Interconnection charges for pay-as-you-go Internet services

Oftel would be grateful for comments on the proposals contained in this consultative document by 18 November 1998. There will then be a 2 week period to 2 December during which comments on the representations made during the first phase of consultation are invited.

Written comments will be made publicly available in Oftel’s Research and Intelligence Unit 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.

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S.1 This consultative document seeks views about the appropriate interconnection arrangements for pay-as-you-go Internet access services like ‘BT Click’ and ‘BT Click+’.

S.2 BT has published an interconnection charge for calls to its pay-as-you-go Internet services from competing networks. Oftel is concerned to ensure that the interconnection charge covers all relevant costs incurred in providing the service and is therefore conducting a competition investigation into the charge. Initial analysis suggests that it is not sufficient to cover the costs of access to ‘ISPNet Dial Access’, BT’s conveyance service for calls to ‘BT Click+’ and other pay-as-you-go Internet services hosted on BT’s network. The outcome of the competition investigation is therefore likely to be a requirement either that the interconnection charge be increased or that a separate interconnection charge for ‘ISPNet Dial Access’ be introduced. A full explanation of this is contained in Chapter 2.

S.3 Discussions with BT have also highlighted some questions of principle about the allocation of costs to call termination for this type of service. Chapter 2 seeks comments on these principles in advance of the completion of Oftel’s competition investigation.

S.4 The document also covers a number of other issues relating to the setting of both retail tariffs and interconnection charges for pay-as-you-go Internet services and other services where value is added at the terminating end of the call. This includes questions about the applicability and operation of arrangements for interconnection of Number Translation Services (NTS). The formula for sharing revenue from NTS is currently under review by a Focus Group established by the Operator Policy Forum (OPF) for the purpose. The work of the Focus Group will feed into a consultative document to be published by Oftel as soon as feasible. Oftel will also be consulting in the new year on wider issues associated with the relationship between retail prices and interconnection charges.

S.5 In the meantime, Chapter 3 of this document provides guidance on Oftel’s approach to these issues as they relate to pay-as-you-go Internet services. Oftel would welcome views on any of these points in advance of the more formal consultation.

1.1 The launch on 1 October of ‘BT Click’ and ‘BT Click+’, BT’s retail pay-as-you-go Internet services, has raised issues about how interconnection should be organised for this service and others like it.

1.2 Pay-as-you-go Internet services are services providing access to the Internet where the user pays the telephone operator originating his/her call on a usage basis (eg per minute for the call). The service does not involve any contractural arrangement with an Internet Service Provider (ISP) and there is therefore no subscription fee or regular charge.

1.4 The most immediate of these issues is the level of the interconnection charge for calls to ‘BT Click’, ‘BT Click+’ and other pay-as-you-go Internet services hosted on BT’s network. Oftel’s approach to this issue and action it is taking to resolve it is explained in detail in Chapter 2 of this document. Oftel is seeking views on its approach and Chapter 2 contains specific questions for consultation.

1.5 Other issues covered by this document require longer consideration than the timeframe for consultation on issues covered by Chapter 2. They are nevertheless urgent and Oftel will be formally consulting on them. In the meantime, Chapter 3 provides guidance on Oftel’s approach and Oftel would welcome view on any of these points in advance of the more formal consultation. These issues concern how retail customers can be protected from excessive prices – and terminating operators can be protected from discriminatory pricing for access to their services – when calls originate and terminate on different networks. This question includes consideration of whether the interconnect charging formula for number translation services (NTS) should apply to other services terminating on IP networks. Work on the review of interconnection arrangements for NTS services is ongoing through the Operator Policy Forum (OPF) Focus Group established specifically for the task. The Group has a deadline to report by the end of January but Oftel is mindful of the difficulties created by uncertainty in this area and will publish a consultative document, incorporating the output of the Focus Group, on the application and operation of the NTS formula as soon as feasible.

1.6 Oftel will also be looking at other issues associated with the relationship between retail and interconnection charges and, in particular, the ability of originating operators to set retail prices for calls terminating on other networks. This issue is increasingly important as more and more new services involve value added at the terminating end of the call. Oftel will issue a consultative document covering these issues in the new year.

1.7 Retail pay-as-you-go Internet services launched by BT are described below. They are listed according to whether they operate from BT’s Systems Business (SB) or Supplemental Services Business (SSB). This is significant because different regulatory requirements apply to SB services and SSB services. Such requirements which are relevant to the issues covered by this document are explained at paragraphs 1.11 and 1.12 below.

