2.1 In previous consultative documents Oftel has set out its proposals for future interconnection charging arrangements. BT will still be required to offer Standard Services and to publish a list of up-to-date interconnection charges for these services and the underlying rates for components and parts, and the routing factors used (the usage of components in each service). However, the charges will no longer be determined annually by Oftel, but set by BT within a new framework of controls in which the extent of flexibility for BT will depend upon the level of competitiveness of the relevant market:
2.2 Reasoned complaints that the charges set by BT are anticompetitive, unduly discriminatory or unfair will be investigated by Oftel. If necessary, Oftel will use its order making powers to require BT to change its charges. This chapter discusses the proposed treatment - basket, safeguard cap or no specific network charge controls - of all of BT's interconnection services currently determined by Oftel.
2.3 One difference between the new regime and the current regime arises from the classification of conveyance services. In the current interconnection regime there are three main inland conveyance services purchased by interconnecting operators: local exchange segment, single tandem segment, and double tandem segment. In the proposed new regime the services bought by operators will be classified in a more disaggregated manner and, as set out in the sections below, different regulatory controls will apply to each of the main types of conveyance.
2.4 In the new regime there will be two local exchange segment services, one for call termination and one for call origination. A single tndem segment will be composed of two services in the new regime: a local exchange segment (either call origination or call termination) and local-tandem conveyance. A double tandem segment will be made up of three services: a local exchange segment (either call origination or call termination), local-tandem conveyance, and intertandem conveyance. These services are shown in Figure 2.1. A fuller comparison of all current standard interconnection services in the new and current regimes, together with the regulatory treatment proposed by Oftel, is set out at Annex E.
Figure 2.1 Main inland conveyance interconnection services
Note: There are corresponding conveyance services for ISDN and these will be treated in the same way as the PSTN services.
International
2.5 Oftel indicated in the June Statement that it intended to go ahead with a determination under Condition 13 of BT's Licence that BT is obliged to provide IPLCs to certain operators on certain routes. Oftel proposed that IPLC charges that are determined under C13 would be the base charges for the proposed network price controls. A RPI+0% safeguard cap would apply until the supply of international private circuit services on a particular route was determined as competitive. Once the supply of international private circuit services on a route was determined as competitive, BT would be free to set prices for IPLCs subject to competitive controls.
2.6 On 6 June 1996 the Government announced that it would end the BT/Mercury duopoly on the provision of international facilities and invited applications for licences. 46 applications were received in the first tranche of applications and licences are expected to be issued before the end of the year. At the time the announcement was made Oftel recognised that the liberalisation would mean that Oftel would need to examine the future pricing arrangements for IPLCs, and accordingly issued a consultation on the Future Pricing of IPLCs in a Liberalised International Facilities Market in July 1996. As a result of this consultation Oftel now considers that international private circuits should from 1 August 1997 be removed from the Condition 13 pricing structure and should fall under the retail price control regime for such circuits.
Inland
2.7 Most inland private circuits are supplied by BT on retail terms. Those supplied to operators with relevant connectable systems status that are not PTOs authorised to selfprovide could potentially be supplied under Condition 13. Oftel proposes to eliminate this anomaly as it has no procompetitive effect, but may actually act as an incentive on potential licensees to seek to limit the scope of their authorisation to selfprovide Private Circuits.
2.8 Oftel, therefore, proposes that ALL inland and international private circuits should not be available to operators from BT as interconnection services under Condition 13. Oftel will put forward licence modifications to achieve this. A fuller discussion of Oftel's proposals for inland and international private circuits is attached at Annex D.
2.9 As in the previous consultative document, Oftel proposes that charges for the value added elements of two services should be outside the network charge controls, because of the degree of competition that already exists and/or the expected development of competition before the start of the network controls on 1 August 1997:
The value added elements of these two services will account for about 5-10% of the revenues of BT Network (excluding payments to other operators).
