DETERMINATION UNDER THE PROVISIONS OF REGULATION 6(6) OF THE TELECOMMUNICATIONS (INTERCONNECTION) REGULATIONS 1997 OF A DISPUTE BETWEEN INTELLIGENT NETWORK MANAGEMENT SERVICES (UK) LTD ("INMS") AND BTCELLNET
December 1999
WHEREAS:
Regulation 6(6) of the Telecommunications (Interconnection) Regulations 1997 ("the Regulations"), provides that where there is a dispute concerning interconnection between organisations, the Director General of Telecommunications ("the Director") shall, at the request of either party, take steps to resolve the dispute within 6 months of the date of the request. The Determination which the Director makes to resolve the dispute must represent a fair balance between the legitimate interest of both parties, and must be notified to the parties in accordance with Regulation 8(3). The parties are entitled to a full statement of the reasons on which the Determination is based.
In accordance with Article 4 (1) of the Interconnection Direction (99/33/EC) (the "ICD"), INMS and Cellnet (now BTCellnet) attempted to negotiate a commercial agreement for interconnection but were unable to reach full agreement. Both parties have Annex II status under the ICD.
By letter dated 9 March 1999, INMS referred the dispute to the Director for determination under paragraph 6(6) of the Regulations.
Both parties submitted their arguments in documents. In particular both parties
responded by means of commenting on Oftel’s consultation document Customer Choice: Oftel’s review of indirect access for mobile networks. The arguments of both parties have been carefully considered by the Director, and the principal points contained in those observations are summarised in the Explanatory Memorandum which accompanies and is published with this Determination.
Both parties were sent a draft of this Determination and the Explanatory Memorandum which contains the Director’s reasons, and were invited to comment.
Comments were received from both BTCellnet and INMS on 24 August 1999. These comments have been taken into consideration by the Director in making this Determination.
NOW THEREFORE THE DIRECTOR, PURSUANT TO REGULATION 6(6) OF THE REGULATIONS, AND HAVING CONSIDERED THE ARGUMENTS OF THE PARTIES, AND THOSE MATTERS SET OUT IN REGULATION 6(8) HEREBY MAKES THE FOLLOWING DETERMINATION:
The Director has determined that BTCellnet should provide indirect
access to INMS customers, who are also subscribers to BTCellnet’s digital mobile services, using INMS’s short access code.
The basis for the charge for the indirect access service to be supplied by BTCellnet to INMS shall be retail-minus.
The Director has determined that the parties should reach an agreement in commercial negotiation on the level of the actual charges to be paid by INMS to BTCellnet for the indirect access.
The parties should reach agreement, including agreement on charges, by the 10 April 2000 for the provision of such services to BTCellnet’s contract subscribers and to BTCellnet’s pre-pay subscribers by a date to be the subject of a further Determination by the Director.
The parties shall implement the agreement by 1 June 2000 or within one month of the date of any agreement following a further Determination by the Director setting interim charges, unless the Director (after appropriate consideration of
representations) consents to some later date or to set aside this Determination.
(ii) If the Director sets interim charges (following a failure on the part of the parties to reach agreement), the parties shall conclude an interconnect agreement within 2 weeks of the date on which the Director sets those interim charges.
(iii) When the Director has made a final Determination of the charges, the parties shall amend their agreement to incorporate these charges and shall ensure the charges from the start of the agreement are on the basis of those final determined charges.
(iv) This Determination shall have effect from 2 December 1999.
DAVID ALBERT EDMONDS
DIRECTOR GENERAL OF TELECOMMUNICATIONS
December 1999
DIRECTOR GENERAL’S DETERMINATION RESOLVING THE DISPUTES BETWEEN INMS AND VODAFONE, AND BETWEEN INMS AND BTCELLNET ON THE ISSUE OF INDIRECT ACCESS TO MOBILE NETWORKS.
Background
1 INMS, an International Simple Voice Resale (ISVR) operator, notified the Director on 12 March 1998 that it was in dispute with Vodafone concerning the provision of Indirect Access (IA) services by Vodafone to INMS. Vodafone is a holder of licences under Section 7 of the Telecommunications Act 1984 and under the Wireless Telegraphy Act 1949, and has been notified to the EU Commission as having significant market power (SMP) in the mobile market under the Interconnection Directive (ICD).
