This Consultative Document sets out proposals for modifications to the Telecommunications Act licence held by Mercury Communications Ltd ('Mercury'). It also considers Mercury's position in the UK market for international services and facilities ('the international market') and what, if any, continuing regulatory restrictions are necessary to take account of this.
2. Mercury's Position in the Inland and Access Markets
4. Mercury's Position in the International Market
Oftel invites comments and evidence on the proposals and issues set out in this Consultative Document.
The initial consultation period on the proposals in Section 2 is until January 26 1996. There will then be a further period up to February 9 1996 during which comments are invited on any submission made to Oftel during the initial period. Written comments on Section 4 should be received by March 1 1996 and comments on those initial submissions by March 15 1996.
Written comments should be sent to:
Andy Miller
Oftel
50 Ludgate Hill
LONDON EC4M 7JJ
All written comments will be made publicly available in Oftel's library, except where respondents indicate that their response, or parts of it, are confidential. Respondents are therefore asked to separate out any confidential material into a confidential annex which is clearly marked as such. In the interests of transparency respondents are requested to avoid confidentiality markings wherever possible.
Short comments can be sent to Oftel by filling in the Feedback Form on these Web pages or by using the e-mail address:
press.office.oftel@gtnet.gov.uk
Oftel intends to set up links between this Consultative Document on Oftel's pages and responses placed on respondents' own Internet pages. Please contact Mary-Ann Auckland at Oftel on 0171 634 8751 to organise this.
Confidential material should not be sent to Oftel via the Internet.
1.0. This consultative document arises from a review of Mercury's licence in the light of changes in the telecommunications market since the ending of the duopoly policy in 1991. The licence granted to Mercury in 1984 mirrored in a number of respects BT's licence. It is subject to a number of requirements which are not applied to the more recent new entrants. The aim of this review has been to put Mercury's licence onto a footing which better reflects its market position. Section 1 accordingly makes a number of proposals for the deletion of licence conditions.
1.1. Oftel believes that these proposed changes to Mercury's licence are justified because Mercury does not have market power at the level of the national markets for local and national calls or the access market (ie business and residential line rentals). This view is based not only on its market shares but also on other factors, including that it faces considerable competition from BT and the new entrants.
1.2. Conditions in the international market are however somewhat different in that not only is Mercury's market share greater (at just under 25%), but there are significant regulatory restrictions on entry. Mercury and BT are the only two 'facilities-based' operators - other operators must route their calls via Mercury or BT's facilities. These conditions are changing with the prospect of greater liberalisation. The document considers to what extent in the intervening period of partial, but growing, liberalisation, the particular conditions of the international market make it necessary for regulation to impose additional controls on Mercury beyond those which would be appropriate in the inland and access markets.
1.3. Section 2 sets out Oftel's view of Mercury's market position in the inland and access markets. It then proposes the deletion of a number of conditions which are either outdated or which are not included in the licences of the new entrants and whose application to Mercury is not, in Oftel's view, appropriate.
1.4. Section 2 also proposes a change to Condition 15 of Mercury's licence (Publication of charges terms and conditions). This modification would remove the requirement for Mercury to notify and publish details of tariff changes 28 days in advance. This Section also proposes modifications to Condition 12 (Interconnection) and Condition 47 (Associates).
1.5. Oftel believes that these proposed modifications should be uncontroversial and it therefore expects to be able to move quickly to statutory consultation following the informal consultation.
1.6. Section 3 highlights three issues which may involve licence modifications where progress depends on the outcome of other consultations and further consideration is necessary. Oftel is therefore taking these forward separately from this exercise.
1.7. Section 4 presents a brief analysis of particular features of the international market and Mercury's market position within that market. It then goes on to consider the regulatory implications which arise from this analysis and suggests possible options.
1.8. This document is intended to be complete and self-standing. However there are a number of places where references are made to other Oftel documents where certain issues are discussed at greater length. The documents referred to are:
2.0. The 1991 White Paper 'Telecommunications: Competition and Choice' opened the UK telecommunications market to the entry of new telecoms operators to compete with BT and Mercury across a broad range of facilities and services. There are currently some 150 Public Telecommunications Operator (PTO) licences. In line with the principle that non-dominant operators should be regulated more lightly than dominant operators, these new entrants have been granted so-called 'slimline' PTO licences. The licence granted to Mercury in 1984 has, however, remained unchanged. Mercury has been in a somewhat anomalous position, since its existing licence largely mirrors BT's licence, although its market position is very different from that of BT. This document sets out the initial conclusions of Oftel's review of Mercury's licence.