2.10 In the separate consultation on national directory information (consultative document published in October 1995 and two subsequent Workshops) two options are being considered. One option is to allow competing core databases to be set up, which would provide competition to BT's numbering information service (NIS), which has now been renamed Operator Services Information System (OSIS). The other option is for there to be a single core database, but managed by an independent agency or joint venture, rather than owned exclusively by BT. Operators or service providers would be able to obtain directory information from the database and would be able to compete in the provision of directory enquiry products. Under either option Oftel anticipates that vigorous competition will develop in DQ services. As in the last consultative document, Oftel proposes that the valueadded element of DQ interconnection services should be free of specific network charge controls. It will, as stated above, be subject to the general UK competition legislation and the provisions of BT's licence, including the Fair Trading Condition. For international DQ services Oftel is not aware of any barriers to entry. Therefore, Oftel proposes that the valueadded element of international DQ should also be free of specific network charge controls.
2.11 For the new regime Oftel proposes that each current standard interconnection service relating to DQ should be unbundled into two services: the valueadded element (use of BT's directory enquiry service), and the related inland conveyance to a BT DQ centre. The charge for the 'valueadded' directory enquiry service will be free of specific network charge controls; Oftel's proposed approach to the charge for the related conveyance service is discussed in paragraphs 2.43-2.52.
2.12 Oftel intends to make a public Statement on general policy direction for DQ services before the end of January 1997. If a single database model were adopted, regulatory action might be required to control the price and quality of access to that database. This would be analogous to the current controls on BT's services of inputting data to and downloading data from the OSIS database, although BT might no longer be the controller of the single database. If there were competing databases, BT's large share of customer connections might mean that continued regulatory scrutiny of the terms of supply of its raw customer information might still be necessary. In either case proposals will be formulated separately from the network charge control review, as part of the consultation process on directory information. If any licence changes required for the removal of barriers to entry into DQ services had not been fully implemented and effective by 1 August 1997, it might be appropriate for the determination of these charges by Oftel for 1997/98 to be allowed to run on for the necessary period.
2.13 In its previous consultations on network charge controls, Oftel suggested that operators should be encouraged to selfprovide operator assistance services and that there are no significant barriers to entry. Some operators have argued that BT has a considerable advantage over other operators because of economies of scale and that operator assistance should be subject to a safeguard cap, at least for the early part of the forthcoming control period. Oftel rmains to be convinced about the importance of economies of scale in this market, but considers that there are no barriers to third parties setting up such services to realise any economies of scale that may exist by supplying operator assistance to a number of different operators. In any case, if there were a disparity in economies of scale, it should lessen over time as other operators, individually and collectively, increase their customer bases. Oftel proposes, therefore, that there should be no specific network charge controls on the value added elements of operator assistance services.
2.14 In some responses to the previous consultative document it was suggested that the policy of no specific network charge controls should not apply to the operator assistance services purchased from BT by indirect access operators. However, Oftel is not aware of any reason why indirect access operators cannot selfprovide operator assistance, or buy it in from a third party, in a similar way to direct access operators. Oftel proposes, therefore, that the valueadded elements of operator assistance services for indirect access operators should also be free of specific network charge controls.
2.15 As for DQ, each current interconnection service relating to operator assistance, both domestic and international, will be unbundled into two services: for the 'valueadded' element (BT's operator assistance), and for the related inland conveyance to a BT operator assistance centre. For Access to BT's international operator assistance and onward successful call there will be a third service: IDD conveyance. The valueadded services will be free of specific network charge controls; Oftel's approach to the charge for the inland conveyances service is set out in paragraphs 2.43-2.52.
2.16 Prospectively competitive services are those that are not expected to be competitive by August 1997, but are expected to become competitive during the next control period, ending on 31 July 2001. Oftel proposes to regulate the charges for such services outside a network basket using a safeguard cap of RPI+0% on each discrete charge. It is intended and expected that the binding constraint on charges will be imposed by the pressures of actual and potential competition rather than the safeguard cap. During the control period, safeguard caps will be removed from services which are determined to be competitive under the existing process set out in Condition 16B.6 of BT's licence. Guidelines on how Oftel intends to operate this condition have now been made public.
2.17 Oftel proposes two types of interconnection service as prospectively competitive:
These services will account for some 15-20% of the revenue of BT Network.
2.18 In the previous consultative documents Oftel proposed that intertandem conveyance should be classified as prospectively competitive services and should be regulated by safeguard caps of RPI+0%. Few responses challenged this approach.