2 On 9 March 1999, INMS further notified the Director that it was similarly in dispute with Cellnet (now BTCellnet) concerning the provision of IA services by Cellnet to INMS. BTCellnet is also a holder of licences under Section 7 of the Telecommunications Act 1984 and under the Wireless Telegraphy Act 1949, and has been notified to the EU Commission as having SMP in the mobile market under the ICD.
3 INMS asked the Director to resolve the disputes under Article 9(5) of the ICD. In precise terms, the INMS request in relation to the dispute with Vodafone was as follows:
a) To determine whether the request as made in Category 1) and Category 2) (see below) is indeed valid as per Directive 97/33/EC, and whether Vodafone is obliged to accept this request. If so, then;
b) To determine the basis of the interconnect charge that should apply for such requests as per the first two categories, and to determine the actual charges that should apply.
c) To determine what is a reasonable period of time by which Vodafone are obliged to have the interconnection agreement 1) concluded and 2) implemented.
Categories 1) and 2) were defined by INMS as:
"….interconnection for the following circumstances:
1) Where a Vodafone subscriber uses the Vodafone network for access by dialling a 1XXX access code allocated by Oftel to INMS (or an alternative prefix mutually agreed between Vodafone and INMS), that calls are routed to INMS’ switch in London, and the call is charged to INMS by Vodafone and not to the end customer or their service provider (SP) – INMS will then bill for the call (analogous to Indirect Access).
2) As above, where a customer dials an 0800 number that is part of a range allocated by Oftel to INMS and uses this 0800 number as a dialling prefix."
4 Subsequently INMS withdrew the request for Determination of the dispute over Category 2).
5 INMS’s request for Determination of its dispute with Cellnet was expressed as follows:
"This letter is a request that the provisions applied to Vodafone in your (Director’s) Determination are equally applied to Cellnet (unless there is of course an objectively justified reason why not)…"
6 In relation to the specific dispute referred to the Director, Vodafone made the following remarks:
"…Vodafone does not accept that there is a dispute with regard to their request for 0800 access or Vodafone call termination. Vodafone does not accept that there is a requirement to provide indirect access based on an access code as requested by INMS. The question of prices, terms and conditions for indirect access has not arisen and therefore is not a matter of dispute."
However, it seemed to Oftel that there was a dispute between the parties on the principle of IA, even if the detailed terms of the indirect access requested were not yet in dispute. Vodafone also submitted observations on the February 1999 consultation documents entitled Customer Choice: Oftel’s review of indirect access for mobile networks, and Competition in the mobile market, mentioned below.
7 In relation to the specific dispute referred to the Director, Cellnet made the following remarks:
"Cellnet is willing to negotiate Interconnection Agreements in accordance with the terms of its licence which has, of course, been modified by Statutory Instrument in order to achieve the implementation of the ICD. The extent to which the modified licence requires the provision of Indirect Access is the subject of the current Oftel consultation…It remains to be seen if the request made by INMS is consistent with the correct interpretation of Cellnet’s licence."
Cellnet also submitted observations on the February 1999 consultation document on indirect access and competition in the mobile market, mentioned below.
8 The Director concluded that he could not resolve the disputes in isolation from the review Oftel was making of the competitiveness of the mobile market in order to complete its commitment to review the continuation of the obligation to supply airtime to service providers by BTCellnet and Vodafone. Both the airtime obligation and the provision of IA have the effect of enhancing the scope for competition, at the retail level, in the provision of mobile services to end-user customers. The same analysis of the competitiveness of the mobile market must therefore underlie the Director’s conclusions on these two issues.
9 Oftel completed its review in February 1999 and published its initial conclusions – for public consultation – in the document Competition in the mobile market. This publication was co-ordinated with the publication on the same day of a further consultation document intended by Oftel to gather views in preparation for the resolution of these disputes on indirect access for mobile networks: Customer Choice: Oftel’s review of indirect access for mobile networks.
