2.1 The first consultative document asked for views on many issues, ranging from major questions on the structure of the next price control to matters of detail. All those issues are considered further in the following chapters. This chapter deals only with the primary issues for the next price control and provides an overview.
2.2 Chapter 2 of the first consultative document set out Oftel's initial views on its objectives for the price control review. Oftel made clear that it considered its central objectives to be:
A secondary objective was:
2.3 Oftel also asked for views on how far the new price control arrangements should incorporate specific mechanisms for ensuring that the benefits of price reductions were shared amongst different groups of customers, although noting that such arrangements would inevitably make the controls more complicated.
2.4 Oftel made clear that it intended to keep the new control arrangements as simple and straightforward as possible so that both customers, operators and potential investors in the industry understood how regulation would operate in particular circumstances.
2.5 Oftel accepted that there was clearly a tension between its objective for this review of proposing price controls which reflect the best-expected improvements in BT's efficiency and the promotion of competition, which is one of Oftel's broad objectives for its work as a whole. Oftel did not, however, propose in this review to trim its consumer protection objective in order to promote network and services competition. Allowing retail or wholesale prices to be higher than they ought to be would risk fostering inefficient competition in the short term. This would not deliver the long term sustainable competition needed to meet Oftel's overall goal of "providing the best deal for the customer in terms of quality, choice and value for money".
2.6 This issue has greater significance in this price control review than it did in the last. There are many new operators starting to provide competition to BT in different sectors of the market. Competition is becoming established and the period of the next price control will be a crucial time for the realisation of effective competition. Indeed, there may come a point in this period where competition alone is sufficient to restrain prices and formal price controls are not needed. The question is when that will be.
2.7 The responses to the consultative document have served to highlight the tension Oftel recognised between, on the one hand, providing protection to customers by seeking the greatest, realistically attainable retail price reductions in markets where BT is still dominant; and, on the other hand, allowing prices to be set at a level which competitors who do not yet have BT's efficiencies of scale can expect to make a reasonable return on investment. If prices are set too low, customers may be happy in the short term but low prices could deter competing investment in those services and customers would, in the longer term, be denied the possibility of choice.
2.8 Consumer representatives recognised the importance of the development of competition for providing choice in the future and for driving continuing efficiency improvements and price reductions. They were, however, sceptical whether competition would, over the period, have sufficiently reduced BT's dominant position in the residential market to be acting as an effective constraint on retail prices. They felt that the case for loosening the present controls on BT's prices was not justified and considered that the price control arrangements should specifically include mechanisms to protect residential customers against the possibility that BT might seek to focus price reductions on business customers. The consumer bodies disagreed with the views from both BT and other operators that Oftel's proposals on continuing price controls would jeopardise competition. They considered customer protection should remain the paramount objective of this price control review. Many responses, indeed, supported the extension of the scope of the current basket to bring in services such as ISDN (where connection charges are seen to be very high, compared with charges abroad), payphones and calls to mobile (where customers are often not aware of the high cost of calls to a mobile phone when they make the call). Most consumer responses argued against reductions in the scope of the price control unless there were alternative safeguards.
2.9 There was considerable common ground in the responses from BT and other operators. They argued strongly that the prospect of greatly strengthened competition over the period reduced considerably the need for continuing retail price control. Oftel has recognised, in considering the responses, that on the issue of retail price control it will not necessarily get a balanced view from the industry itself. Their views need to be considered alongside concerns expressed by consumer groups.
2.10 Telecoms operators generally expressed serious concern at the dangers of setting controls on prices which would require sharp reductions in prices. Operators competing with BT pointed out that they need to be able to earn a reasonable rate of return on their substantial continuing investment. They considered that Oftel's initial views on BT's likely efficiency improvements over the period may be set too high and the cost of capital set too low with the result that retail prices are squeezed and the prospects for successful competitive investment diminished. They pointed out that the UK could look a less attractive place to invest than perhaps other European or world markets which are on the verge of liberalisation or the United States where the new telecoms legislation will be increasing the possibilities for investment in different sectors of the market.
