Chapter 1 Introduction and overview
Chapter 2 Main policy issues raised in consultation
Chapter 3 Structure of the proposed controls
Chapter 4 Financial modelling and the value of X
Chapter 5 Starting charges in the network charge caps
Chapter 6 Charging flexibility and information requirements
Chapter 7 Summary of questions for consultation
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This consultative document represents a further stage in developing Oftel’s proposals for new interconnection charging arrangements. There has been a lot of detail to work through and this has meant we have had to delay the start of the new arrangements from August to October 1997. I am sorry about this but it is important that we get the new framework right.
Most of this document is about confirming the details of the new arrangements. Oftel has, however, made one significant policy change: we are no longer proposing to index various smaller interconnection services individually but will group them into a third basket. The document also covers the incorporation of number portability service charges into the network charging arrangements in due course.
In response to previous consultation several operators raised concerns about Oftel’s powers to resolve disputes. I am satisfied that I will have adequate powers to deal with any issues affecting the development of competition in the UK. This is set out more fully in the document.
The document does not set Xs for the interconnection baskets but it does discuss the factors which are the primary determinants of the value of X and gives an indicative range. On current thinking, we can expect X to be in the range of 6–12% for the call termination and general network baskets. Indicative starting values for the charges for services in these baskets are set out. They are likely to be significantly lower than the charges recently set out in the draft Interim Determination for 1997/98. We are particularly keen to have views on these figures for X and likely starting charges.
The next document, produced in early July, will be a Statement on Oftel’s final proposals and statutory consultation on licence modification proposals. I look forward to your help in sorting out the remaining details before then.
DON CRUICKSHANK
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The initial consultation period will run until 10 June 1997. There will then be a further period up to 24 June 1997 during which comments are invited on any submissions made to Oftel during the initial period. Comments are invited in particular on the questions highlighted in the text of the document and summarised in Chapter 7.
Written comments should be submitted to:
Chris Taylor, Oftel , 50 Ludgate Hill, London EC4M 7JJ
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.
Comments on this document can also be sent to Oftel via the Internet (if they are relatively short) by filling in the form on the Web pages or by using the following e-mail address:
netcomp.oftel@gtnet.gov.uk
Oftel intends to set up a link between this document on Oftel’s pages and any responses placed on respondents’ own Internet pages. Please contact Cate MacPherson at Oftel on 0171 634 8752 to organise this. Confidential responses should not be sent via the Internet.
Oftel will publish its final statement on network charge control, including licence modifications for statutory consultation early in July 1997.
Copies of NERA’s report An Assessment of the 1995/6 Top-Down Model referred to in Chapter 5, and SPR’s report on the efficiency of BT’s network, refered to in Chapter 4, will be made available from Oftel’s library when published.
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1.1 This document contains Oftel’s proposals for new arrangements to set interconnection charges from October 1997. It covers:
Oftel has previously consulted on network charge controls in its consultation on retail price controls (which are agreed and will take effect in August 1997) and in the document Network Charges from 1997 published in December 1996.
1.2 No fundamental changes to the proposals have been made since the December 1996 document. There are some minor adjustments following that consultation and two important changes. This document provides the opportunity for discussion and comment on the new detailed proposals and the drafting of the licence modifications and guidelines. It also sets out for the first time how number portability services will be dealt with under the new arrangements.
1.3 Details of the arrangements for consultation are set out on the inside front cover of this document. Following consideration and discussion of responses to consultation, Oftel will finalise its proposals and publish a statement containing the final text of the licence modifications and guidelines in July 1997 for statutory consultation. If BT agrees to the proposed modifications to its licence, the new charge control arrangements will be effective on 1 October 1997. If BT does not agree, the Director General will make a reference to the Monopolies and Mergers Commission.
1.4 Previous stages of consultation have explained why interconnection charges – the charges which operators pay for use of each other’s networks – are such a crucial element in the competitive markets for telecommunication networks and services in the UK. Interconnection charges paid by other operators to BT account for a large proportion (up to 50%) of the costs of those operators. These charges are central to the investment decisions of the industry and, in particular, will influence other operators’ judgements about whether to build their own infrastructure or interconnect to make use of BT’s. It is important for the whole industry that such judgements are based on accurate economic signals and therefore that BT’s interconnection charges are soundly derived from appropriate costs and, wherever possible, controlled by market pressures.
1.5 Oftel considers that the time is now right to move away from the current system by which Oftel determines the charges for BT’s standard inter-connection services each year. This system was appropriate as new operators entered the market for the first time following the move from duopoly to full liberalisation in 1991. It has worked well, but the level of regulatory intervention in setting charges which it requires is increasingly inappropriate as competition has become established and continues to develop. Oftel believes that a new system where BT sets charges subject to flexible controls geared to the level of competition in interconnect services will better serve the industry by maximising the degree to which markets decide charges and reducing as far as possible the intervention of the regulator. The new network charge controls will provide this flexibility within a framework of rules which will protect competitors in markets for interconnect services in which competition is not yet sufficiently strong to allow BT pricing freedom.
1.6 The headline proposals, as set out in the December document, are to move to a charge control system which will:
or competitive services: BT will be free to set charges (subject to the generally applicable provisions of the licence) for prospectively competitive services (those which are likely to become competitive during the period of the controls): Oftel will set safeguard caps of RPI+0% so that charges may not rise in real terms. This will essentially be a back-stop provision – as services become competitive, prices will be driven down below the safeguard level. for bottleneck and non-competitive services: charge caps will be introduced on three (not two as previously proposed) separate baskets of interconnection services to ensure that charges reflect efficiencies BT could be expected to achieve in reducing its network costs. The weighted average charge for services in the baskets will be allowed to increase by no more than RPI–X each year if the change in RPI is greater than X, or must fall by at least X–RPI if the change in RPI is smaller than X. These charge controls follow the same principles as the familiar retail price caps. There will be one basket for call termination services, one for general network services (the ‘general network’ basket), and one for other interconnection services which will not be competitive during the charge control period (the ‘connection services’ basket).
1.7 There are two important changes to the proposals contained in the December 1996 consultative document.
1.8 The proposals in this document contain one significant adjustment to the structure of the controls. In the December consultative document, Oftel proposed that charges for some interconnection services which will not be competitive during the charge control period and which are not contained in either the call termination or general network baskets should be individually indexed by an RPI–X formula. On reflection, Oftel has concluded that this direct control of setting individually such a large number of charges is inappropriate. It therefore now proposes that the charges for these services should be included in a new basket subject overall to an RPI–X formula. Due to the nature of the services to be included in this basket at the start of the charge control period, it is refered to in this document as the ‘connection services’ basket. This will greatly simplify the structure of the controls.
1.9 It is now proposed that the charge control period will run from 1 October 1997 to 30 September 2001. It was previously envisaged that the period would be 1 August 1997 to 31 July 2001. The change to the start date has been made to enable sufficient time for the detailed work required to put the charge controls in place.
1.10 Chapter 3 explains the structure of the controls in detail. There are some changes to the treatment of services, and some services have been added that were not covered in earlier consultations.
1.11 The December 1996 consultative document listed the value added elements of these services as competitive during the charge control period. But this was in anticipation that markets for them would be fully liberalised following the completion of Oftel’s consultative exercise on these services. However as the consultative process is not yet complete, these services cannot yet be considered competitive. Following liberalisation, Oftel would expect them to become competitive,and hence proposes to classify them as ‘prospectively competitive’. Safeguard caps of RPI+0% will therefore be applied for the start of the charge control period. Oftel will be publishing a further document on DQ services soon.
1.12 Oftel is currently investigating the ‘payphone access charge’. Competition in the payphone market is growing, but, because of BT’s ubiquity, it would seem appropriate for this service to be added to the connection services basket.
1.13 Oftel proposes that targeted transit should be classified as prospectively competitive (and would therefore be subject to a safeguard cap of RPI+0%). However, a starting charge could only be set if Oftel is requested to determine the charge for targeted transit prior to the beginning of the charge control period. If a determination is not made, targeted transit will be treated as a new service.
1.14 Following full liberalisation of international facilities last December, Oftel has considered whether certain international connection services should be subject to network charge controls. It is proposing that:
1.15 Some operators have asked Oftel whether this supplementary charge to call origination charges – whereby indirect access operators contribute to the costs of non-chargeable operator services (known as ‘intermediate services’) – will continue under the charge control regime. Oftel believes that the charge will continue to be appropriate where it is desirable for the services to be available free of charge to customers, or where they are required to be free of charge by regulation. Oftel therefore proposes that two elements of the ‘intermediate services’ component should remain. These are
where the indirect access operator does not provide these services independently of BT.
1.16 Oftel considers that the charges for number portability services should eventually be covered by interconnection charging arrangements. This will mean that the detailed rules on number portability set out in Condition 34C of BT’s licence will be phased out during the course of this control period. Oftel in practice expects the following sequence:
1.17 The quality of performance of BT’s network is very important to interconnecting operators who need to be confident that they can rely on it to offer quality services to their own customers. Presently, BT is required to demonstrate that it has not discriminated between operators or between itself and other operators in respect of the quality of interconnection services it provides. It does this through publication of its performance against specific service functions listed in the Quality Schedule required by Condition 17C of its licence. Oftel considers that this existing requirement may need to be extended to include wider aspects of network quality, and hence in this consultation seeks views on a possible extension to the Quality Schedule to achieve this.
1.18 The document also includes further discussion on points covered by previous stages of consultation. The following issues are worth emphasising.
1.19 Many operators expressed concern that without specific powers to determine charges and terms and conditions for interconnection services the Director General would be unable to resolve disputes. Oftel understands this concern but considers that the powers it will have under licences and the Telecommunications Act will enable it to address any issues likely to affect the development of competition in the UK market. This is explained fully in Chapter 2. Oftel is not proposing any changes to the previous proposals.
