31 July 2002

Contents

Consultation details

Draft Determination

Schedule 1

Explanatory memorandum

Annex A – BT’s proposal of 22 April 2002 for revised per-line 18 charges for CPS (excluding FeatureNet, FeatureLine and Embark)

Annex B – BT’s proposal of 30 April 2002 for revised CPS charges for 19 FeatureNet, FeatureLine and Embark

Oftel is publishing a draft Determination on costs and charges for permanent carrier pre-selection (PCPS), following the consultation period on Oftel’s Notice of Proposed Determination of 13 May 2002. These charges may change before the final Determination in the light of responses to this draft.

Comments are invited in writing on the draft Determination by the end of 14 August 2002. Written comments will be publicly available from Oftel’s Research and Intelligence Unit and on Oftel’s website, except where clearly indicated to be confidential. Respondents are therefore asked to separate out any confidential material in a clearly marked annex. In the interests of transparency, respondents are requested to avoid confidentiality markings wherever possible. Appointments to view written comments in Oftel’s Research and Intelligence Unit must be made in advance (tel: 020 7634 8761, fax: 020 7634 8946).

Comments should be addressed to:

Caroline Wallace
Chief Engineering Advisor
Oftel
50 Ludgate Hill
London
EC4M 7JJ

tel: 020 7634 8917
fax: 020 7634 8924
e-mail: caroline.wallace@oftel.gov.uk

Following the consultation period, the Director General will make a final Determination.

TELECOMMUNICATIONS ACT 1984

DRAFT DETERMINATION PURSUANT TO CONDITION 50A OF THE LICENCE OF BRITISH TELECOMMUNICATIONS PLC RELATING TO PERMANENT CARRIER PRE-SELECTION

(Under Paragraph 6 of Part 1 of Schedule 1 of BT’s Licence)

Whereas:

1. 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;

2. 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);

3. The Telecommunications (Interconnection) (Carrier pre-selection) Regulations 1999 modified the BT licence by inserting a new Condition 50A concerning carrier pre-selection;

4. Regulation 6 (3) of the Telecommunications (Interconnection) Regulations 1997 permits the Director to specify issues which must be covered in an interconnection agreement, or to make a direction that specific conditions be observed;

5. Condition 50A.4 of the Licence permits the Director General of Telecommunications (the Director) to determine the Licensee's charges for providing Carrier Pre-selection Standard Services having regard to BT's reasonable costs;

6. The Director issued a Determination of the charges applicable under Condition 50A.4 for the provision by BT of Carrier Pre-selection Standard Services on 8^th January 2001 (the January 2001 Determination), which specifically excluded charges for BT’s FeatureNet, FeatureLine and Embark customers;

7. The Director issued a Determination of the charges applicable under Condition 50A.4 for the provision by BT of Carrier Pre-selection Standard Services for BT FeatureNet, FeatureLine and Embark customers on 26 November 2001 (the November 2001 Determination);

8. Under Condition 50A.4 the Director may make a determination at any time, or on request;

9. The Director has decided to review the charges set in both the January 2001 and the November 2001 Determinations;

10. Such determinations are subject to the consultation procedure set out in Paragraph 6 of Part 1 of Schedule 1 of the BT Licence;

11. 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 13^th May 2002 inviting comments on his intention to issue a new determination of BT’s charges for providing Carrier Pre-Selection Standard Services;

12. 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.4 OF THE LICENCE, AND HAVING CONSIDERED THE VIEWS OF THE PARTIES, HEREBY MAKES THE FOLLOWING DETERMINATION:

1. The Director has determined that the charges applicable under Condition 50A.4 for providing Carrier Pre-Selection Standard Services and having regard to BT's reasonable costs are those as set out in the attached Schedule 1 of this Determination and further explained in the Explanatory Memorandum to this Determination.

2. The Licensee shall amend its interconnection agreements as appropriate to comply with the terms of this Determination.