2.11 Many operators argued that the expected growth of competition in the next few years removes the need for a traditional price cap approach. They considered that Oftel should instead confine future price controls to measures providing protection for those groups of customers who have no real choice of an alternative to BT. They proposed that, in place of a price cap approach pushing down prices, Oftel should adopt a form of control which placed specific restraints on bills for those groups. Business customers would have effective choice and no constraint would be needed. Bill controls should, therefore, be confined to residential customers. There were a number of suggestions on how this might best be done - for example, a control requiring no real increase in the Median Residential Bill with possible further controls on different deciles of bill size. (In discussions since the first consultative document BT has indicated that it would be interested to develop this approach by offering 'safeguard' tariffs for groups of customers with bills below the median which would not increase in real terms. They would also offer a range of alternative tariffs to give customers choice.)
2.12 BT emphasised that it too needs to see a reasonable return on its investment and that it regards the range of cost of capital values Oftel has consulted on to be too low and the potential efficiency savings assumptions too high.
2.13 BT maintained that the best theoretical approach to price control was a global cap covering both network charges and retail prices. It agreed with Oftel that competitive services should not be included in the price control basket but it disagreed with Oftel's proposals for a fixed price control basket, with services which might prospectively over the period of the control become competitive being outside the basket and each subject to a new safeguard cap. They proposed instead that services should be progressively removed from the basket as they became competitive; that set dates should be specified for when these services could be expected to be removed; and the consequent changes in the value of X when the basket changed should be specified.
2.14 A point made by BT and several operators was that the price cap mechanism, based on identified services, would actually act to ossify the pricing structures of those services which were capped and prevent service differentiation, packaging of services and innovation in tariffing structures. And yet these sorts of changes were to be expected in the UK market in the years ahead as competition develops and operators want to combine services in different ways attractive to customers.
2.15 Oftel's proposals for retail price controls are set out in detail in Chapter 6. Oftel still considers that a conventional price cap will be needed in the period ahead but recognises that the changes to be expected in the industry in the next few years make the future more than usually unpredictable. The UK telecoms market is genuinely at a turning-point in the development of competition and setting a further conventional 4-year price would not reflect the movement in the market towards effective competition. Oftel considers that alternative regulatory approaches might be more appropriate. These options are set out at paragraphs 2.30-2.34 below.
2.16 The Director General's statutory duties require him amongst other things, to act in a way which he considers will best ensure that telecoms companies are able to finance their services, will best promote the interests of consumers and will best maintain and promote effective competition. Clearly, in the context of the price control review, these duties may pull in different directions. Oftel's conclusions in the light of the responses to consultation are that the objectives of protecting customers in markets where competition is not yet fully effective and of promoting the maximum efficiency in the UK industry are still the central objectives driving the current review. Oftel does not consider it should moderate those objectives in order to provide a more profitable trading environment for the industry. That would not be promoting effective network competition. Oftel's commitment to network competition remains undiminished but promoting inefficient competition through `soft` price control is not effective in the long run and probably not in the short run either. Nevertheless, Oftel recognises there is a risk that if X is set too tightly investment could be deterred.
2.17 Oftel remains of the view that a conventional retail price cap will continue to be necessary despite the growth in competition expected over the period. The proposal from some operators of relying instead on controls on representative bills is not an alternative to a price cap: it would provide some consumer protection but would not act to drive down prices (see para 6.11 for further discussion). Oftel proposes to stick to a retail price cap approach which is well understood by both the industry and consumers. The scope of the retail price control basket - the range of services subject to control - needs, however, to be examined in the light of the expected increase in competition. Keeping services which are likely to be competitive over the next price control period within the price cap will be imposing regulation where competition itself ought to work for customers. On the other hand, services should only be removed from the scope of the price cap if the customers can be sure prices will not be unfairly higher.
2.18 There was some but not significant support in the consultation responses for Oftel's proposals for taking prospectively competitive services out of the basket from the start of the period and making them subject to individual safeguard caps. Equally, no practical alternatives were, in Oftel's view, put forward. Oftel considers that BT's proposal of a phased removal of services from the basket, to a set timetable, would prove too complicated. It would be difficult anyway to consent in advance to a specific timetable for removal of particular services: they should only be removed from control when there is effective competition. Changes in coverage of the basket would mean that X would change over the price control period. This would create uncertainty and possible confusion for both industry and customers. Oftel still considers that safeguard caps would be a useful mechanism in a market where services are moving towards competition but the need for safeguard caps depends to a large extent on the coverage of the basket. If the basket is a broad one, it is less likely that safeguard caps will be needed. This is considered further below.
