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The Determination Explanatory memorandum Chapter 1 Background Chapter 2 The cost recovery framework for CPS in the UK Chapter 3 Oftel’s analysis and conclusions regarding the PCPS and ICPS surcharges Chapter 4 The consultation process Chapter 5 Scope for review Final Determination of surcharges for the provision by BT of carrier pre-selection facilities under the provisions of Condition 50A of BT’s Telecommunications Act Licence Oftel is publishing a Final Determination of the surcharges for the provision by BT of Carrier Pre-selection (‘CPS’) Facilities. The Determination will take effect as soon as is reasonably practicable after 1 April 2002. Oftel Telecommunications Act 1984 Determination pursuant to Condition 50A of the Licence of British Telecommunications Plc relating to carrier pre-selection Whereas the Secretary of 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 paragraph 20 of Schedule 5 of the Act the BT licence has effect as if granted to British Telecommunications plc ("BT"); Whereas the Telecommunications (Interconnection) (Carrier pre-selection) Regulations 1999 modified the BT licence by inserting a new Condition 50A concerning carrier pre-selection; Whereas Regulation 6 (3) of the Telecommunications (Interconnection) Regulations 1997 ("the Regulations") permits the Director General of Telecommunications ("the Director") to specify issues which must be covered in an interconnection agreement, or to make a direction that specific conditions be observed; Whereas Condition 50A.6 of the BT Licence requires that when the Licensee provides Carrier Pre-selection Facilities in accordance with the Carrier Pre-selection Specification which does not involve Autodiallers, the costs incurred by the Licensee in providing System Set-Up Facilities shall be recovered by a separate surcharge on all Relevant Calls; Whereas Condition 50A.7 of the Licence requires that when the Licensee provides Carrier Pre-selection Facilities in accordance with the Carrier Pre-selection Functional Specification involving Autodiallers, the Director may determine the proportion of total costs of the provision of Carrier Pre-selection Facilities to be borne by the Licensee and the Licensee shall recover that proportion by means of a surcharge on all Relevant Calls; Whereas the Director has previously determined the Licensee's charges for providing Carrier Pre-Selection Standard Services and the proportion of total costs of the provision of Carrier Pre-Selection Facilities in accordance with the Carrier Pre-selection Specification involving Autodiallers to be borne by the Licensee; Whereas Condition 50A.8 of the Licence permits the Director to make a determination specifying the level of the surcharges referred to in Condition 50A.6 and Condition 50A.7 and the period of time for which they shall apply; Whereas Condition 50A.8 permits the Director to make a determination at any time, or on request; Whereas such determinations are subject to the consultation procedure set out in Paragraph 6 of Part 1 of Schedule 1 of the Licence; Whereas in accordance with the consultation procedure set out in paragraph 6 of Part 1 of Schedule 1 of the BT Licence the Director issued a Notice on 28th September 2001 inviting comments on his intention to set the Licensee's surcharges for the provision of Carrier Pre-selection (‘CPS’) Facilities; Whereas BT and interested parties were sent the final draft of this Determination and the Explanatory Memorandum, which contains the Director’s reasoning, on 19th December 2001 and were invited to comment, and four sets of comments were received; Whereas in making this Determination the Director has taken into consideration representations and observations received and the matters described in the Explanatory Memorandum to this Determination; NOW THEREFORE THE DIRECTOR PURSUANT TO REGULATION 6(3) OF THE REGULATIONS, AND CONDITION 50A.8 OF THE LICENCE, AND HAVING CONSIDERED THE VIEWS OF THE PARTIES, HEREBY MAKES THE FOLLOWING DETERMINATION: 1. The surcharge applicable under Condition 50A.6 for providing Carrier Pre-selection Facilities in accordance with the Carrier Pre-selection Specification which does not involve Autodiallers is that set out in the attached Schedule 1 of this Determination and which is further explained in the Explanatory Memorandum to this Determination. 2. The surcharge applicable under Condition 50A.7 for recovery of the proportion of total costs of providing Carrier Pre-selection Facilities in accordance with the Carrier Pre-selection Functional Specification involving Autodiallers borne by the Licensee is that set out in the attached Schedule 1 of this Determination and which is further explained in the Explanatory Memorandum to this Determination. 3. The period for which the surcharge shall apply shall be five years, for the reasons set out in the Explanatory Memorandum and further to Condition 50A.8, unless the Director determines otherwise. 4. The Licensee shall amend its interconnection agreements as appropriate to comply with the terms of this Determination. 5. Words and phrases in this Determination shall have the meanings ascribed to them in the BT licence or the Act as appropriate. 6. This Determination shall take effect as soon as is reasonably practicable after 1 April 2002.
PETER WALKER A person authorised in that behalf under Section 8 of Schedule 1 of the Telecommunications Act
Pursuant to the Determination made under Condition 50A.8 of BT’s licence, BT shall impose the following surcharges on its wholesale call origination tariffs for all Relevant Calls for providing Carrier Pre-selection (‘CPS’) Facilities. The Director has scrutinised BT's most recent proposal relating to these surcharges (dated 15 January 2002). The Director has indicated where and why he agrees with these proposals in the accompanying Explanatory Memorandum. Where the Director has departed from BT's calculations, the reasoning behind the change is also described in the accompanying Explanatory Memorandum. For reasons of commercial confidentiality, the Director is unable to divulge detailed calculations. For the provision of Carrier Pre-selection Facilities in accordance with the Carrier Pre-selection Specification which does not involve Autodiallers, and for the recovery of the proportion of total costs borne by the Licensee for providing Carrier Pre-selection Facilities in accordance with the Carrier Pre-selection Functional Specification involving Autodiallers, the combined surcharge shall be:
Explanatory memorandum S.1 Chapter 1 of this explanatory memorandum explains the background to CPS in the UK. Chapter 2 repeats for the avoidance of doubt the cost recovery framework for CPS in the UK, as previously established. It includes an explanation of which calls should be considered ‘relevant’ for the purposes of the surcharge (again as previously established). Chapter 3 outlines Oftel’s analysis and conclusions in relation to the detailed calculation of CPS surcharges. Chapter 4 describes the surcharge consultation process that has been carried out so far, the representations that Oftel has received to date and Oftel’s response to these representations. Chapter 5 describes the scope for review of the surcharges set out in this Determination.
Background 1.1 Customers on BT’s network can at present use alternative carriers by dialling three- or four-digit access codes. These codes allow the calls to be routed to the carrier of their choice. This system is known as indirect access, and it requires customers always to dial the extra digits to use an alternative carrier. This process can be automated when a customer has special dialling equipment, called an autodialler. 1.2 Carrier Pre-Selection (CPS) is a mechanism which allows users to select alternative operators in advance without dialling additional codes on the telephone. The customer subscribes to the services of one or more alternative operators and chooses the type of calls (eg all national calls) that will be routed through the alternative operators. 1.3 EC Directive 98/61/EC (the Amending Interconnection Directive) required CPS to be made available throughout the European Community from 1 January 2000. In the UK, the Director General of Telecommunications has determined that BT and Kingston Communications Ltd (KCL) have Significant Market Power (SMP) in fixed telephony. Thus they are required, under the Directive, to provide CPS. CPS was made available from KCL’s network on 1 January 2000. BT’s switches, unlike those used in other Member States, had no inherent capacity for CPS. Therefore the UK obtained from the European Commission a delay of three months for the provision of CPS by BT. Thus CPS had to be available on BT’s network from 1 April 2000. The type of CPS introduced on BT’s network from 1 April 2000 involved the use of autodiallers. This solution is known as ‘Interim CPS’ (ICPS). 1.4 Phase 1 of ‘Permanent CPS’ (PCPS) (also known as switch-based CPS) was available commercially on BT’s network from December 2000. Phase 1 of PCPS allowed switch-based (rather than autodialler based) pre-selection of national and international calls. Phase 2 of PCPS was commercially available on BT’s network from December 2001. Phase 2 allows switch-based pre-selection of national, international and local calls, as well as calls to mobile, premium rate, specially tariffed, personal and paging numbers. ICPS remained available until Phase 2 of PCPS was launched.