3. Words and phrases in this Determination shall have the meanings ascribed to them in the BT licence or the Act as appropriate.

4. This Determination shall take effect on 1 August 2002.

Peter Walker

A person authorised in that behalf under Section 8 of Schedule 1 of the Telecommunications Act.

31 July 2002

Schedule 1

Pursuant to the Determination made under Condition 50A.4 of BT’s licence, BT shall make the following charges for providing carrier pre-selection standard services. The charges have been split into

(a) charges for per operator set-up facilities;
(b) charges for per operator on-going activities; and
(c) charges for per customer line set-up facilities.

The Director has scrutinised BT's most recent CPS charging proposals (dated 22 and 30 April 2002). The Director has indicated in the accompanying explanatory memorandum where and why he agrees with these proposals, and where the Director General has departed from BT's calculations, the reasoning behind the change is also described in the explanatory memorandum. For reasons of commercial confidentiality, the Director is unable to publish detailed calculations.

(a) Charge for per operator set-up facilities
No change. The charge will be as set out in the January 2001 Determination.

(b) Charges for on-going per operator activities
No change. The charge will be as set out in the January 2001 Determination.

(c) Charges for per customer line set-up facilities
The charges are as set out in the following tables. Note that these charges are not cumulative. For example, the only charge that will be made for a simple set-up transaction that is processed successfully will be £3.79.

Charges for per customer line set-up facilities (excluding FeatureNet, FeatureLine and Embark)

Note 1: ‘simple’ covers all current CPS order types.
Note 2: ‘complex’ orders not currently in use.

Charges for per customer line set-up facilities for FeatureNet, FeatureLine and Embark customers

* There is no renumber process for BT’s FeatureNet customers.

CLI = network calling line identity.

MNN = Main Network Number (for FeatureNet). This is the main number of the FeatureNet site in question.

BG = main Business Group number (for FeatureLine). This is the Business Group number associated with the FeatureLine customer in question.

n = number extensions on which CPS is to be provided at the site (for FeatureNet).

n = total number of lines within the Business Group (for FeatureLine and Embark).

Explanatory memorandum

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 by operators with Significant Market Power (SMP). In the UK, British Telecommunications (BT) and Kingston Communications Ltd (KCL) have been determined by the Director General of Telecommunications (the Director) as having 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, have no inherent capacity for CPS. Therefore the UK obtained from the European Commission a delay of 3 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 ‘Permanent CPS’ (PCPS) using software at BT’s switches to route calls to alternative operators was introduced in two phases. PCPS for national and international calls was available on BT’s network from 12 December 2000. Phase two of PCPS, allowing customers to choose PCPS for international, national, both international and national or all calls (excluding certain special categories) was available on BT’s network from 12 December 2001. Implementation of PCPS requires an agreement between BT and the PCPS operators (CPSOs) on how the costs of implementation are going to be recovered. Oftel has developed six principles of cost recovery to help assess the validity of alternative cost recovery mechanisms. The recovery of the costs incurred to implement the functionality of PCPS is achieved by agreeing on a set of charges that reflect the six cost recovery principles. Some of these charges are paid by all operators (system set-up costs) and some are paid only by CPSOs (per customer and per operator costs). For a detailed explanation of the six principles, their application to PCPS and Oftel's reasoning leading to the PCPS cost recovery methodology, please refer to Oftel’s statement Implementation of Carrier Pre-Selection in the UK, February 1999.

1.5 In brief, Oftel’s initial consideration of the cost recovery principles (cost causation; distribution of benefits; cost minimisation; effective competition; reciprocity and practicability) in relation to PCPS leads to recovering the per transaction and the per operator costs from CPSOs. The same principles lead to system set-up costs being recovered through a surcharge on all relevant originating call minutes (thus system set-up costs are borne by BT, CPSOs and all other operators originating minutes on BT's network).