1.20 Oftel has emphasised throughout the development of the new network charge proposals that it sees clear advantage in the charges paid by BT to other operators reflecting the charges paid by those operators to BT. The principle of reciprocity has general acceptance in the industry. However, its exact implementation is open to different approaches. This has been the subject of much discussion between Oftel and the industry since the publication of the December consultative document; and between BT and other operators. Oftel hopes that the further exposition of its view in Chapter 2 will act as the catalyst for a final resolution of the differences between BT and the other operators.
1.21 Other operators have been concerned to ensure that interconnection charges to them for their services should be covered under their own licences. Oftel proposes to delete the licence conditions in both OLO and BT licences which specify a FAC basis for OLO charges with provision for the Director General to determine such charges. They will be replaced in OLO licences by provisions based on the requirement in the international facilities licences that charges be reasonable. Oftel proposes to adopt BT’s suggestion that provisions in the BT licence should be withdrawn in relation to individual operators as the relevant current conditions in the OLOs licence are modified and the new ones put in place. This is discussed in Chapter 2.
1.22 Revised financial statements will be needed to provide the transparency needed to show that BT’s charges reflect underlying costs. Oftel is proposing that BT should provide :
(a) annual audited incremental cost statements for 1997/98 and each subsequent year published on 31 July,
(b) audited CCA FAC financial statements annually to the level of disaggregation of businesses and activities currently available for the HCA accounts,
(c) audited HCA FAC financial statements only for the years 1997/98 and 1998/99, as at present. FAC accounts would then be discontinued.
All these Statements to be audited to the standard of ‘fairly presents’. Half year accounts will no longer be required. This is outlined in Chapter 2 and set out in detail in Chapter 6.
1.23 Chapter 4 explains Oftel’s current thinking that the likely range for X is 6–12% for the call termination and general network baskets, given the range of starting charges presented in Chapter 5. It explains which factors in the financial modelling have the greatest impact on the value of X and shows the changes in X produced when the values of those factors change. X is the central parameter for the new controls and Oftel wants to see a thorough debate about the proposed range and the assumptions which underpin it.
1.24 Chapter 5 sets out the values of the likely starting charges based on the latest financial information from BT. New figures and changes to the treatment of costs in the LRIC modeling have led to reductions in the starting charges such that they are likely on average to be around 10–20% below the charges recently set out in the draft interim determination for 1997/98. Oftel would be particularly grateful for views on the likely starting charges.
1.25 Oftel looks forward to further discussion and consideration of all the issues in this document before its final statement in July.
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2.1 This chapter reviews those areas of policy which the responses to the December 1996 consultation document showed to be of on-going concern and explains the basis of Oftel’s approach to each of them. It deals, in particular with:
2.2 Oftel’s proposals for a complaints-based disputes resolution procedure met with considerable concern. Oftel recognises that further explanation of how the proposed procedures will work is needed. Most respondents agreed that the telecommuni-cations industry should be moving away from detailed regulation but many operators were concerned that, in the absence of determinations, there would be a powers gap leaving operators with no fall back should they have difficulty achieving acceptable interconnection agreements with other operators, particularly BT. Oftel is however confident that the new procedures will provide the Director General with the powers he needs to deal with any unreasonable or anti-competitive behaviour. This obviously was not explained sufficiently clearly in the last document and the following paragraphs explain Oftel’s thinking in more detail. The Guidelines give this issue greater exposure and Oftel hopes that all operators will share its view that the proposals are fair, efficient and transparent.
2.3 To recap, Oftel proposes to:
2.4 Oftel will resolve disputes using its Order making powers to enforce licence obligations. It will be involved where regulatory intervention is required, commercial avenues have been exhausted and the requirements of fair trading justify it. In practice Oftel will expect operators to submit reasoned complaints setting out the grounds on which they believe another operator is failing to comply with their licence – for example refusing to offer reasonable charges, terms or conditions, or acting in a anti-competitive manner counter to the fair trading condition. Oftel will allow interested parties the opportunity to comment, as part of the process for deciding whether there has been a licence breach (for example, by refusing to provide a service which is reasonably required (contrary to C13); by acting anti-competitively (contrary to C18A); or by showing undue discrimination (contrary to C17)) – and what should be the appropriate enforcement action.
The following points summarise and respond to the most significant and frequent concerns raised in the responses to the consultation.
2.5 Many operators understood Oftel’s withdrawal from detailed determinations to indicate that it would no longer play any role between operators attempting to negotiate interconnection with BT or another operator. This is not the case. Oftel will not involve itself in issues which are essentially contractual but will play an active role where matters in dispute raise competition concerns. It is not possible or desirable to set out a definitive test for regulatory intervention. The aim is to maintain as much flexibility as possible, while ensuring that the regulatory regime is stable and transparent. The Guidelines set out some of the grounds on which the Director General would decide whether a dispute should be left for operators to resolve between themselves, resorting to alternative dispute resolution fora or the courts if necessary, and where regulatory intervention might be considered appropriate, for example where one party was insisting on provisions which represented an abuse of market power, or where an operator was refusing to negotiate but simply offering terms and conditions which they wanted when it was clear that another party would have no choice but to accept. Each complaint would be considered on its merits. Oftel recognises that competition could be impacted directly or indirectly by any dispute, and there may be adverse effects on consumers even where there is approximate parity in market power.
2.6 Responses to consultation revealed considerable concern that the Director General may find himself unable to decide the terms and conditions (and perhaps even the charges) which should apply in an interconnect agreement – particularly for new services not subject to existing standard agreements – even where he has intervened under his licence enforcement powers to ensure that agreement is reached in principle. Oftel believes that its Order making powers will allow everything to be achieved, using the new mechanisms, that could be achieved when operators relied on determinations. The most significant change will be that operators will have to be demonstrably acting either unreasonably or anti-competitively for Oftel to act, and an operator will have to make a reasoned complaint setting out why this is so. The new arrangements increase the initiatives open to other operators (in particular to explain why acts should be viewed as having anti-competitive effects), Oftel’s powers remain undiminished and the burden will rest with BT to have available information to justify its charging proposals. Oftel will be able to intervene decisively and effectively where it is desirable or necessary for the regulator to do so. Oftel’s objectives in ceasing to determine terms and conditions are to encourage operators not to rely unduly on regulatory intervention when negotiating interconnection and to step back from detailed regulation. The intention is not to leave the industry with no remedy when confronted with an impasse or an inability to agree what is in the best interests of all parties. This would include issues of general application or interest, as well as those relevant only to the parties to an agreement. Oftel is also aware that, as the market evolves and the environment changes, issues may arise which as yet are unforeseen. Where, for example, BT fails to offer or to agree reasonable terms, the Director General may make a provisional order or a final order under section 16 of the Telecommunications Act 1984 to require BT to offer or agree reasonable terms. Where requisite, an order may specify such terms and their effective date. If BT fails to comply, it will be open to claims for any damages or loss suffered by any operators affected by the breach.
2.7 Some operators felt that in the absence of a determination power for Oftel, BT would delay negotiation of interconnection agreements. Oftel believes that this fear is unfounded, particularly now that Condition 13 (and equivalents in other PTO licences) is being modified to require BT to negotiate reasonably. In particular, negotiations should be concluded within a reasonable period – usually a period longer than six months would be considered unreasonable. Should BT insist on charges, terms or conditions for a new service which effectively make it unavailable to other operators, Oftel will be able to determine that that service is reasonably required, even if BT are not expressly refusing to provide it, because Oftel will regard reasonable terms and conditions as an integral part of provision of service. The charge for the new service will not be set by Oftel, but Oftel will closely scrutinise BT’s proposed charges to ensure they are fair, and will require changes if they are not: the revised proposed licence modifications include a power to index charges for new services if they are not competitive or prospectively competitive services. Should guidance be needed about the parameters within which a charge would be considered reasonable, such guidance will normally be available from Oftel. Oftel’s statement on interoperability sets out the types of service Oftel considers should reasonably be provided by BT and other network operators. Oftel hopes this will considerably reduce scope for disagreement.
2.8 This provoked considerable debate, and is understandably of concern to all operators. Oftel takes the view that the requirement for BT – and other operators – to negotiate reasonably and offer reasonable terms and conditions is a different test from the one set out in the Fair Trading Condition which regulates the possible abuse of a dominant position and anti-competitive agreements. Certain behaviours, while clearly unreasonable would not necessarily be anti-competitive. Examples would arise where there would be an adverse effect on matters other than competition, for example behaviour contrary to best engineering practice, or the basic NTS principles laid down in past determinations. This might include continual delay, bundling of services or attaching unacceptable terms or conditions. This is explored in more detail in the Guidelines, which set out how the Director General would exercise his discretion about what was reasonable and what was not.
2.9 Several operators questioned the consistency of the disputes resolution procedure with EU rules. The consistency between EU rules and Oftel’s proposals for retrospectivity in particular may not have been explained in enough detail. Oftel is confident that there are no disparities between what it is proposing and what is being introduced at European level. Oftel proposes that when it takes action against BT charges which have been found to be anti-competitive or unreasonable, it will have the power to require BT to make arrangements to ensure that the new charge is given retrospective effect, backdating to the date of introduction of the original charge if necessary. The licence modifications contain a specific provision to this effect (see ‘interpretation’ section of draft Condition 13, Annex A).
2.10 Whilst operators are clearly very concerned about future relations with BT, increasingly many will in future want to interconnect directly with one another. In the absence of market power and without the right to a determination, some operators felt that this could become impossible if one side were unwilling to reach agreement or would only do so on unacceptable terms. Whilst Oftel will of course take an interest in how non-BT interconnection develops, it believes that adequate commercial and economic incentives should exist for all operators to interconnect directly, by passing BT’s network altogether if appropriate. The Statement on interoperability makes clear that Oftel would normally expect operators to agree direct connection. Oftel will be proposing that OLO (Other Licensed Operators) licences will be amended to include a requirement to negotiate reasonably, and the Fair Trading Condition will be used to control anti-competitive behaviour in the call termination bottleneck – in which every operator is dominant if the relevant market is defined as calls to an operator’s directly connected customers.