2.19 There is a number of different (though closely related) services wich comprise intertandem conveyance services (see Annex E for a full list). For example, the current subdivision of the basic intertandem conveyance service into three services by distance band (up to 100 kilometres, between 100 and 200 kilometres, and greater than 200 kilometres) will remain. In addition, there are variants on the basic service which use the same network components but with different routing factors, such as intertandem conveyance for international direct dial (which is not subdivided into distance bands) and intertandem transit (which involves an additional tandem switching stage). Transit services are used for calls that neither originate nor terminate on BT's network, but are carried on BT's network between the originating operator and the terminating operator.
2.20 Oftel proposes that each discrete charge for each intertandem conveyance service, including each charge by time of day, should be governed by a safeguard cap of RPI+0%. Oftel would expect that BT will base its charges for all of its intertandem services on the same underlying component rates, so that differences in the charges will arise only from differences in routing factors. If BT were to use different component rates for different intertandem services, Oftel might conclude after investigation that BT was behaving in an unduly discriminatory or anticompetitive manner, unless BT could provide adequate reasons to justify its charges.
2.21 On 6 June 1996, the Government announced that the UK would end the existing BT/Mercury duopoly in the provision of international facilities. The Government also announced that it would be inviting applications for international facilities licences. Forty six licence applications were received in the first tranche (which will all be considered together) and the Department of Trade and Industry has stated that it intends to issue the first licences by the end of the year.
2.22 In Oftel's consultation, IDD Calls, published in December 1995, Oftel considered, amongst other issues, whether gross or net accounting would be appropriate when calculating IDD interconnection charges. Oftel stated that, should international liberalisation occur, gross accounting rates would be appropriate. Following the Government's announcement, Oftel has decided that gross accounting should be used for IDD interconnection charges.
2.23 Oftel proposes to classify IDD conveyance on each country pair route as a prospectively competitive service to be regulated by safeguard caps of RPI+0%. However, Condition 16B.6 allows BT or another operator to request that the Director General determines a service to be competitive. The safeguard caps would not be implemented, therefore, for any route that the Director General had determined as competitive before 1 August 1997. Safeguard caps would also be removed during the control period for any routes that were determined as competitive. Oftel is currently considering a request from BT under Condition 16B.6 in respect of IDD conveyance on certain routes (USA, Canada, New Zealand, Australia, Switzerland, Norway, Sweden and Finland) and all other routes to European Union countries. It expects to issue a draft determination for consultation before the end of the year.
2.24 For routes that have not been determined as competitive before 1 August 1997, Oftel proposes that each discrete charge set by BT for IDD conveyance, including each charge by time of day, but excluding the gross outpayment to overseas operators, will be subject to a safeguard cap of RPI+0%.
2.25 Oftel proposes that the gross outpayment will be excluded from the safeguard cap control (although it will, of course, continue to be part of the charge paid by interconnecting operators). The competitive developments in international routes should provide sufficient downward pressure on accounting rates. In such circumstances, including the gross outpayment in the safeguard cap would mean that there would be a danger that th RPI+0% constraint would not provide a satisfactory safeguard. If accounting rates were falling, a safeguard cap operating on a charge that included the gross outpayment could be satisfied even if the charge for the IDD conveyance element were increasing in real terms.
2.26 Oftel considers that call termination in general can be regarded as an area of bottleneck control and as such should be treated as a separate service to be regulated by a separate basket. The bottleneck arises because, once a customer has chosen to become connected to the access network of a particular operator, anybody wishing to call that customer (and the operator conveying the incoming call) would have no choice but to terminate the call on the chosen operator's network. Call termination will account for around 15-20% of the revenues of BT Network.
2.27 In principle, Oftel sees the bottleneck as covering that part of BT's network from the network side of the lowest part of the network hierarchy at which operators can practically and economically interconnect through to the customerside of the concentrator, ie the local exchange segment. Oftel does not agree with some respondents who suggested that the bottleneck necessarily starts at the point of interconnection, typically the tandem switch, where other operators' calls are handed on to BT for final delivery. At present there is relatively little competition for the provision of links between tandem and local switches and Oftel does not consider that such links can be expected to become competitive during the next control period (which is why they will be in the general network basket - see below). But there is nevertheless the likelihood of competition in the provision of such links over the longer term and so they do not constitute a longterm bottleneck. As in the June 1996 Statement, Oftel proposes to define call termination always from the local switch and never from the tandem switch.