‘BT Click’ – ‘BT Click’ provides basic pay-as-you-go access to the Internet with a helpdesk service and service set-up software provided on a CD Rom, floppy disk or downloaded direct from the Internet. This product does not contain browser capability or any premium content, and its helpdesk is limited to dealing only with issues relating to conveyance. In addition, its set-up software is limited to provision of the minimum to enable customers to access the conveyance service – in effect, just a service manual.

‘ISPNet Dial Access’ – ‘ISPNet Dial Access’ consists just of the conveyance over BT’s PSTN and IP networks, and is purchased by BT’s SSB to provide conveyance to ‘BT Click+’. It is available to Internet Service Providers (ISPs) on the same terms as it is provided to BT’s SSB and enables them to provide their own pay-as-you-go Internet service hosted on BT’s network. The service includes an outpayment to the SSB or ISP purchaser of the service of around 15% of the retail price of the call.

‘BT Click+’ – ‘BT Click+’ is a more comprehensive service than ‘BT Click’. It provides pay-as-you-go access to the Internet, internet browser, helpdesk, and access to some premium content. Additionally, BT has made a complementary free e-mail service (‘Talk 21’) available. Elements of the service provided by the helpdesk and service set-up software are not limited as they are for ‘BT Click’.

Required interconnection services Other operators will want to be able to interconnect so that their customers can access both ‘BT Click’ and ‘BT Click+’. They will also want to access similar services hosted on BT’s network but offered by other ISPs. BT customers will want to access similar services hosted on OLO networks. Oftel would therefore expect the following interconnection services to be available:

Diagram ‘BT Click’, ‘BT Click+’, ‘ISPNet Dial Access’ and the interconnection services are

1.11 It is worth clarifying the regulatory obligations which arise from the fact that ‘BT Click+’ operates from the SSB. They are that BT must ensure

1.12 It should also be understood that, because ‘BT Click’ and ‘ISPNet Dial Access’ are SB services, they must recover their costs though SB activities (ie from call revenue either from retail customers or interconnecting operators).

2.1 This chapter looks at the interconnection charge for calls to ‘BT Click’ and ‘ISPNet Dial Access’. Oftel is conducting a competition investigation into the level of the interconnection charge for these interconnection services (see para 2.3 below). The issue for consultation here is the principle of which costs should be included in the charge.

2.2 BT published a network charge change notice (NCCN) on 2 July to notify interconnection charges for calls to ‘BT Click’ originating on the networks of other licenced operators (OLOs). Oftel’s initial reaction to the NCCN was concern that the interconnection charge was not sufficient to cover all the costs incurred in provision of the service to interconnected customers. Following discussion between Oftel and BT, BT therefore published a further NCCN (24 September) notifying an increase in the interconnection charge of around 20%. Because BT notified an interconnection charge for calls to the number block 0870 09 and both ‘BT Click’and ‘ISPDial Net Access’ are provided behind this number block, these rates apply to interconnection to both services. The new charges will apply from 23 October. Oftel has yet to be convinced that the new charges cover all the necessary costs, especially in relation to interconnection to ‘ISPNet Dial Access’ (ie including interconnection for access to ‘BT Click+’).

2.3 Oftel has requested cost information from BT and will be looking in detail at the relationship between costs and charges for interconnection to ‘BT Click’ and ‘ISPNet Dial Access’ when it receives this. At the end of its investigation, any resulting new charge will be applied retrospectively if appropriate. It should be noted that Oftel is not concerned to determine specific charges for this service but, consistent with its approach explained in the Guidelines on operation of the Network Charge Controls, to establish whether BT’s charges fall between their cost floor – set at forward looking Long Run Incremental Cost (LRIC) – and ceiling set at Stand Alone Cost (SAC).

2.4 The issues are complicated by the fact that, whilst there is a single charge for interconnection to ‘BT Click’ and ‘ISPNet Dial Access’ (which is of course the means of access to ‘BT Click+’), the costs of the services are likely to be different. The following section explains why this is by looking at the costs which Oftel believes should be included in the interconnection charge for ‘BT Click’ and ‘ISPNet Dial Access’ respectively. It also explains why Oftel considers that the current charge notified by BT is likely to be insufficient to cover the costs of ‘ISPNet Dial Access’. The section contains specific questions in relation to costs to be included in the interconnection charge on which Oftel is consulting.

