1.1 The purpose of this document is to draw some conclusions from the debate started in earlier consultations on whether the UK regulatory regime needs adjustment to encourage competition in the provision of services over fixed telecommunication networks. This document does not deal with the provision of services over mobile networks. It is primarily concerned with questions about the right regulatory framework for those who want to provide services over others' fixed networks, not build networks themselves. The issue was first raised in Oftel s December 1994 consultative document "A Framework for Effective Competition". Oftel s preliminary views were set out in Chapter 9 of the July 1995 statement Effective Competition: Framework for Action and a workshop involving a wide range of industry representatives was held on 19 October 1995. This document sets out some firm proposals for change as a result of this wide ranging consultation.
1.2 Oftel's consultative document Pricing of Telecommunications Services from 1997, published in December 1995, raised issues concerning the extent of competition in the telecommunications market which are closely related to the issues covered in this document. The December document did not distinguish between competition to BT from network operators and competition from independent service providers. This document concentrates on competition from independent service providers.
1.3 The issues dealt with in this document are complex. The following section therefore covers some key terms and definitions used in the document: the market players, the markets covered; the pricing rules applicable to the markets and the relevant accounting divisions applied to BT.
1.4 This document uses the classifications in the following paragraphs. A diagram illustrating the relationships between the different market players and BT's accounting entities is included at Annex A.
Network Operators
1.5 An entity that has a Public Telecommunications Operator (PTO) licence, owns its own network, has telecommunications code powers (ie powers that enable it to install its own lines on public and private property etc) and Relevant Connectable System (RCS) status (see glossary). Examples include BT, Kingston, Mercury, Energis and the cable operators.
Service providers
1.6 An entity that sells telecommunication services or services with a telecommunication service component to third parties. It includes network operators, but excludes end users, (see paragraph 1.7 below). Service providers are of two types:
End users
1.7 Any person who is not in the business of selling telecommunication services or services with a telecommunication service component to the public at large. Therefore, it includes closed user groups and entities reselling telecommunication services only to organisations under the same substantive ownership as well as final customers for retail telecommunication services.
1.8 For the purposes of this consultation paper, the telecommunications market has been subdivided into three categories of service. The distinction between the three categories is important as the changes proposed in this document are built on this categorisation. The categories are:
Network services
1.9 A network is made up of the provision of telecommunication links or transmission (eg optical fibre, copper wire) and switching equipment (to enable calls to be directed to the right destination). Only network operators can realistically provide network services economically. Network services are the use of the network to convey calls, messages and signals over it. The product purchased is the connection of the caller, the subsequent conveyance over the network and in some cases, additional services such as call waiting or caller display.
1.10 The market for network services can be further subdivided into two categories:
Basic retail services
1.11 These are retail services which, in a fixed network, have generally been provided by network operators and are based on network services. These services consist only or largely of elements and/or functions that are closely related to the network itself, usually with functions embedded in it. Voice telephony is the major basic retail service. Caller display, call diversion, call waiting, call return and "ring back when free" are examples of additional services embedded within the network.
1.12 Basic retail services comprise two elements: end-to-end network services and the functions required to serve an end user (ie non-telecommunication services such as sales and marketing, billing and customer service).
Enhanced services
1.13 These are services with a telecommunications component but containing some function over and above basic retail services. Electronic mail, premium rate services, on-line information services and video-conferencing fall into this category. Other examples are given in paragraphs 3.10 to 3.23. In many cases, these additional functions are readily capable of being performed by independent service providers.
1.14 Enhanced services comprise three elements: one, network services; two, the functions required to serve end users (these two elements are purchased by independent service providers and end users from network operators in the form of basic retail services); and three, enhanced elements (eg voicemail systems, routers, servers) including, where appropriate, the independent service provider's own retail functions used to serve its own customers.
1.15 For convenience the key terms in the preceding paragraphs highlighted in bold are contained in the glossary at Annex C. The glossary also contains definitions of other important terms used in this document as well as descriptions of enhanced services referred to in the text.
1.16 The current regulatory rules on the prices which may be charged for services apply differently to different market players and services. These rules apply primarily but not exclusively to BT.
1.17 The charges for the use by network operators of BT's network for network interconnection services are currently largely determined by Oftel (and, may potentially, be determined in respect of competing operators' networks). These charges are referred to in this document as Condition 13 charges as this is the relevant condition of BT's licence under which they are determined. The cost base reflects the wholesale basis of the transactions between network operators, and excludes costs associated with their sale by BT at the retail level (see paragraph 1.18 below). Oftel is currently proposing changes to the precise way these charges are controlled and calculated but not the underlying costs upon which they are based.
