PRICING OF TELECOMMUNICATIONS SERVICES FROM 1997

A Consultative Document on BT Price Controls and Interconnection Charging

CONTENTS

Director General's Foreword

Consultation Details

Chapter 1: Introduction

• Scope of Document
• General Overview
• Competition in the UK Telecoms Market
• Retail and Network Price Caps
• The Current Review
• Information Requirements
• Advisers
• Consultation Process
• Other Regulatory Developments affecting BT's Revenues or Pricing
• Theory and Structure of Price Controls
• History

Chapter 2: Objectives

• Overall Framework
• Consumers and Competition
• Oftel's Objectives and Price Control
• Promotion of Network Competition
• Promotion of Service Competition
• Fair Trading
• Fair Shares of Benefits
• Consumer Protection
• Conclusions

Chapter 3: Overview of Competition

• Introduction
• Definition of Markets for Regulatory Purposes
• Customer Groups
• Current Position in Telecoms Market
• Network Competition
• General Market Trends: 1997 and beyond
• Competition in Retail Markets
• Conclusions

Chapter 4: General Issues in Price Cap Regulation

• Global Price Cap
• Appropriate Index for Price Control
• New Services
• Profit Sharing
• Impact of Exogenous Factors including Growth Rates
• Duration
• Roll-Over
• Price Control Mechanics
• Provision for Carry-Over
• One-off Adjustments
• Investment

Chapter 5: Interconnection and Network Charge Cap

• Control of Interconnection Charges
• Similarities to and Differences from Current Arrangements
• Incremental costs, Common Costs and Mark-ups
• Key Parameters in the Network Cap
• Incorporating Efficiency Factors
• The Initial Level of Interconnection Charges
• The Scope of the Network Cap
• Ceilings and Floors
• Quality of Service
• Adjustment to Asset Values
• Interaction of Network Cap with Retail Cap

Chapter 6: Form and Structure of Retail Price Control

• Developing Competition
• Removing Services from the Price Cap
• Expansion of the Cap
• Payphones
• Integrated Switched Digital Network (ISDN)
• Broadband Switched Mass-Market Services
• Separate Caps for Business and Residential Users
• Private Circuits
• Large User Discounts
• Discount Yield
• Treatment of Residential Call/Rental Packages
• The Typical Residential Customer
• Quality and Regulation

Chapter 7: Financial Modelling for the Next Price Control Period

• Introduction
• BT's Historical Financial Performance
• Cost of Capital
• Appropriate Measures of Rates of Return
• Financial Modelling Procedure
• Key Input Assumptions to Financial Modelling

Chapter 8: Summary of Questions for Consultation

Annex A: Oftel's advisers

• The Consumer Panel
• The Panel of Economic and Financial Experts

Annex B: History of Price Controls - Statistical Information

• Changes in the Price Cap and Basket of Controlled Services
• Summary of BT's Price Changes controlled by Condition 24 of its Licence, 1984 - 1986
• Breakdown of BT's Price Changes
• BT's Quality of Service

Annex C: Effective Competition - Relevant markets and Customer Groups

• Customer Groups
• Business Customers
• Residential Customers
• Services currently subject to Price control
• Services currently not subject to Price Control

Annex D: Long Run Incremental Costs

• Forward Looking Costs
• Methodology to Calculate Long Run Incremental Costs
• Floors and Ceilings

Annex E: Financial Modelling

• Introduction
• Cost of Capital
• Appropriate Measures of Rates of Return
• Structure of Financial Model
• Assumptions Underlying Financial Forecast

Annex F: Glossary of Terms