2.5 Oftel’s initial concern about the interconnection charge for ‘BT Click’ was that it did not include the costs of the service set-up software and helpdesk, both of which elements of the service are available to all customers irrespective of whether they are calling from BT’s network or (via interconnect) from another network. There is also a case for including marketing costs specific to the service in the termination charge.

2.6 BT has argued that it is a departure from existing principles of interconnection charging to include such costs (which can be characterised as ‘retail type’ costs) in interconnection charges. The following paragraphs look at the general issue of the inclusion of non-conveyance costs in the charge for call termination on IP networks, and then at the appropriate costs for call termination to ‘BT Click’ and ‘ISPNet Dial Access’.

2.7 Oftel acknowledges that retail costs are not normally included in interconnection charges for PSTN call termination services. There are some exceptions – eg the interconnection arrangements for access from OLO networks to BT’s speaking clock. However, for ordinary PSTN call termination, retail costs are excluded because of the bottleneck nature of the service.

2.8 For termination of calls on the IP network (as in ‘BT Click’ and ‘ISPNet Dial Access’), the situation is fundamentally different. This is because the network contains any number of routes to a particular destination (eg a Website) and so no Internet Service Provider can be said to control a bottleneck.

2.9 In general therefore, it is appropriate to approach termination of calls on IP networks as competitive rather than bottleneck services. This means that the LRIC of all relevant elements of the service provided from the SB should be covered. Relevant elements of the service include all those elements which are consumed by or benefit directly the customer accessing the service.

2.10 For ‘BT Click’, relevant costs would include the service set-up software, helpdesk, and possibly ‘BT Click’ marketing costs.

2.11 Oftel believes that inclusion of the costs of both the set-up software and helpdesk in the LRIC for ‘BT Click’ would be non-controversial. These elements of the service are available to all users of ‘BT Click’ irrespective of whether they are calling from BT’s network or an OLO network. They are provided (as is the whole service) from BT’s SB and so the costs of interconnection calls must be recovered from interconnection charges. Clearly therefore, some costs associated with the provision of the set-up software and helpdesk are incremental to each ‘BT Click’ customer.

2.12 The effect of exclusion of these costs from the interconnect charge would be likely to be anti-competitive because, whilst the set-up software and helpdesk would be available to customers on OLO networks, BT would not be recovering their costs for these customers. Because of this under-recovery of costs, OLOs launching competing services would not be able to provide access to their services on competitive terms (unless they had a cost advantage or also charged below cost).

2.13 Oftel believes that there is also a case for inclusion of the costs of ‘BT Click’ marketing in the LRIC for the interconnect service. However, the case for this is not so clear as that for the set-up software and helpdesk costs. This is because additional marketing costs are not incurred for each customer using the service and so marketing costs are not variable in the sense that they depend on the number of customers or volume of calls to ‘BT Click’. On the other hand, ‘BT Click’ marketing costs are incremental to provision of the service as a whole.

2.14 Oftel would welcome comments on the general principle that costs additional to basic conveyance can be included in the charges for call termination on the IP network where these costs are incurred in provision of the service to callers irrespective of where the call originates. Specifically, in relation to ‘BT Click’, Oftel would be grateful for views as to whether it is right to conclude that the costs of each of

2.15 The fact that ‘BT Click+’ is a SSB service means that the costs which need to be included in the charge for call termination (via ‘ISPNet Dial Access’) are different to those which should be included in the termination charge for calls to ‘BT Click’ (which is of course a SB product). This is because the costs of activities carried out by the SSB have to be recovered from income received by the SSB. In the case of ‘BT Click+’, some of the activities which could be carried out by the SB (and are for ‘BT Click’) are carried out by the SSB along with new elements which are not present in the SB service. In the case of ‘BT Click+’ the SSB elements of the service are the internet browser, full helpdesk, and premium content (including that accessible from the ‘BT Click+’ homepage). These elements are paid for from SSB income, eg revenue from calls to the helpline, advertising on the web and, most importantly, the outpayment made by BT’s SB when the SSB receives ‘ISPNet Dial Access’ calls.

2.16 The conveyance elements of the service are provided from BT’s SB and are purchased by both the SSB and ISPs as ‘ISPNet Dial Access’. ‘ISPNet Dial Access’ includes an outpayment to the purchaser (ie the SSB or an ISP) of around 15% of the retail price of the call.

