Determination of final charges for BT’s standard services from 1 April to 30 September 1997

April 1999

Addendum 1 IDD

Addendum 2 International ISDN

Addendum 3 International Operator Assistance

Addendum 4 2 Mbit/s Interconnect Links Rearrangements

Addendum 5 Number Translation Services (NTS)

Addendum 6 Conveyance Charges By Tariff Gradient

Summary

Introduction

Effective Date

Condition 13

Condition 16b

Methodology

Other Issues

Annex One Conveyance charges: Routing factors and EBCs

Annex Two Non-conveyance charges: Adjusted statement of costs of standard services 1997/98

Annex Three International operator assistance

Annex Four Number Translation Services (NTS)

Whereas the Secretary of the State granted to British Telecommunications on 22 June 1984 a licence (the "BT Licence") under section 7 of the Telecommunications Act 1984 (the "Act") for the running of the telecommunication systems specified in Annex A to that licence;

Whereas by virtue of section 109 of and paragraph 20 of Schedule 5 to the Act the BT Licence has effect as if granted to British Telecommunications plc ("BT");

Whereas in accordance with Condition 13.41 and Conditions 13 and 16B.2 (in effect on 30 September 1997) of the BT Licence, BT has referred to the Director General for determination under Condition 13.5(2) (in effect on 30 September 1997) the charges for each Standard Service, payable in BT’s 1997/98 financial year, which have been previously determined by the Director General pursuant to Condition 13;

Whereas on 28 July 1997 the Director General determined the Interim Charges payable by Operators for the Standard Services in BT’s 1997/98 financial year;

Whereas the Director General has received BT’s Interim Financial Statements for the financial half year to 30 September 1997 the relevant period preceding changes to BT’s Licence with effect from 1 October 1997 and other information for the purpose of recalculating and redetermining the Interim Charges for the relevant Standard Services.

Therefore pursuant to Condition 13 of the BT Licence the Director General makes the following determination:–

1. The Final Charges (or means of calculating the charges) for each Standard Service listed in the Schedule to this determination shall be as provided in the Schedule.

2. The Final Charges (or means of calculating the charges) as provided in the Schedule shall have effect for the period 1 April 1997 to 30 September 1997.

3. Where the Interim Charge and the Final Charge differ, BT shall offer to include in the agreement with the Operator for the provision of that Standard Service terms (that offer not to be conditional on the acceptance by that Operator of the inclusion in that agreement of any other terms and conditions whether relating to the charge (or the means of calculating that charge for that Standard Service)) which provide that:

(a) if the Interim Charge is greater than the Final Charge, BT shall pay to the Operator the amount of the difference together with interest calculated in accordance with Condition 13.5A.3B(b) of the BT Licence (in effect on 30 September 1997); and

(b) if the Interim Charge is less than the Final Charge, the Operator shall pay to BT the amount of the difference together with interest calculated in accordance with Condition 13.5A.3B(b) of the BT Licence (in effect on 30 September 1997).

ANN TAYLOR
Director of Regulatory Policy.
(A person authorised under paragraph 8 of Schedule 1 to the Telecommunications Act 1984)
26 March 1999

From: 1 April 1997 to 30 September 1997

The Director General determines that for access to Freefone, Lo-call, National Call and Premium Rate Services, the originating Operator (ONO) shall pay to BT the Deemed Retail Price for the call on the basis that BT covers the ONO’s costs of conveyance of the call over the network of the ONO, by paying the ONO the rate which has been determined by the Director General for conveyance over a single tandem segment of the BT Applicable Systems uplifted by 46.3% to allow for the ONO’s additional retail costs.

The Deemed Retail Price is:

• in the case of Freefone services, zero;

• in the case of National Call (0990) services, the retail price charged by the ONO for national calls (exclusive of VAT) minus the ONO’s average discounts for such calls based on the ONO’s average revenue figures (or, if the ONO’s discounted price is greater than BT’s retail price in effect at the time of the call minus 7.5%, then BT’s retail price for the call minus 7.5%);

• in the case of Lo-call services (0345), for calls shorter than the call duration to which BT’s minimum call charge applies, the average retail price charged by the ONO for such calls (taking into account the ONO’s minimum call charge and average discounts for such calls) and for other calls, the average retail price charged by the ONO for such calls (taking into account the ONO’s minimum call charge and average discounts for such calls);

• in the case of Premium Rate Services, BT’s retail price from time to time minus 3.5% to allow for average discounts and minus a further 4.4% to compensate for bad debts.