2.19 Oftel considers that with increasing competition expected in nearly all segments of the telecoms market it is inappropriate to increase the scope of the present price control basket. This review should be a time for reducing the scope of the controls, if competition allows, rather than extending it.
2.20 Oftel itself made proposals in the first consultative Document that certain services might be brought into the price control in some way. In the light of consultation, its views on these now are:
2.21 Oftel has examined closely the prospective markets for each of the services in the present basket to see if any could be removed. Oftel considers that, in the light of its plans to push towards portability of non-geographic numbers next year, the markets for Specially Tariffed Voice Services will become competitive and these services should be removed. For other reasons (see para 6.24) Directory Enquiry calls (192) and Operator Assisted calls (100) should also be removed. Oftel considers that both groups of services should be removed altogether from the basket and not subjected to safeguard caps, as was proposed in the first consultative document, although it would welcome views on this in the case of Operator Assistance.
2.22 The Department of Trade and Industry is now consulting on proposals to liberalise the international telecoms market, possibly as early as mid-1996. Other operators might soon be able to own and operate international facilities and provide increased competition for BT (and Mercury) on international routes. Oftel expects these proposals to be strongly supported by most of the industry and, if they are adopted, would expect competition in this profitable market to take off quickly, certainly on major routes. Competition is likely to provide choice primarily for business users initially, although it will increasingly benefit those groups of residential customers who make a significant volume of international calls. For most residential customers, however, these calls are not a major part of their bill.
2.23 There is currently substantial competition in provision of national calls. Business users can take advantage of competitive supply by means of either direct line, if the volume of business warrants it, or by indirect access. Residential customers who make a significant amount of national calls can also use indirect access to take advantage of competition.
2.24 In view of the increasing competition expected in the national and international markets it could be argued that these services should be removed from the basket and made subject to safeguard caps. Oftel, in fact, proposed this for international calls in the first consultative document. In the light of consultation, however, Oftel considers that greater competition in the international and national markets will have little impact for most residential customers, since they generally take all their calls as a combined package of local/national/international calls from their local access operator. Indirect access would allow residential customers to take advantage of greater competition in these markets but the take-up in the residential market has been low and indirect access operators have not in general been widely targeting this section of customers. Oftel last year consulted on whether indirect access facilities should be extended by the introduction of 'equal access' arrangements which would enable BT's and other operators' customers to access the long distance and international services of indirect operators by dialling an equal number of digits. Oftel has recently indicated that it considers the cost benefit analysis it is required to make of such a change does not justify introducing equal access arrangements as defined in operators' licences.
2.25 Residential customers will, therefore, in most cases only be able to take advantage of the greater competition in national and international calls when they have effective competition amongst alternative local access providers. Oftel does not consider this will be in place at the start of the next price control period. Its preferred approach is, therefore, to have a broad basket - the present coverage minus Specially Tariffed Voice Service and Directory Enquiries and Operator Assisted calls - for the next price control. There would be no need, in this case, for any service to be subject to a safeguard cap.
2.26 Oftel would welcome views on whether the alternative option of a narrow basket with national and international calls outside the basket but subject to safeguard caps is nevertheless regarded by others as appropriate, despite the concerns set out above. Further consideration of the value of X for a narrow basket is set out below.
2.27 Should discounts against standard charges be counted towards BT's compliance with retail price controls? This depends, in Oftel's view, on the coverage of the basket. The reason for disallowing discounts in the present price control was to prevent BT using increased discounts to business customers to meet the price controls overall while keeping prices to residential customers higher than they should have been. With a broad basket, there would still be concern that increased discounts on, say, international and national calls (which are very important for business customers) could be offset against standard local call charges (which are the main concern of most residential customers) kept higher than they might have been. Oftel would, therefore, propose that the present treatment of discounts - out of the basket - would continue if there were a broad basket.