1.6 On 8 January 2001, Oftel issued a Determination of charges for the provision by BT of carrier pre-selection standard services (which, according to the definition in BT’s licence, comprise per operator set-up facilities and per customer line set-up facilities). This Determination explicitly excluded consideration of charges for BT’s FeatureNet, FeatureLine and Embark customers, as CPS functionality for these types of customers had not been developed at that point in time, and as a result, the per line costs were not available. However, by 26 November 2001, Oftel was able to issue a determination of the charges for the provision by BT of carrier pre-selection standard services for BT FeatureNet, FeatureLine and Embark customers, as by that point in time, this functionality had been developed and costs were available. Oftel is using this consultation procedure as an opportunity to bring the per line charges for all types of BT customers together in one place.

Reasons for this Determination

1.7 Since the introduction of PCPS, BT and CPSOs have agreed significant changes to the PCPS ordering process. In particular, it is currently planned that from July 2002, a paper-based order confirmation (known as a ‘reply slip’) will no longer need to be sent by the customer to BT. As a result, some of the costs BT incurs for setting up CPS on a customer’s line (specifically those costs related to receiving and processing the reply slip) will no longer be incurred. The charges determined by Oftel in January 2001 and in November 2001 include these costs, and therefore will not correctly reflect BT’s costs when the new customer ordering process is introduced.

1.8 On 5 April 2002, BT proposed new charges for setting up CPS on customers’ lines, to take effect when the new PCPS customer ordering process is introduced. BT issued a slightly amended version of this proposal on 22 April 2002. On 30 April 2002, BT proposed new charges for setting up CPS on the lines of FeatureNet, FeatureLine and Embark customers. For reference, BT’s proposed new charges are set out in tables in annexes A and B. The existing charges are shown in the same tables in brackets, again for ease of reference.

1.9 Although at the time of writing no CPSO has formally disputed the charges proposed by BT, Oftel considers that it is appropriate for Oftel to follow the required consultation procedure to allow the Director to publish a final Determination of the charges. This will enable the Director (if necessary) to make the Determination as close in time as possible to the introduction of the new customer ordering process from July 2002. This will provide the CPS Industry with certainty as to the per-customer charges for CPS that will apply from July 2002 onwards.

1.10 Oftel therefore published a Notice of Proposed Determination in relation to the charges for CPS Standard Services on 13 May 2002. In this Notice, Oftel proposed to limit the scope of the current Determination to BT’s costs for reply slip handling, and to address wider concerns (such as the appropriate order volumes to use in calculating BT’s per-customer charges) to a further review at a later date. Oftel proposed this approach due to the limited time available to review the charges, in time for a July 2002 launch of the new CPS order handling process (without the reply card). In the Notice, Oftel did not provide further explanation of how the proposed charges were derived. This was because BT had in the past (during the third and fourth quarters of 2000) provided both Oftel and Industry with information about how the current per line charges for CPS were derived (although clearly only Oftel had access to commercially sensitive data).

1.11 Oftel received three responses (from BT, Centrica and WorldCom) during the subsequent 28 day consultation period on this Notice. Oftel published these responses, and sought further comments on these responses on 21 June 2002.

1.12 During the following 28 day consultation period, Oftel received one additional set of comments (from BT). All comments received, and Oftel’s consideration of these responses, are set out in the next section of this explanatory memorandum.

1.13 Oftel has reviewed BT’s proposals and considers that they accurately reflect BT’s changed per-line costs for CPS in the light of the removal of the reply slip from the CPS process. In this draft Determination Oftel is carrying over all the costs and methodology set out in Oftel’s 8 January 2001 Determination, except that the costs relating to reply slip handling have been removed. The per-line charges for CPS in this draft Determination are therefore identical to those proposed by BT in April 2002. Oftel proposes to address wider concerns (such as for example the appropriate order volumes to use in calculating BT’s per-customer charges and provision for bad debt) in a further review at a later date. Oftel is proposing that the new Determination should take effect on 1 August 2002. This is because this is very close to the date on which the new CPS ordering process without the reply card will be introduced, and Oftel understands that it is easiest for BT and CPS operators to implement new charges from the beginning of a calendar month. Also, BT has previously proposed making the new charges from 1 August 2002, and Oftel is not aware of any Industry disagreement with this suggestion.

