Oftel has over the last 18 months undertaken a major investigation into the cost of calling to a mobile phone following customers complaints that they were too high. When we started the price of such a daytime call for a BT customer to Vodafone and Cellnet was 37.5 pence per minute. I said in the consultative document which Oftel published last March that this was too high for two reasons: the mobile operators, Vodafone and Cellnet were charging BT too much for terminating calls on their networks and BT was adding too much on top of that.
Since then prices have fallen. The price of a daytime call to a mobile is now 32 pence per minute. But in my view it is still too high. BT, Cellnet and Vodafone are still charging too much for their inputs. I consider these calls should be priced at about 20ppm.
It is open to me to initiate action to impose price control on the cost of calls to mobile phones. It is clear to me that such action would have a potentially broad impact through the whole of the mobile market, involving also the other mobile operators – Orange and One2One – and potentially affecting the pricing structure for handsets and calls from mobile networks. The amounts of money involved are substantial – around ,200m per year across the four operators – and decisions on pricing could have an impact on the nearly eight million customers owning mobile phones as well as those calling into mobile networks.
I have therefore decided that the best course is for these wider public interest issues to be examined independently by the Monopolies and Mergers Commission before Oftel takes any action on the particular issue of the cost of calling into a mobile network. I have therefore today referred to the MMC, in 3 separate references, the prices/charges which BT, Vodafone and Cellnet make for calls to mobile phones.
DON CRUICKSHANK
Chapter 1 Background and Summary
Chapter 2 Mercury (CWC) indexations and Orange’s and One2One’s interconnection charges
Chapter 3 Reductions in Vodafone’s and Cellnet’s interconnection charges and BT’s retail prices
Chapter 4 Investigation of termination rate payable for calls to Vodafone and Cellnet
Chapter 5 BT’s retail retention
Chapter 6 Charges for unsuccessful calls
This Statement has been prepared by Oftel and any queries on it should be directed to
Vince Affleck, Oftel, 50 Ludgate Hill, London, EC4M 7JJ
Comments on the issue which you wish to be considered by the MMC inquiry should be sent to :
The Reference Secretary
Monopolies and Mergers Commission
New Court
48 Carey Street
London WC2 2 JT
Oftel has an free e-mail based mailing list to help people stay informed about the work that Oftel is doing. Each time an Oftel document is published and placed on this web site subscribers to the list receive an e-mail informing them about the document. If you would like to join then please use the electronic form to add yourself to the list. There is a also link to the form from the What's new section of the site.
1.1 In June 1996, Oftel, as part of its review of BT’s retail price controls announced that it was to investigate the prices of calls to mobile phones. This was in response to concern expressed by residential and business consumer organisations who felt that such prices were unduly high.
1.2 Oftel also took into account that mobile network operators, like other network operators, have a monopoly position over the ‘termination’ of calls on their own networks (the final completion of calls on a network is known as termination). Operators have such a monopoly position because when someone wants to make a call to a mobile or any other phone then the calling party has no choice but to call the network to which the called party has subscribed. This means that mobile operators, in common with other network operators, are able to set charges for call termination, without significant competitive pressure. Oftel examined both the level of charges that the mobile operators charge BT when it delivers calls to their networks, and the mark-up that BT itself adds in setting its retail prices. Oftel also looked at the issue of recorded announcements on Vodafone’s and Cellnet’s networks, for which the caller is charged even when no service has been provided.
1.3 In March 1997 Oftel published a Consultative Document on the Price of Calls to Mobile Phones setting out its preliminary views. Oftel received 40 responses to this consultative document and two further subsequent comments on these responses (a list of respondents can be found in Annex B).
Summary
1.4 Having considered the matter further in the light of representations received and further work, Oftel is now in a position to publish this Statement. The Director General considers that the price of calls to mobile phones is still too high in relation to cost. This is because, in his view, both the termination rates Cellnet and Vodafone charge to BT and the retail uplift which BT adds onto its network costs are excessive. The three operators disagree with the Director General’s assessment of the appropriate level of charges and costs.
1.5 During consultation it has also become clear that action on Cellnet and Vodafone termination rates will have a wider impact through the whole of the mobile market, affecting all 4 mobile operators. The potential loss of revenues from termination charges are substantial – of the order of £200m a year across all four operators. The Director General does not feel it appropriate that he should take decisions on the narrow issues of prices for incoming calls to mobile networks without a full consideration of the wider public interest of the effects of such action. He is therefore referring to the Monopolies and Mergers Commission for investigation immediately under Section 13 of the Telecommunications Act, the matters of Vodafone’s and Cellnet’s interconnection charges and of BT’s retail prices. This Statement sets out the matters which were addressed during the investigation and Oftel’s views on them. Copies of the MMC references are at Annex A.
1.6 Oftel considers that Cellnet and Vodafone charge BT too much in relation to their costs for allowing calls from the fixed network to connect with their own mobile networks (‘interconnection’). This charge is then passed on by BT to the caller. Oftel has proposed that Vodafone and Cellnet reduce their charges for terminating calls on their networks to reflect more closely the costs of termination. This would involve a reduction from the existing level of 16.2 pence per minute (averaged between the two operators) to 10.6 pence per minute on a fully allocated cost (FAC) basis. Following recent modifications to the mobile operators’ licences, the methodology for calculating interconnect charges is no longer mandated as FAC and Oftel believes long run incremental costs (LRIC) is appropriate. In Oftel’s view LRIC would result in a lower charge. So that the reduction in interconnect charge passes through to consumers, Oftel would then expect BT and other originating operators to make a reduction of at least the same amount (plus the VAT involved) in their retail prices for calls to mobile phones.
1.7 Further, Oftel considers that BT should reduce its ‘retention’ from the retail price of calls to mobile phones to the same level as that BT retains on inland calls, as the use of BT’s network elements is the same for both types of call. BT currently retain on average 5.8 pence per minute on calls to mobile phones and 3.4 pence per minute on inland calls. Oftel considers that BT should reduce its retention by 2.4 pence per minute but BT has disagreed that its average retention is excessive.
1.8 The effect of both these changes would result in the price of a daytime call to a mobile phone on the Vodafone or Cellnet network falling from a daytime retail price of 37.5 pence per minute in March 1997 (when Oftel’s Consultative Document was issued) to about 20 pence per minute, a reduction of around 17 pence.