10 This second consultation document set out Oftel’s review of the three ways (called Options in the document) in which the disputes might be resolved and the arguments for and against each. These Options are: Option 1– mandated access at cost plus; Option 2 – no mandated access; Option 3 – mandated access at retail-minus. There were 34 responses to the consultation and a further 4 comments on the responses. The main features of the responses received from all of those who responded are summarised in particular at Annex 2 of the July 1999 Statement entitled Oftel’s review of the mobile market. In essence, Vodafone did not believe that indirect access was required at all. It did not believe that indirect access would result in new choices for customers, nor did it agree that the ICD imposes an obligation on networks to provide such access. It considered that Option 1 was not viable. Vodafone said that if Oftel were to determine that indirect access is a requirement, then the method described under Option 3 would be the only route by which it could be introduced without undermining the real long term benefits which will come from network based competition.
11 Cellnet’s response emphasised that it was against the introduction of indirect access for commercial, regulatory and legal reasons. It felt that the introduction of indirect access was unnecessary and believed that the increased availability of value added services was already being achieved. Cellnet suggested that the final decision on whether indirect access should be required should wait until after the year 2000 review of the mobile market. It also said that if Oftel did introduce indirect access as a requirement, then Cellnet would want it to be provided by all four of the existing mobile networks. Cellnet also felt that the cost-plus charging mechanism under Option 1, as described in the February 1999 consultation document, would not be viable as there would be little incentive to develop the network infrastructure.
12 Oftel took all responses into consideration in reaching its conclusion, announced in the Director’s Statement published in July 1999 (Oftel’s review of the mobile market), that, for the reasons set out below, both Vodafone and BTCellnet should be required to provide indirect access to INMS at the rate known as retail-minus (that is, Vodafone and BTCellnet would be required to provide IA services according to Option 3).
Services covered by the Determinations
13 The requirement to supply IA services will apply, for Vodafone, to all of the subscribers to its digital mobile networks according to the timetable set out below; for BTCellnet, it will also apply to all of its subscribers to its digital mobile networks, and for BTCellnet’s contract customers will be implemented according to the timetable set out below but for its pre-pay subscribers according to a timetable that will be the subject of a further Determination by the Director General. Oftel has considered the application of its decision to the subscribers of the analogue mobile networks but concluded that the enhanced risk of fraud and the declining numbers of analogue subscribers made it inappropriate to require the networks to provide IA services to their analogue subscribers.
14 Oftel is discussing with BTCellnet the timetable for the provision of IA services to its pre-pay subscribers. At present BTCellnet’s implementation of pre-pay relies on capabilities built into the handsets which have limited capacity to provide for IA. BTCellnet is in the process of designing pre-pay systems that use network-based facilities that will not have these limitations. IA capability will be built into these facilities.
15 Oftel is considering the technical and operational issues that would arise if IA operators wished to offer SMS services to their subscribers.
16 In the course of the discussions with the parties, the question was raised whether the Determination would cover the provision of IA services to the subscribers of foreign operators when they roam on the networks of the UK mobile operators involved in this dispute. The INMS request for Determinations was expressed (see paragraph 3 above) in terms of services for Vodafone (and Cellnet) subscribers. The consultation in February 1999 was hence in terms of services to UK subscribers. The Determination is necessarily therefore in the same terms and applies only to Vodafone and BTCellnet subscribers.
Details of the Determinations
Decision as to the principle of the provision of indirect access services by Vodafone and BTCellnet to INMS
17 Indirect access for the subscribers to mobile networks is an interconnection service in the same way as indirect access on the fixed networks is an interconnection service. It is therefore a service to which Article 4(1) of the ICD applies. That is, organisations authorised to provide public telecommunications networks have an obligation to negotiate this interconnection service with other such organisations. In UK licences this is expressed in terms of an obligation to "offer to enter into an agreement".