2.28 Oftel would also propose that the treatment now set out in BT's licence for price control treatment of any new call/rental packages BT might introduce would remain if a broad basket were chosen.
2.29 If a narrow basket of access and local calls were considered an option there would clearly be no scope for using discounts on one type of call to keep charges on other types higher. There would, however, remain the possibility that BT could focus price reductions on business customers through large volume discounts on local calls or by concentrating reductions on day-time (rather than evening or week-end) rates.
2.30 Oftel nevertheless considers that discounts or charges for relevant elements of call/rental packages ought to be allowed to count towards the price reductions required. On a narrow basket, Oftel would propose to include in the price cap calculations all discounts or contributions from call/rental packages relating to access or local call charges. Oftel considers that in the increasing competitive domestic market BT is unlikely to want to be seen to disadvantage residential users and figures in the first consultative document showed that in recent years residential customers have received a more equitable share of price reductions.
2.31 It is clear that the UK telecoms industry will change significantly over the next few years. There will be increasing choice, diversity and innovation. Forecasting the future is becoming very difficult. The UK is genuinely at a turning point in the development of effective competition. It is not the time to be extending the price control period to, say 5 years because the appropriateness of continuity with price control would certainly need to be considered before then. Equally reducing the period over which a cap is calculated reduces its incentive properties. Oftel, therefore, proposes to stick to a 4-year period for a conventional control.
2.32 The analysis above leads Oftel to the option of re-imposing a full 4-year price cap on broadly the same basket. This is because although competition is growing it is not yet at the point where it can be considered likely to be sufficient over the control period to give Oftel the confidence to remove controls. Oftel has, therefore, considered whether with a broad basket there are nevertheless alternative regulatory approaches which would recognise that the UK market is currently in transition to effective competition and allow regulation to pull back in areas where consumer protection is already secured. Oftel sees 2 possible alternative options:
Residential/Small Business Cap: as discussed above, competition in international and national calls is already very lively for business users, particularly large ones. Business users are comparatively more profitable than residential customers and many competing operators have, not surprisingly focused their business on these groups. Competition is already bringing them 'quality, choice and value for money'. Competition for the residential customer is increasing and will accelerate through the price control period but will certainly not be effective at the start of the period. There are strong arguments for confirming the next price control to these residential users and small business customers, whose telephone use is similar. Competition itself will work on prices for other business users. Oftel would, therefore, propose on this option to have a broad basket, as discussed above, but count towards it only the volumes and prices of services provided to the residential and small business market.
Shorter Price Control Period: an alternative option would be to set the price control to run from 1 August 1997 on the same basis as calculations assuming a four year control period (ie on the basis that BT's expected rate of return would reach an acceptable level over 4 years, and therefore with the same X) but to provide that the control would end after only 2 years in July 1999. In early 1998 Oftel would then undertake, in consultation with customers and the industry, a wide-ranging review to assess market developments and to determine whether, in the light of these developments any retail price control would be needed from August 1999. Oftel's intention would be that, if there were effective competition in the market and certain pre-set conditions were met, there would be no further retail price controls at all. If not, then Oftel would proceed to consult on what would be appropriate continuing price controls from August 1999. The type of control which wold be appropriate would depend on market developments. It might well at that stage be possible to move to a narrower basket or to some form of bill control. Industry and customers would need to be clear about the conditions Oftel would set for assessing in early 1998 whether competition was likely to be effective from August 1999. In Oftel's view these would need to include:
2.33 In assessing whether competition was effective Oftel would give greater weight to those conditions which were not within BT's control. Otherwise it would be able to influence the outcome. If, in the Director General's view, the conditions were not met Oftel would put in place a new price control to operate from August 1999. The conditions are considered more fully in paragraphs 6.43. If Oftel were to adopt this alternative timing approach it would need to debate widely with industry and consumers exactly what the appropriate conditions should be. These would need to be set out in a Statement before the next price control begins.
