Oftel’s Statement on the Relationship between Interconnection Charges and Retail Prices for Number Translation Services
December 1999
Chapter 1 - Background
Chapter 2 - Future Arrangements
Terminating Charge and Retail Price Transit
Chapter 3 - Implementation
Annex A - Responses to the NTS Consultation
Annex B - Two-Part Charging and Volume Discounts for NTS Call Origination
S.1 In March 1999 Oftel set out for consultation its proposals for increasing competition in prices charged for Number Translation Services (NTS). The proposed new arrangements would allow a greater choice of prices offered, in particular for Internet Access services which have up to now generally been offered at local call rates behind 0845 numbers. This Statement confirms Oftel’s proposals and sets out how the new arrangements will be introduced.
S.2 Oftel proposed that, in future, terminating operators providing NTS should be able to determine the retail prices at which their services were made available to customers. Under the new arrangements terminating operators would be free to set the termination charge they wanted for their services. The level of BT’s origination charge would be set by Oftel and the retail price to customers would be the sum of the two. The availability of a much wider range of price points in BT’s billing systems from the end of this year would mean greater flexibility in tariffing. NTS prices would no longer be pegged at local, free and national price points as they have been in practice.
S.3 Responses to the consultation document, The Relationship Between Interconnection Charges and Retail Prices for Number Translation Services, showed that the proposals were generally well received. This Statement therefore confirms the proposals and sets out how they will be implemented from January 2000. There are a number of key aspects of this for both consumers and operators:
S.4 These arrangements do not apply to originating operators other than BT. These operators are free to set their own originating charges and it is up to them to negotiate with terminating operators the payments required for access to their services.
S.5 Oftel will be monitoring these new arrangements closely to see that they open up competition for services, particularly Internet access. Oftel has also indicated that a system of two-part charging for Internet calls may be a more appropriate approach to conveyance charging than the per minute based approach in the current NTS arrangements. This Statement sets out a possible methodology. Oftel hopes that other operators will follow up this proposal and that BT will come forward with two-part charging proposals in the context of the new regime.
Background
1.1 NTS calls are different from ordinary geographic calls because the caller is generally accessing a service at the other end of the call. The caller pays a specified price (eg local or national rate) regardless of the distance the call is actually conveyed. The existing NTS charging regime centres around a formula determined by Oftel in January 1996. In brief this formula is:
Originating operator retains: P – D + C
Terminating operator receives: D – C
where:
P is the actual retail price charged by the originating operator;
C is the pence per minute charge for conveyance over BT's network (see paragraph 3.1);
D is the Deemed Retail Price for the call eg for 0X45 calls it is the local rate.
1.2 The effect of this formula was to establish a different method for sharing call revenues between originating and terminating operators compared with the practice for ordinary geographic calls. For the latter the originating operator simply pays a cost based termination charge to the terminating operator and retains the residue of the retail price. This covers the originating operator’s network costs and a margin of profit.
1.3 This was fine for ordinary voice calls but receipt of a fixed, cost-based termination charge gave little incentive for terminating operators to develop new services for consumers. After a lengthy consultation Oftel concluded that, since development of the market would be driven by investment in new services at the terminating end, it was appropriate that the originating operator just covered the cost of providing the originating leg. Any profit within the retail price for calls to non-geographic services should be passed to the operator providing the service. The NTS formula constrains the originating operator’s retention to its network and retail costs and passes the residue of the retail price to the terminating operator.
1.4 Since 1996 there has been an explosion in new service offerings and the rapid emergence of dial up Internet access. This service alone has grown from a negligible proportion of calls in 1995 to approaching 20% of local calls at the present time and is expected to continue to more than double in volume annually for the foreseeable future.
1.5 The nature of this growth was not foreseen and has created tensions in the way the NTS formula applied. Originating operators (principally BT) wanted a greater share of the revenue, arguing that this was necessary to pay for the extra investments needed to meet the explosion of demand. Terminating operators also sought more, arguing that the innovative new services they have developed provide the added value in the calls yet falling local call prices meant that their share of the revenue was being squeezed.
1.6 There has been strong growth in calls to the Internet using NTS arrangements, and while the revenue sharing arrangements under NTS have allowed the development of subscription free Internet pricing models which have stimulated the growth of Internet calling, it has become clear that the structure under NTS is not suitable for all callers to the Internet. The linkage of NTS calling rates to PSTN tariffs, particularly the local calling rate, has created an undesirable degree of rigidity in tariffs for Internet calls. Internet access via the PSTN has also created a new problem since the present structure of tariffs is inappropriate for those who use the Internet to any significant extent. This is because a significant portion of the costs of origination arise from call set-up, as opposed to maintaining the connection of the call. Currently, both of these costs are recovered from a uniform per minute charge for call origination. This has the effect that charges for long duration calls exceed their true cost.