18 The Director has concluded that the present situation –in which mobile network operators are free to provide indirect access but have no obligation to do so – is damaging consumers’ interests by denying them the opportunity of using alternative providers of call services. This is because in practice negotiations with both of the networks that are the subject of the disputes have failed to result in agreement, and neither of the other two mobile operators has offered this service. In reaching this decision the Director has taken account, as appropriate, of the criteria for dispute resolution set out under Article 9(5) of the ICD, as implemented by the Telecommunications (Interconnection) Regulations 1997. (Indeed, the criteria were specifically referred to in the consultation document entitled Customer Choice: Oftel’s review of indirect access for mobile networks, mentioned in paragraph 9 above).
19 Oftel reviewed the application, to this issue of IA for mobile networks, of the criteria under Article 9(5) of the ICD in the light of the consultation, and identified those criteria particularly relevant to the two disputes in the July 1999 Statement Oftel’s review of the mobile market (see in particular Chapter 3 and Annex 2 of that Statement, which Oftel incorporates by reference into this Explanatory Memorandum). The criteria identified were:
20 The Director’s conclusion is based primarily on the need to ensure that there are no unnecessary restrictions on the range of choices open to the network’s subscribers. In the context of the disputes, the most significant of the ICD criteria in Oftel’s view was ‘the promotion of competition.’ This is also one of the duties placed on the Director by the Telecommunications Act 1984, and is one of Oftel’s key objectives for achieving its goal of choice, quality and value for money for the consumer. Oftel has set promoting competition as the prime route to ensuring that consumer interests are best served. Indirect access by its very nature, opens up new areas of competition since the IA operator can control how its calls are treated once they have left the mobile network. This adds a new dimension to the packaging and tariffing of calls that is not available to the service providers who resell the mobile networks’ calls and have no control over how the calls are handled (nor of the costs incurred in handling them). Oftel believes it would be wrong to deny Vodafone and BTCellnet subscribers the opportunity to have wider ranges of choice and innovation offered to them; or to restrain these potential developments by denying the IA operators their rights to interconnection and hence the opportunity to demonstrate that they can indeed attract customers.
21 Oftel considers it is appropriate to apply this conclusion to the two mobile networks that are the subject of the disputes on the provision of indirect access because they have market power in the mobile market, currently by virtue of their designation by Oftel under the ICD as having SMP. Under present conditions, if an indirect access operator and one of the networks without market power were in dispute over indirect access, Oftel would not expect to impose an obligation on the network operator. This must naturally be subject to the caveat that any dispute referred to the Director will be considered on its merits in light of the particular features of the dispute and the situation at the time.
Decision as to the method to be used for fixing the basis of charges for indirect access services
22 As part of the options it reviewed in the consultation, Oftel considered what should be the appropriate basis for setting the indirect access charges. Two broad alternatives were discussed in the consultation. The first is known as cost-plus and is the basis for the current interconnection charges raised by BT, including its charges for indirect access. A cost-plus basis would allow the network operator to cover its costs, including the cost of the capital involved in providing the service. Introduction of indirect access on the mobile networks on this basis would mean that there would be a large margin between the present retail prices paid by end-user customers for end-to-end calls, and the costs faced by the IA operator which are a combination of charges paid to the mobile network and its own costs.
23 The IA operators could share some of this margin with the customers: undercutting the mobile networks’ retail prices without being in any way more effective or efficient in the provision of any elements of the calls services. It might only be this sacrifice of margin that allowed the indirect access operators to survive in the market at all. Other things being equal, Oftel would not therefore wish to introduce indirect access on the cost-plus basis unless this were necessary to bring about a required reduction in the retail price of mobile calls.
24 However, Oftel considers that there is no need for regulatory action to reduce the price of mobile calls: it considers that such reduction is already in the process of being achieved by competition in the market place. Oftel anticipates that this process will develop faster in the future and would be impeded by any regulatory intervention which pre-empted market pressures. In any case, if Oftel considered it necessary to intervene to reduce retail prices, it would review the range of other measures, as well as indirect access, which could achieve this including direct price controls. The scope and range of the impact of indirect access on prices would also depend on the pricing policies of the indirect access operators and counter measures by the network operators: hence the benefits to end-users could not be guaranteed. If regulatory intervention were necessary to reduce retail prices, Oftel would in the first instance consider direct controls of the RPI-X form.
