July 1997
Introduction • Market definition • The geographical definition of markets • Market power • Determination • Effect of finding that a licensee is a well established operator • Duration
Introduction • Process • Criteria • Duration
This document contains two sets of guidelines for the guidance of operators holding licences authorising the provision of international services over a company’s own facilities:
Licences authorising the provision of international services over a company’s own facilities provide that certain conditions (or more onerous application of these conditions) of the licence will be activated where the Director General determines that a licensee is a Well Established International Operator. For a licensee to be determined to be a Well Established International Operator it must have market power in the relevant market(s). These guidelines set out Oftel’s approach to defining the relevant market(s) and the factors that will be reviewed in assessing whether a licensee has market power within the relevant market(s). The guidelines also outline the implications of a Well Established International Operator determination for the licensee.
These guidelines are intended to assist operators in complying with the obligations contained in the condition entitled Arrangements for Accounting in Respect of International Conveyance Services contained in licences authorising the provision of international services over a company’s own facilities. The Director General has the power to make a determination on the question 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 on certain international routes. These guidelines are intended to give guidance on the criteria which the Director General expects to apply when considering such a determination. These guidelines are also intended to provide guidance on the obligations of a licensee to inform the Director General and any other operator who is or has announced an intention to operate on a route within twelve months of any changes to its accounting rate.
This condition does not apply to routes which have been specified by the Secretary of State (ie routes which are deemed as open to competition). Oftel is reviewing the nature of these arrangements in conjunction with the Department of Trade and Industry.
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1 These guidelines are issued by the Director General of Telecommunications for the guidance of international operators on Well Established International Operator determinations (throughout this document, references to Well Established International Operators should be read as applying equally to Well Established Operator as it appears in Mercury’s licence in relation to international markets). These guidelines do not form part of any licence, or affect the legal scope of any licence.
2 Licences authorising the provision of international services over a company’s own facilities provide that certain conditions (or more onerous application of these conditions) of the licence will be activated where the Director General determines that a licensee is a Well Established International Operator. Specifically, the price publication and undue discrimination conditions contained within the international facilities licence become fully effective and the additional obligations contained in these conditions will be activated in relation to the market(s) in which the operator is a Well Established International Operator.
3 For a licensee to be determined to be a Well Established International Operator it must have market power in the relevant market(s). Thus, in making a Well Established International Operator determination, or reviewing such a determination, it is first necessary to define the relevant market(s) in which the determination or review of the determination is to be made. Second, it is necessary to review the position of the licensee in the relevant market(s) in order to establish whether the licensee has market power.
4 These guidelines set out Oftel’s approach to defining the relevant market(s) and the factors that will be reviewed in assessing whether a licensee has market power within the relevant market(s). The guidelines also outline the implications of a Well Established International Operator determination for the licensee. The Mercury Well Established Operator Review Statement (published in June 1997 and available from the Oftel Press Office) provides an example of the application of these guidelines. The Director General will take these guidelines into account in determining whether a licensee is a Well Established International Operator. The Director General would normally expect to follow these guidelines, or to give his reasons if he departed from them. The Director General 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 General.
5 Oftel proposes to adopt the approach to market definition as set out in the March 1997 Guidelines on the operation of the Fair Trading Condition. The approach to market definition contained in those guidelines has regard to that used by the European Court of Justice and European Commission in the application of Articles 85 and 86 of the EC Treaty and to the decisions and notices of the European Commission and the relevant pronouncements of the Office of Fair Trading and the Monopolies and Mergers Commission.
6 The approach to market definition focuses on the existence of constraints on the price-setting behaviour of firms in the absence of price control. These constraints may be provided by the possibility of demand-side 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 supply-side substitution (which occurs when firms producing other products switch resources into producing a product whose price has increased).