The cost recovery framework for CPS in the UK Oftel’s February 1999 Statement 2.1 In February 1999, Oftel published a statement Implementation of Carrier Pre-Selection in the UK (the February 1999 Statement). This statement is available on Oftel’s website. It sets out Oftel's policy on implementation of CPS in the UK, including how its provision as a network service should be paid for and timescales for its introduction. The statement did not discuss retail prices for the CPS service, but rather the way in which BT and Kingston Communications (KC) would be expected to recover the costs of modifying their systems to offer a CPS service. 2.2 Prior to the publication of the February 1999 Statement, cost recovery had been the subject of Industry consultation since an initial Oftel paper on this issue in March 1998. This initial paper described how Oftel's six principles guiding decisions on cost recovery (developed originally in the context of number portability) might apply to CPS. Having considered responses to this paper in detail, Oftel reappraised its initial view on cost recovery, and in November 1998 issued a draft statement with revised proposals for comment. Oftel's February 1999 Statement set out Oftel's response to some of the key comments made on the November 1998 draft and presented Oftel's decision on how it would approach cost allocation and recovery for CPS. Annex 3 to the February 1999 Statement detailed how Oftel considered the six principles of cost recovery applied to CPS. As this Determination relates to the recovery of BT's costs for the provision of CPS Facilities, there will be no further discussion here of Oftel's conclusions regarding CPS cost recovery for KC. 2.3 The key cost recovery conclusions in the February 1999 Statement in relation to BT were:
2.4 Oftel continues to believe that the approach set out in the February 1999 Statement is appropriate (subject to the inclusion of an on-going per operator charge as discussed in Oftel’s January 2001 final Determination of costs and charges for Permanent Carrier Pre-selection, which is available on Oftel’s website). Detailed surcharge methodology as set out in February 1999 Statement 2.5 The detailed methodology for imposing the surcharge for system set-up cost recovery was contained in Part 2 of Oftel's February 1999 statement:
2.6 It was originally proposed that the PCPS pence per minute (PPM) surcharge would run from December 2000 until November 2005. The surcharge would be applicable to all Relevant Calls only, namely a) national and international minutes only originating on BT's network during Phase 1 from December 2000 – November 2001; and, b) all minutes originating on BT's network during phase 2 from December 2001 until recovery was complete. However, following consultation with interested parties, modified arrangements for imposing the PPM surcharge were agreed (see below). Interim Carrier Pre-selection 2.7 The cost categories and principles described so far relate to Permanent Carrier Pre-selection. Separate arrangements are in place for the recovery of some of the costs of Interim Carrier Pre-selection by means of a separate ICPS PPM surcharge (see below). This Determination relates to both the PCPS and ICPS surcharges. Oftel’s November 2000 Determination relating to Interim Carrier Pre-selection 2.8 Following consultation, in November 2000, Oftel published a final Determination relating to Interim Carrier Pre-selection, which determined the proportion of the costs of ICPS to be borne by BT. This Determination is available on Oftel’s website. Licence Condition 50A.7 provides for the recovery of the proportion of the costs of ICPS borne by BT by means of a surcharge on all Relevant Calls originating on BT's network (ie all calls of a type available under CPS whether carried by BT or by a CPS or indirect access operator). The level of this ICPS PPM surcharge itself was not however determined in Oftel’s November 2000 ICPS Determination. 2.9 It was originally intended that the recovery period for BT’s ICPS costs would be the 21 months between the ICPS launch in April 2000 and the launch of PCPS Phase 2 in December 2001, and that the ICPS PPM surcharge would apply to all BT originating Relevant Calls during this period. Subsequent developments 2.10 In the course of negotiations on CPS charging between Oftel, BT and OLOs during 2000, it became clear that there was some confusion about the existence of two separate PPM charges (for ICPS and PCPS) covering different minutes and recovery periods. There were also doubts expressed about the ability of billing mechanisms to segregate the two different charges to the relevant minutes only. 2.11 It was therefore decided jointly by BT, Oftel and OLOs that the best option was a single combined PPM charge for ICPS and PCPS, to commence from the beginning of Phase 2 of PCPS in December 2001 (even though this would be after the lifetime of ICPS). This has the advantage that there is no need to modify billing mechanisms to allow the PCPS surcharge to only be incurred on national and international calls during Phase 1. Confusion over different surcharge rates applicable during different time periods will also be avoided. The commencement date for the combined PPM surcharge has subsequently been delayed a few months from December 2001 for reasons of practicality (see the next paragraph). The recovery period 2.12 The recovery period will be five years, to commence as soon as is reasonably practicable after 1 April 2002., A mid-term adjustment to the level of the surcharge to ensure that recovery within the five-year period is plausible may be required, as referred to in Chapter 5 of this Explanatory Memorandum. The commencement date has been chosen as BT has stated that this should give BT sufficient time to make the necessary arrangements for imposing the surcharge appropriately in its billing arrangements, given the timing of the publication of this final Determination. The duration of five years has been chosen by Oftel as BT has previously proposed this period to Industry and no significant objections were raised at that time. In addition, a period of five years appears to Oftel to achieve a reasonable balance between BT’s need to recover its cost promptly without placing an excessive burden on the Industry as a whole during the recovery period. However, a surcharge will apply only whilst there is an unrecovered amount. The actual recovery period could extend beyond five years or expire before then, as the recovery is mainly dependent on actual traffic volumes. If the recovery period is more or less than five years, the Director will make a new Determination accordingly. In view of the length of the recovery period, the PPM surcharge will be set so as to recover the present value of both ICPS and PCPS costs. Oftel’s January 2001 Determination of costs and charges for Permanent Carrier Pre-selection 2.13 Oftel published a final Determination on costs and charges for Permanent Carrier Pre-selection in January 2001. In this Determination, Oftel explicitly decided not to determine the value of the ICPS and PCPS surcharges, as the recovery period was (at that time) planned not to commence until December 2001. It was anticipated that a more accurate assessment of the actual PCPS system set-up costs and actual ICPS costs borne by BT would be possible by December 2001. However, based on BT’s estimates as at January 2001, Oftel was able to give an indicative value in the January 2001 Determination for the PCPS component of the surcharge of 0.00845 pence per minute. The ICPS component of the PPM surcharge was not dealt with in the January 2001 Determination and was not included in the indicative charge quoted.