25 Since it does not consider that cost-plus is the appropriate basis for indirect access charges for mobile networks, Oftel has looked at alternative costing bases. Its conclusion is that the appropriate basis is retail-minus. This concept would set indirect access charges on the basis of starting with the retail prices for mobile calls, but deducting the cost of all the elements of the end-to-end calls which will no longer be provided by the mobile network. These deducted elements would include all the costs of conveying and delivering the calls once they have left the mobile network, since these elements will now be provided by the indirect access operator. The deducted elements would also include retail and other customer servicing costs. The advantage of this retail-minus basis is that it focuses competition between the indirect access operator and the network operator on those elements of the call where they offer the customer the benefits of alternative facilities: it thus concentrates on efficient competition.
Setting the level of indirect access charges under retail-minus: decision to require the parties to negotiate further – setting deadlines for this
26 The Director considers that it would be wrong for him to set the precise level of charges for indirect access at retail-minus without allowing the parties to the dispute a further opportunity to reach agreement commercially on the appropriate rates for the service. The retail-minus concept is not new and is proposed by Oftel in other parallel contexts. Nevertheless it has been clear from the responses in the consultation that this has not been part of the discussion between the parties so far. In this, Oftel is following its standing principle of holding back from regulation where interested parties can reach commercial agreements.
27 The Director’s decision therefore, as part of this Determination, is to require the parties to re-open negotiations and to reach agreement on terms and conditions on how these services are to be provided, including rates of charge set on a retail-minus basis for indirect access. In the July 1999 Statement Oftel’s review of the mobile market (Annex 4: Implementing indirect access), the Director sets out some of the factors he would expect the parties to take into consideration in arriving at such charges.
28 As part of this Determination, the Director has given the parties the fixed dates of 10 March (Vodafone) and 10 April (BTCellnet) by which to arrive at agreement, including charges. This date is set in recognition of the moratorium on changes to software systems over the Millennium. It requires Vodafone and BTCellnet to incorporate the necessary changes to their software systems in the first ‘releases’ of changes to these systems following the lifting of the moratorium. The differences in the dates relates to differences in the dates of ‘releases’ after the Millennium moratorium. The Director considers these timetables to be providing a sufficient but not excessive term within which the parties should be able to reach agreement on the technical, operational, charging and other terms and conditions to be covered in the agreements.
Setting charges under retail-minus basis if no agreement is reached: further Determination by the Director on level of charges, and decision on further timetable for concluding agreement in that event
29 If the parties are unable to reach agreement within the deadline set by this Determination, it may be helpful to the understanding of the Determination for readers to be aware of Oftel’s intentions. In that event, Oftel will set charges for indirect access on each of the networks who are the subject of the disputes on an interim basis, in the light of the information then available. Oftel intends to make this Determination within one week of the parties’ failing to reach agreement. This is in order to minimise any further delay in the availability to customers of the further choices indirect access will provide.
30 In this Determination, the Director has also fixed the limit on the time to be taken for the charges to be included in the commercial agreements following his Determination of the interim charges. Oftel considers that a two week period would be sufficient to incorporate any changes arising from the Determination and any other outstanding negotiations – balancing the need to make adequate time available for these purposes against the needs of consumers to be able to take advantage of the new opportunities indirect access will provide.
Decision on the timetable for implementing the agreement
31 As part of this present Determination, Oftel has set 1 May (for Vodafone) and 1 June (for BTCellnet) as the dates by which the parties should arrange to give effect to the agreements they are required to reach by the dates set in the Determinations. Oftel considers this timetable provides a reasonable, but not excessive, period in which the parties should put in place the procedures and practices agreed to in the earlier months of negotiation.
32 In the event that there is failure to reach agreement (see paragraph 29 above), then Oftel considers that a period of one month starting with the settling of the agreement following the interim Determination of the indirect access charges, will provide a reasonable but not excessive time for implementing the agreement.
33 Oftel will follow this interim Determination with a final Determination of these indirect access charges on a retail-minus basis not later than 31 May (for Vodafone) or 30 June (for BTCellnet) based on the approach set out in Annex 4 of the Statement Oftel’s review of the mobile market.