1.9 Under an earlier determination, the Director General was required to set interconnection charges for termination of calls from Cable and Wireless Communications’ (CWC) network on the Vodafone and Cellnet networks. He set this charge for 1997/98 at 12.3 pence per minute. However, Cellnet and Vodafone continued to charge BT and other operators 16.2 pence per minute. The Director General considered Cellnet’s and Vodafone’s behaviour discriminatory. He notified the operators in December 1997 that, in the absence of their voluntarily reducing their interconnect charges to BT and other operators to 12.3 pence per minute, (ie the CWC level), he proposed making a Final Order requiring them to reduce their charges to this level in order to end the discrimination. However, in January 1998, both Vodafone and Cellnet signed revised interconnect agreements with CWC whereby from August 1998, CWC would pay the same higher amounts as BT and other operators (these higher amounts were offset by favourable terms in other parts of the business to make the whole deal commercially advantageous to CWC). This ended the discrimination but not in the direction Oftel intended.
1.10 Oftel has also investigated the matter of charges made for recorded announcements on Cellnet’s and Vodafone’s networks. Currently, calls to a Vodafone or Cellnet mobile phone which is switched off, out of coverage, or remains unanswered, activate a recorded announcement to advise the caller of this situation. Callers are charged for this announcement. Oftel notes the representations made to it on behalf of customers against these charges. Whilst accepting that the costs of unanswered calls should be recovered, Oftel would regard a charging structure under which unanswered calls were not specifically charged for as preferable to the current arrangements. Neither fixed networks nor the other two mobile networks charge for such announcements. On a related issue, Oftel would encourage operators to review charging practices for diverted calls. Calls to mobile lines that are diverted to fixed numbers attract charges even if the handset is busy or unanswered. Oftel considers this charging practice inappropriate since it is inconsistent with established practice on the fixed networks and therefore confusing to customers who do not expect to pay for unanswered calls. Oftel would expect the MMC to take these issues into consideration.
1.11 Oftel has also reviewed the level of interconnection charges made by Orange and One2One. While sympathetic to consumer concerns, Oftel did not consider the interconnection charges levied by Orange and One2One in 1997 to be unreasonable at that time in view of the fact that they were lower than those charged by Vodafone and Cellnet. Oftel has now proposed lower interconnection charges for Cellnet and Vodafone and considers that Orange’s and One2One’s charges should be at the same level. This is because Oftel believes consumers would benefit from a uniform rate for charges from fixed to mobile networks. This is particularly the case with number portability for mobile numbers available from 1 January 1999. After that, callers to a mobile phone owner who has moved from one network to another while retaining his or her original number will be charged on the basis of the charge to the network they used to be on. Different prices for calls to different mobile networks would become meaningless and would make the arrangements very confusing for the customer.
1.12 Uniform retail prices (for an individual originating operator) for calls to all mobile networks would be appropriate. This would imply that uniform termination rates on all mobile networks would also be appropriate. Orange and One2One are shortly to review their level of interconnect charges with BT for April 1998 onwards. Oftel will consider whether any action is required in relation to Orange’s and One2One’s interconnect charges once they have established new interconnect charges and in the light of the MMC inquiry.
1.13 Oftel has focussed on interconnection charges paid by BT and CWC as the majority (87.7%) of calls to mobile phones originate on BT’s (76.4%) and CWC’s (11.3%) networks. The percentage of calls which BT and CWC pass to Vodafone and Cellnet for termination on a mobile phone will be even higher than this as many originating operators do not have direct interconnection with mobile operators and use BT and CWC to transit their mobile calls.
2.1 While Oftel’s investigation primarily related to the charging by Cellnet to BT and by Vodafone to BT, it has also covered Oftel’s considerations of interconnection charges made by Vodafone and Cellnet to Mercury (now CWC), and interconnection charges made by the mobile operators Orange and One2One.
CWC/Vodafone and CWC/Cellnet indexations
2.2 In 1990, CWC asked the Director General to determine the level of charges it should pay to Vodafone and Cellnet for interconnection, because these could not be agreed between CWC and each of the two mobile operators. These determinations were made in 1991 and set out the interconnection charges Oftel considered Vodafone and Cellnet should offer. The determination also provided for an annual indexation of the charges. The charges set out in the determination were calculated on the basis of the mobile operators’ costs in terms of switching, transmission, administration and cost of capital. The indexation updated these annually following the same methodology as the 1991 determinations.
2.3 Having consulted the three parties directly involved, Oftel has now made indexations for 1996/97 and 1997/98 of the 1991 Determinations of the interconnection charges CWC pays Vodafone and Cellnet for termination of calls. Oftel made some adjustments to the calculations of the index as set out in Annex C, the main one being to the cost of capital.
2.4 After these adjustments, Oftel has calculated that the charges, in pence per minute, should be as set out in the following table. They show continuing reductions because of falling unit costs due to increased volumes of traffic and the substantial reduction of cost of capital from 24.3% to 17.75%.
Vodafone’s and Cellnet’s charges to CWC (under indexation)
| YEAR | 1995/96 | 1996/97 | 1997/98 |
| CHARGE (ppm) | 16.10 | 14 | 12.3 |
2.5 Since the Director General made the 1997/98 Indexation, Vodafone has entered into a revised interconnect agreement with Mercury (CWC) (of which CWC advised Oftel by letter dated 19 January 1998). Under this agreement CWC is due to pay the same rate for termination that Vodafone had agreed with BT from August 1998 – ie a higher charge for call termination than the indexed charge which the Director General considered was reasonable (about 15ppm against 12.3ppm). Despite strong protests by CWC during consultation last year that the figures the Director General were then proposing were too high, CWC agreed to new even higher charges in return for favourable terms in other parts of their business. The agreement between CWC and Vodafone ends the requirement for an annual indexation from Oftel of the termination rates.
2.6 By letter dated 30 January 1998, Oftel was notified that a very similar agreement had been reached between Cellnet and CWC. Again the proposed termination rate was the same as that for BT (ie higher than the indexation).
2.7 CWC argue that in commercial terms the deals with Vodafone and Cellnet in their totality are worthwhile – higher termination charges are offset by favourable terms in other parts of their business. They say that prices for customers calling to mobile operators will not be affected.
Orange and One2One interconnection charges
2.8 In the Consultative Document Oftel noted that the retail prices for calls from BT to Orange and One2One had increased from February 1997, as a result of Orange and One2One having increased the interconnection charges payable by BT.
2.9 Oftel had noted Orange’s and One2One’s increased charges and considered at the time that in view of the fact that they were lower than those charged by Cellnet and Vodafone it was not appropriate to investigate them further but to keep the matter under review in the light of the outcome of this consultation.
2.10 There were several responses to the Consultative Document which were critical of the increase in charges for calls to Orange and One2One, even though they were still below those of Vodafone and Cellnet.