2.11 Oftel has been asked how the Fair Trading Condition (FTC) could be used in markets which are competitive. The FTC can only be used to control the behaviour of an operator who is dominant in the relevant market (or to control anti-competitive agreements or concerted practices, which do not require dominance to be caught). If an operator has a dominant position in a market, then by definition the market is not competitive. A key issue for use of the FTC as a competition tool is how the market in question is defined. If an operator were not dominant, because the market in which it operated was competitive, then Oftel would question whether it needed to be involved to control the operator’s behaviour, or whether commercial pressures should be resilient enough to resolve any perceived damage. In any event, competition can be distorted or even wholly undermined by anti-competitive behaviour – and an operator’s actions could have the effect of turning a market previously considered to be competitive into one which was not (in practice, Oftel may determine this to have happened). The FTC might also be used if behaviour in a competitive market were the result of an operator’s dominance in a related market.
2.12 Oftel will not become involved in disputes which are essentially contractual or which relate to enforcement of contractual obligations. Although Oftel has tried to encourage the industry to develop its own independent dispute resolution mechanism, this does not seem to have been pursued. It may be that the industry does not believe it could use alternative dispute resolution fora, or perhaps it is satisfied that if an issue cannot be resolved by referral to Oftel, then it can be resolved by negotiation between the parties or eventually by the Courts. Oftel does not propose to be the motor behind development of industry specific alternative disputes resolution (ADR), nor to insist on inclusion of ADR arrangements in interconnect agreements. Should a perceived need develop, it will be for the industry to take this forward.
2.13 There was some concern about existing interconnection agreements which contain review clauses with a right to seek a determination if a modification cannot be agreed. Respondents asked what would happen to these agreements and, also, what principles would apply to negotiation of amendments generally. Oftel will not make determinations pursuant to review clauses once the network charge controls come into force – and Oftel does not intend to deal specifically with issues caught under existing review clauses which refer to determinations by Oftel. Should operators fail to reach agreement on modifications, they will be subject to the same rules as apply for any other disputes. If a dominant position is being abused, or an operator is acting so unreasonably that agreement cannot sensibly be reached, Oftel will investigate with a view to enforcing licence obligations. Otherwise it will be up to operators to reach agreement within 6 months. The timetable will apply to modifications in the same way as it does to new agreements.
2.14 Although BT’s standard interconnect agree-ment was negotiated by the industry, it has been made clear that from time to time its terms and conditions may be challenged as unacceptable in the circumstances. Oftel will still be able to intervene to set terms and conditions should operators be unable to reach agreement on what is mutually acceptable. Insistence on unacceptable terms could be unreasonable or an abuse of a dominant position. In either case licence obligations can be enforced to remedy the impasse, but terms and conditions could also be attached to avoid further confusion or delay.
2.15 The Guidelines for application of the network charge controls will have the same legal status as the Guidelines illustrating use of the Fair Trading Condition. The Director General will expect to follow them unless circumstances require otherwise, in which case he will give reasons. The Guidelines will, where necessary, be revised to take account of developments and practice. They will not be legally binding.
2.16 There was considerable concern about the amount and type of information which Oftel would expect an operator to produce to found a complaint. Obviously, Oftel will not require operators to provide information to which they do not reasonably have access. Oftel will continue to use its own powers to request information where appropriate. To make a complaint, an operator will have to present a reasoned case. If it concerns charges, the complaint should set out why the complainant considers that the charge set by BT has an anti-competitive effect in the relevant economic market, or is otherwise unreasonable, and supporting cost information would also be useful (at the least the relevant floors and ceilings, from the latest published BT Incremental Cost Statements, suitably updated if appropriate). Complaints about terms and conditions must be accompanied by an explanation of why they are unacceptable, if necessary accompanied by evidence of what their object or effect might be. Because these will vary, it is not possible to give a definitive answer on the range of information to back a complaint: this will be further developed in the Guidelines.
2.17 All commentators have agreed that some form of reciprocity should be the most effective solution to the question of what should be the appropriate charge for call termination inter-connection services supplied by other operators to BT and to each other. Oftel and the industry are generally agreed that the preferred route is that operators should reach a satisfactory solution themselves. Oftel’s view is that an OLO’s charges for providing call termination should not be strictly based on the costs to that OLO of providing the service. Indeed this could only deliver strictly reciprocal charges if the costs and topologies of the network systems were identical.
2.18 The economic justification for Oftel’s view that the charges should not mirror each operators’ costs is that there would otherwise be a ‘perverse effect’. That is: if OLOs charge BT (or each other) on the basis of their own costs, then those with high costs will be forcing these costs on more efficient operators (since there is no alternative supplier of these bottleneck services) – whilst they benefit from the lower costs of termination they would pay to the more efficient operator. This would be doubly damaging to effective competition. Reciprocity, in Oftel’s view, should avoid this damage and provide a ‘competitively neutral’ solution.
2.19 Oftel’s view that the cost basis should not be that of each OLO, is further conditioned by the fact that reciprocity on the strict basis of costs would not guarantee an efficient result, unless the cost base for each pair of relationships were always that of the more efficient operator. However, this would imply a proliferation of rates and in particular that BT would charge different call termination rates depending on whether it were more efficient than the other operator or less. This would break one of the cardinal principles of interconnection with BT – non-discrimination between other operators. Oftel’s pragmatic solution is that the reciprocal rate should be set by BT’s call termination charges. These have an in-built efficiency factor in that, as bottleneck services, Oftel has proposed that they should be in baskets subject to an RPI–X control. Industry responses were generally in favour of gearing the charges to BT’s costs on this basis.
2.20 The one remaining – and substantial – difficulty identified by the consultation is that there is room for more than one interpretation of how the service of providing termination of calls should be defined. This difficulty stems from the fact that many operators have different system topologies from BT. When they buy call termination services from BT, mostly they buy the single tandem service: this consists of the local–tandem segment (from the point of connection at a BT tandem exchange to the serving local exchange) combined with a local exchange segment. In some instances the point of connection is the local exchange itself and only a ‘local exchange’ charge is payable. By contrast, many OLO systems have topologies where their switch combines the functions of tandem and local exchange.
2.21 In their responses to the consultation, commentators strove to find principles that would stand the test of meeting their financial expectation whilst remaining practical in terms of application and consideration of the interests of all players. On the one hand, BT proposed that its payments to OLOs should match the use made of the OLO system, which would mean many would receive the local exchange rate; on the other, some OLOs proposed that the charge should reflect the costs BT would have faced if the called customer had been a BT customer (these cover the range from local exchange service, through local–tandem and even up to inter-tandem).
2.22 Competitive neutrality requires that BT’s payments to the OLO should be a combination of the charges set by BT for local exchange segment and for single tandem segment. Oftel’s preferred, pragmatic, approach has been that the best proxies can be derived using the point of connection to BT’s system (local exchange or trunk exchange) to set the rate. The Oftel approach avoids the risk of the ‘perverse effect’, by gearing the outpayments by BT on calls routed through each interconnection point to the charges it raises on traffic in the opposite direction through that interconnection point. This would ensure that, where traffic is balanced, payments between the operators would be equal. Other approaches that met the requirement of competitive neutrality might also be acceptable.
2.23 Oftel believes that the industry still has time to work out a solution in this framework. It confirms its earlier statements that it does not intend to mandate reciprocity, by requiring OLOs, through licence conditions, to charge BT on the basis of Oftel’s preferred approach. Operators may seek the Director General’s opinion, either under the modified provisions of Condition 13, introducing the new charge controls into BT’s licence, or, when they have been correspondingly revised, under the provisions of their own licences, about the reasonableness of proposed call termination charges if, in the event, even with the best will, they cannot reach an agreement. In that case, the Director General will consider whether he needs to give an opinion or enforce the licence requirement that charges be reasonable and, if he concludes he does, how the opinion should be reached. Clearly one of the major factors the Director General will take into consideration is the competitive neutrality of the resulting charges and how far they are consistent with the lines proposed above. How the Director General will reach an opinion will be set out in more detail in the Guidelines (Annex B).
2.24 A number of operators have asked if the proposal that OLOs should agree amongst themselves and establish a common rate for call termination might not fall foul of Article 85 of the EC Treaty, banning anti-competitive practices. Oftel has considered whether any implications arise under the Treaty but does not consider that there are any grounds for concern.
2.25 Throughout the discussions on the development of the new network charge, Oftel has proposed that the present provisions in BT’s licence which can govern the setting of interconnect charges raised by OLOs, to be paid by BT, should be removed in favour of leaving these charges to be set under the terms of the parallel provisions already in the OLO licences. This proposal has general acceptance. However, there are some natural consequences discussed in the following paragraphs which would need to be met.
2.26 Given that, from 1 October, BT’s interconnection charges will, under Oftel’s proposals, be set on the basis of incremental costs and under new controls that no longer involve determination of interconnect charges, it is clearly logical for the corresponding provisions of the other operators to be similarly modified. Oftel’s approach to this requirement will be based on its policies of simplifying licences to the maximum degree possible and at the same time of reducing the need for the Director General’s mandatory and detailed intervention in the market.
2.27 As with the proposed modifications to the BT licence, the Director General will continue to have powers to intervene where this is necessary in the discharge of his duties and functions. Within that requirement, the objective is simplification and an encouragement of the industry to settle its own affairs with less recourse to the Director General.