1.7 Oftel believes that one way to address these problems is to alter the NTS arrangements to allow terminating operators flexibility to set their own terminating charges. There is no longer any need to encourage specific prices for such as Local Call Fee Access (LCFA) or for Oftel to ‘deem’ prices as was done for the old NTS formula. Terminating operators should no longer have to accept what remains of the retail price, after BT has retained its share. Given the frequent changes to BT’s charge, terminating operators and service providers found it increasingly difficult to build business plans capable of sustaining the cheaper Internet access sought by both consumers and government. Oftel needed to create an environment where operators can determine their revenue requirements and plan accordingly.
1.8 In June 1998 Oftel set up a Focus Group of operators to undertake a fundamental review of the NTS regime.
1.9 The work carried out by this group led to publication of Oftel’s Consultation Document entitled The Relationship between Interconnection Charges and Retail Prices for Number Translation Services in March 1999. This gave Oftel’s proposals for the future of NTS revenue sharing and sought comments from across the industry. Responses were received from a cross section of operators and other interested parties listed in Annex A to this statement. From these it was clear the proposals were generally well received although one or two reservations over implementation were expressed.
1.10 The consultation document also stated that Oftel would make two determinations relating to BT’s NTS conveyance charges following rejection of BT’s proposals by operators. These determinations now known formally as Directions (of BT’s NTS Discounts and Conveyance Charges) have been made and BT is in the process of calculating its NTS retention for each terminating operator. Copies of both Directions are available from Oftel’s Research and Intelligence Unit and the Direction of BT’s NTS Conveyance can also be found on Oftel’s website at http://www.oftel.gov.uk.
1.11 The current approach to BT’s origination charging will remain in place until new proposals are put forward as part of the Price Control Review. The Review is already underway, a consultation document will be issued in January, and if appropriate, and firm proposals will be put forward in Autumn 2000. Any new Price Controls are expected to take effect from 1 October 2001.
Future Arrangements
2.1 BT’s originating retention (C in the formula) will continue to be set according to the methodology within the NTS formula and updated by Oftel’s recent NTS Direction. It can be defined as BT’s cost-based charge for call origination and conveyance across its network according to distance and the number of switching stages used, uplifted by an amount to cover the relevant retail costs for NTS calls. The Direction of BT’s NTS Conveyance established this framework and the current review of BT’s retail uplift will complete the exercise. The target date for this is now the end of January 2000.
Terminating Charge and Retail Price
2.2 From 1 January 2000 the existing NTS formula will no longer fix the way that terminating payments are calculated. Service providers, in agreement with terminating operators, will be free to set the payments for access to their services. The retail price then becomes the sum of BT’s retention and the terminating payment. Oftel believes this will give service providers the opportunity to decide how to pitch their prices in the retail market and to compete aggressively on both price and service content.
2.3 In practice each call to a terminating operator’s service will attract a different call origination charge depending on the caller’s location in relation to the terminating operator’s point of interconnection. The terminating operator will therefore need to calculate its average charge in order to establish the single retail price consumers will pay. This will be done automatically under the interim methodology laid down in Oftel’s Direction of BT’s NTS Conveyance where charges are calculated according to how many points of connection an operator has with BT, as defined in the Glossary to this Statement.
2.4 Each operator’s charge will be reviewed quarterly by BT and amended if interconnection arrangements change. When BT begins to use its INCA billing system for NTS calls, operators will be able to apply the same method as that already used for indirect access calls to work out their average conveyance charge. INCA is currently expected to operate from April 2000.
2.5 Oftel believes this new pricing freedom will enable a whole new range of innovative pricing solutions to develop to meet the varying needs of consumers. At the same time BT and other operators are already introducing lower cost conveyance options for Internet traffic which will further reduce call prices.
2.6 Where BT acts as the transit operator it will be required to pay to terminating operators the charge the originating operator has agreed with them. It will then seek this sum plus its transit charge from the originating operator. BT acts only as an intermediary in these transactions but there is no reason why it must continue to do so. This is especially true so if the arrangements between originating and terminating operators will not allow BT to recover its costs. Where other originating and terminating operators can not agree their respective charge BT will not be obliged to make up any shortfall in the payments it is required to make. Thus where originating operators will not pay BT sufficient to cover its transit costs and the terminating payment it is open to BT to refuse to carry the calls.
2.7 Retail prices charged by other originating operators should be agreed through commercial negotiations with terminating operators regardless of whether they interconnect directly. There is no compulsion to mirror the charges BT has agreed and nothing to prevent operators agreeing to bill each other directly instead of passing payments via BT.