2.11 It appears to the Director General as a result of the investigation both that the interconnect charges for Vodafone and Cellnet are too high and that the level of interconnect charges levied by Orange and One2One should be the same as Cellnet’s and Vodafone’s, so that customers on fixed networks can expect the same charge regardless of the particular mobile network they are calling. This is particularly the case with portability for mobile numbers being available from 1 January 1999. After that, callers to a mobile phone owner who has moved from one network to another while retaining his or her original number will otherwise be charged on the basis of the charge to the network they used to be on. Different prices for calls to different mobile networks would therefore bear no relation to the cost of calling the actual network used. This would make the arrangements confusing for the customer. Further, if retail prices are the same then the interconnect charges should be the same for all networks too. If they were not set on the basis of each operator’s cost, the originating operator would make arbitrary gains (or losses) depending on the level of efficiency of the terminating operator.
2.12 Orange and One2One are, under their interconnect agreements, due to review the level of their interconnect charge with BT with effect from April 1998. Oftel will consider whether any action is required in relation to Orange’s and One2One’s interconnect charges in the light of the level of 1998/99 interconnect charges agreed with BT and the outcome of the MMC investigation.
3.1 Both Cellnet’s and Vodafone’s 1996 interconnection agreements with BT provided for an indexation of the agreed charges by a factor of RPIB7.5% (with RPI of 2.6% this is B4.9% for 1997/98) applicable from August of each year. Following the publication of the Consultative Document last year, both Vodafone and Cellnet have announced further reductions in their interconnection charges, going beyond the reductions required by the formula.
3.2 Vodafone announced in its response to the Consultative Document that it would be reducing its average interconnection charge from 19.66 pence per minute to 16.12 pence per minute in 1997, falling to 14.83 pence per minute in 1998.
3.3 Vodafone has now agreed the following interconnection charges (pence per minute) with BT:
| PRE – 1/8/97 | 1/8/97 | 1/10/97 | 1/8/98 | |
| DAY | 23.32 | 22.8 | 19 | 17.5 |
| EVENING | 15.49 | 13.5 | 13.5 | 12.2 |
| WEEKEND | 7.14 | 5.6 | 5.6 | 5.3 |
| AVERAGE (APPROX) | 19.66 | 18.45 | 16.12 | 14.83 |
3.4 Cellnet and BT have agreed interconnection charges similar to those BT will pay to Vodafone as follows:
| PRE – 1/8/97 | 1/8/97 | 1/10/97 | 1/8/98 | |
| DAY | 23.32 | 22.8 | 19.2 | 17.5 |
| EVENING | 15.49 | 13.5 | 13.5 | 12.3 |
| WEEKEND | 7.14 | 5.6 | 5.6 | 5.3 |
| AVERAGE (APPROX) | 19.66 | 18.44 | 16.3 | 14.84 |
BT has amended its retail rates for calls to Cellnet and Vodafone accordingly:
| PRE – 1/8/97 | FROM 1/8/97 | FROM 1/10/97 | |
| DAY | 37.5 | 36.5 | 32 |
| EVENING | 25 | 22 | 22 |
| WEEKEND | 12.5 | 10.5 | 10.5 |
[Retail prices include VAT]
3.5 Oftel welcomes these reductions. However, in the Consultative Document Oftel calculated that Vodafone’s average interconnection charge for 1997/98 would be in a range of 10 – 14 pence per minute if it were based on Vodafone’s fully allocated costs, relevant overheads and a cost of capital of 17.75%. Oftel notes that Vodafone’s current charges and those proposed from August 1998 are still outside the range calculated in March 1997 in the Consultative Document.
3.6 Oftel also notes that Cellnet’s charges as applicable from 1 August 1997 are outside the range Oftel calculated as appropriate in the March 1997 Consultative Document and the charges applicable from 1 October 1997 are at the upper end of this range.
3.7 Oftel believes that the appropriate basis for setting interconnect charges is long run incremental costs (LRIC). It believes that charges set on this basis would be lower than those set out above which were on a fully allocated (FAC) basis. This issue is dealt with more fully in the next chapter.
4.1 In the Consultative Document Oftel set out its preliminary views and some options on what the appropriate level of termination charge would be if the Director General had then been asked to resolve a dispute under Condition 5, the interconnection condition, of Vodafone’s and Cellnet’s licences. In effect, for this exercise, Oftel put to one side decisions made by the Director General under the 1991 Mercury/Vodafone and Mercury/Cellnet determinations and took a fresh look at Vodafone’s and Cellnet’s interconnection costs and charges and the appropriate methodology to use under the licence condition as it was then, ie fully allocated costs (FAC).
4.2 The interconnection condition of Vodafone’s and Cellnet’s licences in 1997 provided that interconnection charges should be determined on the basis of the fully allocated costs of termination with an apportionment of costs to reflect a fair balance between the interests of the mobile operator and the operator seeking interconnection. The interconnection condition provided that if the Director General, after being requested by one of the parties, makes a determination of any charges he shall do so in order that :
“..the cost of anything done pursuant to or in connection with the agreement including fully allocated costs attributable to the services to be provided and taking into account relevant overheads and a reasonable rate of return on attributable assets is apportioned equitably between the Licensee and the Operator..”
4.3 In the light of the revised interconnection charges offered by Vodafone and Cellnet and the responses to the Consultative Document Oftel reviewed its proposals for the appropriate level of the interconnect charge. Oftel can now set out its views on the treatment of certain costs on a fully allocated cost basis as required by the licence in 1997. These views cover areas including:
These are detailed in Annex D, (Oftel also sets out in paragraphs 4.8–4.10 below how it would approach any future dispute on termination charges under the new licence provisions and the move generally to a LRIC basis for charges).
Oftel’s view of the Interconnection Charge (based on fully allocated costs)
4.4 If costs were calculated on a fully allocated historic cost basis (as previously required by the licence), Oftel considers the charges for call termination based on Vodafone’s and Cellnet’s network costs, relevant overheads and a reasonable rate of return on capital employed (17.75%) would be as set out in the following table. Charges are in pence per minute.
| Charge paid to | By BT under current interconnection agreement | By CWC under 1997/98 Indexation of 1991 Mercury Determinations | Fully Allocated Charge calculated by Oftel for 1998/99 |
| Vodafone | 16.12 | 12.3 | 10.6 |
| Cellnet | 16.27 | 12.3 | 10.6 |
4.5 In particular, the proposed level of charge would be the same for both Vodafone and Cellnet. This is because although Cellnet’s costs are higher than those of Vodafone, Oftel does not consider that it is appropriate for the customer to pay more because of Cellnet’s comparative inefficiency.