Annex Four to the Explanatory Document illustrates this determination.

This determination does not apply to calls which rely on the Freefone 0800 number to access the telephony services of another Operator.

Note

Double Tandem Short     = >0 <100km
Double Tandem Medium = 100 <200km
Double Tandem Long      = 200+km

Summary

• The Final Charges are calculated using information drawn from BT’s Interim Financial Statements for the half year to 30 September 1997 and replace the interim charges for that period determined in July 1997.

• Conveyance charges are, on average, 20% lower than in 1995/96 and 8% lower than in 1996/97. They are, however, 11% above the forecasts used to determine the Interim Charges and align with the Statement of costs (after Regulatory decisions) contained in BT’s Interim Financial Statements for 1997/98 published in January 1998.

• Oftel has made cost exclusions in this determination on the same basis as it did in the 1996/97 Final Charges determination. The overall effect of the cost exclusions is to reduce conveyance charges by 1%.

• A 12.5% rate of return on capital employed has been used in this determination.

• New arrangements for setting interconnection charges came into operation on 1 October 1997. These are set out in guidelines published on 31 October 1997 and available from Oftel or via the Oftel Internet website. This is the last determination by Oftel of charges for BT’s Standard Services.

1. British Telecommunications plc (‘BT’) has referred to the Director General of Telecommunications (the ‘Director General’) for determination, in accordance with Condition 13 and 16B of the BT Licence (in effect on 30 September 1997), the Final Charges (or means of calculating the Final Charges) payable by an Operator of a Relevant Connectable System (as defined in Condition 13) to BT, in its financial year 1997/98, for the Standard Services the charges for which have been previously determined by the Director General.

2. On 3 April 1998, the Director General determined the Final Charges for the 1996/97 Financial Year for BT’s Standard Services. The Director General determined the Interim Charges for BT’s Standard Services for the financial year 1997/98 on 28 July 1997.

3. BT published its audited Interim Financial Statements for the half year to 30 September 1997 on 26 January 1998. Based on this the Director General has now recalculated and redetermined the charges (the ‘Final Charges’) for BT’s Standard Services for the six months ending 30 September 1997.

4. The Final Charges (or the means of calculating charges) in the Schedule to the determination supersede the Interim Charges determined on 28 July 1997 and apply for the period 1 April 1997 to 30 September 1997. New arrangements for setting BT’s interconnection charges came into effect from 1 October 1997; and BT’s licence having been modified accordingly, the charges in this determination do not apply for periods after 30 September 1997.

5. BT is required by Condition 13 of the BT Licence, in effect on 30 September 1997, to enter into an agreement to connect its telecommunication systems with that of another licensed Public Telecommunications Operator (PTO) or any other Operator licensed to run a Relevant Connectable System if required by that Operator to do so.

6. Pursuant to transitional provisions in Condition 13.41 of the BT Licence, under Condition 13.5(2) in effect on 30 September 1997, when the charge for a Standard Service is referred, the Director General must determine the charge (or means of calculating the charge) which covers the fully allocated costs attributable to the service provided including or taking into account relevant overheads and a reasonable rate of return on attributable assets (or the Applicable Rate of Return on relevant capital employed – see para 41).

7. Provisions for calculating the charges for conveying a call are set out in Condition 13.5A.3 of the BT Licence in effect on 30 September 1997. The charges payable in respect of the establishment of a connection between BT’s systems and the systems of other Operators are calculated in accordance with Condition 13.5C (in effect on 30 September 1997) of the BT Licence which, at Condition 13.5C.1, provides that the costs of establishing such connection (excluding transmission capacity) are to be shared between the parties according to the proportions in which each of them will bill the customers originating calls which are to be conveyed over the point of connection. The proportions must be derived from forecasts by each party of the capacity required to convey those calls for which the respective parties will bill customers originating them. The charges payable for other Standard Services are calculated in accordance with Condition 13.5(A) in effect on 30 September 1997.