2.28 This approach implies that the call termination basket will only include one service, the local exchange segment. Strictly, it will also include three other services: the call termination local exchange segment for ISDN, plus remote-local conveyance for PSTN and for ISDN. Currently the routing factors and interconnect charges for the ISDN conveyance services are precisely the same as for the corresponding PSTN services. Remote-local conveyance is an extra service needed in order to decompose BT-BT own exchange calls into interconnection services - it uses a subset of the components used by the local exchange segment, with the same routing factors for that subset (see Annex E).
2.29 For operators that continue to interconnect with BT at a tandem switch, call delivery will involve purchasing two interconnection services from BT: a local exchange segment for call termination and local-tandem conveyance. Only the former will be included in the call termination basket, but the charge for the latter will be directly regulated because it will be included in the general network basket.
2.30 As in the June Statement, Oftel proposes that the following services should be included in the general network basket:
These services will account for around 25% of the revenues of BT Network.
Call origination
2.31 Call origination is defined in an analogous fashion to call termination, ie from the customerside of the concentrator to the network side of the local switch. As for call termination, Oftel proposes that the local switch should always be the cutoff point for the call origination service and never the tandem switch.
2.32 Some respondents to previous consultative documents suggested that call origination on BT's network is a long term bottleneck. However, unlike call termination, Oftel considers that this description is not appropriate for call origination. The key difference between call origination and termination is that, for origination, the customer who ultimately pays the call origination charge (eg through the retail prices of an indirect access operator) is the individual who makes the choice of which network to obtain an access line from. This provides a constraint on the operator's charges for call origination, which does not exist for call termination charges, because the price paid by the caller for origination will have a direct bearing on the caller's choice of access provider, whereas the price paid by the caller for termination will not directly affect the choice of access provider of the called party.
2.33 Although local access operators are providing increasing competition to BT for call origination, Oftel does not consider that there will be sufficient competition in this market over the next price control period for the service to be regarded as prospectively competitive. Oftel proposes that the call origination local exchange segment should therefore be a service in the general network basket.
Local-tandem conveyance
2.34 In previous consultative documents Oftel has recognised that the competition to local-tandem conveyance on BT's network is significantly weaker than the competition for some other services, such as intertandem conveyance. It is anticipated that competition will increase over time, as more operators in the future will have sufficient traffic volumes to warrant interconnecting with BT's network at local switches rather than at tandem switches. Currently the majority of operators interconnect with BT at tandem switches. In addition, operators that interconnect at BT's local switches might be able to offer to other operators an alternative to interconnection at BT's tandem switch, ie a transit service for delivery to or from BT's local switch. However, it is not expected that this competition will be sufficiently widespread, nor develop sufficiently rapidly, to justify classifying this service as prospectively competitive for the forthcoming control period. Therefore, Oftel proposes that conveyance between local and tandem switches will be included in the general network basket.
Flexibility of charges within the General Network Basket
2.35 Oftel anticipates that in most cases charges for particular interconnection services set by BT between floors and ceilings, based on incremental and standalone costs, will be acceptable (see Chapter 4 and Annex B for further discussion of floors and ceilings). However, for services within a network basket, there is a further effective constraint on flexibility imposed by the cap of RPI-X. BT will not be able to raise the charge for all of the services in a basket up to their respective ceilings, because this would lead to a breach of the charge cap constraint. If the charge for one service increases, to avoid an icrease in the average charge for the basket services, the charges for other services in the basket must fall. Of course, to comply with RPI-X, the average charge (in real terms) must itself fall over the course of the charge control year. An illustration of this effect, under a number of simplifying assumptions, is shown in Table 2.2.