2.35 Oftel invites views on these three alternative proposals.
2.34 The value of X for the retail basket depends on a range of factors. The main determinant, however, is the coverage of the basket itself. (The reason for this is explained in detail in paragraph 6.46). The other key variables which have the greatest impact on the value of X are:
2.35 Decisions on these variables are not issues of policy but rather questions of judgement as to the most appropriate value. The judgement involved in deciding a value for the first two variables is qualitatively different from that for the last two. The first two are forecasts based on the best evidence available to Oftel, from BT and others, of what the future market will look like. The second two are less forecasts and more in the nature of seeking the best available evidence about more objective factors. Oftel has taken external evidence on other telecoms operators' efficiency and, from analysis of financial markets, on cost of capital values. Chapter 7 sets out in detail Oftel's approach to the modelling used to derive X.
2.36 The 2 key variables of forecasts of market growth and of BT market share combine to give a BT volume growth parameter. This parameter has a very significant impact on the value of X. Oftel has examined a number of combinations of different values for the key parameters. Taking central assumptions for improvements in efficiency and cost of capital (as explained in Chapter 7), the table below shows different values of X for different estimates of the growth in BT's call volumes. The different estimates represent broadly BT market growth forecasts with a BT market share in the range BT and other operators are predicting, a continuation of recent market trends and an acceleration of market growth which might be expected if there were significant expansion of new service and of wide/broadband use.
Table 2.1 Possible values of X:
BT Volume Growth
Basket Accelerated Historic BT
Local calls & 3 1.00 -1.5
access
Discounts in
Broad basket
Discounts out 9 7 5
2.37 The figures presented here should not be taken as precise values of X for a particular value of a key variable. Rather, they show the centre of gravity of a number of values for X produced for different values of the key variables. Nevertheless Oftel considers that the values of X set out here span the range of likely values.
2.38 X will obviously change for different estimates of the other key variables. Broadly, a 1 percentage point increase in the assumed rate of reduction of BT's real unit costs would increase X by about 1 to 1.25 percentage points; a 1 percentage point increase in the cost of capital value used reduces X by 0.5 percentage points. (X would also be different for a Residential/Small Business basket to the extent costs and revenues for these customers were significantly different from those for other business users).
2.39 The effect of the value of X on the bills of different groups of residential customers will depend on how BT changes prices for its various services and on any new tariff packages BT may introduce. Taking, for the sake of illustration, the neutral assumptions that rentals stay constant in real terms and that call reductions are applied equally to local, national and international calls, it is possible to indicate ranges of cumulative reductions for residential customers over a four year control period. These ranges are shown in Table 2.2 for customers with bills above and below the Median Residential Bill.
Table 2.2 Possible effects on residential bills of different values of X.
Percentage change in bill in real terms
Value of X Call spend less than MRB* Call spend more than MRB
9 -17% to -27% -27% to -41%
7 -14% to -23% -23% to -34%
5 -9% to -14% -14% to -22%
2.40 There will continue to be separate controls on private circuits. Analogue circuits will be in a basket with an RPI+0% cap. Digital circuits up to and including 64kbit/s will be in a separate basket with an RPI+0% cap. Digital circuits above 64kbit/s will be removed from any price control. Oftel proposes that:
Oftel is seeking views on these three proposals.
2.41 Outline draft licence modifications to implement Oftel's proposals for retail price control are at Annex A. They are based on a broad basket but the duration of the price control period has been left open. The licence modifications will naturally need to reflect the outcome of this current consultation.
2.42 One of Oftel's central objectives in this price control review is to promote the efficiency of the UK telecoms industry. Network costs are a significant proportion of BT's retail costs 43% and it is important that efficiency improvements here are achieved. Interconnection costs also constitute a significant proportion (up to 50% or more) of other operators' costs and reducing interconnection charges to efficient levels will promote effective competition between operators. Oftel, therefore, considers that a network charge cap approach to interconnection charges would bear down on costs and, ending detailed determinations would also be a significant deregulatory step.
2.43 In the first consultation document Oftel proposed that from 1 August 1997 BT's interconnection charges payable by other network operators would no longer be determined by Oftel on the basis of BT's fully allocated costs. Instead there would be a network charge cap operating on the same principles as the retail cap and costs would be based on incremental costs. BT would be required to reduce the revenue from a basket of interconnection services by a certain percentage each year. BT would have the freedom to set individual interconnection charges as long as these were above floors related to incremental costs and below ceilings related to stand alone costs. Oftel suggested that BT might be allowed to make different charges for the same service depending on the end-use of that service.