8. In accordance with Conditions 13.5A.3B and 13.5C.6, in effect on 30 September 1997, the determination provides that if the Interim Charge is different from the Final Charge, BT or the Operator, as the case may be, will repay the difference plus interest. The applicable annual percentage rate set in Condition 13.5A.3B(b) is the London Inter Bank Offered Rate (LIBOR) plus 3/8 per cent.

9. Condition 16B.2, in effect on 30 September 1997, requires BT to refer for determination each year the charges for Standard Services previously determined by the Director General.

10. A Standard Service is a service which an Operator has required from BT and which BT is obliged to provide under Condition 13.

11. The charges for Standard Services which are determined by the Director General in each year are based on the costs of unbundled components and parts. The underlying principle is that costs should be allocated to components and parts, whilst recognising that interconnection is purchased as a service. All Operators are entitled to purchase each Standard Service from BT at the same charge. The same charges for the same network components and parts should also be charged by BT Network to the BT Retail Systems Business.

12. The Director General determines Interim Charges for the Standard Services for each financial year based on information produced by BT primarily in their audited Financial Statements for previous years and forecasts provided by BT. The Director General determines Final Charges after the end of the financial year based on the audited Financial Statement for the period in question.

13. The charges payable for each Standard Service are determined by the Director General on the basis set out in Condition 13 in effect on 30 September 1997. However, in accordance with Condition 16B.5, BT is entitled to seek the Director General’s consent to charge a lower amount. If consent is given, BT will be entitled to offer the New Charge on a non-discriminatory basis to all Operators and to back-date the New Charge (subject to the terms of the consent). No such consent was granted for the period ended 30 September 1997.

14. In accordance with Condition 16B.6, in effect on 30 September 1997, the Director General may, following representations from BT or Operators, determine the market for a Standard Service to be competitive. Following such a determination, BT will be free to set the charge payable by Operators for that service. The Director General may also, following representations from BT or Operators, determine that the market for a Competitive Standard Service has ceased to be competitive.

15. The Director General may also, following representations from BT or Operators, determine that the market for a Competitive Standard Service has ceased to be competitive. No such request was granted in respect of the period ended 30 September 1997.

16. In accordance with Condition 13.16, BT must publish and update the full list of Standard Services (the ‘Standard List’) including competitive services. The Director General must consult BT and other interested parties (as set out in Condition 13.39) before consenting to any exception to the requirement to publish. The Standard List is available from BT and via the Internet on its Interconnect web site: http://www1.btwebworld.com/interconnect

17. The Standard List must identify:

a) the charges to be paid by an Operator for each Standard Service, whether determined by the Director General or not;

b) the location in BT’s current standard interconnection agreement of the terms and conditions associated with the provision of each standard service;

c) the cost attributable to each network component and part used in providing each Standard Service together with the unit cost charged by way of transfer charge within BT for each component and part used; and

18. This obligation continues under the existing interconnect regime.

19. Condition 13.5A.3, in effect on 30 September 1997, provides for call conveyance charges for the year 1997/98 to be calculated on the basis of:

a) BT’s audited Interim Financial Statements for the period 1 April to 30 September 1997; and

b) any other information available.

20. The Financial Statements are based on a separation of BT accounts into Retail Systems, Network, Access, Apparatus Supply, Supplemental Services and Residual businesses (to reconcile to its statutory accounts).

21. The component costs of conveyance have been established and Table 1 of Annex Two shows the calculation of charges by applying usage factors or "routing factors" (see para.33).

22. In accordance with Condition 13.5A.3 of the BT Licence, in effect on 30 September 1997, call charges have been set to cover BT’s fully allocated costs of conveyance and include a full contribution to relevant overheads. The charges also cover a rate of return, decided by the Director General, applied to the relevant capital employed (see para 41).

23. In deciding which of BT’s overheads and capital employed are relevant, the Director General has followed the approach he took in the determination of Final Charges for BT’s Initial Standard Services for the year ending 31 March 1997.

24. The Director General has excluded redundancy costs (including capital costs of deferred redundancy) of £5.6 million out of a total of £12.2 million apportioned to conveyance (switching, transmission, and product management) in 1997/98. The amounts are those above the previously established contractual requirement paid to employees for redundancy payment and the cost of pension provision (pension strain) under BT’s annual schemes for voluntary redundancy. The Director General considers that BT adopted this policy not for the benefit of other operators or the Access business but to avoid risk of labour unrest and for the benefit of BT’s Retail Systems Business. Accordingly, the Director General decided that these costs are not relevant to conveyance and non-conveyance services.