7 Demand-side substitution focuses on whether there are alternative products that are available to customers and to which they could switch, without significant costs and effort, if the supplier of a particular product tried to implement price increases above competitive levels. The products do not need to be perfect substitutes but alternatives which would fulfill a similar role to the product in question and to which customers (including other operators using the product as an input) would be prepared to switch in the event of a price increase. If such products can be found, then these alternatives should be included in the definition of the relevant product market because they would constrain the price-setting behaviour of suppliers. A consideration of the choices available to customers is therefore at the heart of the approach.
8 A constraint on the price setting behaviour of a firm can also arise from the potential behaviour of firms in closely related areas (supply-side substitution). In considering the scope for supply-side substitution, it is necessary to assess whether there are firms that could and would be likely to switch some (more) of their existing facilities to supplying (more of) the product under consideration.
9 Using this methodology Oftel has identified two main markets in relation to international telecommunications services:
the market for international retail services, which may be considered on a route by route basis.
This market will generally consist of international retail calls (retail IDD and retail calls delivered via ISR) only. However, in instances where it is appropriate to look at markets by customer type, IPLCs (normally considered as part of the market for international services to other operators, see below) may also be included in this market insofar as they represent a substitute for international retail calls for large corporate customers.
the market for international services to other operators, which may be considered on a route by route basis.
This market encompasses the alternative mechanisms for conveying international retail services, which can be viewed as potentially substitutable for each other. The alternative mechanisms for conveying international retail services are:
10 Insofar as the market for international services to other operators is concerned, Oftel has considered it appropriate to regard the three alternative methods of conveying international retail services as part of the same market because they are all potential substitutes for each other. Currently, on many routes, one or more of these conveyance methods is not available (for example, ISR may not be authorised at the far end or it may be impossible for new entrants to negotiate correspondent agreements). This may prevent the alternative methods of conveying international retail services acting as effective substitutes for each other. While it could be argued that this implies that the alternative methods of conveying international retail services are not necessarily within the same market, Oftel considers that this lack of effective substitutability is in fact a reflection of competitive conditions within the market, rather than an issue of market definition. As such, Oftel treats the alternative methods of conveying international retail services as part of the same market on all routes irrespective of the extent to which they are effective substitutes for each other on any individual route.
11 When considering the geographical definition of the markets for international retail services and international services to other operators, it is usually appropriate to treat different paired country routes as separate markets. On the demand side, substitution between different country routes is not possible as a call to one country is not a good alternative for a call to another country.
12 On the supply side, the delivery of a call to one country is not generally a good substitute for the delivery of a call to another country. However, it could be argued, that the possibility of ‘hubbing’ (the routing of traffic via an intermediate third country) means that defining geographical markets on a route by route basis might represent too narrow a focus. Oftel’s recent draft Determination under Condition 16B.6 of BT’s licence considered whether the possibility of hubbing justified a broader geographical definition of markets than one based on different paired country routes as separate markets. It concluded that hubbing is currently a higher cost solution than direct country to country call routing (and noted that hubbing may also result in relatively poor quality). Thus, while the possibility of hubbing may impose a ‘ceiling’ on the price of international retail services or international services to other operators, it would not prevent licensees with market power on a particular route from raising and maintaining prices above the competitive level. Hubbing does not, therefore, constitute a fully effective alternative to direct country-to-country call routing. As such, it is appropriate in the majority of cases to look at the markets for international retail services and international services to other operators on a route by route basis.
13 Oftel defines market power 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. While market power is defined in terms of an operators ability to raise prices above the competitive level, one way in which an operator may abuse its market power is by lowering its prices to a level that competing operators could not match without incurring losses. Such an abuse of market power would potentially preclude effective competition. An example of this in international markets may be where a facilities owner has a cost base below the cost base of competing operators who do not own facilities. This could be because IPLCs cost more than IRUs. This may allow the facilities operator to lower its prices to a level which competing operators who did not own facilities could only match by incurring losses. There is nothing wrong with a firm having such a cost advantage over its competitors provided, if the firm has market power, that it does not abuse its market power by manipulating this cost advantage. It is worth noting that such a cost advantage could be reinforced where competing operators who do not own facilities rely, at least in part, on the facilities operator in question for the sourcing of conveyance services. In such a scenario, the facilities operator could subject its competitors who did not own facilities to a two-way margin squeeze by reducing its prices to end consumers while simultaneously increasing the prices it charged to its competitors for the use of its conveyance services.
