Rollover of BT's existing retail price and network charge controls

December 1999

1. In May Oftel published a consultation document – Rollover of existing retail price and network charge controls – seeking views on its proposal to modify BT’s licence to allow for rollover. Adding rollover provisions to BT’s licence would allow the present retail price and network charge controls to continue for a specified period beyond the dates on which they are scheduled to end should the Director General of Telecommunications so determine. The Director would only determine that some or all of the rollover provisions should take effect in the event that BT and Oftel failed to agree on new price and/or charge control arrangements by 31 March 2001, and the Director referred the issue to the Competition Commission.

2. Oftel explained that it wished to add rollover provisions to BT’s licence so that it could complete its consideration of possible future retail price and network charge controls at the latest possible stage. Oftel would then be able to take account of the most recent financial data and market developments.

3. Oftel, generally, received a positive response to its consultation proposing to add rollover provisions to BT’s licence. Oftel has now, therefore, published draft modifications to BT’s licence, which would enable the Director to determine that some or all of the rollover provisions should take effect. Under Section 12 of the Telecommunications Act 1984 Oftel is seeking comments on the proposed modifications, which are published in the Annex to this statement. Comments on the proposed modifications are sought by 31 January 2000. The second stage of consultation, for comments on comments, runs until 14 February 2000.

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4. The current retail price controls are scheduled to end on 31 July 2001, and the current network charge controls are scheduled to end on 30 September 2001. Without rollover provisions, Oftel would have had to complete its review into the extent of competition and put forward proposals for future price controls, should such controls be required, by the middle of 2000. It would have been necessary to complete the review by then so that, should BT and Oftel fail to agree upon new controls, there would be time to refer the matter to the Competition Commission and for the Commission to report to the Director with its findings.

5. The new licence condition enabling rollover (proposed in the Annex) would allow the current retail controls to continue for eight months (from 1 August 2001) and the current network charge controls to continue for six months (from 1 October 2001) should the Director so determine. If there were a reference to the Competition Commission on the extent of any future controls some or all of the current controls would remain in place until 1 April 2002 when any new controls would take effect.

6. The provisions enabling rollover would allow Oftel to complete its current review of the extent of competition, and put forward its proposals for further retail price and/or network charge controls, by the end of next year. Oftel would then expect BT to respond by early 2001 either accepting the new controls – in which case the new controls would be effective from 1 August 2001 and 1 October 2001 – or rejecting the controls, which would result in a reference to the Competition Commission, and the Director would determine that either some or all of the rollover provisions should take effect.

7. Adding rollover provisions to BT’s licence would not affect Oftel’s powers to consider any representations made to it about the current controls.

8. The retail price and network charge controls are established under BT’s licence through Condition 67 (Control of "hard-wired" and other telephone rentals), Condition 69 (Charge control for Standard Services), Condition 70 (Control of General Prices), Condition 73 (Control of private leased circuit prices) and Condition 74 (Treatment of packages for price control purposes). The draft condition enabling rollover would impact upon some or all of these conditions as determined by the Director.

9. The draft condition includes provisions that would enable the Relevant Year to be defined as 1 August 2001 to 31 March 2002 (for the retail controls), and as 1 October 2001 to 31 March 2002 (for the network controls). The draft condition also allows for the extension of the controls themselves, which would have to be amended to take account of the periods of rollover if some or all of the provisions were to be invoked

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10. Oftel received eight responses to its consultation document proposing the addition of rollover provisions to BT’s licence – Rollover of existing retail price and network charge controls. The respondents were:

BT;
Consumer Communications for England;
Energis;
National Consumer Council;
One2One;
Scottish Advisory Committee on Telecommunications;
Scottish Telecom and
Telewest

11. Oftel also received comments on comments from BT.

12. Of the eight respondents six were in favour of adding rollover provisions to BT’s licence whereas two were not in favour of adding the rollover provisions. There were two reasons given by the respondents that were not in favour of the addition of rollover provisions. First, it was stated that the current controls have proved to be inaccurate because of the significant increase in traffic on BT’s network during the current charge control period. Second, it was stated that the current imbalance between retail prices and call origination charges should not be allowed to continue beyond the ending of the present control period. Both respondents believed that adding rollover provisions to BT’s licence would risk the continuation of distortions in the current retail price and network charge controls.

