetting behaviour of suppliers. Consideration of the choices available to customers is therefore at the heart of this approach. The analysis will also need to take into account the geographical area in which demandside substitution is available.

10 In practice, a constraint on the price setting behaviour of a firm can also arise from the potential behaviour of firms in closely related areas (supplyside substitution). In considering the scope of supplyside substitution, it is necessary to assess whether there are firms that, although not currently supplying a particular product, could and would be likely to switch some of their existing facilities to that product.

11 Using this methodology Oftel has identified two main markets in relation to international telecommunications services:

• international calls which may be considered on a route by route basis
• wholesale markets for interconnect services (international conveyance) which may be considered on a route by route basis.

Market power

12 Oftel defines market power as the ability to raise prices above the competitive level for a nontransitory period without losing sales to such a degree as to make this unprofitable. The term is not to be confused with dominance, which Oftel takes as the ability to act independently (in terms of pricing behaviour of output decisions) of other firms in the market or potential entrants. A dominant firm will always possess market power. Firms which are not individually dominant will have market power if what they do (such as raising prices) will have a significant effect on the price for that product (eg others will follow). Assessment of market power or dominance would therefore involve examination of the same indicators.

13 In order to establish whether a firm does have market power it is first necessary to define the relevant market (see paragraphs 7-11).

14 There is no unique indicator of market power. When assessing whether a licensee should be determined to be a Well Established International Operator in a relevant market, Oftel will need to examine a range of factors. A number of factors are important, although they may be related. The number of firms in a market, and the market share of each are only two indications of market power. Market share is not a sufficient measure of market power; however it is unlikely that a firm which has less than 25% of market share possesses market power.

15 In assessing market power Oftel will take into account the approach taken by EU and UK authorities when assessing dominance. This includes a range of factors including the following list, which is not exhaustive. The degree of attention paid to each will depend on the circumstances of the case:

• number of firms; the changing pattern of market shares over time; the degree of concentration in the market; the price history and profitability of firms in the market;
• the degree of vertical integration in the market. Vertical integration is particularly relevant in telecommunications where one firm has a significant share of both calls and the provision of network services. If one firm has market power at the network level then, in the absence of regulation such as measures to bring about transparency in the relationship between costs and charges through accounting separation and the introduction of nondiscrimination rules, the firm could exert considerable market power over operators who need to interconnect with it in order to deliver calls to final customers. In that situation, a measure simply of the number of operators competing in the retail calls market or of their market shares could understate the extent of the dominant operator's market power;
• the degree of excess capacity the competitors possess; barriers to entry and exit together with the history of the entry into and exit from the market
• the way in which firms compete in the market (eg whether they compete on the basis of price, by product differentiation, after sales services or other factors), and
• other issues such as customer awareness. The market power of a producer may be offset by the countervailing power of buyers. Countervailing power is likely to be important where the buyer purchases a large volume relative to the producer's total output, where the buyer's purchases represent a large proportion of the buyer's total costs, where the buyer can switch between suppliers easily but the seller perhaps has some customer specific investment and where the buyer has alternative sources of supply, perhaps by inhouse prduction. Large telecommunications users, for example, are likely to be wellinformed about competitive offerings and telecommunications may form an important part of their own costs. Multinational companies may have the ability to choose between telecoms operators located in different countries.

In summary, evidence of whether the firm has market power might include some or all of the following:

• the firm has less than two active competitors;
• the firm has a market share above 25%;
• entry barriers are significant;
• the firm has control over a vital input which its rivals must use;
• buyers have no countervailing power, (for example because they are typically small and defused);
• lack of new entry or entrants which remain small or rapidly exit the market;
• a market share which is static or which shows a tendency to increased concentration;
• evidence of collusion or price leadership (when nondominant firms simply follow the price set by the dominant firm);
• high profits. (However, high profits may result from efficiency or innovation as well as market power.)

Determination

16 The Director will make a determination based on the factors set out above. Before making any determination Oftel collects information, analyses that information and comes to a conclusion. It is Oftel's general practice to discuss the determination in detail and in advance with the relevant licensee so that they are able to comment. Oftel also issues determinations in draft for consultation within the industry as part of its commitment to transparency and fairness of procedures.

Effect of finding that a Licensee is a Well Established International Operator

17 Once the Director has determined that a licensee is a Well Established International Operator in a particular market, this will trigger the "stepped" obligations contained in the publication of charges, terms and conditions to be applied Condition which will require the licensee to publish its tariffs 28 days in advance. Oftel also considers that only a Well Established International Operator will generally be in a position to exercise undue preference or discrimination within the meaning of the prohibition on undue preference and undue discrimination Condition.