Oftel’s analysis and conclusions regarding the PCPS and ICPS surcharges 3.1 In mid-2000, Oftel commissioned a report to review the PCPS charges proposed by BT, including the PCPS surcharge. Albera Networks, an independent telecommunications consultancy, prepared their report (the Report) that is available on Oftel’s website. Albera Networks was asked to investigate the costs on which BT’s proposed charges were based in order to establish whether they were reasonable and efficiently incurred. The Report explored the cost components to a high level of detail and presented its findings together with some recommendations on particular components of the underlying costing methodology that needed, in Albera’s view, further consideration. 3.2 Following the publication of the Report, Oftel has been in renewed dialogue with BT as to the appropriate level of PCPS and ICPS surcharges since June 2001. Oftel has participated in periodic meetings with BT to investigate the surcharges in detail. BT has produced a spreadsheet calculation to justify the surcharge which it has updated at regular intervals in the light of discussions with Oftel, and as more information about actual out-turns and expenditure has become available. 3.3 Oftel's surcharge discussions with BT have covered the following areas:
3.4 Oftel has used expert advice from its own technical, legal, economic and accounting specialists in arriving at its conclusions in the above areas. In this Explanatory Memorandum, Oftel will describe its investigations and conclusions in these areas, subject to the requirement that commercially sensitive information obtained during the investigation remain confidential. Traffic forecasts 3.5 Oftel has ensured that the traffic forecasts used by BT in calculating the PPM surcharge are consistent with traffic forecasts that BT has provided to Oftel in the context of other regulatory work such as the price control review. Oftel has checked that BT’s forecasted traffic volumes relate to Relevant Call minutes for the purposes of CPS, and do not include (for example) FRIACO and Surftime minutes. 3.6 Oftel has had concerns about the variations between BT’s traffic forecasts and actual levels of traffic on BT’s network, and about variations in BT’s traffic forecasts between iterations of the forecasting process. Oftel is however satisfied that the traffic forecasts used in BT’s latest PPM surcharge calculations are reasonable, given the inevitable uncertainties in predicting traffic volumes in the current market environment. Forecast and actual figures 3.7 Oftel requested that BT clearly indicates on its PPM surcharge calculation spreadsheet which figures were forecasts and which figures were actual out-turns, both in relation to traffic volumes and costs incurred. BT has ensured to Oftel’s satisfaction that the spreadsheet makes this distinction, and has replaced forecast figures with actual out-turns on a rolling basis as data becomes available. 3.8 Oftel has also established that BT has included a provision within its PPM spreadsheet calculation for the forecasted cost of modifying the existing CPS customer ordering process to remove the reply card, shown as being incurred during the first half of 2002. This provision is reasonable in Oftel’s view, given that at this stage it can be an estimate of the cost only. 3.9 For the avoidance of doubt, Oftel has also established that the costs that BT has included in its spreadsheet calculation explicitly exclude the cost of developing the so-called ‘File Based Transfer System’ for ICPS. BT has carried out this development on a commercial basis and there are therefore separate arrangements in place for cost recovery outside the PPM surcharge. ICPS order volumes 3.10 When discussions between BT and Oftel regarding the PPM surcharge were renewed in June 2001, a payment mechanism for ICPS orders between OLOs and BT was on the point of being launched, but no actual orders for ICPS had yet been received by BT. BT therefore decided, with Oftel’s agreement, to use forecasted ICPS order volumes in its initial calculation of the PPM surcharge, and to gradually replace forecasted volumes with actual volumes as data became available in subsequent months. 3.11 Oftel has checked that the ICPS order volumes used in the PPM surcharge calculation by BT are consistent with actual out-turn figures for ICPS order volumes supplied separately by BT, and is satisfied that this is indeed the case. At the time of writing the draft Determination, ICPS orders were continuing to be submitted to BT, so an estimate of the likely total ICPS order volumes was used in the calculation of the surcharges in the draft Determination. At the time of writing this final Determination, BT is no longer accepting new ICPS orders, as Phase 2 of PCPS is available. Therefore an updated ICPS order volume (which is slightly lower than the volume estimated in the draft Determination) has been used in the calculation of the surcharges. This figure is still only an estimate (although it is now likely to be a very accurate estimate) because BT and OLOs are still negotiating the precise status of a limited number of ICPS orders submitted prior to the December 2001 cut-off for ICPS orders. The PPM surcharge figures in this final Determination are therefore slightly lower than those that appeared in the draft Determination. If the final ICSP order volume figure has a material impact on the size of the PPM surcharge, Oftel will consider the need to review the PPM surcharge in line with the provisions for review outlined in Chapter 5 of this Determination. Labour costs 3.12 Since June 2001 when BT and Oftel began the latest round of discussions on the PPM surcharge, there have been several changes to BT’s estimated labour costs for CPS. 3.13 Oftel initially had some concerns about the time profile of some labour costs in the PPM spreadsheet, and whether this accurately reflected the level of BT’s activity on both ICPS and PCPS during 2000 and 2001. BT subsequently modified the time profile of labour costs during this period, which, in Oftel’s view, adequately addressed Oftel’s concerns in this area. 3.14 Oftel also asked BT to justify the labour costs included in both the PCPS and ICPS surcharge calculations in terms of the numbers of full-time equivalent (FTE) employees involved in ICPS and PCPS. BT provided Oftel with a detailed analysis of staff involved in the CPS project by name, showing the months during which they have been and are forecast to be working on CPS. BT has also provided Oftel with a breakdown of the proportion of staff in various grades working on CPS, and the salary and overhead costs associated with each grade. From Oftel’s own knowledge of the BT staff working on the CPS project, and on the basis of the detailed FTE analyses provided by BT, Oftel considers that the figures for labour costs used in the BT PPM spreadsheet are a reasonable reflection of BT’s actual and likely CPS labour costs. For the avoidance of doubt, Oftel has established that no costs associated with BT’s legal challenge of Oftel’s initial ICPS charges determination have been included in BT’s PPM surcharge calculation. Reconciliation with ASPIRE 3.15 ASPIRE is the system BT uses to meet its regulatory accounting obligations. It identifies costs, revenues, assets and liabilities at the level of specified regulatory Business’s and disaggregated activities. Oftel has investigated the CPS costs identified in BT’s PPM spreadsheet calculation, and compared them to those attributed to CPS in BT’s ASPIRE system to 31 March 2001. BT was asked to provide a reconciliation for any differences between the costs of CPS recorded in ASPIRE and the CPS data used in BT’s PPM spreadsheet. 3.16 BT’s reconciliation of the two sets of CPS costs show that there are material differences between the PPM spreadsheet and the cumulative totals held in the Aspire system to the 31 March 2001, even after allowing for any timing differences. 3.17 BT’s response to Oftel’s request for an explanation of this difference was ‘the balance relates to timing and estimation differences, between the costs showing in our regulatory accounting system and the costs included in the ‘bottom-up’ spreadsheet modelling that has been done for the purposes of the determination. We would expect this difference to close between 31 March 2001 and the date at which the system has been set-up’. 3.18 Based on current information, Oftel believes that the costs identified in BT’s CPS PPM spreadsheet reflect a more accurate view of actual costs incurred in setting up CPS. Therefore Oftel considers the PPM surcharge calculation based on the PPM spreadsheet data to be reasonable. Oftel’s concern regarding the accurate attribution of CPS costs in BT’s regulatory accounting systems will be taken up separately with BT. Evidence for out-payments 3.19 Oftel asked BT to provide evidence to demonstrate that the payments detailed in BT’s PPM spreadsheet had actually occurred. Oftel selected a sample of these transactions, and BT was able to provide evidence of payments in the form of transaction reports and evidence for cheque and credit payments, which were to Oftel’s satisfaction. Time of day gradient 3.20 BT proposed to Oftel that the PPM surcharge should vary by time of day in exactly the same way as wholesale tariffs do currently. Oftel has carefully considered the impact on competition of a time of day gradient for the PPM surcharge, and considers such a gradient to be reasonable. Such a gradient ensures that the PPM surcharge (after application of the gradient) represents the same fraction of the relevant wholesale tariff, regardless of the time of day or week. This in turn ensures that the surcharge is competitively neutral in this respect. Therefore this Determination includes a time of day gradient for the PPM surcharge that is identical to the gradient used for BT’s wholesale tariffs, and which is contained in BT’s carrier price list. Further details of how the tariff gradient has been applied to the PPM surcharge can be found in Chapter 4 below. Discounted cash flow calculation 3.21 Initially, BT used a figure of 12.5% (being the regulatory cost of capital) as the discount rate in the discounted cash flow calculation used to derive the PPM surcharge. Recently however, Oftel and BT have agreed (outside the immediate context of the CPS surcharge negotiations) that the figure for the regulatory cost of capital should increase to 13.5%. Therefore BT increased the discount rate in its surcharge calculation to 13.5%, and Oftel has preserved this discount rate in calculating the level of surcharges in this Determination. Calls subject to the PPM surcharge 3.22 There has been considerable discussion between BT and Oftel as to which calls should be subject to the PPM surcharge for CPS, and BT also raised this matter in its response to the second 28-day consultation period on Oftel’s Notice of Proposed Determination (see paragraph 4.16 below). 