25. The Director General has also excluded £182.8 million of net short term investments (that is, short term investments less short term loans plus cash in the bank and in hand) from capital employed and the associated £12.4 million of net short term interest deducted from inland conveyance operating costs.

26. The exclusion of costs from operating costs and capital employed has an effect on other costs, particularly corporate costs, which are allocated in proportion to all costs. The effect on these other costs is a ‘ripple effect’ which produces further reductions. Combined with the ‘ripple effect’ and an adjustment to ‘notional’ debtors which is a fixed proportion of the final charge, the total exclusions amount to £16.8 million out of a total cost base of £3.2 billion.

27. The exclusions (redundancy and net short-term investments) made by the Director General in relation to conveyance costs reduce conveyance charges by about 1%. They can be summarised as follows:

                   Capital employed (1/4/97 to 30/9/97)         £m          @ 12.5% per annum

                    Total                                                            198.2             24.8

                    Total excluded from conveyance (£24.8m – £8.0m)    £16.8m

28. For other Standard Services, the charges are also based on the fully allocated costs to BT of providing the service, taking into account a contribution to relevant overheads and a reasonable return on relevant capital employed. The exclusions from overheads and capital employed discussed in paragraphs 22–27 above have also been made to the non-conveyance Standard Services.

29. The Statement of Costs of Standard Services of BT Network is published in BT’s Financial Statements. An extract from the Financial Statement for the Businesses and Activities which has been adjusted by Oftel in accordance with this determination with 12.5% return on capital employed (see para.41) is given at Annex Two. This shows:

a) the component costs that BT Network "charges" to BT Retail and Operators; and

b) The routing factors which, multiplied by the component costs, produce the Standard Service charge.

30. This determination uses Element Based Charges (EBCs). EBCs are calculated by adding the product of component costs and routing factors (see para.33) and costs which do not vary with usage of the network (for example – product management costs) spread over relevant interconnect and BT call minutes.

31. The Table at Annex Two shows EBCs. A single tandem EBC is made up of both the single tandem and the local exchange segments and a double plus tandem EBC includes the double tandem, single tandem and local segments.

32. In accordance with Condition 13.5A.2(c), in effect on 30 September 1997, call conveyance charges vary according to the time of day gradient in BT’s retail tariff. Addendum 6 to the determination sets out conveyance charges by time of day. The calculation is explained in the Table at Annex One.

33. The methodology for deriving the costs of interconnecting call segments makes use of ‘routing factors’ produced from a sample of the use per call minute of each component of the inland portion of all calls at a period of time. Routing factors are measures of the frequency with which particular components are used by each service. Routing factors represent the weighted average use of local switches (DLE/ALE/TXE), main switches (DMSU/DJSUs), the average distance of junction and trunk transmission between switches and between local exchange and remote concentrator units and the average number of links used in transmission (see Annex One).

34. The routing factors given in this determination are based on a sample of 1 in 300 calls taken in April 1997. Their use aligns with the 1997/98 costs upon which the determination is based.

35. In previous years Oftel has made adjustments to reflect BT’s use of DLE’s as tandem switches because a shortage of DMSU capacity in certain areas. During 1997/98 BT disaggregated its conveyance costs into nine components from the six previously used. This enables the DLE element to be separately identified and removes the need for the ‘DLE as Tandem’ adjustment applied in previous determinations.

36. BT’s disaggregation of conveyance costs into nine components also enable the use of concentrators in local exchange calls to be separately identified. A separate RCU adjustment has not therefore been applied in this determination.

37. The conveyance charges have been averaged across the country. However, for double plus tandem calls an element of distance de-averaging has been introduced so that interconnection charges paid by Operators to BT can be more closely related to their use of BT’s network. This applies to all double plus tandem calls including, for example, double plus tandem ISDN.

38. The relevant route for charging for double plus tandem calls is the route with the shortest distance (measured in terms of the sum of straight-line distance between switches on the route) between the point of connection for the terminating end of the call. The double plus tandem charge bands are divided into three charging bands: 0–<100 km, 100–<200 km, 200+ km and these relate to the distance between the tandem switches on the route. These distances exclude the single tandem to DLE link although this is included when establishing which route should be chosen as the relevant route for determining the charge.