4.6 Subsequent to Oftel’s consideration of the appropriate charge, Vodafone has made some late representations regarding the treatment of transit and switching costs. They advised us that they have recently sent all their outgoing traffic to BT using near end handover, (ie handing the call over at the point of interconnect nearest the calling customer). This means that the transit network is used mainly for inbound calls. Vodafone argue that as a result more costs (approximately 0.5 pence per minute) of the transit layer should be added to incoming call costs. Oftel does not accept that it is appropriate for incoming calls to bear additional costs because of decisions taken on the routing of outgoing calls. In Oftel’s view, spare capacity in the transit network resulting from the decision not to use the network for outbound BT calls should continue to be allocated to outgoing calls. Only when the capacity is actually used by incoming calls would it be appropriate for the costs of that capacity to be borne by incoming calls. Vodafone has also provided some calculations to show that switch processing costs should be allocated proportionately more to outbound calls (by a factor of about 2.6 to 1) which would result in an increase in the costs of inbound calls by 1.4 pence per minute. These representations need further investigation in due course. However, on the information currently available in Oftel’s view some costs are not appropriate to inbound calls but to access (see Annex D1–D5 for an explanation of the access service) and some adjustment to Vodafone’s calculations is necessary to reflect this. Oftel does not consider that it would be appropriate to add more than at most one penny to switching costs on the basis of Vodafone’s arguments and it could be less when details of how the costs have been allocated have been teased through.
4.7 The cost information provided to Oftel relates to 1996/97. In order to calculate a charge appropriate for 1998/99, an adjustment needs to be made to reflect subsequent changes in costs and volumes. Oftel has calculated the charge for 1996/97 as 12.3 pence per minute (including the one penny switching costs referred to above). Vodafone’s costs of handling incoming calls has been falling on average by around 7% per year in nominal terms. Therefore it would seems appropriate to reduce the 1996/97 by 13.5% to derive an estimate of 1998/89 costs. This produces a charge based on fully allocated charge calculated for 1998/98 as 10.6 pence per minute.
Long run incremental cost basis for charge
4.8 In October 1997 the basis on which BT’s charges for interconnection are set was changed, with BT’s agreement, from fully allocated costs to long run incremental costs (LRIC). The Director General made clear during the consultation on the new BT interconnection regime that his view was that, as BT’s interconnection charges would in the future be set on the basis of LRIC, it was appropriate for other operator’s interconnection charges to be on the same basis and draft licence modifications to effect this were proposed. These modifications removed from other operators’ licences the previous requirements in their interconnection conditions for fully allocated historic costs to be the basis of calculation.
4.9 The required changes to other operators’ licences came into effect in the UK on 31 December 1997, being made through the Telecommunications (Interconnection) Regulations 1997 (SI 2391/ 1997) implementing the EC Interconnection Directive. Schedule 6 of the Regulations put in place new licence conditions for Cellnet and Vodafone (and Orange and One2One) which provide:
“ICD2.3 The Licensee shall secure that the (Interconnect) agreement entered into, or an amendment under paragraph 2.1 above is offered on terms and conditions which are reasonable. To the extent that the terms and conditions of an agreement made under paragraph 2.1 (whether on or after the coming into force of this paragraph) cease to be reasonable, the Licensee shall, within a reasonable period, offer to the Operator, or agree with the operator, as the case may be, to amend the agreement so that the terms and conditions of the agreement are reasonable.” and
“ICD2.8 For the avoidance of any doubt:
(i) any question as to whether any term or condition (including a charge) is reasonable shall be decided by the Director having regard to any guidelines on the application of this condition from time to time by the Director”.
As stated above, the Director General has made it clear that his interpretation of “reasonable” would be a LRIC basis for all operators and he would adopt a LRIC based approach to setting termination rates in any dispute referred to him.
4.10 In principle, a LRIC based approach would entail the calculation of forward looking costs. In accounting terms, this would involve a restatement of assets by reference to their current cost (normally their net replacement cost). Oftel’s expectation would be that a LRIC based approach would lead to a lower valuation of assets for mobile networks because of technical progress. In addition, some elements of cost which are relevant under a fully allocated methodology might not be appropriate for inclusion in a calculation of LRIC. Oftel therefore believes that a LRIC based charge would be lower than an FAC based charge.
‘Call-back’ activity
4.11 Both Vodafone and Cellnet commented on the importance of balanced pricing of incoming and outgoing calls so that customers are not encouraged, because of a large difference in calling charges, to engage in ‘call-back’ activity. For example if incoming calls were much cheaper than outgoing calls, mobile phone customers would make very short outgoing calls asking the called party to call them back (the mobile network operators would therefore suffer a reduction in revenue). Oftel accepts that, in the event of incoming call charges being substantially reduced, this potential problem could encourage a restructuring of the mobile phone business (for example outgoing call charges might have to be reduced with the effect of higher monthly payments or a reduction in Service Provider incentive payments). However, Oftel does not believe its proposed lower charges would result in a stimulation of call-back activity.
BT’s retail retention
5.1 The Consultative Document identified the mobile operators’ interconnection charges as the main component of the retail prices for calls to mobile phones. Oftel also expressed concern, however, about the difference between BT’s retail price and the interconnection charges it pays to the mobile operators and queried the size of BT’s retail costs allocated to mobile calls.
5.2 BT has responded to Oftel’s concerns saying that it has attributed its costs in accordance with the Accounting Documents (a framework document, agreed with Oftel, governing how BT’s regulatory accounts are prepared). BT outlines in a separate Detailed Attribution Methods document (a supplemental BT internal working document) the systems and processes used in preparing regulatory accounts as well as detailing the methods employed to attribute turnover, costs, assets and liabilities of its businesses. BT’s view is that its retention rates taken together with the level of retail costs attributed to the business activity are justifiable when compared against tariffs and retention rates of other BT retail call types.
5.3 Whilst Oftel has agreed to BT’s Accounting Documents, it does not approve the detailed interpretation and application of those attribution methods or the systems and procedures to generate the accounting information. Oftel has concerns that the methodology employed in calculating the retail costs applied to the calls to mobile business activity, particularly the extensive use of turnover as a base, does not properly reflect cost causality. Oftel further observes that if BT’s outpayments to mobile operators for terminating calls to mobile phones are ignored, the ‘network cost’ to BT (the cost of the call being conveyed across the BT network) is similar to the network costs of a BT inland call after deducting BT’s termination costs – this cost is less than 1 penny per minute in 1996/97.