2.28 To meet this objective of simplification, as far as possible Oftel is proposing to use for OLO licences the simplified provisions, where and as appropriate, of the IFL licences. Key areas are identified below (paragraphs 2.29 to 2.32) Modifications to OLO licences will parallel those set out in Annex A for BT’s licence: sample draft modifications for OLO licences will be distributed shortly to operators. Oftel is considering holding a workshop to discuss the proposals.
Oftel asks all operators to review their licences: firstly to identify their conditions corresponding to those in BT’s licence that are proposed for modification; secondly to prepare their organisation’s response to the proposal to modify them; thirdly, to check if there are any other conditions in their licences that require consequential modification – and in particular if any include the use of FAC and HCA principles which are now no longer appropriate; and to consider how the discussions on these modification may be handled.
2.29 The first feature of the modifications to be proposed for other operators’ licences is the replacement of the FAC basis of costing. For the OLO licences, however, Oftel will not be proposing, in the standard licence provisions that fix the costing bases to be used, the direct substitution of incremental cost for the present definitions. This is because there may be grounds for adopting bases that are more appropriate in special circumstances – in particular to ensure that the perverse effects that can arise in call termination (see paragraphs 2.18 and 2.19) are not built into licence conditions. However, the Guidelines will make it clear that, this exception apart, operators throughout the industry should expect interconnect charges to be set on the basis of incremental costs.
2.30 The second major feature is the removal of the built-in mandatory intervention of the Director General by deleting the powers of determination of interconnect charges. The formula to be proposed will be that of the IFL ("such terms and conditions as are, in the opinion of the Director, reasonable") – in parallel with the similar provisions proposed for BT. As with the BT licence, this change would bring with it the corresponding removal/reduction of the range of ‘permitted’ and ‘required’ terms for interconnect agreements currently set out in some licences.
2.31 Consistent with its conclusions on the consultation on private circuits and IPLCs (see paragraphs 2.58 and 2.59 below), Oftel proposes to remove the exception (in Condition 46 of BT’s licence) that allows some operators to obtain Private Circuits on interconnect terms. Other operators would still have the right to obtain private circuits and IPLCs from BT under Condition 1 but will have to buy at retail or retail minus tariffs.
2.32 Obligations to supply Private Circuits vary amongst the other operators’ licences. Some have no specific licence condition; some have specific conditions excluding any obligation to supply, even at retail; some have specific conditions excluding obligation to supply, unless the operator attains ‘well established operator’ status in the relevant market or markets -and then the obligation is only to supply at retail tariff, unless the applicant operator does not have ‘self-provide’ capacity. Oftel’s initial view is that the conditions applying to the provision of Private Circuits between operators should all be on the same basis: with the distinction that in BT’s case there is a general obligation to provide (at retail and subject to the usual tests of reasonableness). However, no obligation would apply to other operators until they had reached well established operator status, in the relevant markets.
2.33 Oftel’s original proposal for the revision of BT’s licence was the simple deletion of C13.5B.1 and C13.5B.1A – which allow determination under BT’s licence of charges for services over OLO networks. However, BT in its response to the December consultation pointed out that BT would have some difficulty accepting that it should collect charges set in terms of incremental costs from 1 October if OLO licences (by then having sole control over OLO charges) remained in terms of FAC costs, because the OLO licences had not yet been modified in parallel with BT’s.
2.34 Oftel has itself been concerned at the logistics of attempting to revise all OLO licences on exactly the same day as BT’s new charge control modifications are signed into effect, even assuming that 100% agreement could be achieved in time. It has therefore concluded that it would be wise to develop the proposal suggested in BT’s response: that the conditions in BT’s licence that cover charges by OLOs should cease to apply progressively rather than all at once – the progression being geared to the acceptance by each other operator of the parallel modifications to those accepted by BT.
2.35 If BT’s licence is to retain some, but increasingly restricted, control of OLO charges beyond 1 October, it will require modification. The minimum would be to remove the specification that the cost basis is FAC and to remove the Director General’s power of determination in favour of the new formulation of providing for the enforcement of a requirement that BT make a reasonable offer or accept reasonable terms from an OLO. Alternatively, OLO charges could be settled under the control of Condition 13.1 and the general requirement that terms and conditions be reasonable.
2.36 In parallel with provisions for the progressive ‘sunset’ of the BT licence conditions covering charges by OLOs, there will be provision for the new Conditions in BT’s licence ensuring control under the OLO licences (see Annex A) to ‘sunrise’ progressively in step with the modification of the OLO licences.
Oftel seeks operators’ views on the proposal to match, for each other operator, the ending of the application of the BT licence conditions (covering the setting of charges raised by the other operator) with the entry into effect of the modifications to the other operator’s licence removing the determination of interconnect charges and the FAC basis of costs.
2.37 The present determination and FAC cost-based system for the control of BT’s interconnect charges is based on the production by BT of accounting information in the form of Financial Statements for businesses and disaggregated activities defined for regulatory purposes. Behind these Financial Statements are accounting documents which define the basis on which these ‘regulatory accounts’ are drawn up – and behind these lies BT’s Detailed Attribution Methodology. The regulatory accounts are required to be audited – the full year FAC accounts to the high standard that they ‘fairly present’ the results of the Businesses and activities "in accordance with the Accounting Documents". These arrangements stem from the provisions of Condition 20B: whose objectives are summed up as being:
(a) to ensure BT does not unfairly subsidise or cross-subsidise or show undue preference or discrimination;
(b) to assist the Director General in determining charges for interconnect services, properly and transparently derived from costs.
2.38 There is no intention to change the first of these purposes – preventing unfair cross-subsidy and undue discrimination. One of the prime purposes of the provisions of Condition 20B will remain the provision of information that will identify subsidies and cross subsidies so that the Director General can take whatever action is then appropriate. However, there are two features of the present drafting of these provisions that unduly restrict their full application in pursuit of this prime objective: restrictions on the definition of Businesses for regulatory purposes (discussed below in paragraph 2.45); and the additional tests that have to be applied to disaggregated activities before action can be taken against unfair cross-subsidy.
2.39 On the additional tests, Oftel is considering removing them so that the tests for unfair cross-subsidy of disaggregated parts of BT’s Businesses are the same as those applied to the Businesses themselves.
2.40 The principle underlying the second fundamental objective of Condition 20B – that charges should be transparently related to relevant cost – remains unchanged. But the mechanics of how this is achieved will now need to be adapted to reflect the use of incremental costs as the standard basis for interconnect charges and the new sets of information this requires.These are outlined in the following paragraphs.
2.41 The information requirements under the new control system are detailed in Chapter 6. The principal changes to the Statements BT will be required to produce under the modifications to its licence are:
(a) upgrading of the CCA Financial Statements to mirror their new importance in feeding base data into the models. They will be required to be disaggregated down to the same set of activities as for the HCA Statements and be audited to the same high "fairly presents" standard of verification.
(b) addition of further Statements to cover the output of the annual running by BT of the LRIC top-down model (described in Chapters 3 and 4 of the previous consultation document: Network Charges from 1997, published in December 1996). These will include "cost statements" which will set out the floors and ceilings for interconnect services as they derive from the running of the model (see Chapter 6 – figures 6.2 and 6.3). These Cost Statements provide essential information for other operators in assessing BT changes in interconnect charges. The LRIC Statements are to be audited to the same "fairly presents" standard as the present FAC Statements.
(c) acceleration of the presentation of some Statements; all three (HCA, CCA, LRIC) should be produced by the same date: 31 July following the end of each financial year.
(d) abolition of the half-year ("Interim") HCA Statements on the basis that under the new arrangements they will no longer add significantly to information (their prime purpose was to provide more up-to-date information for determination of charges at the start of the year) – see below (paragraph 2.43) for the special arrangements for Interim Statements for 1997/98) ;
(e) ending production of HCA Statements (after the year ending March 1999) – required only for a transition period while the expanded CCA and LRIC statements "bed down".
(f) dropping the "Restated Financial Statements" – no longer needed once the last Final Charges determination has been made (on the half year results at 30 September 1997 – see below, paragraph 2.43).
Oftel seeks operators’ views on the proposals for the changes in the provision of information backing up BT’s interconnection charges.
2.42 One of the key features of the new control (as explained in the previous consultation document of December 1996, Chapter 4) – is that, when it proposes changes to interconnect charges, BT is required to make sure it has the information available to demonstrate that the charges are reasonable and not liable to damage competition. This is the "burden of information" which lies squarely with BT. Oftel makes clear in the draft Guidelines that BT is expected to meet this to the same deadlines as are set out in the FTC Guidelines: that is, that the support information that BT will have prepared when designing its new charges and preparing to explain them should be available within two weeks of Oftel’s request.
Oftel invites operators’ views on the proposed setting of a two week period for BT to produce support information on its interconnect charges, existing or proposed.
2.43 Determined charges for BT’s interconnect will end on 30 September. (For "prospectively competitive" services the charges on 1 October will still be the same as those operating on 30 September: but they will have been set by Oftel as starting charges under the new arrangements and will be open to changes by BT as soon as the required 28 days notice has passed). For the six months to 30 September 1997, BT will have charged other operators on the basis of the Interim Charges determined for 1997/8. Without modifications to BT’s licence, these Interim Charges would not be replaced by Final Charges until these had been determined after the presentation of the outturn 1997/8 Financial Statements in July 1998. Oftel believes that the inter-operator accounts for the last half year of determined charges should be settled as soon as possible. Interim Financial Statements for 1997/8 are due by 31 January 1998. Oftel proposes therefore that these should be the basis for the last Final Charges determination. It will be important for other operators’ confidence in the basis of this determination that the Financial Statements should be audited to the same standard ("fairly presents") as is required for the outturn Financial Statements. Oftel has therefore included in the draft modifications at Annex A provisions to cancel the requirement for Final Charges to be determined on the full year outturn Financial Statements for 1997/8 and to replace it with a requirement for the Interim Financial Statements (the last that will be produced – see above 2.41 (d)), to be produced to a "fairly presents" standard and to be used by the Director General as the basis of the Final Charges determination for the charges already paid in the first half of 1997/8.