13. Oftel acknowledges both these points and its reactions are outlined below.

14. A fundamental reason for adding rollover provisions to BT’s licence is to enable Oftel to assess market developments nearer to the end of the current controls. This ability to assess the market at the latest possible stage would enable Oftel to ensure that it had taken account of all relevant factors, and be in a better position to predict future growth, before proposing future controls. If the rollover provisions were not added Oftel would have less up-to-date information when proposing any future charge controls, which could result in the accuracy of the future controls being more susceptible to market developments. Oftel therefore believes that the benefits of later completion of the review outweigh the possible disbenefits associated with the extension of the current controls – which would, of course, only occur if the rollover provisions were invoked.

15. For some time there has been concern about the balance between call origination charges and BT’s retail calls prices. BT’s retail call prices cover the additional costs that are not covered by its fixed rental price, which is below cost. Call origination charges, however, which are levied on indirect access operators, are set at cost. BT does not therefore recover the shortfall between access costs and access prices from indirect access calls. It has been suggested that this imbalance between retail call prices and network call origination charges distorts the market. In response to Oftel’s rollover consultation document one respondent suggested that rollover, if invoked, would extend the distortion unnecessarily.

16. Oftel recognises this respondent’s concern. However, Oftel is of the opinion that adding rollover provisions, and enabling Oftel to obtain the latest possible data before proposing further retail price and charge controls, would help to ensure that future proposals were as appropriate as possible.

17. It should also be remembered that the addition of the rollover provisions does not necessarily mean that the provisions would need to be invoked. The rollover provisions would only be invoked if BT rejected any proposals for future price and charge controls that Oftel put to it, and the dispute was then referred to the Competition Commission.

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18. Oftel believes that the benefits obtained by using the most up-to-date financial and market data, before considering the extent and level of future price and charge controls, outweigh the disadvantages levelled at the possible continuation of the current controls for a limited period. Oftel believes that the opportunity afforded by the addition of rollover provisions to BT’s licence to assess market competitiveness, and obtain financial information from BT at the latest possible stage, should aid consideration of the extent and level of such future controls as are required.

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 Consultation

Oftel would welcome comments on the licence modifications that it has proposed.

Oftel seeks the views of consumers and industry on the proposed licence modifications by 31 January 2000. There will then be a 2-week period to 14 February 2000 during which comments on the representations made during the first phase of consultation are invited.

Comments on the proposed licence modifications should be made in writing and sent to:

Regulatory Policy Directorate
Oftel
50 Ludgate Hill
London, EC4M 7JJ

Tel: 0171 634 8869
Fax: 0171 634 8924
E-mail

Written comments will be made publicly available in Oftel’s Research and Intelligence Unit except where respondents indicate that the response, or parts of it, is confidential. Respondents are therefore asked to separate out any confidential material into a confidential annex and clearly mark it as such. In the interests of transparency, respondents are requested to avoid confidentiality markings wherever possible. Appointments to view written comments in Oftel’s Research and Intelligence Unit must be made in advance (tel: 0171 634 8761, fax: 0171 634 8946).

Oftel would like to set up a link between this Consultation Document on Oftel’s web site and any responses placed on respondents’ own Internet pages. Please contact Lauren Ryner by email at Oftel or on 0171 634 8753  to arrange this. Confidential responses should not be sent via the Internet.

Copies of this Statement are available on disk.

The Summary is available in large print, Braille, and tape formats.

Please contact the Oftel Research and Intelligence Unit on 0171 634 8761, or by e-mail:  or call textphone 0171 634 8769 for more information.

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ROLLOVER OF RETAIL PRICE CONTROLS AND NETWORK CHARGE CONTROLS

X.1 If by 31^st March 2001:

1. the Director, having given notice and considered representations or objections in accordance with the requirements of Section 12(2) and (3) of the Act, has submitted to the Licensee proposals for any or all of Conditions 67, 69, 70, 73 and 74 of this Licence to be replaced or modified; and
2. the Licensee has not consented to those proposals in whole or in part under Section 12(4) of the Act; and
3. the Director has made a reference to the Competition Commission under Section 13 of the Act in relation to any part of the proposals (including the whole) to which the Licensee has not consented as referred to in paragraph(b) above, but in relation to no other matter,

the Director may determine that any or all of the following provisions shall take effect:

X.2 In Schedule 1, Part 1 of this licence, the definition of "Relevant Year" shall be amended to read:

"Relevant Year" means:

1. except for the purposes of Condition 69, any of the four periods of 12 months beginning on 1 August starting with 1 August 1997 and ending on 31 July 2001; and the period 1 August 2001 to 31 March 2002;
2. for the purposes of Condition 69 only, any of the four periods of 12 months beginning on 1 October starting with 1 October 1997 and ending on 30 September 2001; and the period 1 October 2001 to 31 March 2002;

X.3 The following text shall be added to Condition 67.1 after "Retail Prices Index":

", except in the Relevant Year ending 31 March 2002 when the amount of the change in the Retail Prices Index will be multiplied by 0.667,"

X.4.a In Condition 69.7, "1 April " shall be replaced by "1 January".