Table 2.2 Illustration of flexibility in charges in the general network basket, using indicative figures for 1994/95
Pence per minute
Local exchange Local-tandem Total (Single
segment (call conveyance tandem segment for
origination) call origination)
'Starting charges' 0.48 0.26 0.74
floor plus floor plus
equal markup equal markup
Possibility (1) 0.40 0.31 0.71
at floor close to ceiling
(high as possible,
given no change
in average charge)
Possibility (2) 0.52 0.23 0.75
high as possible, at floor
given no increase
in average charge
Notes: The 'starting charges' are the costs of services, including markups, derived from the hybrid incremental cost figures for 1994/95 (see Chapter 3 for further details)
The floors and ceilings are similarly the indicative figures derived for 1994/95 (see Chapter 4).
For simplicity, it is assumed that there are only two services in the general network basket
The calculation of the average charge assumes, for illustrative purposes, that the weight on a change in the charge of the local exchange segment is 55% and that the weight on the change in the charge of local-tandem conveyance is 45%.
2.36 The first possibility in Table 2.2 is constructed by setting the charge for the local exchange segment to its floor and deriving the highest charge that BT could set for local-tandem conveyance in order for there to be no increase in the average charge (in the simplified case of only two services in the basket). In the second possibility it is the charge for local-tandem conveyance that is set at its floor. The figures in Table 2.2 represent a very simple view of the basket constraint, in the sense that the constraint is treated as being no change in the average charge, rather than RPI-X on the average change in charges.
2.37 In Table 2.2 the charge for a call origination single tandem segment varies in quite a narrow range between these possibilities, although there is substantially more variability in the charge for either of the services that makes up the single tandem segment. The limited flexibility on the charge for a call origination single tandem segment arises from the proposal that the general network basket should include just three types of interconnection service. This in turn follows from the proposal to exclude a substantial number of interconnection services from the network baskets, in particular the intertandem conveyance services and IDD conveyance (both to be covered by safeguard caps as described above - see Annex E for a full list of the services in each basket and in safeguard caps).
Single Transit
2.38 Single transit involves the use of a single switch, but no transmission over BT's network. Single transit interconnection would occur where there is no (convenient) point of interconnection between two operators' networks, but both have a point of interconnection with BT at the same BT switch. This service is not expected to become competitive during the forthcoming control period. As in the previous consultative document, Oftel proposes to include single transit in the general network basket.
2.39 Other interconnection services include access to Number Translation Services, the conveyance services related to DQ and operator assistance, interconnect specific services, and access to emergency services.
2.40 Access to Number Translation Services includes access to BT's Freefone, Locall, National Call and Premium Rate Services. The determination made in January 1996 for access to NTS specifies that the originating operator will pay to BT the Deemed Retail Price for the call on the basis that BT covers the originating operator's costs of conveyance over its own network by paying the originating operator the rate determined for a single tandem segment on BT's network (plus an allowance for the originating operator's additional retail costs). The Deemed Retail Price depends upon which of BT's services is being accessed.
2.41 Oftel proposes that the principles of the determination for access to BT's NTS should continue to apply, and this will be incorporated in the interconnection guidelines (see Annex B). The payments made by BT to originating operators for access to NTS should therefore be based upon the charges for a call origination local exchange segment and local-tandem conveyance that are set by BT under the general network basket, plus an allowance for retail costs. The payments made by originating operators to BT should be related to the retal price. Payments which do not comply with this approach may be viewed as anticompetitive or unfair.
2.42 Oftel proposes that similar rules should determine the flow of payments in the opposite case, ie where BT provides call origination for access to another operator's NTS. Oftel's view that the NTS determination should in principle apply generally, regardless of whether BT were the terminating operator or the originating operator, was set out in the determinations of Interim Charges for 1995/96 and for 1996/97.
2.43 As outlined above, in the new regime there will be an unbundling of each current DQ and OA service into two services: for the valueadded element and for the related conveyance to BT's DQ or OA centre. As discussed above, the value added service will be free of specific network charge controls because of the degree of competition that is expected. This section discusses the treatment of the related conveyance service.
2.44 The current charging approach for DQ and OA, with the valueadded element and the conveyance element bundled together in a single service, is on a per call basis. In the new regime, charges on a per call basis may continue to be appropriate for the valueadded service but, in Oftel's view, the conveyance service should be charged on a pence per minute basis in the same way as all other conveyance services.