2.17 The interconnection service for calls destined for ‘BT Click+’ and equivalent ISP services hosted on BT’s network is essentially interconnection to ‘ISPNet Dial Access’. The originating network is purchasing the conveyance to the service plus the outpayment made by the SB. The outpayment should cover just those elements of the service provided by the SSB which are necessary incidental to the conveyance service and therefore could be provided from the SB (as explained in paragraph 2.15 above). The costs of elements of the service provided by the SSB or ISP are not directly included in the interconnection charge because (as explained above) they must be recovered from other income streams of the SSB or ISP.

2.18 Oftel has concluded that the outpayment made from the SB to the SSB or ISP must be included in the interconnect charge for access to ‘ISPNet Dial Access’. This is because calls from OLO networks to these services need to cover the costs of this payment or they would be being provided below cost. They would therefore potentially be anti-competitive because OLOs launching competing services would not be able to provide access to their services on competitive terms (unless they had a cost advantage or also charged below costs).

2.19 Oftel would be grateful for views as to whether it is right to conclude that the payment to ISPs and BT’s SSB purchasing ‘ISPNet Dial Access’ from BT’s SB should be included in the termination charge for calls destined for ‘BT Click+’ and equivalent services hosted on BT’s network.

2.20 As stated in paragraph 2.2 above, the interconnection charge published by BT on 24 September included an increase of around 20% on previously proposed charges. Oftel is looking in detail at the charge through its competition investigation. Oftel does not yet have all the cost information related to IP conveyance to reach a final conclusion on the level of the interconnection charge. However, at this stage, Oftel has concluded that it is likely that the interconnection charge is not sufficient to cover the LRIC of the service including the outpayment and that, if the principle of inclusion of the outpayment in the interconnection charge is agreed, a further increase in the interconnection charge or a separate higher charge for interconnection to ‘ISPNet Dial Access’ is therefore likely to be required to be applied retrospectively.

2.21 This is because the original interconnection charge (published on 2 July) appeared to be sufficient to cover just the PSTN and IP conveyance elements of the service. It did not include the cost of the outpayment from the SB to the SSB and ISPs. As explained above, Oftel considers that the outpayment is part of the LRIC for the interconnection service and therefore must be included in the interconnection charge. The 20% increase to the interconnection charge published on 24 September raises the level of the charge as follows:

	Interconnection charge (figures rounded from 4 decimal places)
	NCCN published on 2/7/’98	NCCN published on 24/9/’98	Difference
Daytime	1.15	1.38	0.23
Evening	0.64	0.77	0.13
Weekend	0.54	0.64	0.1

	‘ISPNet Dial Access’ SB outpayment to SSB and SPs (level of the payment is dependant on forecast traffic volumes)
Daytime	0.41 – 0.73
Evening	0.21 – 0.37
Weekend	0.16 – 0.30

2.22 Until it has analysed the cost information which BT will provide, Oftel cannot reach a final view about the interconnection charge for calls ‘ISPNet Dial Access’. However, for the interconnection charge to cover the costs of the outpayment, it clearly needs to be set at a level of at least the charge for conveyance plus the outpayment. From the comparison above, it is clear that the increase made to the interconnection charge via the NCCN published on 24 September is not sufficient over and above the cost of conveyance to cover the outpayment. Oftel therefore considers that it is likely that the interconnection charge for calls to services via ‘ISPNet Dial Access’ does not fully cover the cost of the outpayment to SPs (and in BT’s case, its SSB service – ‘BTClick+’) and is therefore likely to required to be increased – either through increase in the single charge for interconnection with ‘BT Click’ and ‘ISPNet Dial Access’ or introduction of a new separate charge for ‘ISPNet Dial Access’ interconnection.

2.23 Oftel would welcome comments on the general principle that costs additional to basic conveyance can be included in the charges for call termination on the IP network where these costs are incurred in provision of the service to callers irrespective of where the call originates. Specifically, in relation to ‘BT Click’, Oftel would be grateful for views as to whether it is right to conclude that the costs of each of

2.24 Oftel would be grateful for views as to whether it is right to conclude that the payment to SPs and BT’s SSB purchasing ‘ISPNet Dial Access’ from BT’s SB should be included in the termination charge for calls destined for ‘BT Click+’ and equivalent services hosted on BT’s network.

3.1 Oftel will be consulting on wider issues relating to the relationship between retail and interconnection charges. In the meantime, it is publishing the following guidance on its view on interconnection arrangements and retail tariffs for pay-as-you-go Internet services. Oftel would welcome views on any of these points in advance of the more formal consultation.

