PRICING OF TELECOMMUNICATIONS SERVICES FROM 1997

Controls and Consultative Document on BT Price Interconnection Charging

CHAPTER 8 SUMMARY OF QUESTIONS

8.1 This document seeks views on the issues which Oftel must consider in its review of price control arrangements from August 1997. The following is a summary of the questions raised in the document on which Oftel invites comments:

Chapter 2 - Objectives

8.2 In light of its goal, its key objectives, and the range of other regulatory instruments it can apply for different purposes, Oftel's central objectives in this price control review are:

• to protect customers in markets where competition is not yet effective, and
• to promote maximum efficiency in BT.

A secondary objective will be

• to chose a price control structures which, where appropriate, furthers Oftel's objective of fair trading.

and, subject to consultation, it may be possible that price controls will help

• to ensure all customers share the benefits of competition.

Oftel recognises that the effect of price controls on the development of network and service competition cannot be ignored but these considerations will not drive Oftel's decisions in this review.

8.3 Oftel welcomes views on this initial position.

Chapter 3 - Overview of Competition (Past, Present and Future)

8.4 Oftel would welcome comments on:

• The approach it has adopted for defining markets and for assessing the degree of competition in those markets.
• Whether the separation of: local and long-distance calls; and the separation of the provision of access and call services is valid for the purposes of evaluating and monitoring effective competition.
• The extent to which the emergence of services based on the convergence of delivery technologies needs to be considered in the context of this price control review and whether it is correct at the current stage of market development to treat the broadcasting and telecommunications markets as separate markets.
• Whether the customer groupings set out in annex C are most appropriate for considering the impact of competition.
• The likely extent and pace of competitive developments, their impact on the scope of the price control framework for the next price control period from 1997 and Oftel's analysis of the potential development of competition in Annex C.

8.5 The following further questions on effective competition related to specific services are contained in Annex C. Oftel would welcome comments on:

• The extent to which effective competition in the provision of access services is likely to develop across different customer groups and across different geographical areas in the future.
• The extent to which the market for inland calls is likely to become fully competitive for all customer groups over the next price control period.
• The impact on competition in the provision of IDD calls of one-end breakout into the PSTN. It would also welcome views as to the extent to which the IDD market is likely to become fully competitive for all customers during the next price control period.
• The extent to which there will be effective competition in the provision of Operator assisted/DQ calls taking into account Oftel's proposals for stimulating competition in this area.
• Whether there is likely to be effective competition in the provision of specially tariffed services and in particular the extent to which competition will depend upon the implementation of number portability for these services.
• Whether it is appropriate to make a distinction between digital circuits with a capacity of more than or less than 64kbit/s for the purposes of assessing effective competition. For instance, would it be more appropriate to make a distinction based on circuits up to 64kbit/s, circuits of between 64kbit/s-2Mbit/s and circuits over 2Mbit/s?
• Its analysis of the prospects for competition in the provision of low capacity inland private circuits.
• Whether corporate customers possess a degree of buyer power in the msrket for high cspscity private circuits, and whether there will be effective competition in the provision of high capacity private circuits.
• The degree to which there will be effective competition in the provision of high and low capacity international private leased circuits over the next price control period.
• Whether it is appropriate to distinguish between vision circuits and other private circuits and, if so, whether there is likely to be effective competition in the provision of vision circuits.
• Whether it is appropriate to distinguish private circuits used to provide CCTV services from other private circuits and, if so, whether there will be effective competition in the provision of these circuits.
• Its analysis of the market for telex services.
• The prospects for the development of effective competition in the provision of payphones in the future.
• Whether there will be effective competition in the provision of ISDN lines in the future.
• Whether it is appropriate to regard Value Added and Data Services markets as being competitive at present and whether they are likely to remain so.
• The extent to which there is effective competition within the mobile sector. It would also welcome comments on whether the possible convergence of fixed and mobile services might raise issues which should be addressed in this price control review and, if so, what they are.

Chapter 4 - General Issues in Price Cap Regulation

• 8.6 Oftel would welcome comments on:
• Its inclination not to consider the introduction of a global price cap.
• Its view that it remains appropriate for the price control to be based on the RPI. Also on possible alternatives, for example, use of the RPI in addition to some other index.
• Its view that new services should not be price capped, and on how new services should be defined for this purpose.
• How far it is appropriate to allow, in setting the price cap, for the benefits to BT from economies of scope derived from the introduction of new services.
• Its view that the present system should not be modified to introduce an explicit profit sharing element.
• Its view that allowance should not be made in the price cap for unanticipated growth in GDP or other exogenous factors.
• The appropriate duration of the price cap.
• The introduction of "roll-over" arrangements.
• Its preference to continue with a prior year revenue weighting system for a network price cap.
• Its view that it is appropriate to make arrangements for carry-over in future price control rules and that present arrangements should therefore continue.
• Its belief that the best approach is to set X so that the expected rate of return reaches an acceptable level by the end of the price control period.
• The best way of ensuring that BT achieves the outputs implicit in the levels of investment allowed for in setting the price cap.

