Summary

Introduction

Oftel’s position and questions for consultation

Other issues covered by the consultative document

Results of consultation

Action resulting from the outcome of consultation

Conclusion

Annex A

S.1 This Statement announces the results of consultation on interconnection charges levied by BT for termination of calls to ‘BT Click’ and services (including ‘BT Click+’) hosted on BT’s network for which conveyance is provided by ‘ISPNet Dial Access’ at the retail tariff of local rate + 1p. The consultative process has confirmed the following proposals made by Oftel:

• The interconnection charge for termination of calls to ‘BT Click’ should include the costs of certain elements of the service provided to all customers irrespective of the network from which they are calling.

• The interconnection charge for termination of calls using ‘ISPNet Dial Access’ (including calls to ‘BT Click+’) should include the cost of outpayments made by BT both to independent service providers (ISPs) and, in the case of ‘BT Click+’, to BT’s Supplemental Services Business (SSB).

S.2 The Statement does not cover any pay-as-you-go Internet services launched at local rate (eg ‘BT Click Free’), nor any for which interconnection charges are set according to the formula employed by operators for sharing revenue from calls to number translation services (generally known as the NTS formula).

S.3 The results of consultation are explained in detail below.

1.1 In October 1998, Oftel published a consultative document entitled, Interconnection Charges for pay-as-you-go Internet Services. The document sought views on specific questions relating to the level of interconnection charges levied by BT for terminating calls to pay-as-you-go Internet services hosted on BT’s network. The services concerned were ‘BT Click’ and ‘ISPNet Dial Access’ both provided from BT’s Systems Business (SB), and ‘BT Click+’ provided from BT’s Supplemental Services Business (SSB). The underlying conveyance service to ‘BT Click+’ is ‘ISPNet Dial Access’ which is also available on non-discriminatory terms to other operators and service providers providing competing services hosted on BT’s network. Both ‘BT Click’ and ‘BT Click+’ were launched at a tariff to the caller of local call rate + 1p a minute. This Statement contains the results and conclusions of the consultative exercise.

1.2 This Statement does not cover interconnection arrangements for calls to ‘BT Click Free’ which was launched in February 1999 at local call rates. Neither does it cover calls to services for which the underlying conveyance service is ‘Managed Dial IP’. Oftel is in receipt of a formal complaint about the pricing of ‘Managed Dial IP’ and ‘ISPNet Dial Access’ at local rate and is investigating the issues raised by the complainant.

1.3 Interconnection of many calls to the Internet is charged according to the NTS formula. Oftel recently reviewed the NTS formula and on 10 March published proposals on issues raised by the review. It is important to be clear that this Statement does not cover services for which interconnection charges are levied according to the NTS formula.

1.4 The introduction by BT of ‘BT Click Free’ at local call rates following the launch of local rate services by other players means that the market for Internet access services at local rate + 1p is likely to be limited. The services which are the subject of this Statement may not therefore be particularly significant in the Internet access market looking forward. However, the principles of cost recovery by call termination services established by the consultative exercise are important and may be relevant in analysis of other existing and future service offerings.

2.1 The consultative document explained that the interconnection charge for terminating calls to pay-as-you-go Internet services hosted on BT’s network should at least cover the Long Run Incremental Costs (LRIC) of the service. This is an established principle of interconnection charges. Oftel’s Guidelines on the Operation of the Network Charge Controls make it clear that Oftel considers the setting of interconnection charges below LRIC to be one indicator that the charge is likely to be anti-competitive.

2.2 In the case of calls to pay-as-you-go Internet services hosted on BT’s network, the setting of interconnection charges below LRIC would have an anti-competitive effect. This is because other operators providing interconnection services for termination of calls to services hosted on their networks which compete with BT’s pay-as-you-go Internet services would not be able to do so on terms which can match BT unless they have a cost advantage or also charge below cost.

2.3 Oftel proposed that, in addition to the costs of conveyance normally included in inter-connection charges, the LRIC for termination of calls to ‘BT Click’ should include the costs of

• the service set-up software (typically a CD-Rom),

• the service helpdesk, and

• service specific marketing

and that the LRIC for termination of calls to ‘BT Click+’ and other services accessed via ‘ISPNet Dial Access’ should include

• the cost of outpayments made to ISPs purchasing ‘ISPNet Dial Access’ (in the case of ‘BT Click+’, the outpayment will be made to BT’s SSB).

This is because these costs are incurred in providing the service to all customers, irrespective of whether they are calling from the BT network or an OLO network.

2.4 The consultative document asked 2 specific questions. They were:

• Oftel would welcome comments on the general principle that costs additional to basic conveyance can be included in the charges for call termination on the IP network where these costs are incurred in provision of the service to callers irrespective of where the call originates. Specifically, in relation to ‘BT Click’, Oftel would be grateful for views as to whether it is right to conclude that the costs of each of

- the set-up software;

should be included in the termination charge.