1.18 BT's prices for these services are controlled at the aggregate level by the RPI-X formula (the retail price control) although individual prices are not determined. The cost base for the price control includes not only BT's network services but also its costs as a retailer of such services and, therefore, includes things like the costs of billing individual customers for individual calls, advertising etc. There are no price controls on other network operators in this market.
1.19 BT is also obliged when required to do so by the Director General (under Condition 15 of its licence) to offer one category of customer ("systemless resellers", ie those reselling others' basic retail or enhanced services) a lower tariff than the generality of retail customers, to reflect any cost savings in serving this type of customer. However, the definition is so narrow that this condition has hardly ever been used.
1.20 There is currently no direct regulation of prices in this market. However, for BT, there are rules which have an impact on prices, for example, the prohibitions on BT relating to unfair subsidy and undue discrimination. Paragraphs 1.27 and 1.28 below explain in more detail how these rules apply to BT.
1.21 The existing rules are applied to BT by reference to a number of accounting entities, and by defining the rules of interaction between them. The important elements of these accounting entities are as follows:
1.22 The Systems Business (SB) of BT is defined by Condition 18 of BT's licence. The definition is included in the glossary. In essence, the Systems Business is defined as those telecommunication services which are not in the Supplemental Services Business and is that part of BT which currently supplies most but not all basic retail services and network services, together with some enhanced services (eg premium rate services). For accounting and regulatory purposes, the Systems Business is further divided into a number of different entities, including:
BT Network Business
1.23 In essence, the Network Business contains BT's transmission and switching activities for its network services to other operators and BT Retail Systems Business. BT's access or local network activities are accounted for separately.
BT Retail Systems Business
1.24 The Retail Systems Business of BT supplies basic retail services, whether provided to end users, independent service providers or BT's Supplemental Services Business.
1.25 The Supplemental Services Business (SSB) of BT is defined in Condition 18 of BT's licence. The definition is included in the glossary. In essence, the SSB comprises those telecommunication services or services with a telecommunications service component which are not in the Systems Business.
1.26 The regulatory framework thus already recognises distinctions between the network services, basic retail services and enhanced services markets with most network and basic retail services contained in the Systems Business and most enhanced services contained in the Supplemental Services Business. However, the mapping of BT's accounting entities on to these markets is at present only approximate as indicated in paragraph 1.22. A key concern of this document is to remedy this defect.
BT Network and BT Retail
1.27 BT Retail Systems Business buys (on a transfer charge basis) network services from BT Network on the same basis that BT Network sells that output to other network operators (ie Condition 13 charges).
Systems Business (SB) and Supplemental Services Business (SSB)
1.28 The SSB must buy (in the form of transfer prices) basic retail services from the SB at the same retail prices as independent service providers are offered. The SSB cannot directly purchase network services from BT's Network Business. This is to ensure fair competition in enhanced services between BT's SSB and independent service providers.
1.29 The SSB also has to buy non-telecommunication services (eg accommodation, sales etc) from the SB at full cost.
1.30 Oftel recognises that the regulatory regime which has just been described is a complicated one. One possibility to reduce the complexities would be to increase the flexibility allowed to BT to differentiate prices to end users according to the volume of business they generate over the network. At present BT may offer discounts against published tariffs in certain circumstances. It has used this flexibility to target segments of the business market, particularly large users, with volume-related discounts. Independent service providers are expected to be large users of BT's services. If BT were given greater tariffing flexibility this would mean that independent service providers and large end users could expect lower prices for end-to-end network connection services than other end users and that the regulatory regime might not need to distinguish between basic retail services and enhanced services or between end users and independent service providers for pricing purposes. It could also be argued that a regulatory regime permitting different prices for end users on volume grounds would be consistent with the US approach. There are, however, three problems with this regulatory approach:
1.31 Given Oftel's conclusion that greater retail price flexibility through volume discounts for BT could undermine long-term sustainable competition and Oftel's objectives of encouraging both infrastructure competition and competition between network operators and independent service providers (see Chapter 2, paragraphs 2.6 to 2.8 for a more detailed discussion of Oftel's objectives), there seems no alternative but for Oftel to ensure that for the time being the more complicated regulatory regime outlined in this chapter continues to work effectively and where it is deficient, changes are made to ensure fair competition.
1.30 The UK is currently unique in encouraging competition in both the long distance and the local telecommunications markets. Oftel is therefore the first regulatory authority in the world to face many of these competition issues. It may well be that as others grapple with these problems as markets all over the world are increasingly opened to competition, they too will discover that complex regulatory mechanisms are needed at least while new entrants are establishing themselves, to ensure fair competition.
1.31 Oftel's objective is to roll back regulation as competition develops. In the immediate future, its task - and therefore the purpose of this document - is to ensure that all concerned in the telecommunications market understand the regulatory structures currently in place and have a full chance to comment on the proposed changes being put forward in this document before final decisions are taken.