3.23 Oftel concluded in its February 1999 Statement Implementation of Carrier Pre-Selection in the UK that ‘relevant’ calls for the purposes of the surcharge should be all calls of a type that could be carried by CPS, whether they are actually carried by a CPS operator or are carried by BT or an indirect access operator. 3.24 This conclusion is reflected in the definition of Relevant Calls contained in BT’s Licence Condition 50A, namely: "Relevant Calls" means all calls which originate on the Licensee’s network and which are of a type which are available for Subscriber selection in accordance with the Carrier Pre-selection Functional Specification 3.25 The Carrier Pre-selection Functional Specification (available on Oftel’s website) further defines the types of call available for the CPS ‘all calls’ option as: all calls, to include international, national, local, mobile, specially tariffed (eg freephone, local rate, national rate), premium rate, personal and paging. CPS will not apply to calls using Type A short codes (eg 100, 999, 112, 192), Type C (operator specific) short codes or the 0844 04yyxxx and 0808 99yyxxx number ranges used for unmetered interconnect Internet access. 3.26 Oftel therefore considers that all geographic local and national calls, international calls, NTS calls, calls to mobile, premium rate, personal and paging numbers originating on BT’s network should attract the PPM surcharge. Oftel also considers that call types that are not specifically excluded in the Functional Specification should also attract the PPM surcharge (such as calls to the 05X corporate numbering range), since the list of included call types is not exhaustive. Oftel considers that calls to the FRIACO and Surftime number ranges should not attract the PPM surcharge, as these calls are clearly not relevant according to the above definitions. 3.27 Oftel notes that Condition 50A refers to a ‘type’ of call available for CPS being ‘relevant’ for the PPM surcharge, and does not mention calls from certain categories of subscribers in this context. 3.28 BT has suggested that calls made by the customers of its Social Telephony schemes should all be excluded from the CPS surcharge since CPS is not available to these customers for policy reasons. Oftel agrees that the CPS surcharge should not apply to calls made by these customers but considers the fact that Social Telephony users are unable to make CPS calls as only indirectly being a justification for this. Oftel believes that the CPS surcharge should not apply to calls made by these customers because the price of calls made by Social Telephony Scheme customers will not be subject to additional competitive pressures by the introduction of CPS. 3.29 To see why this is the case it is necessary to consider each kind of Social Telephony Scheme currently offered by BT. These are (1) the ‘In Contact’ scheme; and (2) the ‘Low User Scheme (LUS)’. 3.30 Under the In Contact scheme, customers pay up front for a bundle of access, which is subsidised, and call credits, which are charged at the same price as BT Chargecard credits. Calls made under the In Contact scheme should therefore not be subject to the CPS surcharge, in the same way as standard BT Chargecard calls are not subject to the charge (see below). 3.31 LUS is BT’s main Social Telephony scheme and works on the basis of users receiving a rebate on BT’s standard rental charges if their call charges fall below a minimum level of £15.95 per month. The user is paid a rebate of 1.08p for every 1.0p that his or her total call charges fall below this level. Oftel’s monitoring of this scheme entails ensuring that the bottom 21% (in terms of usage) of BT’s subscriber base would be better off under this scheme. Therefore BT is, to some extent, free to choose the level of the rebate (the ‘1.08p’ quoted above) within certain boundaries. The introduction of CPS will partially benefit some LUS users because of lower call charges. However, the nature of BT’s obligation to offer this rebate (as described above) is such that it is in a position to change the size of its rebate provided that the bottom 21% of subscribers would be better off under the scheme. Because of this Oftel is not persuaded that the introduction of CPS will introduce a net benefit for LUS customers, and consequently believes that the PPM surcharge should not be applied to call minutes made by LUS customers. 3.32 BT has also suggested that calls made from BT’s public or managed payphones or by using BT’s Chargecard should not attract the CPS surcharge either. Oftel considers that public or managed payphone and Chargecard customers will not benefit from the increased competition created by CPS since there is no link between BT’s general retail tariffs and the tariffs BT charges for public or managed payphones or Chargecard calls. Therefore Oftel considers that the PPM surcharge for CPS should not apply to calls made from BT’s public or managed payphones or by using BT’s Chargecard. 3.33 Oftel reiterates that the fact that Social Telephony Scheme customers, public and managed payphone customers and Chargecard customers are not eligible for CPS is not in itself relevant when considering whether calls from these customers should attract the PPM surcharge. Rather the relevant consideration is whether customers will benefit from the increased competition created by CPS (ie a distribution of benefits argument in the context of Oftel’s six principles of cost recovery). Parties that should bear the PPM surcharge 3.34 There has also been considerable discussion between BT and Oftel as to which parties should bear the PPM surcharge for CPS. BT raised this matter in its response to the second 28-day consultation period on Oftel’s Notice of Proposed Determination (see paragraph 4.16 below). Oftel has devised a set of rules to be applied in order to determine the party to bear the PPM surcharge. These are briefly outlined in the remainder of this section. 3.35 The PPM surcharge that is allocated to CPS eligible calls should (unless made via an indirect access or CPS operator) in general be borne by BT Retail via an internal transfer. 3.36 The following cases are an exception to this: a) In the case of calls originating on BT’s network, but carried by an indirect access or CPS operator, Oftel considers that the indirect access or CPS operator should incur the CPS surcharge (where applicable). The indirect access or CPS operator should itself come to a commercial decision about whether to pass this surcharge on to other interconnected operators, service providers or end users as appropriate. BT may therefore modify some of its charges for indirect call origination to reflect this position. b) In the case of calls originating on BT’s network, but where the end user originating the call uses a Calls and Access service provider, the surcharge should be incurred by the Calls and Access service provider, who can make a commercial decision about whether to pass this surcharge on to the end user. Calls and Access service providers can use CPS, and can also benefit from the increased competition in retail tariffs introduced by CPS. BT may therefore add the CPS PPM surcharge to its bills to Calls and Access service providers. For the avoidance of doubt, if the Calls and Access service provider uses a CPS or indirect access operator, then part (a) above takes precedence, and the surcharge should be borne by the CPS or indirect access operator for all Relevant Calls, including NTS. The CPS or indirect access operator can come to a commercial decision about whether to pass the surcharge on to the Calls and Access service provider. c) In the case of NTS calls (including free to caller, local rate, national rate and premium rate calls), Oftel will follow the approach set out in its February 1999 Statement. This Statement concluded that, for NTS calls, the terminating operator should bear the CPS PPM surcharge, and that this could be achieved by adding the surcharge to the amount retained by the originating operator for call origination. Oftel notes that the analysis in the February 1999 Statement was carried out on the basis of both the NTS arrangements extant at that time, and the potential new NTS arrangements that were subsequently adopted. The analysis showed that the same conclusions would be drawn, regardless of whether the old or new NTS rules were to apply. For a full explanation of the economic rationale for this conclusion, the reader is referred to Oftel’s February 1999 Statement. For the avoidance of doubt, Oftel considers that if the NTS call terminates on BT’s network, then BT Retail should incur the PPM surcharge, and if the NTS call terminates on an OLO network, then the OLO network at the point the call exits BT’s network should incur the charge. BT may therefore revise the charges made to OLOs to reflect this position. The exception to this is NTS calls that are made via CPS or indirect access, in which cases part (a) above again takes precedence and the CPS or indirect access operator should incur the surcharge, as described above. 3.37 In the case of calls to mobile telephones, Oftel believes that these calls should be treated in the same way as calls to fixed operators ie the surcharge should be borne by BT Retail via an internal transfer unless made via a CPS or indirect access operator. 3.38 BT has previously suggested that for calls to mobile, the terminating operators at exit from the BT network (ie the mobile operators) should bear the CPS PPM surcharge. In making this suggestion BT has correctly stated that retention for calls to mobile originating on its networks are currently capped by the 1998 MMC investigation and that the CPS PPM surcharge was not included in the ‘cost stack’ at the time the size of BT’s retention was determined. 3.39 However, this argument ignores the following factors:
3.40 In the light of the above considerations, Oftel believes that, contrary to BT’s arguments, the CPS PPM surcharge on calls to mobile phones should be borne by BT retail or the Calls & Access service provider (unless made via a CPS or indirect access operator). 3.41 The table below summarises the types of call subject to the PPM surcharge, and the parties that should bear the surcharge.