Oftel invites operators’ views on this proposal to require a "fairly presents" audit of the Interim 1997/8 Statements and to use the results to make the Final Charges determination for the last half year of determined charges ending 30 September 1997.
2.44 Two years of experience have revealed a number of areas of the present provisions of Condition 20B (which controls the production and presentation of audited financial information) which could be improved. Further modifications will be proposed to incorporate Oftel’s proposals for these improvements – the background to which is set out in the following paragraphs.
2.45 The present Condition 20B allows for the revision of the definition, for regulatory purposes, of the Businesses, and for the disaggregation within businesses down to those activities which require to be separately reported on. Changes to the definitions of Businesses and their disaggregation, can be made with BT’s agreement, or, if this is not given, after investigations leading to directions. It is becoming clear that these provisions may not allow for sufficiently fast reactions in the increasingly dynamic world of telecommunications and associated industries. The organisational boundaries adopted by firms in the industry to meet commercial, competitive and managerial requirements will increasingly tend to ignore the boundaries set by statutory licencing and the regulation that derives from it. It has always been a cardinal principle of Oftel’s approach to defining regulatory businesses that this is in no way intended to dictate to firms the way they should organise their businesses. Indeed it is designed to leave them free to be organised and re-organised as they judge best whilst preserving the Director General’s ability effectively to discharge his statutory duties and functions. The "regulatory accounts", designed to report on each separately defined business and activity, and the access to the detailed accounting information behind them, set up by the ICAS modifications of March 1995, are essential to this end. The definition of regulatory businesses and activities is central to the Director General’s meeting his duties: it is increasingly important that re-definition of businesses, and activities, for regulatory purposes should be able swiftly and simply to keep pace with the changes of a dynamic industry.
2.46 Oftel is concerned that the rather rigid processes of Condition 20B may not be able to match the pace of events. It is therefore considering what modifications may be necessary to streamline changes to these definitions. In particular it is re-considering the scope of its powers to seek changes to business definitions and the especial treatment given to the Residual Business.
2.47 These Statements are arguably the most important output of the present Financial Statements – in terms of meeting the second of the objectives of Condition 20B, assisting the Director General in the determination of charges. They will have the same – if not increased – importance under the new system of incremental costs. When BT has freedom to set charges on an incremental cost basis other operators will rely on the information (from the LRIC Statements of Costs in particular, see para 2.41(b) above) in forming judgements on whether to challenge BT’s charging proposals. A number of small changes are proposed to make clear that these Statements have the same status as the rest of the Statements and are audited to the same high standards.
2.48 Experience of the Financial Statements published so far has shown that the there can be differences between Oftel and BT, as to the appropriate disclosure and presentation of some of the contents of the Statements, still unresolved by the time the deadlines for publication, set by the licence, are reached. Sometimes this results from issues that have only arisen at the end of the audit process; sometimes they reflect fundamental differences of view between Oftel and BT on the way the data should be presented. Oftel has concluded that it is important for the proper understanding of the Financial Statements – and for them to make their full contribution to the transparency of the processes that lead to the setting of interconnect charges – that these differences should be minimised; and that, where they cannot be resolved, differences should be made clear to the readers of the regulatory accounts in the interests of transparency.
2.49 To meet the first problem (late identification of difficult issues), Oftel will be proposing licence modifications that will include provision for BT to present Oftel with the near-final version of the draft Statements and the Reports it contains not less than one month before publication. To meet the second problem (differences of view about the data to be presented and the form of presentation) Oftel proposes, through licence modifications, to require BT to publish with the Statements any commentary Oftel provides in writing, setting out its view on any issues where it has serious differences with BT. This process will mirror the commentaries made by Oftel in distributing the LRIC Statements for 1995/96 and for the half year 1996/97.
2.50 The present provisions require BT to produce, and the auditors to verify, the Statements "in accordance with the Accounting Documents". These lay down the broad policies, principles and practices that should be used; and are agreed between Oftel and BT. However, the detailed practices to be followed in arriving at the costs of components (one of the two key objectives of Condition 20B) are set out in the Detailed Attribution Methodology (DAM), an extensive document defining how costs are allocated and apportioned. This is a BT document which BT can be required to publish but which they have so far published voluntarily. It is not required to be agreed with Oftel. If there are elements in the DAM that Oftel does not accept, it can only change them via the Accounting Documents, not directly. In addition, although the DAM should be followed in producing and auditing the Statements, the licence does not make this absolutely clear.
2.51 Oftel proposes to resolve these uncertainties about the role and use of the DAM in two ways. The first, immediate, proposal is to amend the licence to make clear that the Statements should be "in accordance with" the DAM as well as in accordance with the Accounting Documents (parallel provisions would apply to the production and audit of the LRIC Statements in accordance with the detailed documentation behind the LRIC model). The second proposal, which Oftel will now develop with BT, is to find ways to ensure that, where Oftel identifies a detailed attribution used in the production of the Financial Statements, and particularly of the Statements of Cost of Standard Services, that is not acceptable, then the Director General, after due consultation, will have the capacity to change the attribution for the purposes of producing the Financial Statements.
2.52 Within Condition 20B there is provision (20B.17) for the Director General to consult with interested parties on his determinations and consents. Where revisions of the Financial Statements (and Accounting Documents) are concerned, the timetable set out by Condition 20B.17 may not be sustainable without delay to publication of the Statements (for which deadline dates are set in BT’s licence) or to the publication of the Accounting Documents that should accompany them. In practice it is clear that in most cases such consultation would be unlikely to result in any material changes to the proposed consents and determinations concerning Financial Statements or Accounting Documents; and that such consultation would only result in delay to the publication of data of immediate importance to OLOs in working out their up-to-date strategies. Oftel therefore proposes to delete the requirements for consultation for the consents required for changes to the Financial Statements and Accounting Documents. Oftel will nevertheless consult where appropriate and where time permits. It is not intended to change or remove any other of the consultations required under Condition 20B.
Oftel seeks operators’ views on the transparency of the present form of the Financial Statements, on the proposals outlined above for their adaptation to the needs of the new charge controls, and on the proposals for changes to address difficulties experienced with the Financial Statements, Accounting Documents and DAM.
2.53 As set out in paras 4.12-4.18 of the December 1996 consultation document on the new network charge controls, Oftel intends to maintain the fundamental requirements of Condition 24F which relates BT’s retail price changes to the charges BT Retail and OLOs pay to BT Network. That is: BT will still be required to ensure that there is no discrimination between these charges. It will still be necessary for BT to obtain Oftel’s prior consent before proposing retail prices that do not cover the combination of BT’s retail, fully allocated, cost and the charges for the services bought from BT Network ("Type A changes"). Where Oftel finds that the failure fully to cover costs and charges is not likely to damage competition, it may consent to the introduction of the prices, subject (as now) to the requirement that any reduction in interconnect (service) charges should be made available to all OLOs obtaining that service from BT Network, unless the Director General has consented to this requirement’s being set aside.
2.54 BT will still be required to provide information on the breakdown of the cost elements that go to make up retail prices. This breakdown will continue to be required for the same range of retail price changes as at the present, whether they require Oftel consent or not: this information is an important source of data for Oftel in making its assessment of any charges challenged by OLOs – and for OLOs in making challenges. The "Price Change Notices" (PCNs) required under Condition 24F will still be required to show how any proposed new retail price compares with the old existing price: identifying the profit element; the costs of Retail elements of the service; and the transfer charges to be paid to Network. The transfer charges will be those derived from the new incremental cost basis for interconnect charges; the retail costs will also eventually be on an incremental cost basis but initially will be based on FAC costs since (as noted in para 46 of the Fair Trading Guidelines) accounting information on incremental retail costs is currently limited.
2.55 Unlike the present version of the PCN, in the new version, the network transfer charge element will be broken down into purchases of standard interconnect services (compared with components which are used with the present PCNs) and of the remaining elements of the network required to complete the call after all standard service elements have been identified. These are the "sticks" – link and length components of transmission (and in some cases concentrator) facilities – explained in Chapter 3 (under "Operation of the Charge Controls").
2.56 The new PCN data is broken into standard services because it is only at the level of charges for (standard) services that a true comparison can be made between transfer charges paid by BT Retail and the charges paid by OLOs (since these charges will include the appropriate mark up) . The charges for the "sticks" have to be shown as one of the elements in the new PCN so that Oftel and other operators can compare the charges ascribed to this component (or combination of components) with the charges for the same components/combinations when they feature in charges for other services.
2.57 Modification of Condition 24F is expected to be minimal and designed primarily to adapt the present definition of Type A price changes to catch those proposed prices that fail to cover the combination of retail FAC costs and network service charges.
Oftel invites operators’ comments on how the PCNs can best be adapted in the light of experience and the change to the new controls.
2.58 In the December Document Network Charges from 1997 (Annex D), following public consultation, Oftel announced its intentions:
(a) to reclassify IPLCs as no longer services available under Condition 13;
(b) to classify all inland Private Circuits (to whomever supplied) as not available under Condition 13;
(c) to confirm that connection of systems for the supply of Private Circuit services would remain a service available under Condition 13.
2.59 Oftel proposes to give effect to these decisions by deleting the remaining two parts of Condition 46. Other operators will still have the right to require BT to provide Private Circuits and IPLCs but must obtain them at retail tariffs.
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3.1 As set out in previous consultative documents, in future BT will set interconnection charges within a new framework of controls in which the extent of flexibility will depend upon the level of competitiveness of the relevant market:
3.2 This chapter discusses Oftel’s classification of interconnection services by degree of competition and hence each service’s proposed treatment: basket, safeguard cap or no specific network charge controls.
3.3 Oftel has not changed the proposals concerning the main inland conveyance services set out in previous consultative documents. The proposals are summarised in the Table 3.1.