2.1. Although market shares alone are a poor measure of market power, it seems clear that without a significant share of the market (or very high entry barriers), a firm is unlikely to have the market power to behave anti-competitively. A number of competition authorities, including those in the UK and the European Commission, use a market share threshold when investigating competition issues. There is no presumption of dominance above this level, but it is unlikely that, below this level, a firm acting alone would have sufficient market power to act anti-competitively. (This issue is discussed more fully in the Statement Fair Trading in Telecommunications, which contains the draft guidelines on the proposed licence condition on the maintenance of effective competition).
2.2. Mercury's shares (by value) of the national and local calls and access markets (ie residential and business lines) are as follows:
Oftel's view is that in the light of these data on market share, and taking into account other factors such as the number and growing strength of more recent entrants signifying the absence of substantial barriers to entry, Mercury should be regarded as non-dominant at the level of these markets. The approach taken in this document is therefore that Mercury's licence should be brought into line with the more recent new entrants (who hold 'slimline' PTO licences)) unless there are substantial reasons to justify additional controls.
2.3. The licence modifications discussed in this section fall under four headings:
2.4. The proposed licence modifications are included as Annex A to this document.
2.5. There are a number of conditions which for various reasons are now out of date and should be deleted:
2.6. There are a number of conditions which mirror conditions in BT's licences. It should be noted that Oftel has published a statement (Fair Trading in Telecommunications) which seeks views on proposals to delete a number of these conditions from BT's licence and to rely instead on guidelines linked to the proposed condition on the maintenance of effective competition. Irrespective of the outcome of this consultation Oftel does not believe that these conditions should be applied to a non-dominant operator such as Mercury - and indeed they are not included in the slimline licences. These are:
2.7. Oftel also believes that Condition 9 (Priority fault repair service) falls into this category. This requires Mercury to offer a priority fault repair service to particular groups of customers. Oftel's view is that while it may be appropriate to place such a requirement on a dominant operator, it is unjustified in this case It is also unnecessary because competitive pressure means that in practice Mercury must offer these organisations service guarantees.
2.8. Mercury's licence includes conditions requiring it to publish and notify tariffs 28 days in advance (Condition 15) and prohibiting undue preference and discrimination (Condition 16). These requirements are included in all PTO licences but in the 'slimline' licences are only activated once the operator achieves a 25% share of the, what is, in the opinion of the Director, the relevant market and is determined to be a "well-established operator" by the Director.
2.9. Mercury has argued that it should have full tariff flexibility and not have to publish tariffs. Oftel has taken the view that Mercury's position in the international market means that these issues need further consideration and debate.
2.10. These issues are therefore discussed in Section 4. However, Mercury has argued that the requirements of condition 15 (particularly the long notice period required) are damaging its ability to compete in the large customer market where operators frequently bid by tender for business, and that more urgent action is needed. Oftel believes that Mercury appears to have a good case and agrees that the period of advance notice is unduly burdensome. Oftel therefore proposes to amend the Condition so that publication and notification are only required when the tariff becomes effective, ie when services are supplied under the terms of the tariff.
2.11. Oftel had considered whether it might go further (by for example disapplying the condition to inland services) but came to the conclusion that any further relaxation of the requirement had to depend on the outcome of the consultation on the issues discussed Section 4. This proposed modification is therefore intended to be an interim measure pending the outcome of the consultation on the issues outlined in Section 4 which might result in a proposal for a further modification.
2.12. Oftel is proposing an amendment to Condition 12 (Connection of systems providing connection services) to provide for the Director-General to review interconnection agreements. At present this Condition gives the Director General a role in determining interconnection issues not agreed between the two parties before the interconnection agreement has been signed. The licence does not however empower the Director to determine any issues which are subject to disagreement after the agreement had been signed and which arise on review unless the Director General has determined the review clause of the interconnect agreement prior to its signing. The proposed licence modification is very similar to that already made to BT's licence.