2.45 Oftel proposes, however, that there should continue to be a single conveyance service for each current DQ or OA service, ie that the conveyance service should not itself be decomposed into individual services, one for each of the different types of routing that make up the average routing.
Oftel invites comments on the proposal that the new conveyance services related to DQ and OA should be charged for on a pence per minute basis, not a per call basis, and the proposal that the conveyance services should not be decomposed into individual services for each type of routing.
2.46 In the previous consultative document Oftel proposed that the inland conveyance services associated with DQ and operator assistance would not be included in a network basket, because their routing factors constitute averages of different types of routing, some parts of which would fall under the general network basket and some parts under the intertandem conveyance safeguard caps. However, Oftel stated that it would expect that the charges set by BT should be no higher than if they were based on the component rates (for the corresponding services that make up the different types of routing in the average routing) that will be set by BT under the intertandem conveyance safeguard caps and the general network basket. It was noted that the charge itself would be different because of the specific routing factor for this type of conveyance. The reason for this proposal was the recognition that the ability of other operators to selfprovide DQ and operator assistance could provide some competitive constraint on BT's charge for the inland conveyance element as well as the value added element.
2.47 The potential difficulty with the proposal in the last consultative document is that it might lead to a distortion in competition in the market for the value added service. This issue is discussed first in the context of the DQ market, then OA is considered. Competing suppliers of DQ services might be either other network operators or independent service providers (IPs). These competitors may need to purchase conveyance from BT to a greater or lesser extent to provide their DQ services (the more comprehensive the network, the smaller the need to buy conveyance from BT or another operator). Operators will be able to purchase conveyance from BT under Condition 13, ie service(s) in a network basket or a safeguard cap. Oftel's policy is that Condition 13 charges will not be available to ISPs, who should pay retail prices (perhaps with a discount) - see the June Statement Promoting Competition in Services over Telecommunications Networks. Competition between suppliers of DQ services and BT at the network level is considered in this section.
2.48 If BT were to set charges for the inland conveyance element of its DQ offering to Other Licensed Operators (OLOs) at a lower level than if component rates in the general network basket or safeguard cap had been used, other operators who wish to set up a DQ service to sell in competition to BT would be disadvantaged (if they needed to buy in conveyance from BT). In such circumstances these operators would buy conveyance from BT from a network basket and/or a safeguard cap, whereas OLO customers of the BT DQ service would pay the lower rates (at the retail level, BT Retail would also pay the lower rates to BT Network).
2.49 Since, in such circumstances, OLO competitors to BT Network's DQ service would be disadvantaged, Oftel would be likely to view BT's charges as unduly discriminatory or anticompetitive. One remedy, if charges were found to be discriminatory, would be that any operator purchasing conveyance from the general network basket or safeguard caps for use in a DQ service should obtain the same (lower) component rates as BT has chosen to set for the inland conveyance element of its own network DQ service. But setting lower charges for conveyance when used in a DQ service would constitute enduse charging, since the charge for conveyance services in the general network basket or safeguard caps would be different, depending upon the enduse of that conveyance. Oftel's general approach to enduse charging is set out in Chapter 4.
2.50 A different possible treatment of the inland conveyance service would arise from a requirement on BT to provide the DQ service out of its Supplemental Services Business, which would mean that the BT DQ service would itself have to buy conveyance at retail prices. This possibility has been raised in the context of the future regimes for DQ and service providers. The June Service Provider Document stated that moving DQ to the Supplemental Services Business was still under consideration. If it were decided not to move the DQ service to the Supplemental Services Business, BT Network would be permitted to vary the charges for the inland conveyance service from that implied by the charges under the general network basket and safeguard caps (subject to the comments about discriminatory and enduse charging described in the preceding paragraph).
2.51 The nature of the providers of OA competing with BT is likely to be similar to those in the DQ market, though perhaps there might be more selfprovision and less involvement of ISPs. Unlike DQ, however, it has not been suggested that OA should be moved to the Supplemental Services Business. Oftel proposes that BT would not be prevented from setting charges for inland conveyance using different component rates than in the corresponding conveyance services in the general network basket or safeguard caps. But, similar considerations in respect of discriminatory and enduse charging would be relevant as for the conveyance related to DQ.