14 Alternatively, (and even assuming that there are no differences in the cost base of operators with facilities and those without facilities), where proportionate return is imposed at the far end, operators with their own facilities will receive return traffic. If the incoming traffic on a route exceeds the outgoing traffic, the facilities operator will receive a net inpayment from their correspondents at the far end under the accounting rate regime. Where accounting rates are above cost, this net inpayment can be considered as an additional source of profits. Given that competing operators who do not own facilities (eg ISR operators and other operators with wholesale interconnect agreements) do not receive return traffic, the net inpayment received by the facilities operator could allow that facilities operator to price outgoing calls at a level that is below its own cost base (and the cost base of competing operators who do not own facilities) without incurring a loss on its operations overall.
15 In both of the examples given above, it is the operators ownership of facilities that puts it in an advantageous position relative to its competitors. However, this would normally only be of concern where the operator in question has market power and, therefore, has the ability to abuse this position to behave in an anti-competitive or unduly discriminatory manner.
16 The term market power is not to be confused with dominance, which has been defined as the power to behave to an appreciable extent independently of competitors and customers in terms of pricing and other decisions. A dominant firm will always possess market power, while a firm with market power will not necessarily be dominant.
17 In assessing market power, Oftel will take into account the approach taken by EU and UK authorities when applying competition rules. This takes into account a range of factors including the following list, which is not exhaustive. There is no unique indicator of market power. The degree of attention paid to each will depend on the circumstances of the case:
(i) 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;
(ii) 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 effective regulation (such as measures to bring about transparency in the relationship between costs and charges through accounting separation and the introduction of non-discrimination 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 that firm’s market power;
(iii) the degree of excess capacity that competitors possess; barriers to entry and exit together with the history of entry into and exit from the market;
(iv) 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
(v) 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 in-house production. Large telecommunications users, for example, are likely to be well-informed about competitive offerings and telecommunications may form an important part of their own costs. Multinational companies may have the ability to choose between telecommunications operators located in different countries.
18 In summary, evidence that a firm has market power is likely to include some or all of the following:
19 The Director General will make a determination based on the factors set out above. Before making any determination Oftel collects information, analyses that information, consults and comes to a conclusion. It is Oftel’s general practice to explain the decision behind the determination in detail and in advance with the relevant licensee. Oftel also issues determinations in draft for consultation within the industry as part of its commitment to transparency and fairness of procedures.
20 Once the Director General has determined that a licensee is a Well Established International Operator in the relevant market(s) the price publication and undue discrimination conditions contained within the international facilities licence become fully effective and the additional obligations contained in these conditions will be activated in relation to that market.
21 The additional obligations contained in the Condition in international facilities licences relating to the publication of charges, terms and conditions to be applied will be activated. The additional obligations will require the licensee to publish the terms, conditions and precise amount of charges for those services set out in Condition 7.1 (a) of the licence 28 days in advance of their coming into effect. The licensee will be obliged not to depart from these published charges, terms and conditions.
22 Oftel considers that only an international operator who has market power (and is, therefore, Well Established) is capable of unduly preferring or discriminating. Thus, a Well Established International Operator determination means that any preference or discrimination shown in respect of the services set out in Condition 8.1 of the licence may be considered as undue within the meaning of the prohibition on undue preference and undue discrimination Condition. In addition, Oftel considers that where a Well Established International Operator bundles together services in markets where the international operator is Well Established with services in markets where it is not, Oftel may make a finding that there has been undue discrimination or preference in relation to the bundling.