2.13. Oftel is also proposing to update Condition 47 (Associates) in line with the condition incorporated by DTI into newly-issued 'slimline' PTO licences.
3.0. There are three further issues which may involve licence modifications which Oftel intends to take forward separately. These concern Condition 11 (Maritime Services) and Condition 42 (Private Circuits).
3.1. Mercury has sought a modification to Condition 11 of its licence to allow it to offer ship-to-shore and shore-to-ship maritime services. The condition at present only allows Mercury to offer telephone services to offshore installations, but not to ships. The 1991 White Paper Competition and Choice: Telecommunications Policy for the 1990s said that the Government would be prepared to consider licence applications from operators wishing to provide competing maritime services. The White Paper also said that in considering such applications, the economic impact of any new services on the BT service would need to be taken into account. Oftel will therefore be taking this issue forward, as a separate exercise, after discussions with the appropriate interested parties within Government and the industry.
3.2. The statementFair Trading in Telecommunications includes a request for views on the deletion of Condition 46 (Private leased circuits) in BT's licence. Mercury's licence contains a parallel condition - Condition 42. The consultation on BT's licence is therefore relevant to Mercury's licence.
3.3. Condition 42 of Mercury licence requires it to provide private circuits to operators, who are themselves licensed to provide such circuits, broadly at retail tariffs rather than at Condition 13 (interconnection) terms. The Condition includes provision for the retail tariffs to be determined by the Director General in specific circumstances. The obligation to provide circuits does not apply where the Director is satisfied that either:
3.5. Oftel will consider whether amendments to Mercury's licence are appropriate in the light of the outcome of the consultation on BT's licence, bearing in mind the differences in their respective licences and market positions.
3.6. These licence conditions require Mercury to draw up codes of practice for its employees covering disclosure of customer information. The consumer protection aspects of this condition have now been superseded by the Data Protection Act safeguards and in consequence these requirements are not included in the 'slimline' licences.
3.7. There is a proposal for a EU Directive on the protection of personal data and privacy in the context of digital telecommunications networks. Oftel will review this condition in conjunction with DTI once the details of the directive are finalised.
4.0. Section 2 noted that, for 1994/95, Mercury's share of inland and local calls was 8.8 per cent and its share of line rental revenue was 1.6 per cent. This Section considers whether its position in the international market (ie the market for international calls and other telecommunication services out of the UK) should be treated separately, and if so how.
4.1. Mercury's share for 1994/95 of all local, national, and international calls was 12.4 per cent. If exchange line rentals are included then its share of revenues was 8.8 per cent.
4.2. However, Mercury's share of the international market taken on its own is, at 24.5 per cent, somewhat greater than its share of the overall market. In addition, in Oftel's view, there are other special circumstances in the international market which mean that this market needs to be treated as separate, and Mercury's position within it considered separately.
4.3. The major reason for treating the international market separately is that it operates in a very different way to the inland calls market. The routes between countries are controlled by a strictly limited number of operators. In most cases this is the dominant (often state-owned) national operator at each end - although in a few cases (such as the UK) there is more than one operator with an international gateway.
4.4. Some progress has been made in liberalising the market for international services, and still more developments are planned. Nevertheless, BT and Mercury alone are licensed to provide the full range of international services out of the UK using their own facilities. Other telecommunications operators wishing to provide international services must obtain facilities from one of these two facilities-based operators.
4.5. The current situation in international facilities contrasts with the situation in the inland market where there is considerable alternative infrastructure available for national calls, and increasingly effective competition from cable in the local loop.
4.6. This section presents a brief analysis of the features of the international market and Mercury's position within it; and of Oftel's views on the regulatory issues raised, together with the possible options on which consultees' views are sought.
4.7. The market for calls between the UK and other countries is becoming increasingly open to entry and competitive through the opening up of the market to service providers reselling leased capacity. The degree of opening up of the market depends on the service and the destination country:
4.8. There has been rapid growth in ISR traffic since ISR operators began offering services. Prices for international calls on these routes have fallen substantially. However it should be noted that (in 1994/95) the routes to the ISR-designated countries accounted for just under 24 per cent of total international calls revenue and ISR operators' share of the international calls market in 1994/95 was still under 3 per cent overall.