The consultation process 4.1 The Director has power to determine the level of the PCPS and ICPS surcharges under Condition 50A.8 of BT’s Licence. Where he does so, the long consultation procedure set out in paragraph 6 of Part 1 of Schedule 1 of BT’s licence must be adhered to (see Condition 50A.10). 4.2 BT published its proposed PCPS and ICPS surcharges to the Industry on 26 September 2001. BT proposed that the total surcharge for both ICPS and PCPS should be 0.0113 pence per minute (prior to the application of any time of day gradient). No agreement had been reached at that point between BT and the Industry on the appropriate level of surcharges for PCPS or ICPS, although Oftel welcomed the fact that positive discussions were likely. Oftel's Notification of Proposed Determination 4.3 In the interests of avoiding delay in the event that a Determination was to be necessary, Oftel began the consultation process for determining the surcharges in September 2001, since at that time no agreement had been reached between BT and OLOs as to the final charges. On 28 September 2001, Oftel published a Notice of Proposed Determination in relation to surcharges for the provision by BT of Carrier Pre-selection (‘CPS’) Facilities. The Notice informed all interested parties that the Director General was considering imposing a draft decision on these surcharges in the light of the outcome of consultation if the parties involved did not reach a commercial agreement. Representations received during initial 28-day consultation 4.4 After publication of the Notice, there was a 28-day period during which all interested parties were able to make representations on the Notice. Oftel received five representations during this period from: BT, Centrica, COLT, the CPS Costs Sub-Group, and Tiscali. These representations are available on Oftel’s website, and from Oftel’s Research and Intelligence Unit. Appointments to view written comments in Oftel’s Research and Intelligence Unit must be made in advance (tel: 020 7634 8761, fax: 020 7634 8946). The BT response to Oftel’s initial Notice 4.5 BT simply noted Oftel’s Notice of Proposed Determination and reiterated the hope (as expressed in Oftel’s Notice) that the surcharges could be agreed between BT and the Industry without the need for a Determination. Oftel does not consider that a substantive response is required to this point. The Centrica response to Oftel’s initial Notice 4.6 Centrica raised the following points in its response: a) Centrica hoped that an agreement on the level of surcharges could be reached between BT and the Industry, but felt that the asymmetry of information and negotiating power made this unlikely. Centrica hoped that both the PCPS and ICPS components of the surcharge could be further reduced, particularly through consideration of BT’s ‘sunken inefficiencies’, which might make BT’s actual costs higher than those of an efficient operator. b) Centrica noted that the CPS product might be modified in future, and that a mechanism should exist for BT’s further ‘set-up’ costs in respect of such modifications to be included within the surcharge arrangements. c) Centrica suggested that BT should not begin to impose the CPS surcharge until existing proposed CPS process modifications are implemented, as, in Centrica’s view, it is not clear that a fully functioning CPS product has been delivered yet by BT. Centrica considered that a delay to the start date of surcharge recovery would give BT an incentive to complete the agreed process improvements. d) Centrica also endorsed the CPS Costs Sub-Group response (see below), and particularly emphasised the need for the ICPS surcharge to be based on actual ICPS outpayments from BT. 4.7 Oftel has considered these points and come to the following conclusions: a) The issue of BT’s ‘sunken inefficiencies’ is wider than the CPS product and indeed is the subject of on-going exploration by Oftel. The extent to which the existing price controls on BT provide incentives for BT to improve its efficiency needs to be considered in addition. It is not therefore appropriate for Oftel to consider this issue further in the context of this determination. b) The subject of cost recovery for future CPS process improvements has been discussed in the various CPS industry groups. Oftel has circulated a paper outlining its position on this issue. To reiterate, for the avoidance of doubt, Oftel has stated that future process improvements will be considered part of BT’s regulatory obligations for CPS (and hence subject to a determined cost recovery) if they pass an overall cost-benefit test, taking into account costs and benefits to BT, industry and consumers. Should a process improvement pass such a test, the precise mechanism for cost recovery would need further consideration on a case-by-case basis. In any event, Oftel’s ‘six principles of cost recovery’ (as set out in Oftel’s February 1999 statement) would apply. c) Oftel considers that with the launch of CPS Phase 2, the UK has met its obligations for CPS under European Directive 98/61/EC. Oftel further considers that the Phase 2 CPS product does represent a fully functioning CPS product, and would point out that the existing CPS processes were agreed by the Industry, and were not in any sense imposed by BT or Oftel. Given that ICPS has been available since April 2000, the commencement of ICPS cost recovery for BT has already been significantly delayed. It is clearly important that BT has an incentive to complete the CPS process improvements currently being agreed in the CPS industry groups. However it is difficult for Oftel to understand the value of placing an incentive on BT in isolation, when the Industry also needs to complete various actions (eg resolving process details, documenting the changes, preparing specifications and modifying internal systems) in order for the work to be completed on schedule. For these reasons, Oftel considers that it is appropriate for the surcharge to be imposed as soon as is reasonably practicable after 1 April 2002. d) The issue Centrica raises in relation to ICPS outpayment volumes was also raised by the CPS Costs Sub-Group (see below). There are three components included in the ICPS costs in BT’s surcharge proposals: ICPS autodialler payments, ICPS Programme Management costs and the costs of introducing ICPS order handling facilities (excluding the file transfer process for which separate cost recovery arrangements are in place). The ICPS autodialler payment costs were initially based on forecasted ICPS orders, since ICPS orders only started in June 2001. However, as actual ICPS order data became available, BT produced several iterations of its surcharge proposals replacing forecast data with actual data. The CPS surcharges set in the draft Determination were based on the latest available actual ICPS order volumes at that time, only using forecasts where actual data was not yet available. The ICPS order volumes used to calculate the PPM surcharge in this final Determination have been slightly modified in the light of more up-to-date data supplied by BT since the draft Determination was published. Oftel considers the ICPS order volumes used to be reasonable, and that the balance between actual and forecast order data is also reasonable given the dynamic nature of ICPS order volumes during the time that both the draft and final Determinations were being prepared. The COLT response to Oftel’s initial Notice 4.8 COLT raised the following points in its response: a) COLT asked for clarity on the reasons for the variation in the PPM surcharge between different documents, and on what the total costs to be recovered are. b) COLT stated that ‘the draft determination does not address the need to ensure that BT passes the surcharge on BT-to-BT calls directly through to its retail consumers’. COLT was concerned that the retail price controls might make this impossible, and that if BT did not pass the surcharge on, this would amount to cross-subsidy and would have anti-competitive effects in COLT’s view. 4.9 Oftel’s response to the points raised by COLT is as follows: a) Oftel points out to COLT that the calculation of the CPS PPM surcharge has been an iterative process, with the total costs and consequential surcharge figure being gradually established over time. Last year’s Albera report quoted total cost figures and a PPM figure based on the best estimates of costs and traffic available at that time. However, Oftel did not determine the PPM surcharge in its January 2001 PCPS determination because it acknowledged that better estimates of costs and traffic would be available closer to the time that the PPM surcharge was to commence, namely in December 2001. Oftel gave an indicative figure of 0.00845 for the PCPS component of the PPM surcharge in its January 2001 determination. The major changes from the Albera report figures were due to revised traffic forecasts (to exclude FRIACO and Surftime minutes) and some additional switch modification costs. Subsequent to January 2001, Oftel has been in renewed discussions with BT as to the PPM surcharge. On 26 September 2001, BT proposed a combined ICPS and PCPS surcharge to Industry of 0.0113 pence per minute (representing a base figure prior to application of the tariff gradient). On 30 November 2001, BT proposed a combined ICPS and PCPS surcharge to Industry of 0.0111 pence per minute (again prior to application of the tariff gradient). The figures in Oftel’s draft Determination were calculated by applying the standard BT tariff gradient to this figure. On 15 January 2002, BT proposed a combined ICPS and PCPS surcharge figure to Oftel of 0.0105 pence per minute (prior to application of the tariff gradient). Figures in this final Determination have been calculated by applying the standard BT tariff gradient to this latest base figure from BT. b) The issue of whether BT will pass on the PPM surcharge to its retail customers is for BT to decide. Oftel will be concerned to ensure that there is no margin squeeze on BT’s retail prices in the event that the surcharge is not passed on (COLT’s reference to a cross-subsidy does not appear to be relevant or appropriate to Oftel). Given the magnitude of the surcharge, Oftel’s initial comment (without fettering the Director General’s discretion) would be that a margin squeeze would appear unlikely. Oftel would not therefore automatically consider that BT’s decision not to pass the PPM surcharge on to their retail customers would have an anti-competitive effect. The CPS Costs Sub-Group response (on behalf of 13 alternative operators) to Oftel’s initial Notice 4.10 The CPS Costs Sub-Group response contained the following points: a) The CPS Costs Sub-Group asked whether the ICPS costs in BT’s surcharge proposals were based on forecasted or actual costs. b) The question was also raised as to why the PCPS costs in BT’s surcharge proposals appeared to have risen by about £6 million from indicative figures quoted earlier in the year. c) The CPS Costs Sub-Group felt that the forecasted minutes over which the surcharge was to apply appeared to be low, and sought guidance on how this volume of minutes had been derived. d) The Group also requested greater transparency as to how the discounted cash flow (DCF) calculation had been used to arrive at the ‘Post DCF’ figure in BT’s proposal. e) Echoing Centrica, the Group queried whether the costs for which BT was seeking recovery were those of an efficient operator. f) Also echoing Centrica, the Group also suggested that Oftel might defer its determination of surcharges until April/May 2002, by which time ICPS costs would be finalised and, in the respondent’s view, there would be a "fully operational CPS product" following process enhancement. 