Table 3.1 Inland conveyance services
| Service | Classification | Charge control treatment |
| Call termination (local exchange segment) | Non-competitive | Call termination basket RPI–X |
| Call origination (local exchange segment) | Non-competitive | General network basket RPI–X |
| Local–tandem conveyance | Non-competitive | General network basket RPI–X |
| Single transit | Non-competitive | General network basket RPI–X |
| Inter-tandem conveyance | Prospectively competitive | Safeguard caps RPI+0% |
| Inter-tandem transit | Prospectively competitive | Safeguard caps RPI+0% |
3.4 Some of the points made in the responses to the previous consultative document, for example, about the definition of call termination, or the distinction between call termination and call origination, were repetitions of comments made in earlier consultations and contained no new arguments. One new point was BT’s suggestion that single transit (conveyance between two OLOs across one BT switch) is a prospectively competitive service and should be in a safeguard cap rather than the general network basket. Oftel considers that the competitiveness of single transit differs from the other transit services offered by BT. Other transit services, ie inter-tandem transit, face direct competition from other long-distance carriers. But single transit can only be offered by an operator that has a switch to which both the originating and terminating OLO are connected. BT, because of the size and ubiquity of its network, would appear therefore to have a significant advantage over competing transit operators. The competitive constraint on BT’s charges for single transit is more likely to be the provision of a direct interconnect link between the two OLOs. However, Oftel is concerned that, in the absence of its inclusion in the general network basket, OLOs with relatively small volumes between them could be exploited by an excessive single transit charge.
3.5 The full list of interconnection services in each basket and subject to safeguard caps (see Annex C) shows separate services for PSTN and ISDN for each of the inland conveyance services. This merely represents a continuation of the current regime, although historically the routing factors and charges have been identical for corresponding PSTN and ISDN services. Under the proposed network charge controls Oftel would expect this situation to continue unless BT were able to justify any differences in the appropriate routing factors for PSTN and ISDN services. Since it remains Oftel’s proposal that component rates will be the same for services in the same basket, the PSTN and ISDN conveyance services will continue to carry the same charges unless a difference in the routing factors were to arise.
3.6 Oftel continues to regard all international routes as prospectively competitive now that international facilities liberalisation has occurred. Each IDD conveyance charge, including by time of day, will be subject to a safeguard cap of RPI+0%. Generally, there was agreement with Oftel’s proposal that the safeguard caps should exclude the gross outpayment to the foreign operator. To monitor the safeguard caps, Oftel will need to monitor the changes in the settlement rates as well as BT’s announced changes in charges. The charge paid by operators will include the gross outpayment, so even with no change in the announced charge (including outpayment), the effective charge for IDD conveyance would increase if the settlement rate were to fall.
3.7 Oftel confirms that it intends to continue with its policy set out in the last consultative document, that from the start of the new network charge controls BT should not be obliged to provide inland or international private circuits as interconnection services under Condition 13. They will still be available from BT Retail at retail tariffs.
3.8 Several respondents argued that the test for whether the provision of private circuit services should be on interconnection terms is the degree of competition in the market for the provision of such private circuit services. In the case of private circuits Oftel does not consider that this is the appropriate test. IPLCs are close substitutes for international cable or satellite infrastructure (including backhaul, cable station access and up/downlinking) and inland private circuits are close substitutes for transmission capacity. In order for non-incumbent operators to invest in infrastructure they need an economic incentive to do so. The provision of private circuits on Condition 13 terms could undermine this incentive. Oftel therefore considers that BT should not be obliged to provide inland and international private circuit services as interconnection services. This proposed change does not however affect the connection of private circuits, which will still be on Condition 13 terms.
3.9 Operators wishing to provide partial private circuits need to connect with BT’s private circuits. Since no other operator can provide it, Oftel considers that the connection of private circuit systems is a bottle-neck service. Oftel has already made a determination that BT should provide this service and considers that it should continue to be an interconnection service. Typically, the charges for services of this type will be regulated in a basket with a cap of RPI–X (see, for example, charges for ISI, CSI and IECs discussed below). However, Oftel has not yet been asked to determine charges for connection of partial private circuits. If no determination of charges is made before 1 October 1997, such services provided by BT will be treated as new services – see paragraphs 3.51–3.52 below. The charges set by BT will be scrutinised very carefully by Oftel and, if necessary, appropriate regulatory action will be taken, such as inclusion in a basket.
3.10 Oftel remains in favour of the continuation of the basic formula to determine interconnect payments for NTS calls (in both directions) that has been used in recent determinations. Under this formula the originating operator receives compensation for originating the call, given by P–D+C, where P is the retail price, D is the deemed retail price, and C is the charge for a BT single tandem segment. The remainder of the call revenue is handed over to the terminating operator. This approach and the underlying rationale are discussed in greater detail in the Guidelines at Annex B. If BT were to depart from the NTS formula the Director General might consider that the charges levied or payments made were either anti-competitive and an abuse of a dominant position under the Fair Trading Condition, or not reasonably derived from cost under Condition 13.
3.11 Recently there have been discussions in the industry about the appropriate treatment of long duration local call rate calls. This may suggest some amendments to the detail of the application of the NTS formula above. Such adjustments are unlikely to give Oftel any cause for concern, especially if they are widely agreed in the industry. However, Oftel would need to consider any substantial deviations from the basic principles of the NTS formula, in particular to ensure that consumers do not suffer as a result. The Guidelines will be amended, if necessary, to reflect any adjustments to the formula which Oftel agrees are appropriate.
3.12 At the time that Oftel first made its proposal to classify DQ as a competitive service, it expected that the outcome of the separate consultation process dealing with DQ services would be known and the necessary changes implemented some months in advance of the start of the network charge controls. However, there has unfortunately been a delay in the DQ process. Oftel expects to issue a further document on DQ services soon. In advance of the reforms to liberalise the markets for DQ services they cannot be considered competitive. The DQ reforms will seek to eliminate the significant barriers to entry that currently exist, such as the terms of access to information from the holders of numbers (PTOs and service providers) and the only core database that exists at present (BT’s OSIS).
3.13 DQ liberalisation may change the nature of the services offered by BT. For example, some of the services might no longer be provided by BT Network under Condition 13, but might be moved into the Supplemental Services Business (SSB). In such circumstances the prices would fall outside of the scope of the network charge controls. This question will be addressed in the forthcoming DQ consultative document. Taking into account the delay in the implementation of the DQ reforms, Oftel proposes to classify any services relating to DQ that remain as interconnection services as prospectively competitive rather than competitive. They would therefore be subject to safeguard caps.
3.14 Most respondents (apart from BT) agreed with Oftel’s proposal that conveyance for DQ be charged for on pence per minute basis rather than a per call basis. BT suggested that changes would be needed to operators’ billing systems to implement Oftel’s proposal. Oftel also proposed in the previous consultative document that there should not be individual charges for the individual routings that made up the average routing factor. On this point the responses were mixed: some respondents favoured a single, averaged routing so that operators were not penalised because of BT’s choice of location of DQ centres, but others wished to see as much deaveraging of routings as possible.
3.15 The logical extension of deaveraging of routings would be not to have a separate conveyance service for access to DQ: if operators wished to purchase BT’s value-added DQ service they could purchase whatever normal conveyance services were required to reach the BT’s DQ centre: eg inter-tandem transit. This would remove the complexity in the treatment of conveyance for DQ proposed in the previous consultative document, ie comparing the component rates used with the component rates used for the underlying routings in the services in the general network basket and safeguard caps.
3.16 Oftel proposes that conveyance for DQ should not be treated differently from conveyance bought by an interconnecting operator for any other purpose. Operators should buy normal conveyance services from the network baskets and safeguard caps as required. To incorporate this change, some development of operators’ billing systems may be required.
Oftel welcomes comments on its proposal that interconnecting operators should buy normal conveyance services from BT if they wish to access its DQ service.
3.17 One complication is that, currently, to access BT’s DQ service requires the use of the Derived Services Network (DSN) switch and link – no other interconnection charge uses DSN costs. Oftel would expect BT to set a reasonable charge for use of DSN switch and link. In considering what charge would be reasonable, Oftel considers that there is close parallel to additional conveyance for non-geographic number portability. In both cases, the DSN is used only because the more efficient solution of accessing an intelligent network (IN) platform directly from tandem switches has not been implemented by BT. Oftel is minded, therefore, to take the view that it would be unreasonable for charges for use of the DSN when bought for access to BT DQ service to be greater than the charges for the DSN when bought as additional conveyance for non-geographic portability. Oftel is proposing to determine charges for additional conveyance in non-geographic portability up to 31 December 1998 as half the difference between the costs using the DSN and IN platform solutions; thereafter, there shall be no specific charges for additional conveyance (see paragraphs 3.60 to 3.63 below).
Oftel invites comments on its proposal to judge the reasonableness of BT’s charges for use of the DSN when bought for access to DQ in relation to the charges (to be determined by Oftel) for additional conveyance in non-geographic portability.
3.18 The majority of responses questioned Oftel’s proposal that the value-added element of OA be classified as a competitive service and that no specific charge control was needed. Two operators – BT and Mercury – agreed with Oftel. Both of these operators sell OA services to other operators; some operators provide their own OA service. The key question is whether BT is dominant in OA – for example, if BT were unregulated in this market, would it be able to increase its charge significantly without significant loss of business to competitors or self-provision.
3.19 Oftel recognises that there may be some economies of scale in providing an OA service. For example, it may be easier to optimise the number of staff in an OA centre if a larger number of calls is received, because there may be greater predictability about the arrival of calls in the busy hour. However, despite the number of responses that suggested that OA was not yet competitive, no convincing market analysis or quantification of economies of scale or other evidence of important barriers to entry has been provided to Oftel to persuade it to alter its view. In the absence of such evidence Oftel continues to propose that the value-added element of OA be treated as competitive.