4.9. The prospects for further liberalisation in the international market are looking brighter than ever before, although doubts remain about the speed with which full liberalisation and effective competition will be realised. The consultative document International Direct Dialled Calls draws attention to a number of relevant developments in other countries. EU Member States have made a political commitment to liberalise infrastructure and all remaining unliberalised services by 1998 (possibly later for a few Member States). The European Commission are proposing a Directive under Article 90 of the EC Treaty designed to liberalise "alternative infrastructure" for liberalised services within the EU within the next year, and for all services (including voice telephony) by 1998; and Directives under Article 100A on Licensing and Interconnection to put in place the framework for effective liberalisation within the EU by 1998.
4.10. These Directives are intended to be in place in time for the 1998 deadline. There may, however, be some slippage in adopting them, and there remain uncertainties about the detailed implementation of the general commitments on liberalisation. Experience of liberalisation within the UK market and elsewhere suggests that there may be a lag before liberalisation measures translate into effective competition in the market.
4.11. It should be borne in mind that these directives will only affect links within the EU. Traffic to other countries will be covered by negotiations under the auspices of the World Trade Organisation, which are set to end in April 1996 and are tending towards multilateral liberalisation.
4.12. International telephony arrangements are still largely based on a long-established series of accounting arrangements for calls between national operators. These accounting arrangements, and the prices which flow from them, are only very loosely related to the costs of providing the services. There are therefore substantial market distortions which arise from the international accounting rates system. These are discussed in more detail in the consultative document International Direct Dialled Calls. The document asks for views on options for determining IDD interconnection charges, some of which would allow the interconnecting operators to share with BT and Mercury the benefit of the profits due from the return traffic.
4.13. In Oftel's view the analysis of the international market highlights two sets of regulatory issues. These concern the implications of:
(a) the exclusive rights enjoyed by BT and Mercury to operate international facilities;
(b) the interaction between the partially liberalised international market and the liberalised markets for services within the UK.
4.14. On the first of these the major concern is that a facilities-based operator has the potential to offer retail prices for international calls which may either be below the price charged to non facilities-based operators for interconnection, or which the other operator cannot match because there is an insufficient margin between the retail price the facilities-based operator is able to offer retail customers and the wholesale price the other operator has to pay. Such a pricing strategy could have an anti-competitive effect.
4.15. On the second point, the concern is that, in the absence of adequate regulatory controls, a facilities-based operator could bundle international and national services together at a price which non facilities-based operators could not match. The national calls element of the package price could, in effect, be a loss leader with the profit being made on the international element.
4.16. The exclusive rights enjoyed by the facilities-based operators lead Oftel to take the view that it is justifiable to regard the facilities-based operators as being jointly dominant in that they jointly have exclusive rights which constitute the means of access to essential facilities. Third parties must have access to these facilities in order to provide other services. At the same time however, while Mercury can be held to share a dominant position in the international market, its position in the inland calls and access markets is that of a non-dominant operator.
4.17. The issues noted above are currently dealt with through a number of interlinked licence requirements. These are the requirements to:
(a) publish all tariffs and not depart from them (Condition 15);
(b) give 28 days notice of new tariffs (Condition 15);
(c) not exercise undue preference or undue discrimination between customers or classes of customers (Condition 16);
(d) not make the sale of any telecommunications service or apparatus conditional on the purchase of another (Condition 31).
4.18. Oftel believes that the requirement for Mercury to give 28 days notice of changes in tariffs is unduly onerous and is therefore proposing that it should be modified. Proposals on this were outlined in Section 2. However, Mercury also argues that the publication and non-discrimination requirements are unduly hindering them in the large user market. In this sector of the market telecoms purchasers are increasingly opening business to competitive tender. Mercury's competitors have the considerable advantage of being able to estimate what Mercury's bid will be in a particular case by referring to its public tariff. In addition to this informational advantage they have greater pricing flexibility.