4.11 Oftel has considered these points carefully. Oftel’s response is as follows: a) Oftel has addressed the issue of ICPS costs, and whether these are forecasts or actuals, in its response to Centrica (see above). b) In September 2000, BT published an early PCPS surcharge proposal to Industry as part of the overall discussions of the charges for PCPS that were taking place at that time. In that proposal, BT stated that it estimated the costs of system set-up for PCPS to be £52.150 million. In its September 2001 surcharge proposals to Industry, BT indicated that its PCPS system set-up costs were £58.788 million. Oftel has confirmed with the CPS Costs Sub-Group that these figures are the origins of the Sub-Group’s concerns about the apparent £6 million increase in PCPS costs. Oftel has investigated this increase carefully, and has found that the main reason for the apparent increase is that these figures are not comparing like with like (although Oftel acknowledges that this is not clear in BT’s surcharge proposals). The figures given by BT in September 2000 were prior to any present value calculations, and took no account of the fact that some costs were incurred in the past (in some cases up to three years previously). The figures given by BT in September 2001 represented the total cash spend by BT in today’s terms, taking into account significant payments by BT in the past. The underlying PCPS costs figure in BT’s September 2001 proposals (prior to any present value calculation) was in fact £51.453 million. Against this background, there have been some subsequent variations in PCPS costs used by BT in further iterations of the surcharge calculation, mostly due to the actual and forecasted labour used by BT for PCPS system set-up being higher than originally forecast. Oftel has been monitoring these changes carefully and ensuring that there is a reasonable explanation for each change. c) Oftel acknowledges that the calculation of the PPM surcharges for both ICPS and PCPS is very sensitive to the forecasted volume of Relevant Call minutes. Given that the surcharge is to be imposed over a period of 5 years, Oftel considers it inevitable that there will be significant uncertainty in any traffic forecast that BT uses. Oftel has investigated the traffic forecasts that BT has proposed using, and has sought detailed information about the assumptions BT has used in preparing its forecasts. Oftel has been particularly concerned to ensure that the traffic forecasts used in the CPS surcharge calculations are consistent with those that BT has used elsewhere (eg in the price control calculations). Oftel believes that the traffic forecasts used are consistent with those used by BT elsewhere. Oftel believes that the traffic forecasts may appear low to some operators because traffic to ranges for unmetered interconnect Internet access (ie the 0844 04yyxxx and 0808 99yyxxx number ranges which are excluded from CPS) is excluded from the forecasts (since this traffic would not be considered ‘relevant’ for surcharge recovery). d) The CPS Costs Sub-Group has requested greater transparency as to how the discounted cash flow (DCF) calculation had been used to arrive at the ‘Post DCF’ figure in BT’s surcharge proposal. In particular, the Group was keen to understand why BT’s costs of about £80 million allow BT to recover over £100 million over the 5-year recovery period. Oftel considers that in view of the length of the recovery period, it is appropriate to set the PPM surcharge so as to recover the present value of both ICPS and PCPS costs. This is standard financial practice for costs recovered over lengthy periods. With discounted cash flow calculations, the present value of payments to be received in the future is always lower than the ‘face value’ of those payments, hence the difference between BT’s costs of £80 million today and the £100 million BT will recover during the next 5 years. Oftel has seen and checked detailed month-by-month present value calculations of BT’s cashflows in relation to CPS system set-up costs and surcharge recovery. These discounted cash flow calculations are based on the standard regulatory cost of capital of 13.5%. Oftel is satisfied that the discounted cash flow calculations have been carried out correctly. e) The last two points raised by the CPS Costs Sub-Group (whether BT’s costs are those of an efficient operator and whether Oftel would consider delaying the determination of CPS surcharges until a "fully operational" CPS product is available) were also raised in Centrica’s response. The reader is referred to Oftel’s position on these two points already given above in the context of Centrica’s response. Tiscali UK’s response to Oftel’s initial Notice 4.12 Tiscali expressed concern at the wide definition of Relevant Calls that would be subject to the CPS pence-per-minute surcharge. In particular, Tiscali felt that it was unfair for this surcharge to be incurred on all calls originating on BT’s network (including those carried by indirect access operators and BT retail) as Tiscali believed that only CPS operators would benefit from CPS. Tiscali suggested that the surcharge only be payable by CPS operators, not by BT or other operators (eg indirect access operators) originating calls on BT’s network. 4.13 Oftel’s response to the concerns raised by Tiscali is as follows: the framework for CPS cost recovery is well established. Oftel has previously consulted on this framework – starting with a consultation document in July 1998, followed by a draft Statement in November 1998 and a final Statement in February 1999. Oftel is currently consulting on the level of the surcharge, not the existence of the surcharge, nor what calls should be considered ‘relevant’ for the purposes of this surcharge. Oftel’s decision that BT’s system set-up costs should be recovered through a surcharge on all ‘relevant’ minutes, and Oftel’s decision as to what minutes are ‘relevant’ are set out in Oftel’s February 1999 Statement. Oftel’s decisions were based on analysis of sound economic principles that have been used by Oftel in many other contexts, for example, number portability. Oftel’s six ‘principles of cost recovery’ (cost causation; distribution of benefits; cost minimisation; effective competition; reciprocity and practicability) have been accepted to such an extent that they have also been used by the Competition Commission. For a detailed explanation of the six principles, their application to PCPS and Oftel's reasoning leading to its chosen cost recovery methodology, please refer to Oftel’s statement Implementation of Carrier Pre-Selection in the UK, February 1999. 4.14 Oftel would highlight in particular in this context Oftel’s analysis of the distribution of benefits. Tiscali believes that CPS system set-up costs should be borne entirely by CPS operators, who will be (in Tiscali’s view) the sole beneficiaries of the introduction of CPS. Oftel takes a different view on the distribution of benefits, namely that all BT customers, including those not using the CPS service will benefit from the competitive impact of CPS. This is because even BT customers not using the CPS service (including those who already use other indirect access services but not CPS) will benefit from the competitive impact (eg lower prices) of CPS. Recovery of all the costs of CPS via CPS traffic, as suggested by Tiscali, would therefore be inefficient from the distribution of benefits perspective. Oftel’s analysis of the principles of effective competition, cost minimisation and practicability also support Oftel’s decision to introduce a CPS surcharge on all BT originated minutes. Oftel’s response to representations received during the second 28-day consultation period 4.15 Following the initial 28-day period for comments on Oftel’s Notice of Proposed Determination, a subsequent 28-day period was allowed for interested parties to make observations on the comments received during the first consultation period. The second 28-day period ended on 29 November 2001. During this period, Oftel received one representation, being that from BT. This representation is available on Oftel’s website at:www.oftel.gov.uk/publications/responses/2001/cps_not280901/bt_oncomms.rtf. It is also available from Oftel’s Research and Intelligence Unit. Appointments to view written comments in Oftel’s Research and Intelligence Unit must be made in advance (tel: 020 7634 8761, fax: 020 7634 8946). 4.16 BT’s response during the ‘comments on comments’ period for Oftel’s Notice of Proposed Determination covers the following issues:
The draft Determination 4.17 Having considered all representations and observations received, the Director decided on 19 December 2001 to publish a draft Determination of surcharges for the provision by BT of carrier pre-selection facilities for the following reasons:
4.18 All interested parties had a further 14-day period to comment on the draft Determination, ending on 13 January 2002. This period was calculated by ignoring all days between 22 December 2001 and 1 January 2002 inclusive, to take account of the Christmas period. At the end of that period, the Director considered all comments received and is now informing interested parties of his final Determination. Representations received during the 14-day consultation on the draft Determination 4.19 Oftel received four representations during the consultation period on its draft Determination of CPS surcharges from: BT, the CPS Costs Sub-Group (on behalf of 10 alternative operators), Cable and Wireless and Centrica. These representations are available from Oftel’s website, and from Oftel’s Research and Intelligence Unit. Appointments to view written comments in Oftel’s Research and Intelligence Unit must be made in advance (telephone 020 7634 8761 fax 020 7634 8946). The BT response to Oftel’s draft Determination 4.20 BT raised the following points in its response: a) BT commented that it did not expect that the duration of the surcharge would be determined at five years, rather that the surcharge would continue until BT’s CPS system set-up costs had been recovered in full. BT suggested that the wording of the Determination be made more flexible to reflect this position, and that an explanation as to the target recovery period could be given in the Explanatory Memorandum. b) BT pointed out that it was unlikely that BT would be able to commence imposing the surcharge from the date proposed in the draft Determination. This was due to the time taken to implement the necessary changes in BT’s interconnection agreements with other operators. BT suggested instead that some wording be included in the Determination to allow BT to commence raising the surcharge ‘as soon as practicable’ after the date on which the Determination takes effect. c) BT noted that the price control on BT’s retention for calls to mobile expires on July 31 2002, not April 2002 as Oftel stated in the draft Determination. d) BT agreed with Oftel’s position that calls made from public or managed payphones, BT Chargecard calls and calls made by customers using BT’s Social Telephony schemes should not be subject to the PPM surcharge. BT repeated its position that calls from Social Telephony customers fell outside the definition of ‘Relevant Calls’ contained in the BT licence. e) BT agreed with Oftel’s position that the CPS surcharge on NTS calls should be borne by the terminating operator at the exit from BT’s network. f) BT disagreed with Oftel’s position that new number ranges (such as calls to the 05X corporate numbering range) should be assumed to be included in the CPS ‘all calls’ option. BT also felt that until all (or most) CPS operators had agreed to handle a particular number range, no surcharge should be incurred on calls to that number range. g) BT pointed out that the time of day gradient which had been used to calculate the applicable PPM surcharge for day, evening and weekend periods from the base PPM figure is subject to change. Therefore, in future, it might be necessary to change the PPM surcharge figures in the Determination to reflect changes in the time of day gradient. BT noted that under the wording of the draft Determination, a re-Determination would be required if the time of day gradient changed. Oftel understands that BT is therefore proposing that the Determination allow the PPM figures to vary in accordance with future changes in the time of day gradient without the need for the Director to issue a new Determination, provided that the time scale for recovery does not materially change. h) BT suggested that the Determination explicitly allow for an annual review of the surcharge to ensure that cost recovery was on target to be complete after five years, and that the wording of the Determination be modified to reflect this provision. 4.21 Oftel has considered the points raised by BT and has come to the following conclusions: a) BT is correct in its understanding that the surcharge shall apply until BT as fully recovered its CPS system set-up costs. Oftel considers that this was made clear in paragraph 2.12 of the Explanatory Memorandum to the draft Determination (which is repeated in this final Determination at paragraph 2.12) where Oftel states "a surcharge will apply only whilst there is an unrecovered amount. The actual recover period could extend beyond five years or expire before then…" Oftel considers that for the purposes of legal certainty and transparency, the Determination needs to explicitly state that the recovery period shall be five years, while the Explanatory Memorandum explains that the Director will re-determine the recovery period as necessary to ensure full recovery (and not under- or over-recovery). b) Oftel notes BT’s comments about modifications that BT will need to make to interconnect arrangements to allow BT to raise the PPM surcharge appropriately. Oftel has therefore determined that the PPM surcharge should take effect "as soon as is reasonably practicable after 1 April 2002". c) Oftel notes BT’s comment in relation to the expiry date for the price control on BT’s retention for calls to mobile, and has modified paragraph 3.39 to reflect this expiry date. However, Oftel does not consider that this slightly later expiry date materially changes Oftel’s argument that the CPS PPM surcharge on calls to mobile phones should be borne by BT retail or the Calls and Access service provider. d) Oftel notes BT’s agreement with Oftel’s position in relation to calls from payphones, calls made using BT Chargecard and calls made by Social Telephony scheme customers. However, for the avoidance of doubt, Oftel does not agree with BT’s position that calls made from Social Telephony scheme customers are outside the definition of ‘Relevant Call’ within BT’s licence. As Oftel explained in paragraphs 3.24 to 3.30 of the draft Determination (and has repeated in this final Determination), Condition 50.A of BT’s licence refers to a ‘type’ of call available for CPS being a ‘Relevant Call’ for the purposes of the CPS surcharge. It is clear that in the context of BT’s licence and the CPS Functional Specification, types of call refer to the destination number dialled, not to the nature of the subscriber making the call. However, as Oftel has explained, calls made by Social Telephony scheme customers are excluded from the CPS surcharge because consumers making such calls are unlikely to benefit from the introduction of CPS. e) Oftel notes BT’s agreement with Oftel’s position in relation to the CPS surcharge for NTS calls, and does not consider that a substantive response is required. f) Oftel considers that the CPS Functional Specification explicitly states which types of call are to be excluded from the CPS ‘all calls’ option, and does not therefore attempt to explicitly list all the different types of call which are included in the ‘all calls’ option. Therefore, new numbering ranges (such as the 05X range) that are not explicitly excluded are in fact included in the ‘all calls’ option. BT correctly notes that the introduction of new number ranges in future will therefore have to include consideration of the impact on CPS, but the default assumption should be that these new number ranges are included in the ‘all calls’ option. The fact that there are currently concerns surrounding whether certain alternative operators will carry the 05X numbering range is not relevant to the question of whether the 05X range should be included in the CPS ‘all calls’ option. Oftel is considering this issue elsewhere, and it is not appropriate to discuss it further in this Determination. g) Oftel considers that the time of day gradient changes infrequently enough not to introduce a significant burden on Oftel, BT and the Industry if the CPS PPM surcharge needs to be redetermined as a consequence. Oftel considers that there is sufficient scope for review as set out in Chapter 5 of this Determination if the time period for recovery begins to vary materially from the five year target, or the surcharge appears to be materially under- or over-estimated as a result. Oftel therefore believes that it is unnecessary to allow the PPM surcharge to vary in accordance with changes to the time of day gradient without the need for a re-Determination, as BT appears to be proposing. h) Oftel considers that there is sufficient scope for reviewing the PPM surcharge set out in Chapter 5 below, and that it is therefore unnecessary to bind the Director to review the surcharge annually. Any material variations in the recovery period or the level of the surcharge are already covered by the existing text of Chapter 5. The CPS Costs Sub-Group response to Oftel’s draft Determination 4.22 The CPS Costs Sub-Group response contained the following points: a) The Sub-Group noted the inconsistency between the effective date given in the draft Determination (1 February 2002) and the statement in paragraph 4.7 of the draft Determination that the surcharge ‘be imposed from the launch date of CPS Phase 2’. The Sub-Group also noted that the draft Determination proposed that the start date of the surcharge be 1 February 2002, and that this would not give BT sufficient time to make the necessary notifications of changes to its charges. b) The Sub-Group noted that the actual ICPS order volume should be included in any future review of the PPM surcharge. c) The Sub-Group noted that the Sub-Group had not seen any evidence that BT’s costs are incurred efficiently, even if incurred correctly. d) The Sub-Group commented that if the time of day gradient varies during the life of the surcharge, then the surcharge should be modified to reflect this change. e) The Sub-Group considered that Social Telephony scheme customers should enjoy the benefits of increased competition created by CPS (even if not eligible to use CPS), and that therefore calls from Social Telephony customers should incur the PPM surcharge. f) The Sub-Group wished to understand how BT will exclude Social Telephony calls, calls from BT’s public and managed payphones and calls made using BT Chargecard from the PPM surcharge. g) The Sub-Group disagreed with Oftel’s position that in the case of calls made via a Calls and Access service provider, the service provider should incur the surcharge rather than BT Retail. The Sub-Group considered that it should be up to BT Retail whether to pass on the surcharge to the service provider, in