5.4 The level of BT’s retention (that is BT’s profit after deduction from the retail price of VAT, discounts and outpayments to mobile operators or own network costs for call termination for fixedBfixed calls) is shown in the following table. It shows the component parts of the BT’s price (averaged across tariff gradients) for calls to a mobile and compares BT’s retention with the average retention on inland calls.
| pence per minute | Retail price (average) | Retail price net of VAT | Retail Price net of average discount | termination costs | BT’s retention |
| mobile calls | 26.90 | 22.89 | 21.75 | 15.98 | 5.77 |
| all fixed inland calls | 5.10 | 4.34 | 3.91 | 0.52 | 3.39 |
Note: the retail price has been adjusted to reflect the effect of BT’s minimum call fee and the discount level used is 5% for mobile calls and 10% for inland calls taking account of both residential and business discounts.
5.5 It appears to Oftel that BT’s retention on calls to mobile phones is too high and that the 70% higher retention on calls to mobile phones compared to inland fixed to fixed calls is not cost justified. BT has argued that it considers its retention level is justified and that certain retail costs for calls to mobile are justifiably higher.
5.6 In the absence of an agreed position between Oftel and BT, it appears to Oftel that BT’s retention on calls to mobile phones should be no higher than the retention on inland calls and that BT’s retention should be reduced by 2.4 pence per minute.
Charges for unsuccessful calls
Charges for recorded announcements
6.1 All calls that are conveyed by an operator over its network incur costs, regardless of whether or not the call can been deemed “successful”, ie. through being answered or a message being left. The costs incurred by calls to mobile phones on the Cellnet and Vodafone networks that are met by recorded announcements (such that the caller is not able to speak to the called party nor leave a message for them) are recouped by a charge being made to the calling party. Customers ringing these numbers are often unaware that unsuccessful calls are being charged. Oftel expressed concern at this practice in its Consultation Document.
6.2 This charging practice is different to that followed for calls to fixed line phones on BT’s, or other fixed line operator networks. There, the costs of calls met by an engaged or ringing tone – which in most respects is equivalent to the recorded announcement on calls to Cellnet and Vodafone networks – are not charged for but recovered in the charges for successful calls. Similarly, calls from BT fixed line customers to Orange and One2One answered by recorded announcements (where the caller cannot leave a message) are not charged for.
6.3 While the number of calls met by recorded announcements are estimated to be a significant proportion of all incoming calls to Cellnet’s and Vodafone’s networks, they are estimated to be on average of very short duration, less than 10 seconds, and accounting for only a small part of each operator’s total costs and revenue.
6.4 The responses to the document included many that expressed concern at the charges made for recorded announcements on calls to the Cellnet and Vodafone mobile networks so that customers were being charged, often unknowingly, for unsuccessful calls. As a result Oftel has carried out an analysis of available data from operators to consider whether it would be more appropriate to recover the costs of these unsuccessful calls in other ways.
6.5 The reason BT levies these charges in the case of unsuccessful calls to Vodafone and Cellnet, but not in any other cases, is because the interconnection agreements between BT and Cellnet and BT and Vodafone require BT to make a payment to these mobile operators for unsuccessful calls transferred.
6.6 Cellnet and Vodafone have also set up their systems so that they do not as a matter of course distinguish between incoming calls answered by recorded announcements and those answered by a message taking service or the called party. Their digital GSM networks are, however, similar to PCN networks operated by Orange and One2One in that they can be configured to make this distinction.
Diversion of calls from mobiles to fixed phones
6.7 Oftel also addressed concerns raised over the charging for diversion of calls from mobile phones to fixed phones. On the fixed network, if a caller is diverted from one fixed line number to another, he or she is charged the normal rate, with the diverting line paying for the diverted leg. The same applies for callers to mobile numbers.
6.8 However the difference between diversions on mobile networks and those on fixed networks – and a focus of concern for Oftel – is that diverted calls from mobile numbers are chargeable from the moment they are identified as such by the mobile network. This can result in the caller paying at the fixed to mobile rate to listen to a ringing or busy tone even though the more costly functions of the mobile network which justify higher charges for calls to mobiles than for calls across fixed networks are not being used. This does not happen on fixed networks.
6.9 Although mobile operators claim such charges have to be made in order to cover the cost of diversion to voice mail, Oftel believes that it is unreasonable that callers should be charged at the rate for calls to mobiles for diverted calls before those calls have been answered. This charging practice is contrary to established practice on the fixed network where callers are not charged for unanswered calls. Callers to unanswered numbers on or via the mobile network may therefore be unaware that they are being charged at the rate for calls to mobile for their unsuccessful calls.
Conclusion
6.10 With regard to recorded announcements, it appears to Oftel that the net effect for customers is that they are charged a high effective rate of around 30 pence per minute including VAT at all times for calls answered by recorded announcements. Customers are unable to leave a message for the person they are calling and the message does not give them useful information on whether a further call attempt is likely to be successful or merely result in another charge for a further recorded announcement. Oftel is also of the view that callers should not be billed at the rate for calls to mobiles for calls which remain unanswered where a call has been diverted from a mobile phone to a fixed phone.
Further action
7.1 Most of the responses to the Consultative Document agreed that the prices of calls to mobile phones were too high. Despite recent reductions in Vodafone’s and Cellnet’s interconnection charges and BT’s corresponding reduction in its retail prices for calls to these two operators, it still appears to the Director General that the prices to fixed network customers for calls to mobile phones are too high.
7.2 Oftel has had extensive discussions with the mobile companies, particularly Vodafone and Cellnet, about their costs – notably on switching costs and cost of capital. At the end of December, Oftel circulated to the mobile companies and to BT a draft statement setting out the Director General’s emerging conclusions. The draft was largely on the lines of the preceding chapters of this document. It set out that the Director General had set the rate for the indexation of the 1991 determination for the year 1997/98 for payments from CWC at 12.3 pence per minute. It also stated that, on a fully allocated cost basis, as then required by the licence, if Oftel had to make a determination of the termination charge a figure of 12.3 pence per minute would be appropriate.
7.3 The draft Statement said that the Director General proposed to take action under the condition of Cellnet’s and Vodafone’s licences which requires that they do not unduly discriminate between operators. The Director General proposed to use this condition to require the two operators to reduce their charges to BT to bring them into line with those they charge to the lower level charged to CWC (12.3 pence per minute). The Director General considered that this rate would be a significant move by the mobile operators to a more appropriate level of charges and that indexation provisions in the interconnection agreements would ensure that the rate continued to fall substantially year on year.