23 Oftel recognises that, over time, a Well Established International Operator may lose market power through the emergence of effective competition. In those circumstances the continued application of the restrictions applied to a Well Established International Operator may adversely affect that licensee’s ability to compete. To deal with this, the Director General 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 restrictions upon that licensee.
24 The Director General remains free to amend these guidelines at any time, after consultation if appropriate.
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1 These guidelines are issued by the Director General of Telecommunications 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 any licence, or affect the legal scope of any licence.
2 The Arrangements for Accounting in Respect of International Conveyance Services condition is designed to operate in markets where there are restrictions on competition on a particular route, because of the control or ownership of 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. In such instances, this condition is designed to prevent anti-competitive behaviour where this behaviour may take the form of agreeing an accounting rate or method of settlement or division of the accounting rates in respect of any Accounting Rate Service that has, or is likely to have, an effect to the detriment of users and providers of International Conveyance services in the United Kingdom. Ultimately, the Director General’s overriding objective in this matter is for prices to the end consumer to fall as close as is possible towards costs. In practice, this condition gives the Director General the power to determine that 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. Where such a determination is made, the Director General may direct the licensee to take such steps necessary to remedy the situation or to cease to convey any messages to the far end country. The condition does not apply to routes which have been specified by the Secretary of State (ie routes which are deemed as open to competition). Oftel is reviewing the nature of these arrangements in conjunction with the Department of Trade and Industry.
3 As noted in paragraph 2, the Director General has the power to make a determination on the question 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 on certain international routes. These guidelines are intended in particular to give guidance on the criteria which the Director General expects to apply when considering such a determination. These guidelines are also intended to provide guidance on the obligations of a licensee to inform the Director General and any other operator who is or has announced an intention to operate on a route within twelve months of any changes to its accounting rate. The Director General 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 General.
4 The ‘Arrangements for Accounting in Respect of International Conveyance Services’ condition obliges international operators to inform the Director General and any other operator who is or has announced an intention to operate within twelve months on any particular route, of any changes to its accounting rate. ANY OPERATOR THAT FAILS TO COMPLY WITH THIS OBLIGATION WILL BE IN BREACH OF ITS LICENCE. Such notification, which shall include the new rate, the rate division applicable, the currency, the effective date and the distant carrier, is to be made no later than 14 days before the date of such change to the accounting rate. Where changes to the accounting rate are made retrospectively, operators are required to notify the change no later than 14 days after the date that the change to the accounting rate is agreed. There is no requirement on an international operator to seek prior agreement of the Director General 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 General’s attention and 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 a complaint the Director General may, on the basis of the information available to him, investigate and make a determination with respect to any rate.
4.1 Any changes of a temporary nature to the accounting rate shall be notified to Oftel and all other operators as above with the exception that the notification must be made 48 hours before the temporary change to the accounting rate, such temporary changes being limited to a maximum duration of six weeks per route per year in each direction.
4.2 Oftel will maintain a list of operators who have informed Oftel that they are operating on a particular route, or who have informed Oftel of an intention to operate on a particular route within 12 months, and this list will be provided to other operators on request (Contact Oftel’s Library, tel: 0171 634 8764). Oftel will be considering whether it is practicable to make this information available on its Web site. The publication of accounting rates by Oftel is a separate issue on which Oftel will be publishing a Statement shortly.
5 The Director General’s overriding objective in considering whether an accounting rate, method of settlement or division of accounting rates is detrimental is for prices to the end consumer to fall as close as is possible towards costs. The Director General is also seeking to prevent anti-competitive behaviour by operators where, for example, attempts are made to prevent entry on a particular route. 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 General will have regard in particular to the following:
(i) the extent of competitive pressures on the route in question;
(ii) what prospects exist on that particular route for further development of competition in international conveyance services;
(iii) 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
(iv) whether or not the proposed agreement, arrangement or variation is likely to have the effect of reducing the price of international telephone calls from the United Kingdom.