2.44 The network charge cap would apply only to interconnection services which were not competitive or prospectively competitive. Oftel considered that BT's call termination services would require special treatment. BT clearly has bottleneck control of services for terminating calls to its exchange line customers. Oftel proposed that charges for these services would be set by Oftel at the start of the period and required to reduce each year by RPI-X (as set for the network cap) over the period. Oftel asked for views on whether other operators' call termination charges should also be determined by Oftel - other operators have bottleneck control over calls terminating on their networks. For BT's interconnection services which were potentially competitive over the price control period Oftel proposed a safeguard cap of RPI+0%. Competitive services would not be regulated.
2.45 The first consultation document made it clear that whatever interconnection arrangements were decided upon BT would still be required to publish a list of the standard interconnection services it offers and to publish its charges. BT would also be required to charge itself the same for use of its network as it charges other operators so that it would not, by discriminating in interconnection charges, be able to give itself any undue advantage. The current accounting separation arrangements, including the publication of audited accounts, would also remain in place.
2.46 Responses to the part of the first consultative document dealing with the network charge cap came primarily from the industry, although there were several consumer comments on it. Consultation showed that there is strong support from most of the other operators for a move to an incremental cost basis for interconnection charges. BT was concerned that any model of incremental costs should be based on its own costs. Other operators, not surprisingly, preferred to see charges based on the engineering model of costs which has been developed in the Incremental Costs Working Group. Many operators are concerned that the incremental cost model is not yet finalised and that a robust reconciliation of the top down (BT costs) and bottom up (engineering) models has not yet been established. Some in the industry do not feel there is yet proper transparency of what will come out of the incremental model - although it has to be said that Oftel has made strenuous attempts to involve all the industry in the Incremental Costs Steering Group and in workshops.
2.47 Operators (and some consumer groups) are also concerned about the flexibility BT could have in setting charges between floors and ceilings and how far it may be able to use this flexibility to act anti-competitively. There is also concern about the proposal to charge differentially for different end-uses of services. Many operators feel this gives unacceptable scope for BT to flex charges to suit its own businesses.
2.48 Some operators felt that Oftel should stick with the current arrangements of annual determinations of BT's interconnection charges until the incremental cost model had been firmly worked through and that even then interconnection charges should continue to be set annually by Oftel on the basis of the model, updated as necessary.
2.49 Oftel's proposals for network charges are set out in detail in Chapter 5. Oftel recognises operators' concerns about having more information on the incremental cost methodology but considers that a robust methodology will be delivered by early May. Oftel intends to publish, with the proposals put forward for statutory consultation at the end of May:
a statement on the incremental costs methodology it proposes to use
indicative values for the floors and ceilings which would be applied to consideration of interconnection charges set by BT, and
guidelines on how the new interconnection framework would be expected to operate.
On this basis Oftel considers that a network charge control based on incremental costs can be introduced from 1 August 1997.
2.50 Oftel does not regard the continued determination of interconnection charges each year as consistent with an increasingly competitive interconnection market. Determinations involve Oftel in detailed decisions which it should not have to make and which the industry could sort out for itself. Disputes about prices which cannot be resolved would still be referred to Oftel for consideration. Oftel is considering further how the dispute resolution process would operate and will consult industry on this in due course. Moving to an incremental cost basis should, however, avoid some of the unproductive arguments about cost exclusions. Oftel proposes that the costs which have been in dispute in the recent interim charges determination for 1995/96 will not be put forward as part of the proposed cost base on which the network charge cap will be based. Comparison between the bottom up and top down models will give an indication of what overhead costs have been included in BT's forecasts and it will be for BT to justify why these should be included.
2.51 In light of responses to consultation, Oftel has concluded that it should develop network charging controls on the basis of its proposal for different arrangements for competitive, prospectively competitive and non-competitive services. It considers that there need, in fact, to be 3 separate baskets: one covering just call termination services (about 15-20 % of network revenues), one for all interconnection services which BT supplies only to other operators and not to itself (very small, less than about 1%); and the third, all other non-competitive services (about 25-30%).