18 Oftel recognises that a licensee may lose its position as a Well Established International Operator through the emergence of effective competition. In those circumstances the continued application of the conditions applied to a Well Established International Operator may affect that licensee's ability to compete. To deal with this, the Director has power to determine that a licensee is no longer a Well Established International Operator within a particular market or markets and so remove the more onerous conditions upon that licensee.

Duration

19 These guidelines will apply from their date of issue and will continue to apply unless amended by the Director.

GUIDELINES ON ARRANGEMENTS FOR ACCOUNTING IN RESPECT OF INTERNATIONAL CONVEYANCE SERVICES

Introduction

1 These guidelines are issued by the Director General of Telecommunications ("the Director") for the guidance of international operators in complying with the obligations contained in the condition entitled "Arrangements for Accounting in Respect of International Conveyance Services" in licences authorising the provision of international services over a company's own facilities. These guidelines do not form part of the licences, and they do not affect their legal scope.

Scope

2 The guidelines are designed to operate in markets where there are restrictions on competition in international facilities at the far end, and where at the UK end more than one operator has established, or proposes to establish, the provision of international conveyance services. Markets which are open to competition at both ends are expected to be specified by the Secretary of State, with the effect of exempting international conveyance services on those routes from the "Arrangements for Accounting" condition.

3 These guidelines are intended in particular to give guidance on the criteria which the Director expects to apply when making a determination on the uestion of whether an accounting rate, method of settlement or division of the accounting rates has or is likely to have an effect to the detriment of providers and users of international conveyance services in the UK. The Director would normally expect to follow these guidelines and to give his reasons if he departed from them. He cannot legally fetter his discretion in advance and therefore he retains the ability to depart from the guidelines where the circumstances warrant it. The guidelines are not, therefore, legally binding on the Director.

Process

4 The "Arrangements for Accounting" condition makes provision for international operators to inform the Director and other licensees operating on the route in question of any new correspondent arrangements, accounting ans settlement rates. There is no requirement on an international operator to seek prior agreement of the Director or of any other international operator before changing an accounting rate, method of settlement or division of accounting rates. If any international operator objects to an accounting rate etc agreed by any licensee that operator (or any other interested party) may bring the matter to the Director's attentionand seek a determination that the rate is likely to have an effect to the detriment of providers and users of international conveyance services. Any person objecting to a rate should explain to the Director General why they believe the rate would be detrimental. Even in the absence of an objection the Director General may, on the basis of the information available to him, investigate and make a determination with respect to any rate.

Criteria

5 In considering whether an accounting rate, method of settlement or division of accounting rates agreed by any international operator has or is likely to have an effect to the detriment of providers and users of international conveyance services, the Director will have regard in particular to the following:

1. the extent of competitive pressures at the other end of the route in question;
2. what prospects exist on that particular route for developing competition in international conveyance services in the overseas country or territory;
3. whether or not the proposed agreement, arrangement or variation would be conducive to the reduction of international accounting rates between the United Kingdom and that overseas country or territory; and
4. whether or not the proposed agreement, arrangement or variation is likely to have the effect of reducing the cost of international telephone calls in the United Kingdom.

6 There is no requirement on operators to maintain a system of parallel accounting. However, where an operator seeks to depart from parallel accounting, the following circumstances will predispose the Director to find the accounting rate, method of settlement or division of the accounting rates detrimental:

• where another international operator on the route in question can demonstrate that the departure from parallel acounting is a result of whipsawing tactics by a dominant overseas operator;
• where an accounting rate agreed by an international operator is higher than the previous one, or than the accounting rate paid by all other operators on that route;
• where the division of the accounting rates agreed between the international operator and the overseas operator are unequal, unless the inequality can be justified on the basis of differences in cost.

7 The following circumstances would predispose the Director to find the accounting rate,method of settlement or division of the accounting rates not detrimental:

• where the agreement is with an overseas operator who is an emerging competitor at the far end of a route;
• where a new accounting rate is lower than a previous one.

8 The Director will keep records of all international accounting rates operated by UK licensed international operators and any variations to those accounting rates, including in particular, the methods of settlement between UK international operators and overseas operators, and shall publish such information from time to time in a manner which he considers appropriate.

Duration and definitions

9 These guidelines will apply from their date of issue and will continue to apply unless amended by the Director.

10 In these guidelines:

• "accounting rate" has the meaning given in Article 2.8 of the ITU Regulations (Final Acts of the World Administrative Telegraph and Telephone Conference, Melbourne 1988);
• "division of the accounting rates" means the amount as a proportion of the accounting rate which accrues to the terminating operator from the originating operator in payment for the termination of an international accounting rate call in the country or territory of the terminating operator;
• "international operator" means a telecommunications operator licensed in the United Kingdom to operate international facilities;
• "overseas operator" means a person running a telecommunications system outside the United Kingdom.