Implementation
3.1 One of the key features of the old NTS arrangement was the ability to inform consumers of the price they were paying for calls through the number dialled. Oftel has had to consider how consumer price visibility can be maintained when a variety of new prices are introduced.
3.2 At present, all prices can be accommodated within the 080, 084 and 087 ranges, since these are defined as free, ‘up to local rate’, and ‘up to national rate’. Consumers can generally be sure that they are paying no more than these maximum prices. This relative clarity is also a function of the limited number of price options available for these calls. The introduction of price competition means that a more flexible numbering arrangement has to be established.
3.3 One option would be to allocate a new 08XX range for each new price, though this would be difficult to define given that different operators will charge different amounts. It is also extremely wasteful of numbering resources.
3.4 Having considered a number of options and put its proposals to the Numbering Forum for consultation, Oftel has concluded that the following arrangements best meet the new requirements:
3.5 There are already a number of services operating on 0845 and 0870 numbers which are priced differently from the specified prices for those numbers. These services will be required to migrate to the new number ranges.
3.6 Under these arrangements operators wishing to continue to offer services at the traditional prices can continue to do so without the need to migrate to new numbers. Operators seeking to offer new products such as flat rate, eg 1ppm at all times, or where prices straddle the old local/ national rate prices, eg 1.5ppm at all times, can use the new 0844XX range so long as no price at any time of day exceeds 5ppm.
3.7 Consumers will thereby retain some although not total clarity on what they are paying. Oftel is looking to operators and service providers to show clearly the prices for their services within their advertising and product literature.
3.8 Having decided the terminating charge for their service and, where necessary, obtained the appropriate number range from Oftel, terminating operators will notify BT. The retail price will be this plus BT’s originating retention. BT will then update its billing system and ‘databuild’ the new price on each of the switches in its network and finally carry out the necessary testing. This process currently takes several weeks and BT is looking at how the processes can be improved to minimise any delay.
3.9 The operation of the new arrangements will be closely monitored by Oftel and the NTS Focus Group will continue to act as the forum to address any problems that arise.
3.10 Oftel is keen to encourage operators to develop new and more relevant pricing options for Internet Access. A paper ‘Pricing of calls to the Internet: possible initiatives to bring about more appropriate and flexible tariffs’ was published on the Oftel website on 16 November. One of the options put forward was Two Part Charging. It said:
"A further development that would be possible would be to separate BT’s retention for NTS calls into two parts reflecting the two key cost drivers for call origination: the cost of setting up a call and the cost of maintaining the call. This is known as two-part charging. Currently, the set-up and duration related costs are averaged together to form a single pence per minute charge. This is appropriate if the main concern is to ensure overall cost recovery, but it has the effect that long duration calls are over-charged and short duration calls are under-charged. This clearly works to the disbenefit of those making long duration calls, such as users of the Internet. Two-part charging would address this problem."
3.11 Oftel wants to see NTS Internet Access charges reflect appropriately the costs incurred in delivering these, generally longer duration, calls. Operators may be prevented from offering new retail pricing proposals because of the constraints of the current structure of interconnection charges. If this is of concern, it is up to operators to discuss their needs with BT. If negotiations fail, and Oftel considers the request to be reasonable, Oftel can intervene to settle a dispute and determine a tariff. Annex B sets out a methodology which Oftel believes could form the basis of a two part charging arrangement. Illustrative numbers are also provided to show the potential effect of the adoption of two part charging.
3.12 This Statement confirms the proposals put to the industry in March. From January 2000 the market will control call termination charges. It is now up to originating operators to respond with products which allow the industry as a whole to meet the needs of the consumer.
Oftel
December 1999
Responses to the NTS Consultation
Responses to Oftel’s consultative document entitled ‘the Relationship between Interconnection Charges and Retail Prices for Number Translation Services’ were received from:
AOL
BT
COLT
CWC
Directline
Energis
Freeserve
Global Numbers
MCIWorldcom
NetKonect
Norweb
NTL
One 2 One
Orange
SACOT
Scottish Telecom (Thus)
Torch
UUNET
Two-Part Charging and Volume Discounts for NTS Call Origination
Two Part Charging
B1. Call origination costs arise in two ways: there is a cost of setting up a call, and also a separate cost of maintaining the connection for the duration of the call. Currently, origination charges are set at a uniform level in pence per minute, the rate being calculated to cover both types of cost overall. The effect of this is that short duration calls under-recover their costs, and long duration calls over-recover their costs.
B2. Since Internet calls are, on average, of much longer duration than voice calls, operators terminating a considerable amount of Internet traffic might wish to ask BT for an interconnection arrangement for NTS calls based on two-part charging by which the two elements were charged for separately. If operators were unable to reach agreement with BT, Oftel could be called upon to make a determination. If it were called upon to make a determination, it would consider all relevant facts. In order to proceed, it would need to obtain information about the individual costs of call set up and call duration. Oftel does not have all of the relevant information, but it is possible to calculate an illustrative set of charges using information provided by BT to the MMC in the Calls to Mobiles Inquiry.