X.4.b       In Condition 69.8, the definition:

D_i = the date on which the ith price change takes effect expressed as a numeric entity on a scale ranging from 1 October = -182 to 30 September = 182, except in a leap year when 1 October = -183

shall be replaced by:

D_i = the date on which the ith price change takes effect expressed as a numeric entity on a scale ranging from 1 October = -92 to 31 March = 89

X.4.c In Condition 69.9 the definition:

D_i = the date on which the ith price change takes effect expressed as a numeric entity on a scale ranging from 1 October = -547 to 30 September = -183, except in a leap year when 1 October = -548, or in a year which precedes a leap year when 1 October = -548 and 30 September = -184

shall be replaced by:

D_i = the date on which the ith price change takes effect expressed as a numeric entity on a scale ranging from 1 October = -457 to 30 September = -93

X.4.d In Condition 69.10:

"1 October = -182" shall be replaced by "1 October = -92"
and "D_i = -182" shall be replaced by "D_i = -92"

X.4.e       The following text shall be added to Condition 69.13 after the words "reduced by 8":

"except in the Relevant Year October 2001 to 31 March 2002 when RPI reduced by 8 will be multiplied by 0.5"

X.4.f      The following text shall be added to Condition 69.18(d) after the words "the total amount of revenue accrued in respect of the relevant aggregate Charges during the Relevant Financial Year which relates to that Relevant Year);"

" the difference between the forecast amount referred to in sub-paragraph (a) and the amount of actual accrued revenue (the difference to be expressed as a percentage of the total amount of revenue accrued in respect of relevant aggregate Charges during the Relevant Financial Year which relates to that Relevant Year) shall in the Relevant Year ending 31 March 2002 be multiplied by 2;"

X.5.a In Condition 70.2, "1 February" shall be replaced by "1 December".

X.5.b In Condition 70.3, the definition:

D_i = the date on which the ith price change takes effect expressed as a numeric entity on a scale ranging from 1 August = -184 to 31 July = 180, except in a leap year when 31 July = 181.

shall be replaced by:

D_i = the date on which the ith price change takes effect expressed as a numeric entity on a scale ranging from 1 August = -122 to 31 March =120.

X.5.c In Condition 70.4 the definition:

D_i = the date on which the ith price change takes effect expressed as a numeric entity on a scale ranging from 1 August = -549 to 31 July = -185, except in a leap year, when 1 August = -550.

shall be replaced by:

D_i = the date on which the ith price change takes effect expressed as a numeric entity on a scale ranging from 1 August = -487 to 31 July = -123.

X.5.d In Condition 70.5:

"1 August = -184" shall be replaced by "1 August = -122"
and "D_i = -184" shall be replaced by "D_i = -122"

X.5.e       The following text shall be added to Condition 70.9 after the words "reduced by 4.5":

"except in the Relevant Year 1 August 2001 to 31 March 2002 when RPI reduced by 4.5 will be multiplied by 0.667"

X.5.f       The following text shall be added to Condition 70.14(d) after the words "the total amount of revenue accrued in respect of General Prices during the Relevant Financial Year which relates to that Relevant Year);":

" the difference between the forecast amount referred to in sub-paragraph (a) and the amount of actual accrued revenue (the difference to be expressed as a percentage of the total amount of revenue accrued in respect of General Prices during the Relevant Financial Year which relates to that Relevant Year) shall in the Relevant Year ending 31 March 2002 be multiplied by 1.5;"

X.6 The following text shall be added to Condition 73.1 at the end of the last sentence:

"and in the Relevant Year ending 31 March 2002 the increase in the RPI shall be multiplied by 0.667."

X.7 The following text shall be added to Condition 73.3 after the words "by more than RPI":

"except in the Relevant Year ending 31 March 2002 when the increase in the RPI shall be multiplied by 0.667"

X.8 In Condition 74.2, "31 July" shall be replaced by:

"the final day of the Relevant Year"

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