Analysis of the OA market demonstrating BT’s dominance and evidence of the importance of barriers to entry are invited from respondents who wish to persuade Oftel to change its view that the value-added OA service is competitive.
3.20 Oftel will also be considering whether it would be more appropriate for the value-added element of OA to be provided by BT from its Supplemental Services Business, rather than as at present from its Systems Business.
3.21 Oftel proposes the same approach to the conveyance element of access to OA as for access to DQ, ie that there be no separate conveyance service and that operators purchase the conveyance service required to be conveyed from their point of interconnection to the BT OA centre. BT’s OA centres are accessed from local switches, but in such cases the local switch is performing a tandem function and so, in Oftel’s view, should be charged for as a tandem switch (see the further discussion of this issue in Chapter 5). Therefore, the main conveyance service for access to OA will be inter-tandem transit.
3.22 The current service for access to BT’s emergency operator will be separated into the value-added element and conveyance. Oftel does not consider that the value-added element of access to the emergency operator is currently competitive, nor is it prospectively competitive. Barriers to entry into this market exist, such as the understandable reluctance of the emergency services to deal with a large number of operators, because of concerns about reliability and accuracy of information. Currently the only providers are BT, Mercury and Kingston.
3.23 Usually non-competitive services would be covered by a charge cap of RPI–X. However, this service is different from other non-competitive services because of the particular sensitivity about quality and reliability – diminution in quality could have disastrous consequences. For this reason, Oftel considers that there is a need for BT to be able to apply to the Director General for consent to exceed the limit set by the cap if it can demonstrate that not to increase charges by more than allowed by the cap would endanger the quality and security of the service. There is an argument that Oftel should go further and abandon incentive regulation for this particular service and use cost-based charges rather than a charge cap. Oftel considers that a sensible balance between creating incentives for cost reduction without risking the quality of service would be struck by a cap of RPI+0% with a power of consent for the Director General to allow this cap to be exceeded if BT could demonstrate a risk to quality and reliability.
3.24 The conveyance element of access to BT’s emergency operator will be treated in the same way as conveyance for access to DQ and OA. As for these services, Oftel would expect the main conveyance service bought for access to BT’s emergency operator to be inter-tandem transit.
3.25 The current regime has been changed so that there are only three DMA services that are charged for directly – the costs of the other DMAs are recovered through a small pence per minute surcharge (less than 1%) on all interconnection services that use the local and tandem switch components. One of these directly charged DMAs relates to 10,000 number block transfers for number portability – this is a type of per line set-up cost (see paragraphs 3.58 to 3.59). The other two DMAs are:
3.26 Oftel proposes to include the former in a third basket, the ‘connection services’ basket, with the starting charge based on an estimate of incremental cost. BT has suggested that the latter is more like a bespoke service than a standard service. First, the service cannot be provided to all-comers, because of capacity limitations at the PCBs. Second, the cost depends upon the urgency with which the DMA is required – if non-urgent the change at the PCB can be incorporated into the regular visits of BT staff to the PCB; otherwise a specific trip will be needed. No charges have currently been determined for this service by Oftel. Therefore, Oftel proposes to treat the second type of DMA as a new service and will scrutinise the charge(s) set by BT to ensure that they are reasonable.
3.27 Sharing the costs of establishing points of connection, excluding transmission capacity, is already provided for in Condition 13.5C.1 of BT’s licence. The issue of whether transmission capacity should now be included in the cost sharing arrangements has been considered in the Interconnect Policy Forum. Oftel’s proposal is that Condition 13.5C.1 of BT’s licence should be deleted, but that the principle of sharing the costs of establishing points of connection, including transmission capacity and ongoing rental of the interconnect circuits, should be included within the list of terms and conditions in the guidelines that Oftel considers should reasonably be included in interconnect agreements. This would cover ISI, CSI and IECs. Oftel also proposes that the guidelines should reflect that it would be considered reasonable that costs should be shared according to the proportions in which BT and the interconnecting operator will bill the customers originating calls which are to be conveyed over the point of connection (this would mean an OLO would pay the whole cost for an IEC, because IECs only carry OLO owned traffic).
Oftel welcomes comments on its proposal to delete Condition 13.5C.1, but to include cost sharing principles for interconnection circuits in the Guidelines, covering all elements of the costs.
3.28 Continuing regulation of charges would be appropriate even if all elements of the costs were shared, because these services are bottle-necks, ie they can only be purchased from BT. Cost sharing would reduce, but not eliminate, BT’s incentive to set excessive charges. Therefore, Oftel proposes to include each individual charge for ISI, CSI and IECs in the connection services basket.
3.29 The costs that arise from the planning of interconnect and the management of interconnect relationships are reflected in the component called Product management, policy and planning (PPP). These costs are currently recovered on a pence per minute basis from OLOs buying inland conveyance interconnection services, and from BT Retail on BT-OLO call minutes.
3.30 The appropriate cost drivers and the way in which interconnect specific costs should be recovered by BT have been the subject of discussions in the Incremental Cost Working Group. The Working Group decided that the best approach would be to carry out a cross-sectional regression approach to identify the key cost drivers and their relative importance. A further objective was to investigate through this analysis whether there was any evidence that BT’s level of cost (£22m in 1995/96) was inefficiently high. Unfortunately, cost data has been submitted from so few operators that there are insufficient data points for a robust regression analysis to be carried out. The Working Group is considering how best to proceed. In the worst case that no detailed analysis of interconnect specific costs is possible, the fall-back could be to stick with the existing charging approach of pence per minute, with the charge included in the connection services basket. The starting charge could be based on an estimate of the incremental cost of interconnect specific costs, which is one of the outputs of the top-down model.
3.31 In the determinations under the current regime there are two sets of charges for local exchange segment, single tandem and double tandem segments. The difference between the two is that one includes an additional charge for operators with indirect access customers who use BT’s non chargeable operator services (so-called ‘intermediate services’). The non chargeable services include 999 calls to the emergency operator and a proportion of OA and DQ calls. A large proportion of operator assistance (OA) calls is not charged for, eg a customer reporting a problem in contacting a number, or attempting to set up a reverse charge call where the call recipient’s line is engaged or not answering. A proportion of directory enquiry (DQ) calls is also non-chargeable, eg blind and disabled DQ calls, or text calls to DQ, or calls where the operator does not start a search. The size of the charge to indirect access operators for BT non-chargeable operator services was 0.077 pence per minute in the draft final charges determination for 1995/96.
3.32 The argument for recovery of a proportion of the costs of non-chargeable operator services from call origination, purchased both by BT Retail and indirect access (IA) operators, can be stated as follows. BT incurs costs on non-chargeable operator services, which it would usually recover through retail call prices. If the IA operator does not incur the costs of non-chargeable operator services, it has a competitive advantage over BT that is not justified by greater efficiency. In such circumstances, requiring IA operators to pay the additional charge restores competitive neutrality.
3.33 Oftel considers that this argument is relevant for those types of non-chargeable operator services that are either imposed by regulation (such as free emergency calls, and free blind and disabled DQ calls) or where no charge is desirable (such as free text calls, and calls to operator assistance). But there are two exceptions. First, in Oftel’s view, the costs of ‘ineffective’ DQ calls should be recovered from those DQ calls that are charged for, and so should not be included in interconnection charges for call origination. Second, if an IA operator is not buying operator assistance services from BT, it will face its own cost of non-chargeable operator assistance calls – the argument above would not be relevant and inclusion of BT’s costs of non-chargeable operator assistance in interconnection charges would unfairly tilt the ‘playing field’ in favour of BT.
3.34 Oftel proposes that two elements of the ‘intermediate services’ component should remain:
The first charge will be payable on call origination only if the interconnecting operator purchases OA services from BT. In the draft final charges determination for 1995/96 this amounted to about 0.05 pence per minute. The second charge will be payable on all call origination services purchased by interconnecting operators (including BT Retail). It was about 0.01 pence per minute in the draft final charges determination for 1995/96.
Oftel invites comments on its proposals for intermediate services.
3.35 Respondents identified a few interconnection charges that were not dealt with in the previous consultative document, namely the public payphones access charge, and charges for targeted transit and VPN interconnect.
3.36 Oftel has accepted BT’s argument that there should be a charge to operators using BT’s payphones (including BT’s own services, such as Chargecard) to contribute to the recovery of the costs of the payphone line, housing, maintenance, etc.
3.37 Competition in the supply of payphones is growing, but because of BT’s ubiquity it is unlikely that competition will be sufficient to provide an adequate constraint on BT’s payphone access charge. In principle, therefore, Oftel considers that this charge might need to be controlled by including it in the connection services basket, with the starting charge set at an estimate of incremental cost. However, although BT has set a charge for payphone access in its carrier price list, Oftel has not made a determination of the charge. If no such determination were made before the start of the network charge controls, or if it were not possible for Oftel to obtain the necessary cost information in time to derive the incremental cost before the start of the network charge controls, the payphone access charge would effectively be treated as a new service, albeit one that may require close scrutiny.
3.38 Targeted transit is a service that will allow the operator originating a call to insert numbers as a prefix to identify to the transit carrier a particular delivery point for the transit service. For example, a cable operator might wish to use BT as a transit operator on an IDD call, to hand over the call to an ISR operator for international conveyance. Currently, the cable operator would need to use a private circuit link to the ISR operator.
3.39 Targeted transit is a particular type of transit service, but can be offered by long distance operators competing with BT. Therefore, it should be regarded as at least as competitive as inter-tandem transit, which has been classified as prospectively competitive. If before the start of the new network charge controls a request were made to Oftel to determine the charge for targeted transit, and if such a determination had been made, that charge would be subject to a safeguard cap for the control period. If no such determination had been made, targeted transit would effectively be treated as a new service.