B3. BT supplied the MMC with data for 1997/98 on the percentage of costs of each network element which related to call set up and the percentage which related to call duration. The MMC used this information to calculate two sets of unit costs. For each element they established two unit charges, one for call set up costs expressed in pence per call, and one for duration related costs expressed in pence per minute. The MMC’s calculations of two part charges for each network element can be combined with Routing Factor data to derive illustrative two part charges for network services such as call origination.
B4. The attached table shows such an illustrative calculation for a Single Tandem segment. The MMC took as a starting point a uniform charge per minute for a Single Tandem segment in 1997/98 of 0.585p. The information provided by BT, along with the MMC’s calculations, can be used to break this down into illustrative charges of 0.57p per call for call set up and 0.35p per minute for duration.
B5. It is possible to use these unit costs to calculate an illustrative average cost per minute of calls of different duration under two-part charging. For example, for a 17 minute call, the average charge per minute falls to 0.38p.
B6. This exercise therefore shows that, on an illustrative basis, a move to two part charging would reduce the average conveyance charge for a call of 17 minutes’ duration by 36% compared with the average charge under uniform charging.
Volume Discounts
B7. Oftel also intends to consider whether discounts for high volume customers would be appropriate and practicable.
B8. In its Internet pricing document published on 16 November, Oftel noted that it was probable that economic efficiency could be enhanced by non uniform charging for call origination. The average costs of maintaining connections exceed the marginal costs of doing so, and volume discounts are often efficiency improving in these circumstances. Oftel intends to explore this issue, and will propose appropriate adjustments to charging arrangements, depending on the findings of this review.
Illustrative table
| Element | Call set up costs (pence per call) |
Call duration costs (pence per minute) |
Single Tandem Routing Factor |
Call set up (pence) |
Call Duration (pence per minute) |
|
ST |
||||||
| Local exchange – processor | 0.150 |
0.047 |
1.102 |
0.165 |
0.052 |
|
| Local exchange concentrator | 0.312 |
0.097 |
0.964 |
0.301 |
0.094 |
|
| Main exchange | 0.097 |
0.047 |
0.901 |
0.087 |
0.042 |
|
| Remote-local: link | 0.005 |
0.051 |
0.726 |
0.004 |
0.037 |
|
| Remote-local: length | 0.004 |
0.043 |
1.158 |
0.005 |
0.050 |
|
| Local-tandem: link | 0.005 |
0.054 |
0.715 |
0.004 |
0.039 |
|
| Local-tandem: Length | 0.002 |
0.017 |
2.068 |
0.004 |
0.035 |
|
| Tandem-tandem: link | 0.005 |
0.047 |
||||
| Tandem-tandem: link | 0.001 |
0.007 |
||||
| Total | 0.569 |
0.348 |
||||
| Cost of calls of different durations | ||||||
| Duration | 2.41 |
mins | ||||
| Cost of call | 1.41 |
|||||
| Per min cost | 0.59 |
|||||
| Duration/Average | 0.60 |
|||||
| Cost of calls of different durations | ||||||
| Duration | 17.00 |
mins | ||||
| Cost of call | 6.49 |
|||||
| Per min cost | 0.38 |
|||||
Freefone – No fee calls to BT’s non-geographic NTS services which are free to calling customers
INCA – BT’s automated billing system for interconnection charges
IP – Internet Protocol; refers to the special network arrangements required for transmitting data over the Internet.
Local Call Fee Access – Calls to non-geographic NTS services for which calling customers are charged at the local call rate
National Call Fee Access – Calls to non-geographic NTS services for which calling customers are charged at the national call rate
NTS – Number Translation Services – calls to certain non-geographic numbers including freefone, local call fee access, national call fee access and Premium Rate services
Points of Connection – also known as a Switch Connections ie where an operator’s network interconnects with BT usually at a Digital Main Switching Unit (DMSU) or Wide Area Tandem (WAT). Points of connection with BT in the context of Oftel’s Direction of BT’s NTS Conveyance refer only to switch connections carrying NTS calls where the links were ordered by the operator and agreed with BT according to forecasts of capacity requirements provided by the operator. The operator will also have paid any appropriate charges. Circuits provided by BT for its own network management purposes, referred to as NTS Extension Circuits (NTSECs), do not qualify as they are not a BT standard interconnection product. These are distinct from Interconnection Extension Circuits (IECs) which are a BT Standard Service.
PRS – Premium Rate Services: Calls to certain non-geographic numbers for entertainment or information services
Tandem – A main exchange in BT’s network which acts as a single switching point for calls.