7.4 The draft Statement also indicated that with the advent of number portability from 1 January 1999 it was Oftel’s view that a single retail rate for all calls to mobile networks and a single termination rate was desirable, both in terms of customer understanding and competitive equity. One2One and Orange would therefore be expected to reduce their own termination rates to those indicated for Cellnet and Vodafone when they re-negotiated their interconnection agreements with BT (these charges are due to be reviewed with effect from April 1998).
7.5 All the companies made clear their concern about the proposals in the draft Statement and Oftel had further discussions with all of them.
7.6 In the meantime, however, both Vodafone and Cellnet have entered into revised interconnect agreements with CWC under which CWC will pay the same higher rate (ie about 15 pence per minute) from August 1998 for call termination that Vodafone and Cellnet have agreed with BT. This has removed the element of discrimination (albeit by moving in the opposite direction to that intended by Oftel) and the Director General is unable to pursue his initially proposed course of action.
7.7 Additionally, the provisions in the mobile operators’ licences governing the calculation of the interconnect charge has been changed. Oftel’s considers that the appropriate basis is LRIC rather than FAC and Oftel believes that a move to this basis would reduce the interconnect charge still further. Even on a fully allocated cost basis, Oftel considers the charge for 1998/99 should be 10.6 pence per minute after adjusting the charge to reflect an estimate of contemporaneous costs. As a result, Oftel’s view of the appropriate level of BT’s daytime retail price, based on cost, falls to 20 pence per minute for daytime compared to the existing price of 32 pence per minute.
7.8 Oftel has now thoroughly investigated all the issues arising from the price of calls to mobile phones. It appears to the Director General that the price is excessive in relation to cost both because the interconnect charges made by the mobile operators are too high and because BT’s retention is too high.
Way Forward
7.9 In considering the way forward the Director General has taken into the account that :
7.9 In all the circumstances, the Director General considers that the most appropriate way forward is to make an immediate reference to the MMC. Oftel would expect the MMC to take the issues of the charges for recorded announcements and the charging for unanswered calls diverted from mobile to fixed phones into consideration.
CALLS TO MOBILES
The Director General of Telecommunications, in exercise of his powers under section 13 of the Telecommunications Act 1984 (‘the Act’), hereby refers to the Monopolies and Mergers Commission for investigation and report the questions:
(a) whether the following matters operate or may be expected to operate against the public interest:
the charges made by Vodafone Limited (‘Vodafone’) to operators of fixed public telecommunications systems:
(i) for the delivery of calls to telephone handsets connected to Vodafone’s mobile public telecommunications system;
(ii) for unanswered calls to such handsets; and
(iii) for the diversion of such unanswered calls; and
(b) if so, whether the effects adverse to the public interest which those matters have or may be expected to have could be remedied or prevented by modifications of the conditions of the licence granted to Vodafone under section 7 of the Act on 9 December 1993.
The report on this reference shall be made within a period of [six] months beginning with the date of this reference.
DIRECTOR GENERAL OF TELECOMMUNICATIONS
................ 1998
CALLS TO MOBILES
The Director General of Telecommunications, in exercise of his powers under section 13 of the Telecommunications Act 1984 (‘the Act’), hereby refers to the Monopolies and Mergers Commission for investigation and report the questions:
(a) whether the following matters operate or may be expected to operate against the public interest:
the charges made by Telecom Securicor Cellular Radio Limited (‘Cellnet’) to operators of fixed public telecommunications systems:
(i) for the delivery of calls to telephone handsets connected to Cellnet’s mobile public telecommunications system;
(ii) for unanswered calls to such handsets; and
(iii) for the diversion of such unanswered calls; and
(b) if so, whether the effects adverse to the public interest which those levels of charges have or may be expected to have could be remedied or prevented by modifications of the conditions of the licence granted to Cellnet under section 7 of the Act on 22 March 1994.
The report on this reference shall be made within a period of six months beginning with the date of this reference.
DIRECTOR GENERAL OF TELECOMMUNICATIONS
......... 1998
CALLS TO MOBILES
The Director General of Telecommunications, in exercise of his powers under section 13 of the Telecommunications Act 1984 (‘the Act’), hereby refers to the Monopolies and Mergers Commission for investigation and report the questions:
(a) whether the following matters operate or may be expected to operate against the public interest:
the charges made by British Telecommunication plc (‘BT’) to users of its fixed public telecommunication systems, for calls to subscribers to the mobile public telecommunication systems operated by Telecom Securicor Cellular Radio Limited and by Vodafone Limited; and
(b) if so, whether the effects adverse to the public interest which those levels of charges have or may be expected to have could be remedied or prevented by modifications of the conditions of the licence granted to BT under section 7 of the Act on 22 June 1984.
The report on this reference shall be made within a period of six months beginning with the date of this reference.
DIRECTOR GENERAL OF TELECOMMUNICATIONS
......... 1998
LIST OF RESPONSES
Operators/Service Providers
ACC
BT
Cellcom
Cellnet
Energis
General Cable
ICO Global Communications
Ionica
Mercury Communications
Mercury Personal Communications Ltd
Orange
‘Regional operators’ (Joint response from:COLT/Kingston/NORWEB/ScottishTelecom/Torch)
Vodafone
Advisory Committees
BACT
Central & S. Dorset TAC
ENACT
NIACT
SACOT
Shropshire TAC
Other Organisations
Advertising Standards Authority
Babergh District Council
Consumers Association
Data Protection Registrar
Network Outsourcing Association
Telecommunications Users Association
Other responses
Bob Bennet Technical Services
Mr E Bowden Makower
Casdron Enterprises Ltd
Mr D Clark
Mr R Cole
Mr D Mutlow
Mr M Daniells
Prof. J O Reilly
Mr J Forrest
Mr A White
K Goldsworthy
Mr A Wiltshire
Mr A Lait
Mr J Windmill
Mercury/Vodafone and Mercury/Cellnet indexations: Adjustments to the calculations of the Index (paragraph 2.3 refers)
Cost of capital
C.1 The most significant change to the Index has been to update the cost of capital to reflect current levels of risk, interest rates, inflation etc. It is only practical to review the cost of capital once every 3 or 4 years and this updating follows Oftel’s recent review of BT’s cost of capital, performed as part of the 1996 Price Control Review. Oftel has had a great deal of discussion about this issue with Vodafone, CWC and Cellnet and after considering their representations has modified a number of the inputs used to calculate the cost of capital. Oftel therefore now considers the range of the nominal pre-tax cost of capital for the Vodafone Group to be between 16.5% and 19%. In calculations based on the CAPM, this range is derived by using a beta of 1.30. No data on Cellnet’s beta are readily available as betas are available directly only for companies which are traded separately on the Stock Market and shares in Cellnet are not traded in this way. But Cellnet’s cost of capital may be assumed for the purposes of the indexation to be the same as Vodafone’s since the companies are similar. Oftel used the mid-point of the range of estimates for Vodafone’s updated cost of capital for the 1996/97 indexation, a value of 17.75%.