2.52 Oftel intends to specify in the network charge control arrangements for August 1997 and beyond separate totals of allowable revenue which BT may recover from the charges for interconnection services covered in each of the three separate baskets. The allowable revenue will be determined from the incremental cost model and will include contributions to common costs, the amount of which will be fixed on an equal proportionate mark-up basis. Thereafter, the weighted average of network charges will be required to reduce each year by RPI-X and BT will have to set its individual charges for the services in each basket to achieve this. Its charges should lie between the floors and the ceilings - as explained in detail in the first consultation document. This principle will be set out in the licence modifications setting up the network charge cap arrangements. Initial draft licence modifications are attached at Annex B. These are outline first proposals and Oftel will publish an updated draft at the end of April to keep operators informed in advance of draft modifications issued for statutory consultation at the end of May.
2.53 Oftel will not specifically set any interconnection charges, not even for call terminations. The allowable revenue for the call termination basket will be specified and will then be subject to a separate RPI-X cap which will reduce the allowed revenues each year and require BT to reduce interconnection charges to meet this. For call termination rates only; Oftel is seeking views on whether there should be a one-off adjustment to bring call termination rates down to the level of an efficient operator. Its initial view is that there should not be such an adjustment.
2.54 Before the start of the control period Oftel will publish the updated values for the floors and the ceilings which are derived from the incremental costs model. Clearly how those floors and ceilings move over the control period will depend on cost movements for different components. The rest of the industry is in a better position to track these movements than Oftel. Oftel does not, therefore, intend to re-calculate or update automatically the floors and the ceilings on an annual basis but will do so in 1999, halfway through the control period, to assist transparency. If a case of possible anti-competitive behaviour is brought, Oftel will re-calculate the appropriate floors and ceilings necessary to pursue the complaint as they stand at that time.
2.55 Given industry concerns about allowing BT to charge differentially for interconnection services depending on end-use Oftel proposes that there should be a presumption against such flexibility. If, however, BT were able to assure Oftel and others in the industry that any such charges were not anti-competitive or unduly discriminatory or unfair they could be permitted. There would not be a complete ban on such proposals.
2.56 Oftel has decided not to determine call termination rates for other operators. Different types of operators have different network topologies and Oftel considers that determination of call termination for other operators could become unduly complex. This should be a matter for negotiation against the background of the guidelines to be issued by Oftel. The guidelines would indicate that Oftel expected agreement to be reached on the basis of equal payments in each direction for broadly similar network types. If agreement could not be reached the matter could be referred to Oftel but Oftel hopes that within this framework operators will be able to reach agreements commercially. Oftel is proposing in the licence modifications to delete Condition 13.5B which sets out how (when that Condition applies) BT's payments to other operators should be calculated. Amendments may also be needed to other operators' licences to allow this approach to call termination to have effect.
2.57 Oftel proposes that IDD and inter-tandem interconnection services will be covered by safeguard caps. It has asked for views on whether international private circuits and Operator Assistance service (network) should be covered by safeguard caps and excluded from control altogether.
2.58 The main variables which determine the value of X for the network cap are the forecasts for growth in BT's call volumes and assumptions about BT's expected productivity growth. On the basis of assumptions explained further in paragraphs 5.43 values for X are shown in Table 2.3.
Table 2.3 Possible values of X for the network cap
BT Productivity Growth
Market Volume Growth High Medium Low
Accelerated 6 5 4
Historic 5.5 4.5 3.5
'BT' 4 3 2
2.59 With a network charge cap in addition to a retail price cap there are arguments for applying the retail controls only to the margin between network charges and retail prices. Oftel was concerned that there might be practical difficulties of incompatibility between retail and network caps which were set independently. There might also be the possibility of strategic manipulation of charges to benefit BT's businesses. In addition there is the important presentational problem that, while the impact on retail prices can be gauged, it is not precise. The effect on prices customers actually pay would be unclear. Oftel has, however, concluded that there is no material practical problem (see paragraphs 5.86) and Oftel therefore proposes, in the interests of clarity and transparency, that the retail price controls will continue to apply to actual retail prices, as at present.
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