34 The Determinations provide for the parties to amend the agreements to incorporate the final determined charges and to make such retrospective adjustments as are necessary to ensure that the final charges apply from the beginning of the agreement.
Summary
35 In summary, in resolving these disputes, the Director’s decisions are as follows:
A The INMS/ Vodafone dispute
A1 Determination whether Vodafone is obliged to provide indirect access to INMS customers using INMS’s short access code.
The Director has determined that Vodafone should provide this access to INMS to its digital subscribers.
A2 Determination of the basis of the charge for the indirect access service to be supplied by Vodafone to INMS.
The Director has determined that the basis for the charge shall be retail-minus.
A3 Determination of the actual charges to be paid by INMS to Vodafone for the indirect access service.
The Director has determined that the parties should reach an agreement on the level of charges in commercial negotiation.
A4 Determination of the reasonable period for the conclusion by the parties of an interconnection agreement for the provision by Vodafone of indirect access to INMS.
The Director has determined that the parties should reach agreement, including agreement on charges, by 10 March.
A5 Determination of the reasonable period for the conclusion by the parties of an interconnect agreement when the Director has set the level of interim charges following the failure of negotiations during the period to the date set in A4.
The Director has determined that the agreement shall be concluded within 2 weeks of his Determination of the level of interim charges.
A6 Determination of the reasonable period for the implementation by the parties of the agreement.
The Director has determined that the parties must implement the agreement by 1 May if the agreement is reached by 10 March (as outlined in A4) or within one month of the agreement following a further Determination by the Director setting interim charges.
A7 Determination of the incorporation of final determined charges in agreements.
The Director has determined that the parties shall incorporate the final determined charges in their agreement with such adjustments as shall ensure that these charges shall apply from the start of the agreement.
B The INMS/ BTCellnet dispute
The Director has made the same Determination in the dispute between INMS and BTCellnet, as he has made for the dispute between INMS and Vodafone. In particular, the Determination requires the provision of IA services to both contract and pre-pay subscribers. However, for the practical reasons set out above, the BTCellnet Determination only sets specific dates for provision of IA services to BTCellnet’s contract subscribers and these dates are one month later than the dates in the Vodafone Determination. The date by which the parties must reach agreement is 10 April 2000 and the date for implementation of the agreement is 1 June 2000. The timetable for the implementation of IA for BTCellnet’s pre-pay subscribers will be the subject of further Determination.
Oftel
December 1999
Annex II (of the ICD) – Annex II operators are those who have rights and obligations to interconnect with each other under Article 4(1) of the Interconnection Directive for the purpose of providing publicly available telecommunication services.
Cost-Plus – a charge which covers the costs incurred by the network operator in providing services for other operators, including a reasonable return on capital employed.
Indirect Access – a situation where a customer contracts to buy a telecommunication service from an operator to which the customer is not directly connected, and where the second operator pays the first operator for the use of that connection.
Interconnection – the physical and logical connection of two operators’ networks thereby allowing customers of one system to connect with customers of the other, or to access services provided from the other system.
Interconnection Directive (ICD) – the European Union Directive which came into effect from 31 December 1997, setting rules for, amongst other things, who has rights and obligations for interconnection and the terms on which it should take place.
Market Power/ Market Influence – the ability to raise prices above the competitive level for a non-transitory period without losing sales to such a degree as to make this unprofitable.
Retail-Minus – the price charged by the Licensee for the provision of a service to end users less any elements of cost that are not incurred in providing the same service to a relevant mobile operator.
Roaming – the provision of connection services by means of the Applicable Systems to authorised mobile operators in respect of teleservices and bearer services pursuant to a national roaming agreement between the licensee and a relevant mobile operator.
SMP (Significant Market Power) – the SMP test is set out in various European Directives, notably the Interconnection Directive. It is used by Oftel to identify those operators who must meet additional obligations under the relevant Directive. It is not an economic test; rather it requires a consideration of the factors set out in the test within a specified market – much is left to the NRA’s discretion.
Transit service – a conveyance service provided by a network between two points of interconnection. It is, therefore, a service that links two networks that are not themselves directly interconnected.