2.52 Table 2.3 summarises the proposed policy for the treatment of the new conveyance services associated with DQ and OA.
Table 2.3 Treatment of inland conveyance services for DQ and OA
BT's DQ/OA Competing DQ/OA Policy proposal
Standard Services service offered by
OLOs (to other OLOs)
Conveyance Conveyance service Own network perhaps
related to DQ/OA plus BT conveyance services
from general network basket
or inter-tandem safeguard caps
Component rates BT charges lower If buy conveyance from BT, pay Likely to be viewed by
lower in DQ/OA component rates to OLO higher component rates than Oftel as unduly
conveyance service customers than to OLO OLO customers pay to BT discriminatory or
than in corresponding competitors who need Network's (competing) service anti-competitive
type of conveyance to buy BT conveyance (If viewed as end-use
in the general network services for their own charging, Oftel's approach, basket and safeguard DQ/OA services discussed in Chapter 4,
caps would be relevant)
Component rates BT charges same If buy conveyance from BT, Oftel's approach to
lower in DQ/OA component rates to OLO pay same component rates end-use charging is
conveyance service customers as to OLO as customers pay to BT discussed in Chapter 4
than in corresponding competitors who buy Network's (competing) service;
type of conveyance in BT conveyance services pay lower component rates
the general network for their own DQ/OA than conveyance bought from
basket and safeguard services general network basket
or caps, except when safeguard caps for other
conveyance in basket/ end-uses
cap bought by OLOs
for their own DQ/OA
services
Component rates BT charges higher Not disadvantaged, whether Possibility of excessive
higher in DQ/OA component rates to OLO buy conveyance services charges (to be
conveyance service customers as for from BT or not pursued if necessary
than in corresponding corresponding services in under general
type of conveyance in general network basket competition legislation
general network basket and safeguard caps or relevant conditions
and safeguard caps of BT's licence
2.53 Interconnect specific services comprise data mangements amendments, access to BT's numbering information system (now renamed OSIS), interconnection circuits and Product management, policy and planning (PPP). In 1995/96 the fully allocated cost of all of these services taken together was just £53 million, about 1% of the costs of BT Network. Although the amount of money involved is not significant in the context of BT Network's total revenue, the payments made for these services may be significant to the operators who pay them and Oftel has been reviewing the appropriate basis for charging for all of these services.
Data Management Amendments
2.54 Oftel has proposed for the current interconnection charging regime that the majority of data management amendments should no longer carry specific charges. Instead their costs should be recovered through a small pence per minute surcharge on all interconnection services that use the local and tandem switch components. Under current proposals there will be just three DMA services that will not be dealt with in this way:
2.55 All of these services represent bottlenecks and can only be purchased by OLOs from BT. The third service in the list above will be dealt with under the number portability licence conditions and determination process. For the other two DMA services Oftel proposes that the charge for each be indexed by RPI-X, with a starting charge (at 1 August 1997) based on an estimate of the forward looking incremental cost of the service. The value of X would be derived using the same underlying assumptions as used in Oftel's financial model to derive the value(s) of X for the network baskets (see Chapter 5), but taking into account particular features of these services, such as the labour: capital mix. A reasonably reliable estimate of the incremental cost will be obtained by examining BT's disaggregated CCA costs of these services and removing part or all of the overhead allocation.
Access to NIS (renamed OSIS)
2.56 The liberalisation of the market for DQ services will involve reform of access to customer numbering information (see paragraphs 2.9-2.12). Under one of the liberalisation options, there will be no need for specific network charge controls on access to BT's OSIS, because of the existence of competing databases. Under the other option there will be a single database, but owned and managed independently of BT - if this option were chosen, regulation of charges and the terms of access to the database would be implemented under the Directory Information consultation process, not the network charge control review. This would also be the case if there were a need for continuing regulation of charges for the supply of raw customer information by BT to other databases. The liberalisation of directory information will mean that there will be no need for specific network charge controls on related interconnection services, such as access to KDT terminals, Directory Assistance Service (DAS) and supply of phonebooks.