6 There is no requirement on operators to maintain a system of parallel accounting (ie maintain the same accounting rate, etc. as others operating on the route). However, where an operator does depart from parallel accounting, the following circumstances will pre-dispose the Director General to find the accounting rate, method of settlement or division of the accounting rates detrimental:
(i) where another international operator on the route in question can demonstrate that the departure from parallel accounting is a result of whipsawing tactics by a dominant operator at one end of the route;
(ii) where a new 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;
(iii) where the division of the accounting rates agreed between the operators at each end of the route are unequal, unless the inequality can be justified on the basis of differences in cost.
7 The following circumstances would pre-dispose the Director General to find the accounting rate, method of settlement or division of the accounting rates not detrimental:
(i) where there is evidence of emerging competition on that route;
(ii) where the new accounting rate is lower than the previous one.
8 The Director General 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 be issuing a Statement on the publication of this information shortly.
9 The Director General remains free to amend these guidelines at any time, after consultation if appropriate.
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This glossary contains definitions of terms used in these Guidelines.
Agreements made between two international operators at each end of a particular route for the handling of international calls. They include arrangements for each operator to pay the other for the termination of calls in their respective countries.
Has the meaning given in Article 2.8 of the ITU Regulations (Final Acts of the World Administrative Telegraph and Telephone Conference, Melbourne 1988).
Backhaul is a high capacity inland circuit. It represents the connection between a cable landing station and an operators existing domestic infrastructure.
The capacity an international cable has for carrying calls. Cable capacity can be expressed in terms of design capacity (the amount of capacity a cable is technically designed to carry) and notional capacity (the amount of capacity which has been subscribed for by cable consortia members).
The means by which an international operator connects an undersea cable to backhaul.
An agreement with a far end operator, for that operator to receive and terminate international calls originating on the near end operator’s facilities.
Far end termination of calls by a domestic operator at a cost based rate.
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
The routing of international traffic via an intermediate third country.
International Facilities Licence.
Infrastructure owned and operated by a licensed operator for conveying traffic between countries. In the United Kingdom the international facilities licensees are licensed to own and operate international facilities at the UK end on all international routes.
A telecommunications operator licensed in the United Kingdom to operate international facilities.
International Private Leased Circuits are international circuits leased from facilities operators in order to provide international services.
Indefeasible Right of Use. Gives IRU owner the right to use capacity for the life of a cable and liability to pay maintenance charges. IRU owners do not have voting rights in cable consortium.
International Simple Resale is an international service provided by an operator to customers using the international facilities owned by other operators. In the case of an outgoing call, the operator collects traffic from the public telecommunications network, transfers it to a line leased from a facilities operator, and then hands it over to a public telecommunications operator in an overseas country who will deliver the call to its destination. It therefore involves "breakout" onto the public telecommunications network at both ends, but with the international leg of the call being carried on leased circuits. ISR traffic bypasses the accounting rate system.
Where a country allows operators to receive incoming and offer outgoing calls conveyed via ISR.
Minimum Investment Unit in cable consortia. Differs from an IRU in that it gives ownership of the cable, voting rights, and rights to extra capacity if design capacity of cable is subsequently expanded.
A person running a telecommunications system outside the United Kingdom.
An arrangement by which incoming traffic from the far end country is distributed among the near end country’s operators in proportion to the outbound traffic sent by them to the far end country. Under the international facilities licences (and in Mercury’s licence), there is a requirement on operators for a form of proportionate return whereby the share of incoming traffic they receive on a route is no greater than the share of outgoing traffic that they send.
Retail International Direct Dialled calls are calls made by end-users dialling direct to subscribers in other countries.
If a telecommunications company has a licence to operate international facilities at both ends of a route, it may be able to originate and terminate calls on the route at both ends. This can obviate the need for a correspondent agreement.
The rate of payment, usually based on call minutes, due from one operator to another for terminating calls. The settlement rate is usually 50% of the accounting rate.
Wholesale International Direct Dial is where one operator supplies IDD services through an interconnect arrangement to other operators for onward supply to retail customers.