Promoting Competition in Services over Telecommunications Networks

CHAPTER 4: ISSUES ON WHICH Oftel IS NOT PROPOSING MAJOR CHANGE

4.1 Paragraph 2.1 listed the issues on which Oftel has received representations in favour of change. This chapter deals with those areas in which Oftel is not proposing significant changes although paragraphs 4.10 to 4.13 propose a clarification of policy on Relevant Connectable System status.

Structural separation

4.2 Some commentators argue that the only way to achieve fair competition in the network and enhanced services market is for BT's activities in each of these areas to be put into separate ownership. Oftel is not proposing to pursue this option now because:

Many enhanced services are closely connected to the provision of network services. In practice, it could be difficult to separate the assets used in both activities - and any such separation could involve a high degree of cross selling;
Oftel has always considered there to be benefits from the integration of network and enhanced services arising from the sharing of different facilities (economies of scope). These advantages are likely to benefit the customer as long as regulatory controls on abuse of dominance including accounting separation and the prohibitions on unfair cross subsidy and undue discrimination enable fair competition in the market.

4.3 Oftel believes that - with BT's cooperation - it should be possible to make the regulatory controls on BT's behaviour work. If this should prove not to be the case, Oftel would look again at the case for separation of BT's businesses.

Unfair cross subsidy and undue discrimination issues

4.4 These are significant issues given BT's vertical integration across the market for basic retail and enhanced services and its very large share of the network services market. As described in paragraph 3.27 there is a regulatory framework already in place to deal with unfair cross subsidy and undue discrimination issues.

4.5 The anti-competitive practices condition proposed in Oftel's December 1995 consultative document "Fair Trading in Telecommunications", if implemented, would also have a role to play. The proposed condition would prohibit behaviour preventing, restricting or distorting competition in relation to any commercial activity connected with telecommunications. This includes both an abuse of a dominant position and the entry into any agreement with a competitor or a customer which has an adverse effect on competition. Oftel has published draft guidelines which it would propose to adopt if the condition is agreed. These guidelines specifically cover the question of unfair cross subsidy and undue discrimination (see pages 38 and 47-51 of "Fair Trading in Telecommunications"). Oftel could also deploy Conditions 18 and 20B of BT's licence in relation to unfair cross subsidies by BT, if appropriate. The guidelines would be kept under continual review in the light of enforcement action and relevant case law. Oftel is reviewing its enforcement procedures to increase the transparency and understanding of them. The outcomes of investigations will be made known on a regular basis, along with the reasons underlying them. An internal administrative casework audit system will be introduced to enhance procedural fairness.

4.6 Oftel's view is that no additional regulation is needed to deal with questions of unfair cross subsidy or undue discrimination.

Should independent service providers be charged the same as network operators?

4.7 Some of those commenting on Oftel's December 1994 consultative document argued that all independent service providers ought to have Relevant Connectable System (RCS) status which confers the following benefits:

Condition 13 charges;
ability to connect a wider variety of equipment to BT's network and to connect at C7 signalling interfaces which provides access to a wider range of services within BT's network; and
allocation of numbers, in their own right, rather than being limited to a sub-allocation of numbers through another operator.

4.8 Giving RCS status to independent service providers would mean they were charged the same for end-to-end network services as network operators are for network interconnection services. This has some attractions, not least because it would be deregulatory. However Oftel is not proposing to adopt this approach for the following reasons:

the Condition 13 charges available to network operators reflect their usage of BT's network. Unlike service providers who require service across BT's network, network operators are connecting within BT's network and are charged only for the elements of the network they use and not for the costs of providing basic retail services. This will remain the case under the network charge control proposed in Oftel's consultative document "Pricing of telecommunications wervices from 1997";
to allow connection of a wider range of equipment or connection at C7 signalling interfaces (that is, at non "network termination points") raises questions about ensuring that the particular equipment or connection will not lead to technical failures within BT's network. Before all service providers could be given such access, an appropriate mechanism would need to be in place to ensure the network was not put at risk;
if independent service providers offering a resale service substituting for BT traffic were charged for end-to-end network services at Condition 13 rates, BT could find it was at risk of not covering all the costs of providing end users with access to the network. These access costs are currently met in part from call charges. If the access costs were not being covered, BT would be under pressure to increase this element of its charges.

4.9 Given the regulatory structure described at paragraphs 3.27 and 3.28, the consequence of independent service providers not getting Condition 13 charges for end-to-end network services is that they will continue to be charged retail prices for basic retail services (including end-to-end network services). This means they may find it harder to compete with BT in the provision of basic retail services although they would be paying the same as BT's Supplemental Services Business for basic retail services as an input to enhanced services.

Oftel would welcome views on its conclusion that independent service providers should not get access to BT's network on the same basis as network operators for network services.

Future policy on Relevant Connectable System (RCS) status

4.10 The conditions surrounding RCS status are described in the glossary. It entitles the holder to Condition 13. The Director General can determine that a company should not have RCS status. There are one or two independent service providers who have RCS status and who are therefore currently benefitting from Condition 13 charges for the use of BT's network without having any network of their own. Oftel would not propose to deprive any licensee who currently has RCS status of this. However, subject to the results of this consultation paper, Oftel would propose to limit RCS status for anyone applying for an individual licence after 5 February 1996 (the date of publication of this paper) to:

network operators;
International Simple Resale (ISR) operators who are contributing significantly to competition in the international market.

4.11 The second category is because, at the moment, only two companies - BT and Mercury - have full international facilities licences. An ISR licence is therefore the only route for network operators to compete in the international market. Moreover most ISR operators have invested in some network (usually switching) facilities. Oftel recognises that this policy would involve it in judgemental decisions about who should have RCS status. Developments in the EU mean that further international facilities licences may be granted in the UK in due course. When this occurs, Oftel would propose to define as network operators only those building significant networks of their own.

4.12 Oftel's proposed policy would mean that, in the future, service providers applying for licences (such as, for example, those offering personal numbering services) but not building their own network would not get RCS status though they would benefit from the changes proposed in Chapters 5 and 6 to the regulatory regime for independent service providers.

4.13 Oftel recognises this could lead to questions about access to numbers and higher levels of interconnection with BT's network. There is no fundamental reason why providers of enhanced services should not have access to numbering resources in their own right, provided the class licence(s) under which they operate required them to comply with the UK's specified numbering scheme and numbering conventions. Oftel will be examining these issues as outlined in paragraph 2.2 with a view to putting forward further proposals on them as soon as possible.

Oftel would welcome comments on its proposed future approach on RCS status.

Effects of current regulation on BT

4.14 Paragraphs 1.27 and 1.28 and the diagram at Annex A show that:

BT must charge the SSB and independent service providers the same price for basic retail services, although it charges itself Condition 13 charges for the network services that are inputs to those basic retail services;
BT charges other network operator Condition 13 charges for all network interconnection services whether those other network operators use them as inputs to basic retail services or enhanced services.

4.15 BT believes these arrangements already confer a competitive advantage on network operators and that this advantage will increase as the market in enhanced services develops.

4.16 There are two possible remedies:

BT charges the SSB Condition 13 charges for network services. But this would mean that competition from independent service providers would not develop unless they too had Condition 13 charges. The arguments against independent service providers having Condition 13 charges have been set out in paragraph 4.8;
Other network operators are forced to charge themselves retail prices for network services used as inputs for enhanced services. This would probably mean accounting separation and rules on transfer charges similar to those in BT's licence for all network operators, regardless of market position.

4.17 Oftel does not favour the solution at paragraph 4.16(b). It believes the appropriate solution is a new independent service provider price or prices, the details of which are explored in Chapter 5.