C.2 Oftel concluded however that it would not have been appropriate to use a fully updated cost of capital for the 1996/97 indexation. This was because it was the first time that the cost of capital had been changed and the size of the change could not have been fully anticipated by any of the parties involved. As the indexation was decided after the end of the applicable financial year it was therefore too late for CWC to reduce its retail prices for 1996/97 to reflect the lower termination rate it would be paying to Vodafone and Cellnet under the 1996/97 indexation, so CWC’s customers would not benefit.
C.3 The Director General therefore decided that it would be more appropriate to include half of the reduction in the cost of capital (from 24.27% to 17.75%) in the indexation for 1996/97 and include the full impact of the cost of capital change in the indexation for 1997/98. A cost of capital figure of 21.01% was therefore used in the calculation of the 1996/97 indexation, and of 17.75% for the 1997/8 indexation.
C.4 Oftel considers that decisions it has taken about the cost of capital for the purposes of the indexations will not (except if exceptional circumstances arise) be re-visited for the next one to two years. However Oftel recognises that the cost of capital is a very important issue and proposes, for the purpose of any future determinations of Vodafone’s and Cellnet’s interconnection charges, to consult again on this issue. In this situation Oftel will use its current view of the cost of capital as the starting point for consultation.
Other adjustments
C.5 Following representations, Oftel has made some other minor changes to inputs to the calculation of the indexation for 1996/97. These were to reflect the fall in the costs of private circuits, ceasing to apply an inflation adjustment to the costs of depreciation, and adjusting switch site construction costs for inflation.
Results of 1996/97 and 1997/98 indexations
C.6 For the 1996/97 indexation the effect of the cost of capital adjustment is to reduce the index by 4%, while the other adjustments increase the index by 0.2%. Oftel has calculated the charge to be paid by CWC to Vodafone and Cellnet for 1996/97 should come down from 16.10 pence per minute in 1995/96 to an average of 14.0 pence per minute,
C.7 For the 1997/98 indexation, Oftel has made the minor adjustments set out in the previous paragraph and has applied the change in the cost of capital in full (a value of 17.75%). After taking into account movements in costs and call volumes, the indexed average charge for 1997/98 is 12.3 pence per minute.
Investigation of termination rate payable for calls to Vodafone and Cellnet : Oftel’s views of treatment of certain costs based on a fully allocated cost basis (paragraph 4.3 refers)
Allocation of costs to services
D.1 Oftel still takes the view that conceptually there are three services provided by Vodafone and Cellnet and that total costs should be allocated to these three services. This approach was taken for the 1991 Mercury determinations and this is the approach Oftel has used to calculate the charge on a FAC basis. The three services are access, conveyance of incoming calls and conveyance of outgoing calls.
D.2 In the Consultative Document, access was defined as ‘the provision of the minimal geographic network to make and receive calls.’ Three of mobile operators took the view that there was no such service as access while Orange described it as ‘the opportunity to make and receive calls.’ Oftel still considers there is a separate access service for mobile operators because it has a separable incremental cost and separable demand per subscriber. Oftel believes, however, that a more appropriate definition of the access service relevant to the customer of the mobile network would be ‘the capability to make and receive calls.’ This includes the provision of the minimal geographic network to make and receive calls and the handset. Since the handset is, in fact, supplied to the customer of the mobile network by a third party, the access service provided by the operator consists of all those elements giving the capability to make and receive calls, minus the handset. One may draw parallels between the handset for mobile networks and the local loop and handset in fixed networks.
D.3 One of the criticisms of the three services approach was that the introduction of the option of pre-payment plans for services would mean there would be no monthly charge (the customer buys the handset and then pays in advance for call minutes, with no monthly subscription or rental charge) to recover the costs of access. Oftel considers that the introduction of pre-payment plans is a tariffing decision taken by the mobile operators which does not undermine the three services approach.
D.4 The separable costs of access service provided by the operator are the fixed costs which do not vary with the volume of traffic over the network. The separable costs of incoming and outgoing calls are the costs of conveyance (ie, call handling costs), which vary with the volume of traffic over the network.
D.5 Oftel is still of the view that costs should be attributed to access, incoming calls and outgoing calls in accordance with appropriate cost allocation principles. Direct costs should, clearly, be attributed to the service for which they are incurred. For indirect costs, such as marketing costs, an appropriate attribution methodology should be applied to the allocation of these costs across the various services. This is discussed later.
Cost of capital
D.6 Oftel proposes a range for the nominal pre-tax cost of capital (which it would use for the proposed determined charge) of 16.5% to 19%. Oftel proposes to use the midpoint of this range, a value of 17.75%. This estimate of cost of capital reflects the following assumptions:
Service Provider incentive payments
D.7 In the Consultative Document, Oftel set out two options for treating Service Provider incentive payments. These were:
1. Treating such payments as advances to the Service Providers which are subsequently recouped by expected future revenues (net of the direct costs of providing services). In this case, they would not be treated as costs at all.
2. Treating such payments as costs, incurred by the mobile operator to secure future revenue streams, and allocating them in a way which reflects the relative certainties of the future revenue streams. In this case they are allocated first to connection charges and access subscriptions.
D.8 Vodafone, Cellnet and Orange argued in their responses that Service Provider incentive payments should be treated as costs and allocated to calls. Vodafone added that Service Provider incentive payments were not just used to subsidise the prices of handsets, but included some recompense for marketing costs incurred by the Service Provider. Oftel understands that mobile network operators make incentive payments to Service Providers on the basis of the number of customers taking up service, but they do not control what each Service Provider spends these payments on. Therefore Oftel’s view is that it would not be appropriate to distinguish between the different ways in which Service Providers use these payments.
D.9 Having considered these and the comments of others, Oftel has decided to treat these payments as costs. However Oftel considers that because they are costs incurred to secure future revenue streams they should be allocated in a way which reflects the relative certainties of the future revenue streams. (This would be in line with the accounting concept of prudence). Accordingly incentive payments would first be set off against revenues (net of direct costs) from contractually committed connection charges (ie in relation to new subscribers) and access subscriptions with any balance being allocated to calls in proportion to call minutes.