3.2 There has already been debate about whether interconnection charges for dial-up access to pay-as-you-go Internet services should be calculated according to the formula for sharing revenue from Number Translation Service (NTS). Oftel considers that it is not appropriate to apply the NTS formula to interconnect charges for BT’s pay-as-you-go Internet services or others for which the retail price is not set at an NTS rate.

3.3 The NTS formula was designed to enable Service Providers at the terminating end of a call to be rewarded for their provision of the service whilst ensuring a fair return for network operators originating the call. It was established to cater for calls to information and marketing services and has inbuilt recognition of the typical duration of calls to such services. Calls to the Internet are usually much longer and widespread use of local rate numbers to access Internet services has led to the current review of the formula. This is being progressed by the OPF NTS Focus Group.

3.4 Debate about the applicability of the NTS formula to pay-as-you-go Internet services has raised the question of how call termination charges should be set for pay-as-you-go Internet services. Oftel considers that interconnection to OLO pay-as-you-go Internet services should be on the basis that each terminating operator is free to set its own charge for termination. In Oftel’s view, it is not appropriate to impose specific termination rates for competitive termination services. Oftel would expect originating operators to pay termination rates set by the terminating operator. They would themselves then be free to set an appropriate retail price for their customers to reflect this.

3.5 BT’s dominance in the call origination market could give it a powerful position here. By setting an excessive retail charge for access to the services of competitors from its network, BT could seriously disadvantage those services. Oftel would therefore expect that the retail price set by BT should have the characteristic that, where the service in question is in competition with a BT service, the retention made by BT for providing the call origination leg should be the same for the BT product and the interconnected product. Were BT to set this retention higher, Oftel would be likely to regard this as unduly discriminatory in favour of BT’s own product. This will ensure that BT cannot discriminate in favour its own products in setting retail prices for calls from its network to OLO pay-as-you-go Internet products and importantly protects customers on BT’s network from high prices for access to services hosted on OLO networks.

3.6 Generally, any terminating operator that considered a retail price for its service charged by an originating operator to be unfair could take the matter up with Oftel.

3.7 It is worth noting that pay-as-you-go Internet services also raise a consumer protection issues related to the level of outpayment from conveyance providers to ISPs. There is a danger that large outpayments demanded by ISPs could lead to difficulties for consumers because these would be reflected in high retail prices. This would be particularly significant for pay-as-you-go Internet access because customers pay extra for each minute of their call and Internet use tends to involve long call durations. There is a danger that customers will not be fully aware that these services are charged at a high tariff and will consequently run up high bills. Oftel will be looking at the issue of how to deal with situations like this as part of its work on the relationship between retail prices and interconnection charges.

Internet – The Internet is a global network of networks enabling computers of all kinds to directly and transparently communicate and share services throughout much of the world.

Internet Protocol (IP) – A packet data protocol used for routing and carriage of messages across the Internet.

Network Charge Change Notice (NCCN) – Notification sent by BT to all interconnecting operators when BT decides to change an interconnection charge. The NCCN notifies the operators of the charge change and its effective date.

Number Translation Service (NTS) – In the context of this document, NTS services are those specifically tariffed services (free-phone (0800) local rate (eg 0845) national rate (0870) and premium rate (09XX) covered by special interconnection arrangements originally determined by Oftel in 1996 following industry consultation.

Incremental Cost – The costs which arise as a result of provision of the ‘increment’. The incremental costs of a service include only those costs that are directly caused by the provision of the increment. So long as revenue exceeds incremental costs, the firm improves its profitability by providing the increment.

Interconnect Policy Forum (IPF) – A forum consisting of industry representatives and chaired by Oftel which meets periodically to discuss commercial and regulatory aspects of interconnection which are of interest to the industry generally.

Stand Alone Costs (SAC) – The costs to a single-product firm of providing a service. The stand-alone costs of a service exceed the incremental costs to a multi-product firm.

Supplemental Services Business (SSB) – That part of BT's business which provides true value added services, as opposed to elements of enhancement to basic services. By operating services from the SSB, competitive equality with the similar services from independent service providers can be assured. Typically, SSB value added services involve the provision of content, storage of content, manipulation of content or interaction with content. This is in contrast to SB services which convey messages without any impact on the content of the messages conveyed.

Systems Business (SB) – That part of BT's business from which its core conveyance services are provided, such as telephone calls, telex calls, private circuits and other basic services. Since 1 April 1998 this has included basic data services, such as IP routing services.

Interconnection charges for pay-as-you-go Internet services (eg BT Click, BT Click+)

Consultative Document