Interconnection Circuits (ISI/CSI IECs)
2.57 Interconnection circuits include both services bought from BT for In Span Interconnect (ISI) circuits, Customer Sited Interconnect (CSI) circuits and Interconnection Extension Circuits (IECs). These services are bottlenecks, since for interconnection with BT's network, they can only be bought by OLOs from BT.
2.58 Cost sharing is already partially allowed for in BT's licence, since Condition 13.5C.1provides for sharing of the costs of establishing the connection. Oftel intends for the present to retain this provision. However, a review of whether the principle of cost sharing should be extended to cover transmission capacity is ongoing and Oftel will take forward discussions on this issue with the industry in the next few months.
2.59 Even if all elements of ISI and CSI charges were shared between BT and the relevant OLOs, Oftel does not consider that this would remove the need for continuing regulation of charges. BT's incentive to set excessive charges for these services would be reduced, but not eliminated. Oftel proposes, therefore, that each individual charge currently determined annually by the Director General should be indexed by of RPI-X, with a starting charge (at 1 August 1997) based on an estimate of the forward looking incremental cost. The value of X would be derived using the same assumptions as used in Oftel's financial model to derive the value(s) of X for the network baskets, but taking into account particular features of these services, such as the labour:capital mix or the type of capital assets involved (eg transmission electronics). As for DMAs, a reasonably reliable estimate of the incremental cost will be obtained by examining BT's disaggregated CCA costs of these services and removing part or all of the overhead allocation.
Product management, policy and planning (PPP)
2.60 Product management, policy and planning is the term used by BT to refer to costs that are specific to interconnection, arising, for example, from interconnect finance and billing and from the BT personnel who manage interconnect relationships. Currently, these costs are recovered as a pence per minute surcharge over all interconnect minutes, ie from other operators on OLO-BT call minutes and from BT Retail on BT-OLO call minutes. These costs are shown under the component 'Product management, Policy and Planning' (PPP) in BT's financial statements. In 1995/96 the costs of product management, policy and planning were £22 million, less than 1% of the costs of BT Network.
2.61 The size of these interconnect specific costs and the way in which they arise (ie their cost drivers) are currently under investigation by the Incremental Cost Working Group. It is being taken forward as a separate modelling exercise from the main bulk of the incremental cost work and a small bottomup model is under construction to estimate the costs of PPP. The preliminary work has suggested that some elements of these costs may be driven by the number of operators with whom interconnection is managed and the number of points of interconnection; for other elements interconnect minutes may be the primary cost driver. Oftel hopes that this work will be completed early next year.
2.62 A principle that will influence Oftel's proposal for the recovery of PPP costs is that the charging basis should reflect, as far as practicable and reasonable, the way in which these costs arise. But before the completion of the modelling work it would be premature to specify the detailed approach for the recovery of PPP costs that Oftel proposes. Nevertheless it is likely that Oftel will propose some amendment to the current approach of a surcharge on the charge for interconnection services, both because of the likelihood that multiple cost drivers will be identified and because the change in the classification of interconnection services in the new regime might mean that more than one service could be purchased for a single interconnection minute (leading to potential problems of double charging of PPP for an intrconnection minute). One approach to charging would be that the amount to be paid to BT Network by each operator, including BT Retail, should be calculated separately using a simple charging formula, perhaps incorporating a number of payments, each related to a different cost driver.
2.63 In the current interconnection regime, the charges for access to BT's emergency service are determined by the Director General. As in the previous consultative document, Oftel proposes that the charges for this service will be unbundled into two services: conveyance to BT's emergency operators and the operator service itself. Oftel would expect that the charge for the inland conveyance service would be the same as if based on the charges set under the general network cap and safeguard caps, taking account of the specific routing factor for this service. The charge for the emergency operator service will be subject to a safeguard cap to ensure that BT does not raise the charge unduly. However, BT will be able to apply to the Director General for consent to exceed the limit set by the safeguard cap if it can demonstrate that not to increase charges would endanger the quality and security of the emergency service.
Oftel would welcome comments on the proposed classification of interconnection services by degree of competitiveness, and the proposed network control treatment.