5.1 There are two areas in which Oftel considers change would be appropriate because it would promote and maintain competition in the independent service provision market and therefore the development of innovative, value for money services for end users. The changes proposed are:
5.2 The first proposal is explored in this chapter and the second in Chapter 6.
5.3 The fact that Oftel does not consider Condition 13 charges appropriate for independent service providers (see para 4.8 above) does not mean it thinks there should be no change in the current pricing arrangements. There is no distinction at the moment between the prices BT charges for retail customers and independent service providers. Oftel considers that some differentiation would be appropriate. Independent service providers are likely to cost BT less to serve. For example, an independent service provider may not want a full billing service but a single bulk bill in some electronic format. The question is how might a differentiated price or prices be achieved in regulatory terms.
5.4 One option would be for Oftel to take a highly regulatory approach, requiring BT to provide such prices, and having determination powers if BT's offer was not acceptable to independent service providers. Oftel is very reluctant to take such an interventionist approach for the following reasons:
5.5 Oftel also believes such an interventionist role may not be necessary. Its preferred approach is to leave it to BT to set the prices for independent service providers on a basis which did not involve undue discrimination. Oftel believes some differentation between prices offered to end users and independent service providers could be justified. If left to do so, it seems likely that BT would offer lower prices than at present. However, at this stage, it is not clear what level of prices BT might actually offer since BT would need to take account of a range of factors including the following:
5.6 Oftel recognises that some commentators may question whether, if BT was permitted rather than required to offer differential prices for independent service providers, it would actually use that freedom. Paragraph 5.5 explained Oftel's view of the incentives on BT to use that freedom. Oftel recognises that a number of other regulatory issues might also arise. Oftel believes that these could be dealt with under existing regulatory controls (requiring the provision of telecommunication services to meet reasonable demand - Condition 1; and prohibiting undue discrimination and unfair cross subsidy - conditions 17, 18 and 20B.15; and via the proposed anti-competitive practices condition - see paragraph 4.5).
5.7 One possibility is that BT might refuse to provide a network service to independent service providers that it did not supply to itself or it might refuse to unbundle a network service from some of the purely retail aspects of the basic retail service. In both such cases, Oftel might act under Condition 1 and/or Condition 17 of BT's licence requiring BT to meet any "reasonable demand" for a telecommunication service on a non-discrimintary basis or it might take action under the proposed anti-competitive practices condition.
5.8 Another potential problem is that BT might agree to provide the service requested only at an excessive price. This might occur, for example, where BT planned to introduce its own enhanced service at a future date but wanted to keep the price of one of the inputs high until it was ready to launch its service. If this occurred, it would be exactly the sort of behaviour that Oftel would expect to pursue under the proposed anti-competitive practices condition. Additionally, if the service in question was an unbundled service, the conditions on undue discrimination would require BT to set the price at or below the bundled service less any cost savings. The scope for excessive prices for the unbundled element of any basic retail service would, therefore, be significantly reduced.
5.9 If Oftel's proposals were adopted, this would mean either changes to or deletion of Condition 15 of BT's licence and possibly, guidance to BT on what might or might not be considered undue discrimination.
It is Oftel's view that a combination of the incentives on BT (see paragraph 5.5) and the regulatory controls already available or proposed by Oftel (paragraph 5.6) suggest that if BT is encouraged to discriminate between independent service providers and end users, it may well choose to introduce a service provider price lower than the end user price. Do consultees agree with this conclusion?
Do consultees think there is a risk that if BT introduces a service providers price, this would be roughly similar to Condition 13 charges for network operators (see paragraph 5.5(c))? If so, does this matter?
Oftel's view is that the anti-competitive practices condition proposed for BT's licence will be essential to enable effective control of any anti-copetitive behaviour by BT in respect of the level at which a service provider tariff is set (see paragraph 4.5). It is not clear at this stage whether the proposed condition will be included in BT's licence. In the absence of the condition, Oftel believes it would need to consider more prescriptive powers, such as a power to determine prices, to ensure fair competition. The views of consultees on this issue would be welcome.
5.10 There is one further question which needs exploration - whether distinctions between different types of service being provided should also be legitimate grounds for differential pricing. Oftel's "Pricing of telecommunications services from 1997" proposes that BT should have pricing flexibility to set different charges for network interconnection services depending on the end use to which that service is put (paragraph 5.14 of that document). At first sight a discriminatory pricing policy depending on end use may fall under the licence condition prohibiting undue discrimination or as an abuse under the proposed anti-competitive practices condition. In either case, such a discrimination would not be undue or abusive if there is an objective justification for it.
5.11 Oftel believes that there may be good economic grounds for allowing BT to differentiate between types of services being provided in the prices it sets for the component of those services charged to independent service providers. Varying charges to take account of demand characteristics for specific services (notably responsiveness to price) could lead to more services being provided and possibly at lower cost to customers than would otherwise be the case (if, for example, a drop in price leads to higher take up of a particular service). The services offered by independent service providers are a potentially good example of this. BT may also wish to charge different prices according to whether the service which is being supplied is a substitute for its own basic retail service (eg plain voice telephony) or provides additional opportunities to increase demand for its network services. In the latter case, the price might be lower to reflect the fact that there would be a greater volume of traffic generated across BT's network. In the former case where the service is a substitute for BT's basic retail service, there would be no net additional use of the network so a lower price would not be in the interests of BT and is unlikely to be in the interests of all customers either since the price reduction for the use of the network for this purpose could be balanced by a price increase for some other use.
5.12 On the other hand, giving BT freedom to decide how such categories are derived might be risky given its dominant position in the provision of network services, and its interest in the enhanced services market. BT clearly has a concern, at least theoretically, in limiting competition to its own enhanced services and could try to act anti-competitively by setting relatively high prices for end-to-end network services used for enhanced services it does not itself provide, but relatively low prices where these are an input into its own enhanced services. By trying to draw fine distinctions between its own enhanced service and similar services provided by others, it could attempt to distort competition in its favour.
5.13 There is also a question of how effectively such arrangements would work in practice. An independent service provider might obtain basic retail services at the price appropriate for one service but use it to provide another service which should attract a higher price.
Oftel would welcome views on whether BT should be encouraged to differentiate in the prices it charges for end-to-end connection services according to the different uses to which they are put by independent service providers; whether such a freedom could be policed effectively; whether it would have beneficial economic effects or whether it could be used anti-competitively, and if the latter, what are the potential risks involved.