4.19. It is possible to argue that such restrictions on Mercury may actually act as a disincentive for it to compete in some sectors of the market. There is clearly little incentive to Mercury to reduce prices if it knows that its competitors will always be able to 'trump' it by cutting their prices slightly further.
4.20. Oftel accepts that the present regulatory controls are something of a 'blunt instrument', in that while the regulatory concerns centre on the partially liberalised international market, the controls themselves apply across the board.
4.21. In considering what its approach should be, Oftel believes that its aim should be to put in place the appropriate controls to take account of Mercury's (jointly) dominant position in the international market whilst avoiding placing unnecessary controls on its actions in the markets where it is non-dominant.
4.22. There is therefore a balance to be struck: on the one hand there is the need to take account of the risk that distortions in the international market could in turn lead to the distortion of competition in the national market; on the other hand there is the need to avoid the potential for distortion of competition resulting from unnecessarily restrictive regulatory controls.
4.23. As well as avoiding unnecessarily restrictive controls it will be important, given the way that the conditions for competition are changing in the international market, that any additional controls on Mercury are not maintained for longer than is necessary or justifiable. Ideally the controls should incorporate the flexibility to take account of changing market conditions.
4.24. Oftel also believes that the existing status quo - albeit modified by the proposals in Section 2 - is unsatisfactory and that the inclusion in Mercury's licence of a condition prohibiting anti-competitive behaviour has the potential to offer a more flexible alternative. Such a condition could be more effective than the present controls in preventing the distortion of competition in the inland markets whilst avoiding unnecessary restrictions on Mercury. The draft condition proposed for inclusion in BT's licence is attached at Annex B for information. Oftel expects that the amendment to Mercury's licence would be identical.
4.25. Oftel believes that the condition prohibiting anti-competitive behaviour could provide the safeguard to ensure an differential between the retail and wholesale price margin on international calls sufficient to allow an efficient interconnecting operator to compete in the retail market. In particular, Oftel believes that where dominance is joint dominance resulting from an operator having control of access to essential facilities it would be an abuse of that joint dominance were an undertaking to fail to allow an adequate margin - eg by cutting retail prices while maintaining the wholesale price, and thus squeezing the margin available to the interconnecting operator. This is not necessarily predatory pricing, in the sense in which the term is normally used, because it is not necessarily pricing below cost (approximately measured). However, Oftel would regard this as an exclusionary practice - ie one with the effect of excluding competitors from downstream markets (and/or deterring potential competitors). Such a pricing strategy depends for its success on dominance derived from control of access to essential facilities (if interconnecting operators had alternative sources of supply they would be able to go to another 'wholesaler'). To the extent that such a pricing strategy involves the abuse of a dominant position (resulting from control over access to essential facilities) Oftel believes that such a practice would fall within the scope of a condition prohibiting anti-competitive behaviour and the use of such a condition to remedy the effects of this behaviour would therefore be appropriate.
4.26. Guidelines to the condition would make it clear that it would be a breach of the condition for an operator having control of an essential facility to fail to maintain an adequate retail-wholesale margin for interconnecting operators. (Mercury could maintain the margin while cutting retail prices by making corresponding reductions in wholesale prices). The Guidelines would also make it clear that the condition prohibits bundling of international inland services in a way which would constitute unfair competition.
4.27. If such a condition were to be introduced it could enable the deletion of Condition 31 (Prohibition of linked sales) as well as enabling Condition 16 (Prohibition on undue preference and undue discrimination) and, possibly, Condition 15 (Publication of charges, terms and conditions) to be 'de-activated' by making them subject to a 'well-established operator' trigger. The conditions could then only be activated if Mercury had more than 25 per cent of what, in the opinion of the Director, is the relevant market and the Director determined it to be a 'well-established operator'. The mechanism would therefore be similar to that in the 'slimline' PTO licences).
4.28. This approach would allow Mercury tariff flexibility while putting in place additional safeguards to ensure that the advantages Mercury derives from its position as a facilities-based operator do not distort competition. Interconnection and resale could continue to provide a mechanism by which the benefits of competition in the large user segment of the market can be spread through the wider market.