39. Capital employed is based on the net assets method, adjusted for the current

portion of long term debt, dividends payable and other items the Director General has determined, taking the mean of the opening and closing balances for the year.

40. Interconnect debtors have been included in the figure for capital employed. Oftel has examined the appropriate number of days outstanding and the Director General is satisfied that, on the basis of current information, 59 days is appropriate. It is made up of 15 days as the average number of days the debt is outstanding for the month in question, 14 days as the period required for issuing the invoice and 30 days for payment by the Operator. It reflects BT’s interconnect debtors position in its Financial Statements.

41. The Director General has used the figure of 12.5% as the rate of return on capital employed in this determination as in the 1996/97 Final Charges Determination.

42. The charges for IDD calls have to be calculated in accordance with Condition 13.5A of the BT Licence, in effect on 30 September 1997, that is based on BT’s fully allocated costs of conveyance, relevant overheads and a rate of return on capital employed. The costs of conveyance include the payments made to overseas operators in respect of delivery of calls overseas.

43. The growth in International ISDN services has resulted in BT introducing a number of new routes and this expansion is continuing. BT has five International ISDN chargebands which cover all existing and foreseen routes. Oftel has therefore agreed that to simplify the introduction of new routes by allocating them to existing chargebands this determination will show International ISDN charges by chargeband rather than on a country basis as previously. These are shown at Addendum 2

44. In the 1995/96 Interim Charges determination, the Director General determined the charges for data management amendments in accordance with the services identified as Initial Standard Services. Subsequently, Oftel received representations that this was not the most appropriate way for BT to recover these costs. Operators expressed concerns that the charges are payable at the start of business and prior to the launch of new services and therefore were a barrier to entry.

45. Following consultation with the industry, the BT licence was modified on 20 December 1996 to remove certain DMAs from the list of initial standard services and to provide that the costs involved be recovered through conveyance services. With effect from 1 April 1995, these DMAs should not be separately charged for but recovered through an uplift of both conveyance and transfer charges by including the costs in local exchange and main exchange component costs (with the majority going to local exchange). The charges for these DMAs have therefore not been determined but the costs have been added to local and main exchange components thereby increasing conveyance costs by 1%.

46. In respect of requests by a number of Operators, the Director General determined on 30 January 1997 that BT was obliged to provide certain IPLCs under Condition 13 and has since determined the Final Charges payable for 1994/95, 1995/96 and 1996/97. This determination therefore includes the Final Charges for 1997/98 for the routes and capacities so determined.

47. Effective on 1 October 1997 BT’s licence was amended (inter alia) to provide that the supply of all private circuit services (inland and international) fall under Condition 1 and Condition 13 no longer applies to such services.

48. Oftel has determined a separate IDD charge for traffic between Northern Ireland and Eire in accordance with the accounting rates agreed with Telecom Eirann. This charge does not apply to traffic originating elsewhere in the UK.

49. New arrangements to interconnect with BT came into effect from 1 October 1997. Details can be found in the Oftel publication entitled Guidelines on the operation of Network Charge Controls published in October 1997.

1. Table 1 of this Annex shows the average component costs for 1997/98 in pence per minute. There are four main components: local exchanges; trunk exchanges; junction transmission; and trunk transmission. The transmission components are further divided between costs which are sensitive to the number of transmission links and those which are sensitive to the length of the links.

2. Table 1 also shows the 1997/98 routing factors for conveyance services. References to lengths of transmission paths are references to the average length of such paths for each segment. That is, the "length" routing factor is the product of the average length when such a segment is used and the frequency with which it is used. The segment conveyance rates can be calculated by totalling the products of the component costs and routing factors. These are then added to other costs to give total segment costs. Other costs separately identified include operator services (EQ and 999) and product management policy, planning and performance. All costs include their allocations of debt.

3. Table 1 also shows EBCs by tariff gradient.

Concentrator

Local switch

Main exchange

Remote to 

Local Link

Remote to 

Local Length

Local to 

Tandem Link

Local to 

Tandem Length

Tandem to 

Tandem Link

Tandem to 

Tandem length

PPP & PM

EQ/999

Total ex 

EQ/999*

Total plus 

EQ/999*

Unit cost p/min

0.1014

0.2145

0.0846

0.0573

0.0052

0.0561

0.0021