D.10 In taking this view, Oftel should make clear that it is neutral on the issue of whether the paying of incentives to service providers is appropriate.
Marketing costs
D.11 Oftel took the view in the Consultative Document that the marketing costs of mobile operators should be allocated according to campaign, but this was not possible because Vodafone and Cellnet were unable to provide sufficient information to identify campaigns with the specific purpose of encouraging more incoming calls. Oftel received mixed comments on the three options, set out in the Consultative Document, for allocating marketing costs. Oftel asked whether, if there is insufficient information regarding campaigns should:
a) no marketing costs be allocated; or
b) marketing costs be allocated on the basis of the relative certainty of future revenues; or
marketing costs be allocated to incoming and outgoing calls in proportion to the volume of call minutes going in each direction.
D.12 Oftel still considers that in a fully allocated cost calculation marketing costs should be allocated in some way, although because there is insufficient information on campaigns the allocation must be done on another basis. Oftel considers that these costs should be allocated on the basis of the relative certainty of future revenues. Marketing costs are incurred to generate revenues and improve profitability and margins, so they should be allocated against revenues (net of the direct costs of providing services), in relation to the relative certainty of the revenue streams.
D.13 The Consultative Document’s two options for the treatment of Service Provider incentive payments, treating them as an advance or a cost, both resulted in exhausting the majority of contractual revenues from access. Oftel therefore calculated that if all marketing costs were to be allocated to both outgoing and/or incoming calls in proportion to call minutes, 1.2 pence per minute should be allocated to incoming calls for (1997/98 level). Oftel considers that this is how marketing costs should be treated.
D.14 Oftel’s method of allocating some costs (Service Provider incentive payments and marketing costs) on the basis of the relative certainty of future revenues was criticised in some of the responses to the Consultative Document. Oftel has therefore reviewed its use of this method.
D.15 One criticism was that a different package of tariffs would under this method change the allocation and that cost allocation should not be dependent on tariffing. Oftel considers that, for the direct costs of an incoming call, the allocation methodology should not be dependent on the structure of revenues. However Service Provider incentive payments and marketing costs are indirect costs, for which an allocation reflecting pricing structures might be quite appropriate. Since those costs are incurred to encourage new subscribers and new revenues from customers, it might be economically sensible for the way an operator structures its revenues to lead to a change in the allocation of the marketing costs.
D.16 Another criticism of this methodology was that it was an unusual or even unprecedented allocation method. Oftel does not consider this to be a valid argument against using the methodology as a basis for cost allocation. The fact that a methodology might not have been used in a particular situation before does not invalidate its use and in any event none of the responses offered a satisfactory alternative methodology.
D.17 Oftel considers that it is appropriate to allocate costs relating to Service Provider incentive payments and marketing on the basis of the relative certainty of future revenues consistent with the accounting concept of prudence.
Switching costs
D.18 Oftel’s preliminary view set out in the Consultative Document was that, in the absence of a robust and detailed methodology to attribute component costs to particular types of call and processing activity, total switching costs should be allocated on the basis of call minutes in each direction, rather than the number of calls. Oftel said it would consider any alternative practical methodologies for more appropriate allocation.
D.19 Oftel has received detailed comments from all four mobile operators, particularly Vodafone and Cellnet, on this issue. Vodafone accepted that the cost driver for transit switches in its network was call minutes, but disputed that this was the case for mobile switches. All four mobile operators argued that call processing (call attempts) were the principal drivers for switching costs and therefore the number of call attempts was a more appropriate basis for cost allocation.
D.20 After considering the comments it received on this issue, Oftel has concluded that the allocation of switching costs should reflect the cost drivers for mobile switches which are both call attempts and call minutes. For the transit layer of the mobile networks the sole cost driver is call minutes.
D.21 To consider the allocation of switching costs further, Oftel asked Vodafone for detailed cost information on the use of the different switches for call processing and call switching. Vodafone was unable to provide the information requested but presented further arguments that its use of mobile switches was constrained by its call attempt capacity and that it was always call attempts rather than call switching which exhausted first. In that case it argued that call attempts were the sole cost driver.
D.22 Oftel has considered this along with information from Vodafone about the relative relationship between call processing and call switching in Vodafone’s switches. Oftel noted that there was not a fixed relationship between call processing and call switching and Vodafone had been able to increase processing activities on existing switches. A reasonable methodology would provide for allocation of call processing costs on the basis of call attempts and the cost of traffic handling capabilities on the basis of call minutes. In Oftel’s view, it would be reasonable for the remaining costs to be allocated on the basis of an equal mark up type regime: that is for the common costs to be allocated on the basis of call processing and call switching in proportion to the incremental costs associated with the provision of each.
D.23 Oftel had already carried out studies on the cost drivers of a network PSTN switch. Oftel noted from the information provided by Vodafone, that a mobile network MSC can be taken to be broadly equivalent to a DLE minus the concentrators on the fixed network. As a result of its calculations, Oftel has concluded that the switching costs should be apportioned on the basis of 77% call attempts and 23% call switching. The result of this revised allocation is to increase the ‘proposed’ determined charge by 0.3 pence.
D.24 Vodafone and Cellnet both commented that there is a greater cost for switch processing in handling incoming calls than outgoing calls because it is necessary to locate the mobile customer. Oftel accepts this, but notes that the Home Location Register (HLR) locates customers at regular intervals whenever the handset is switched on, even when they are not making or receiving calls. Oftel takes the view that the cost of the processing power used to maintain the HLR is generally an access-related cost – i.e. to have the potential to make a call it is necessary to be able to locate the handset. The ability of locating a particular handset in order to make calls to it (and the associated costs) is accepted to be a call related activity. If Oftel agreed that these switching costs were a cost driver for incoming calls, it would add up to 1 penny to the cost of an incoming call.
Customer care
D.25 Oftel’s view remains that the costs associated with customer enquiries about such things as where they are able to make and receive calls are not usage-related, as there is no causation of costs relating to incoming calls, and should therefore be excluded from the costs
of incoming calls.
Frequency allocation
D.26 Oftel still considers that frequency costs, that is, the payment of fees by mobile network operators to the UK government for allocation of spectrum frequency, are related to the volume of calls over the mobile network. Oftel therefore considers that these costs should be allocated to incoming and outgoing calls in proportion to call volumes.
SIM cards
D.27 Oftel’s view remains that since SIM cards are not related to the volume of incoming or outgoing calls and are associated on a one to one basis with the handset, it would be appropriate to allocate all of the costs of SIM cards to access.