4.29. An issue which needs to be considered is whether the requirements of Condition 15, on the publication of charges etc, need to be retained alongside the prohibition on anti-competitive practices in order to facilitate enforcement. Without a publication requirement, the licence condition on anti-competitive behaviour might prove difficult to police. The Director General could use his powers under licences and under s.53 (Powers to require information etc) of the Telecommunications Act. Oftel could therefore conduct 'spot checks' to obtain information on prices, terms and conditions, or ad hoc investigations in response to complaints. However this approach would be resource intensive and, in addition, operators suspecting anti-competitive pricing might be unwilling to make formal complaints for fear either of losing the possibility of future business by embroiling the customer in an investigation, or of prejudicing its chances of being invited to tender by other potential customers.
4.30. There may therefore be merit in maintaining a publication requirement alongside the proposed anti-competitive behaviour condition in order to maintain transparency and to make the control more 'self-enforcing'. Under this approach Mercury would be free to price discriminate, subject to the anti-competitive behaviour condition, but all relevant tariffs would have to be published - albeit on the day they become effective. If need be, Mercury could even publish a one-customer tariff -(although we would expect the customer identity to be kept confidential to Oftel and Mercury).
4.31. Oftel wishes to avoid imposing unnecessary burdens on Mercury, but this publication requirement would need to apply at least to international services and (in view of the issues concerning linked sales) also to packages of services with an international element. Views are sought on what should be the extent of such a requirement.
4.32. Oftel does not wish to retain additional controls on Mercury longer than is necessary or justifiable by reference to its position in the international market. The guidelines on the anti-competitive practices condition give the necessary flexibility. If a requirement on publication were to be retained in addition to the prohibition on anti-competitive behaviour, then that requirement will need to be reviewed and modified as market conditions allow.
4.34. Developments which would have an important bearing on the timetable for the review of this requirement would include:
Views are therefore also sought on what the criteria and timetable might be for the review and eventual phasing-out of any additional requirement.
4.35. One possibility on which Oftel would welcome views is that the publication requirement be subject to a 'sunset' clause to bring the control to an end at an appropriate point. That point could for example be the full liberalisation of the EU telecommunications market - ie the ending of all special rights and restrictions, expected to be 1 January 1998( Mercury have suggested that the alternative infrastructure directive, due for implementation in July 1996, will have a substantial impact in key areas of its business and that this might therefore be an appropriate moment for review). The 'sunset' clause might bring the publication requirement to an end at the beginning of 1998 - subject to a determination provision which would allow the Director either to lift the control before that date, or retain the control for a specified period in the event of the postponement of EU liberalisation.
4.36. Oftel believes that maintaining the existing status quo - ie maintaining Condition 15 (Publication of charges, terms and conditions - modified by the proposals in Section 2), Condition 16 (Prohibition on undue preference and undue discrimination) and Condition 31 (Prohibition of linked sales), is unsatisfactory. However, it remains the default option if a suitable alternative cannot be found.
4.37. The two options on which views are sought are as follows.
4.38. Option 1 - the inclusion of a new licence condition on the maintenance of effective competition, together with:
Guidelines to the licence condition on the maintenance of effective competition would address the need to maintain an adequate differential between the retail and the wholesale price available to interconnecting operators and the bundling of inland and international services.
4.39. Option 2 - the inclusion of a licence condition on the maintenance of effective competition together with:
As noted above, this approach would leave Mercury free to price discriminate, subject to the anti-competitive behaviour condition, but all relevant tariffs would have to be published - albeit on the day they become effective.
Do you agree with Oftel's view of Mercury's position in, respectively, the inland and access markets, and the international market?
Do you agree with Oftel's basic approach in seeking to impose only those regulatory controls necessary to ensure that there is an adequate differential between retail and wholesale rates for international calls, and to ensure that distortions in the international market do not lead to distortions in the inland markets?
(Respondents who believe that this approach is not sufficient, and that additional controls are necessary, are asked to provide evidence in support of this view).
Should there be a continuing requirement for publication of charges, terms and conditions, in addition to the anti-competitive behaviour condition - as proposed in Option 2? What should be the extent of that requirement?
What criteria should Oftel use in deciding when such an additional requirement should phased out?. Should there be a specific timetable for the review of the provision eg a 'sunset' provision?
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