3.40 BT has an advantage over competing suppliers of VPNs because of its geographical ubiquity. However, Oftel has not yet determined a charge for VPN interconnect, nor has it decided the principles on which such a determination would be made. Therefore, it would be premature to specify charge control treatment of VPN interconnect – effectively, it will be dealt with in a similar way to new services.
Oftel welcomes comments on its proposals for the network charge control treatment of the payphone access charge, targeted transit and VPN interconnect.
3.41 The previous consultative document was published before international facilities liberalisation (IFL) licences had been issued and before BT had launched its in-span handover (ISH) product. It did not therefore cover any international products (other than IDD and IPLCs). Until 18 December 1996 only BT and Mercury were licensed to own and operate international cable facilities in the UK. Other international operators providing international services could either obtain international private leased circuits (IPLCs) to compete as international simple resellers or resell BT’s or Mercury’s international calls. A total of 45 international facilities licences have now been issued.
3.42 Operators supplying international services will usually require access to international capacity. It is an upstream input for competitors in the market for supply of international retail services (switched calls and non-switched private circuits). International capacity includes both international private leased circuits (IPLCs) and international facilities: backhaul, cable station access and undersea cable capacity.
3.43 When the UK government announced last summer that it intended to issue new international facilities licences, Oftel reassessed its regulation of international markets. Regulation is an imperfect substitute for competition, so all elements of international services were analysed to identify where competition was possible. In order for a new facilities based operator to compete, it either needs to be able to self-provide all the elements of transmission of an international call, or to the extent that it is unable to do so and it is legitimate to require the incumbent operators to provide it, access to those elements on cost oriented, non-discriminatory terms. Any potential barriers to entry were identified so that they could be regulated effectively to ensure any market power possessed by the incumbent former duopolists could not be abused. The following potential barriers to entry were identified:
3.44 Backhaul is a high capacity inland circuit between a cable landing station and a switch. Provided operators can connect to international capacity at cable stations there are no significant barriers to entry. Any UK long distance facilities based operator can use (or build) elements of their existing network to provide backhaul, and some operators have done so to construct alternative backhaul.
3.45 BT is currently obliged to supply inland circuits to other operators under Condition 1 and Condition 46 of its licence and the supply is subject to Condition 16 (publication of tariffs), Condition 17 (non-discrimination and preference) and Condition 18A (fair trading). As backhaul is a particular use of an inland circuit, BT is similarly obliged to supply backhaul. BT’s current backhaul prices are based on droit de passage prices, which are lower than other inland private circuit prices. Oftel is closely monitoring the development and pricing of alternative backhaul provision in the UK. Although the plans of individual companies are confidential, from Oftel’s discussions with the industry it understands that alternative backhaul is planned within the next year to a number of cable stations. Oftel proposes that, like other inland private circuits, BT should not be obliged to provide backhaul as an interconnection service.
Oftel invites comments on its proposal to treat backhaul in the same way as other inland private circuits.
3.46 Cable station access is the means by which an international facilities operator connects offshore cable capacity to inland backhaul. In the UK no licences (in addition to IFLs) are needed to land new undersea cables or construct cable landing stations. BT, as a cable station owner, currently has bottle-neck control. BT is obliged to supply access services, including digital cross-connect activation – the BT product is known as in-span handover (ISH) – under Condition 13 on cost-based terms. Supply is subject to Condition 16B (publication of intercon-nection tariffs), Condition 17 (non-discrimination and preference) and Condition 18A (fair trading) which ensure that other operators can obtain access to the same functionality as BT at the same cost as BT.
3.47 BT’s charges are currently based on fully allocated historic costs. Charges have not been set by Oftel, but have been checked to ensure that they are consistent with the charging requirements under Condition 13 of BT’s licence.
3.48 Oftel does not consider that ISH will become competitive within the period of the next price control and so proposes to charge control ISH as a non-competitive service. The elements of ISH are similar to the elements of ISI. Those elements that are the same will be purchased at charges governed by ISI charges set by BT in the connection services basket. The elements particular to ISH will also be included in this basket, with the starting charge set at an estimate of incremental cost using the same methodology as for ISI.
Oftel welcomes comments on its proposal to include charges for in-span hand-over in the connection services basket.
3.49 Oftel does not regard international cable capacity as a bottleneck controlled by BT, but it does have some concerns in the short term about its availability and price to new UK international facilities licensees. Oftel has indicated to BT that, as a minimum, it expects BT to act as a ‘broker’ for new (non co-owner) UK licensees and to convert IPLCs to indefeasible rights of use (IRUs), which BT is doing on the basis of a price that reflects the true cost to BT of acquiring the capacity. Oftel is also undertaking a wider investigation into the pricing and availability of cable capacity. Oftel proposes no specific charge controls for undersea cable capacity.
3.50 Customer sited handover (CSH) is provided to international facilities licensees who do not wish to construct their own infrastructure. The product consists of handover on the customer’s premises, a leased private circuit to BT’s international trans-mission centre and leased backhaul to the cable landing station. To provide transparency, Oftel expects BT to identify explicitly within its CSH tariff which elements relate to each of handover, private circuits, and backhaul. So long as BT complies, further specific charge controls on CSH should not be needed, since customers will be able to benefit from any charge reductions in individual elements (whether these are due to competition or to regulation). If BT were to charge purchasers of CSH higher charges for individual elements than other purchasers of backhaul, ISH or private circuits, Oftel would be likely to conclude that BT was behaving in an unduly discriminatory or anti-competitive manner.
3.51 When a new service is introduced customers cannot be made worse off, provided that all of the old services continue to be provided. But the prospect of excessively restrictive regulation could deter innovation and prevent operators from benefitting from the new service offering. Therefore, generally when a new interconnection service is introduced by BT, there will initially be a presumption that no charge control will be necessary.
3.52 But if the new service becomes an important input into retail services and if it became clear that BT was abusing a dominant position, there might need to be an adjustment to the level of charge offered by BT for the new service, using appropriate conditions of BT’s licence, such as C18A or C13. For services where BT can be expected to have a degree of market power, such as connection of partial private circuits, DMAs at public payphones, and VPN interconnect, Oftel will scrutinise very carefully the charges set by BT to ensure that they are reasonable. In some circumstances it might be appropriate for specific charge control to be introduced which, depending upon the competitive-ness of the service and the circumstances, might be a safeguard cap, an individual charge cap for the new service for the remainder of the charge control period or including the charge in a basket.
3.53 Charges for number portability are determined in accordance with Condition 34C of BT’s licence, which provides for an annual determination of Standard Portability Charges by the Director General. These charges are currently based on fully allocated costs. As with all other network charges, Oftel intends to base future number portability charges on long-run incremental costs. In the long term Oftel considers that portability should become a standard service covered by the provisions of Condition 13.
3.54 The first determination of number portability costs and charges was produced in January 1997. This covered portability of ‘geographic’ numbers (‘ordinary’ residential and business telephone numbers) and allowed BT to recover two portability charges: ‘per line set up’ (the costs of enabling individual customers to port their numbers) and, for a limited period, ‘additional conveyance’ (a proportion of the costs associated with routing a call to a ported number).
3.55 In July 1997 operators will begin offering portability of some ‘non-geographic numbers’: freephone (eg 0800), local rate (eg 0345) and national rate (eg 0990) numbers. Later in the year, portability will be extended to premium rate services (eg 0898). Oftel has yet to produce a determination of BT’s charges for such ‘non-geographic’ portability, but will do so shortly. This determination will be based on fully allocated costs, pending the introduction of long run incremental costs. Oftel would expect this determination to follow similar principles to the determination of geographic portability: it would allow standard portability charges for per-line set up and, in some cases and for a limited period, additional conveyance.
3.56 Condition 34C specifies that charges shall be based on fully allocated costs "unless some other cost-basis shall have been substituted in relation to the charges determined by the Director General or otherwise provided for under the provisions of Condition 13", in which case the Director General may determine appropriate arrangements for altering the cost-base in order to conform with those provisions. Once long run incremental cost is introduced as the cost basis in Condition 13, the Director General may require the same basis for portability charges. As noted above, there are currently two categories of portability charges: per-line set up and additional conveyance. Oftel considers that both types of charges should be based upon long run incremental costs as soon as this basis is adopted for other network charges. Oftel expects to produce a determination of number portability charges in March 1998; this will be based on long run incremental costs and will be applied retrospectively back to charges from 1 October 1997.
3.57 Other costs associated with portability may arise over time, such as administrative costs associated with ‘simultaneous’ or ‘subsequent mobility’ (whereby a customer retains his number when changing address at the same time or after changing operator). If and when new costs arise, the Director General will treat them in the same way as any new services, referring, as appropriate, to Conditions 13, 17, 18A and 34C in BT’s licence. Any new portability charges would also be based on long run incremental costs.
3.58 Per line set up charges relate essentially to the cost of data build (ie change to the number record at the switch) and other administrative processes. A reasonably reliable estimate of the incremental costs may be obtained either by constructing a simple ‘bottom-up’ model of the activities involved or by examining BT’s disaggregated CCA costs of these functions and removing part or all of the overhead allocation.
3.59 The 1996/97 determination of geographic portability charges makes a distinction between digital switches and analogue TXE4 switches. The costs associated with TXE4 switches are much higher than digital switches. In its 1995 report on number portability, the Monopolies and Mergers Commission (MMC) stated that "BT told us that its current intention was to replace all remaining TXE4 exchanges with digital ones by the end of September 1997, although this was not a firm commitment. We consider that the higher costs resulting from the continued existence of TXE4 exchanges should be disallowed from that date even if BT has not by then completed the replacement programme" (paragraph 2.192 of November 1995 MMC report – Telephone Number Portability). Oftel intends to implement this MMC recommendation. After 30 September 1997 all per line set up charges will be determined on the basis of the long run incremental costs of per line set up on digital