Chapter 5 - Interconnection and Network Price Cap

8.7 Oftel would welcome comments on:

• Its proposal to introduce a general network charge control on BT's interconnection charges, and on the division of the services into four distinct categories based on the level of competition.
• The scale and range of costs likely to be considered as common costs; whether BT should be able to vary the degree of recovery of common costs; the criteria that should be used to assess to which services this flexibility might apply; and the use of components as the chosen level of disaggregation.
• The proposed methodology to calculate incremental costs which is set out at Annex D.
• Its proposal to include safeguards on the charge for each prospectively competitive interconnection service; the proposals that the 'lid' should be set at RPI+0%; and on the services that should be covered by the safeguards.
• Its definition of call termination, its proposal for a sub-cap to regulate BT's charges for those services, and on their exclusion from the flexibility BT may have in setting other charges.
• The need for changes to the regulation of call termination charges on the networks of other operators than BT, and on the form that any such changes should take.
• The range of interconnection services that should be included in the BT network charge cap basket.
• Its proposal to use ceilings and (guideline) floors to restrict BT's charges for network components and on Oftel's proposals on the burden of proof.
• How far and in what ways charge controls should cover the quality aspects of BT's network services.
• Whether adjustments to asset values should be part of the charge control calculation and on Oftel's proposed approach.
• The interaction between network and retail price caps and on mechanisms to ensure compatability.

Chapter 6 - Form and Structure of Retail Price Control

8.8 Oftel would welcome comments on:

• The suggestion that three groups of retail markets should be distinguished and that a 'safeguard cap' should be applied to those newly removed from the basket. Should this safeguard cap be set at RPI+0% or should it take account of expected price or cost movements.
• The possible removal of IDD calls from the price control basket. If so, should IDD be made subject to a maximum increase of RPI+0%, and should this 'safeguard cap' be applied to each individual price or to IDD calls in aggregate.
• The possible removal of Operator Assisted Calls/DQ and Specially Tariffed Voice Services from the basket. If so, should such services be subject to a maximum price increase of RPI+0%, and should this 'safeguard cap' be applied to each individual price or to these services in aggregate
• The appropriateness of including calls to mobile in BT's price cap and how this might best be done.
• The proposal not to cap payphone prices but to link them to the price of other calls. How should this be done?
• Its inclination to include ISDN prices in the new price control. If included, should they be placed in a separate basket or in the main PSTN basket?
• Its belief that the approach outlined in the August document on the regulation of broadband switched mass market services, principally that the prices of such services should not be capped unless it proves necessary to do so, is correct.
• Whether, and under what circumstances, it might be appropriate to introduce separate price control arrangements for business and residential services and what monitoring would be necessary to ensure that there was no dispraportionately negative effect on particular groups.
• The proposal to retain controls on analogue and low capacity digital private circuits but to subject prices of high capacity digital private circuits only to a safeguard cap. Also on the level of any safeguard cap and on whether limits on individual private circuit prices should be retained.
• The proposal to continue control of prices of international private circuits and on whether provision should be made to remove the control if the market becomes sufficiently competitive.
• The proposal to retain separate caps for analogue (including low capacity digital) and high capacity digital private circuits and for international private circuits.
• The proposal to subject vision circuits to price control and on whether they should be subject to an individual price cap.
• Whether any new tariff packages offered by BT in the context of the lifting of the constraint on line rentals should be brought within the price control basket.
• Whether, as part of future controls on BT's prices, specific limits should be put on the effect of price changes on the Median Residential Bill or on other representative customer bills. Also, on whether and how the customer groupings outlined in Chapter 6 could provide a useful basis for monitoring BT's price changes.
• Its proposal not to introduce a formal quality requirement into price control arrangements and to instead promote quality improvements through the strategy set out in Chapter 6. Also on Oftel's suggested approach to monitoring BT's quality of service.

Chapter 7 - Financial Forecasts over the Next Price control Period

8.9 Oftel would welcome comments on:

• Its proposed range for the pre-tax weighted average cost of capital for BT, the assumptions that lie behind the choice of this range, and the size of any adjustment necessary to arrive at a cost of capital for the price-controlled activities.
• The most appropriate methodology for calculating the rate of returns on different activities in order to compare it to estimates of the cost of capital for those activities. Also on how a change in the basis of regulation to CCA or economic rates of return could be reconciled with the HCA rates of return which BT reports to its shareholders and the wider community.
• The likely trends in demand in the main service markets identified in Chapter 3 (both network and retail) over the next control period. Also on the likely scale of demand for important new telecoms products that may appear over the period.
• The efficiency improvements that could be expected of BT in its network and retail activities over the next price control period.

Return to the start of this chapter

Return to this document's table of contents

Go to Annex A