• Oftel would be grateful for views as to whether it is right to conclude that the payment to ISPs and BT’s SSB purchasing ‘ISPNet Dial Access’ from BT’s SB should be included in the termination charge for calls destined for ‘BT Click+’ and equivalent services hosted on BT’s network.

2.5 Responses to these questions are covered in Section 4 below.

3.1 The consultative document also discussed other issues relating to the setting of both retail prices and interconnection charges for pay-as-you-go Internet services. This included consideration of the application and operation of the NTS formula. As explained in paragraph 1.3, Oftel has recently reviewed the formula and, on 10 March, published proposals on issues arising from the review.

4.1 Oftel received nine substantive responses to the consultative document, and one further submission offering comments on the initial responses. A list of the respondents is at Annex A. Oftel is very grateful to all respondents for their comments.

4.2 Six of the respondents agreed with Oftel’s position that the LRIC of terminating calls to pay-as-you-go Internet products hosted on BT’s network should include the costs referred to in paragraph 2.4 above. Two did not express definitive views on the questions on which Oftel consulted.

4.3 In its response, BT stated that it does not object to the inclusion in the interconnection charge for calls to ‘BT Click’ of the costs of service set-up software and helpdesk. It regards the inclusion of marketing costs as more contentious so suggests that they should not be regarded as an element of LRIC. However, some marketing costs have been included in the interconnection charge published by BT on 24 September. That interconnection charge is still effective.

4.4 BT’s response stated that it is not opposed to the inclusion of outpayments to ISPs and its own SSB in the interconnection charge for termination of calls using ‘ISPNet Dial Access’.

5.1 Consultation has confirmed Oftel’s view that

• the LRIC for termination of calls to ‘BT Click’ should include the costs of the service set-up software, helpdesk, and service specific marketing; and

• the LRIC for termination of calls to ‘BT Click+’ and other services accessed via ‘ISPNet Dial Access’ should include the cost of outpayments made to ISPs purchasing ‘ISPNet Dial Access’ (in the case of ‘BT Click+’, the outpayment will be made to BT’s SSB).

5.2 The interconnection charge published by BT on 24 September included an uplift of around 20% on the previously published charge. This increase was made when Oftel expressed concern that the previous charge only just covered conveyance costs and did not include the costs of the service set-up software, helpdesk, and service specific marketing. BT made the increase by attributing first line customer support and a proportion of marketing costs to the termination service. On the basis of this, Oftel considers that the current interconnection charge for terminating calls to ‘BT Click’ covers its costs including the relevant costs of the service set-up software, helpdesk, and service specific marketing. Oftel does not therefore intend to take any further action in relation to the charge for this interconnection service.

5.3 In the consultative document, Oftel explained why it was concerned that the current interconnection charge is not sufficiently high to cover the outpayment made to ISPs (and, in the case of ‘BT Click+’, BT’s SSB) purchasing ‘ISPNet Dial Access’ at the retail tariff of local rate + 1p. This was because the 20% increase to the original charge (made in order to increase the charge such that it covered the service set-up software, help desk, and a proportion of relevant marketing costs) did not raise it sufficiently to cover conveyance costs plus outpayments.

5.4 On 19 February, BT published details of price changes for ‘ISPNet Dial Access’. These adjusted the outpayment. The announcement also included notification of new outpayments for ‘ISPNet Dial Access’ which will apply when the service is used to deliver calls at a tariff to the caller of local rate. Interconnection of calls to the local rate option is charged according to the NTS formula and therefore not covered by this Statement. As stated in paragraph 1.2, Oftel is investigating the overall pricing of ‘ISPNet Dial Access’ separately in response to a complaint. The focus of this consultative exercise has been on whether the interconnection charge for termination of calls over ‘ISPNet Dial Access’ at local rate + 1p is sufficient to cover its LRIC. On the basis of the information it has, Oftel still considers that the interconnection charge is not high enough to cover the outpayment.

5.5 The tables below illustrate the situation for termination of calls using ‘ISPNet Dial Access’ at local rate +1p.

5.6 In order for charges to cover their costs, they need to cover the cost of conveyance plus the outpayment to the SSB and ISPs. This principle has been established through the consultative process. The level of charge published on 2 July 1998 (column A) appears sufficient to cover the costs of conveyance but no more. The current level of outpayments is shown in column B. In order for the charge to cover conveyance plus outpayments, it should therefore equal or be greater than the totals of columns A plus B. The current interconnection charge is shown in column C. So, for the charge to cover its costs, C must be equal to or greater than A plus B. This is clearly not so even where outpayments are at their lowest levels.

6.1 Oftel considers that this consultation exercise has established important principles about the coverage by termination charges of outpayments to SPs and other costs incurred in providing access to the Internet. The principle that outpayments to SPs should be included in interconnection charges for termination of calls to the Internet is likely to be significant for other services. Oftel is continuing to pursue the issues as they relate to ‘ISPNet Dial Access’ and will keep operators up-to-date with progress through the Operator Policy Forum.

AOL Bertelsmann
BT
Cable & Wireless Comms
COLT
ENERGIS
MCI/WorldCom
NTL
Scottish Telecom
Torch

BT