the same way that it would be up to the CPS operator or Indirect Access operator whether to pass on the surcharge if the service provider has chosen to use CPS or Indirect Access for call conveyance. h) The Sub-Group considered that Oftel is using the ‘old’ NTS rules rather than the new NTS arrangements set out in Oftel’s December 1999 Statement The Relationship between Interconnection Charges and Retail Prices for Number Translation Services. The Sub-Group considered that the PPM surcharge should be considered as a cost of call origination not termination. The Sub-Group does not understand how NTS terminating operators can benefit from CPS. i) The Sub-Group supported Oftel’s position that the surcharge on calls to mobile should be borne by BT Retail, but did not believe that the surcharge on calls to mobile should be passed to the Calls and Access service provider if one is present. j) The Sub-Group noted that cost recovery for alternative operators using ICPS has also been delayed, as well as the delay to BT’s cost recovery for CPS. 4.23 Oftel’s response to the points raised by the CPS Costs Sub-Group is as follows: a) Oftel has corrected the inconsistency between the effective date for the Determination and the statement in paragraph 4.7 of the draft Determination. This does not change the substance of the Determination. b) Oftel acknowledges that the actual ICPS order volume should be included in any future review of the surcharge. See also paragraphs 3.10 and 3.11 above. c) Oftel has responded to the issue of BT’s efficient costs (as raised by Centrica and the Costs Sub-Group in their responses during earlier phases of this consultation). Oftel has nothing to add to this position. d) In relation to variations in the time of day gradient during the lifetime of CPS, Oftel has outlined its position at paragraph 4.21 (g) above. e) Oftel has expanded its explanation as to why calls from BT’s Social Telephony scheme customers should be excluded from the CPS surcharge at paragraphs 3.29 – 3.31 above. These paragraphs explain why Oftel is not persuaded that the introduction of CPS will produce a net benefit for BT’s Social Telephony scheme customers, and therefore why their calls should not attract the surcharge. f) BT has assured Oftel that it is possible for BT to accurately identify calls from Social Telephony customers, along with calls from payphones and calls made via BT Chargecards, and to exclude them from the surcharge. Oftel suggests that if alternative operators require further details as to the precise mechanisms for doing this, that they approach BT directly. g) Oftel considers that for calls originated from a Calls and Access end user (and not routed by CPS or Indirect Access) it is necessary to explicitly determine that the Calls and Access service provider should incur the surcharge. This is because, whilst BT is not formally required to offer the Calls and Access product in its license, its charges to Calls and Access service providers are monitored by Oftel (these are currently on a "retail minus" basis). BT is not therefore free to choose whether to pass the surcharge on to Calls and Access service providers. If the service provider has chosen to use a CPS or Indirect Access operator, then the CPS or Indirect Access operator can choose whether or not to pass the surcharge on. h) Oftel has clarified the wording of paragraph 3.36 (c) above to demonstrate that it is irrelevant whether the old or new NTS rules are considered when deciding how the surcharge on NTS calls should be incurred. Oftel’s February 1999 statement on CPS analysed the NTS rules in place at the time, and the proposed new NTS rules (which came into force via the December 1999 statement). Oftel concluded that the surcharge should be incurred on the terminating operator in either case. As outlined in Oftel’s February 1999 statement on CPS, the introduction of CPS can be expected to benefit terminating operators because retail prices for NTS services are closely related to the prices charged for other services (eg 0845 calls are priced at the local call rate). The benefit from CPS putting pressure on the retail uplift will therefore tend to feed through to the terminating operator and its customers, meaning that the terminating operator should bear the cost of the surcharge. i) In the case of Calls and Access end users making calls to mobile phones, Oftel considers that the reasoning presented earlier in this paragraph under item (g) applies. j) Oftel agrees with the Sub-Group’s point that cost recovery for ICPS was delayed as an ICPS order handling system was not introduced until mid-2001 (although diallers installed from April 2000 onwards were obviously eligible for ICPS payments). However, total ICPS out-payments affected by this delay are at least an order of magnitude less than BT’s costs for CPS system set-up. Oftel does not therefore consider that delays in ICPS payments to alternative operators justify any further delays in commencement of the PPM surcharge. The Cable and Wireless response to Oftel’s draft Determination 4.24 Cable and Wireless made the following points in its response to Oftel’s draft Determination: a) C&W believes that a more detailed plan for reviews of the surcharge is necessary, and that Oftel should commit to a review two years after the surcharge is implemented, whether or not Oftel has received a formal request. Not to do so could, in C&W’s view, lead to disputes if actual out-turns prove to be significantly different from forecasts, particularly in relation to traffic volumes and ICPS order volumes. C&W considers that there is a risk of over-recovery due to under-estimation of traffic volumes if this issue is not addressed. b) C&W argues that the application of the tariff gradient makes the surcharge unnecessarily complicated, and the timing of recovery more difficult to predict. C&W considers that customer should benefit approximately equally from CPS regardless of the time of day or week a call is made. C&W appears therefore to argue that the time of day gradient should not be applied to the PPM surcharge. c) C&W raises the issue of whether BT’s efficiency in relation to CPS is addressed adequately (if at all) through the price control, and notes that if BT provides CPS in an inefficient manner, this will reduce the benefits of CPS to consumers. d) C&W questions whether operators have had sufficient visibility of the detailed methodology for calculating the surcharge. C&W asks whether some data may have unnecessarily been considered commercially confidential and in consequence not shared with alternative operators. In this context, C&W notes that it is difficult for C&W to comment in detail on the draft Determination. 4.25 Oftel’s response to the points raised by C&W is as follows: a) Oftel considers that the provisions for review of the PPM surcharge outlined in Chapter 5 of this Determination are adequate. Oftel can reassure C&W that Oftel will be receiving regular reports from BT during the lifetime of the surcharge as to how cost recovery is progressing. Oftel has acknowledged that the calculation of the surcharge is very sensitive to the forecasted traffic volumes. However, Oftel does not consider that there is a risk of over- or under-recovery of the costs of CPS system set-up, as Oftel has made it clear that the surcharge will cease as soon as BT has recovered its costs (whether this takes more or less than the target period of five years). Oftel does not therefore see the need to commit to a specific schedule of surcharge reviews, given that these reviews could prove to be unnecessary. Also, the provisions for review given in Chapter 5 mean that Oftel will consider the need for a review at any stage during the recovery period if there are material differences becoming apparent between the actual and targeted recovery. b) Oftel has modified the wording of paragraph 3.20 of this Determination to clarify why Oftel considers it important to apply a time of day gradient to the PPM surcharge. To ensure competitive neutrality, it is important that the surcharge represents the same proportion of the relevant wholesale tariff (rather than being a flat surcharge regardless of the time of day). Making the surcharge the same proportion of the wholesale tariff at all times of the day and week reflects the fact that all customers benefit from CPS regardless of the time of day or week the call is made. Oftel has addressed the issue of changes to the time of day gradient during the lifetime of the PPM surcharge in its response to BT above. c) Oftel notes that the CPS charges are not included in the current price control. However, Oftel also notes that many of the systems that BT uses to provide CPS are shared with other services which are subject to price control, and therefore, as Oftel noted in paragraph 4.7 (a) of the draft Determination "the extent to which the existing price controls on BT provide incentives for BT to improve its efficiency needs to be considered…" Oftel did not at any time state that the question of BT’s efficiency in relation to CPS was entirely addressed through price control. Oftel has established its position in relation to the efficiency of BT’s costs for CPS in paragraph 4.7 of the draft Determination, which has been carried forward into this final Determination, and Oftel has nothing further to add. d) Oftel notes C&W’s view in relation to visibility of the data used by BT to calculate the PPM surcharge. Oftel can assure C&W that Oftel requires BT to justify its decisions not to share data with Industry, and that Oftel carefully scrutinises all data provided by BT in relation to CPS, particularly where this data is not shared with Industry. The Centrica response to Oftel’s draft Determination 4.26 Centrica raised the following concerns in its response to Oftel’s draft Determination: a) Centrica questioned Oftel’s decision to make the Determination take effect from 1 February 2002, and reiterated its view that the surcharge should not be imposed until the CPS product is (in Centrica’s view) ‘fit for purpose’. b) Centrica reiterated its concern about whether BT’s costs for CPS have been incurred efficiently. c) Centrica was surprised by the introduction of a time of day gradient in the draft Determination, and asked why this gradient is felt to be necessary. Centrica also asked for clarity as to h | ||||||||