Comments received

BT’s comments

1.14 BT commented on Oftel’s Notice of 13 May. BT noted Oftel’s intention to review the January 2001 Determination and the November 2001 Determination. BT pointed out that Annex A to Oftel’s Notice referred to complex orders (which hitherto covered CPS orders for customers with ISDN 30 connections). BT stated that the CPS ordering process for these types of connections is to be automated, and that therefore they will no longer incur the complex order charge. However, BT proposed that Oftel determine complex order charges in case there was a need in future to re-introduce this order type.

1.15 In view of BT’s comments, Oftel has determined complex order charges for CPS, but has noted in Schedule 1 to this Determination that the complex order type is not currently in use. Oftel notes that any future proposal by BT to classify CPS orders for certain types of customer connection as complex would be subject to review and if necessary re-determination of these charges by Oftel.

Centrica’s comments

1.16 Centrica commented on Oftel’s Notice of 13 May. Centrica accepted Oftel’s proposal not to review BT’s CPS-related inbound call costs in the current Determination. However, Centrica considered that Oftel should review the order volume estimate used to calculate the per customer charges at this time. Centrica noted that the original per transaction charges were based on an assumption of 80,000 transactions per month. Centrica acknowledged that, at the time of preparing its comments, this transaction volume had not been achieved. However, Centrica considered that the transaction volume was likely to rapidly exceed 80,000 per month, particularly when the new ordering process without the reply card was introduced. Centrica therefore argued that BT would soon be over-recovering its costs. In Centrica’s view, previous under-recovery of costs by BT due to lower than assumed transaction volumes should have been more than offset by the penalties paid by CPS operators for failure to meet forecasts.

1.17 Centrica explained that the proposed reduction of £0.67 per transaction to reflect the removal of the reply card from the CPS process was lower than Centrica had expected. In Centrica’s view, the processing of the reply card was the main component of the CPS process which contained a manual element. With the removal of the reply card, it was unclear to Centrica what costs were being covered by the remaining charge of £3.79 per transaction. Centrica asked if Oftel could provide a detailed clarification of the elements making up the remaining per transaction charge to provide transparency to the Industry.

1.18 More generally, Centrica expressed concerns as to whether the per transaction costs for CPS had been derived on a fully allocated or incremental basis (given that some of the per transaction costs appeared not to scale with transaction volume).

1.19 Oftel has considered Centrica’s comments in relation to a suitable order volume to use in calculating the per transaction charges. However, at this time, Oftel continues to consider that it is not appropriate to change the assumption of 80,000 transactions per month. Monthly CPS order volumes have only exceeded this threshold once in the last 20 months that CPS has been available in the UK (at the time of writing). BT has presented detailed financial information to both Oftel and the CPS Industry (circulated to the CPS Commercial Group on 19 December 2001) showing that BT was not at that stage recovering its CPS transaction related costs, even taking into account forecast penalty payments from CPS operators. Given the desire of both Oftel and the Industry to have new charges for CPS in place to coincide as nearly as possible with the introduction of the new CPS ordering process without a reply card, Oftel does not consider a review of transaction volumes to be desirable at this time.

1.20 Oftel notes Centrica’s request that Oftel provide greater transparency of the cost elements covered by the proposed transaction charges for CPS following removal of the reply slip processing costs. Oftel considers that as much detail as possible (consistent with preserving BT’s commercial confidentiality) has previously been provided to the CPS Industry, during the negotiation and determination of the current CPS charges. Oftel refers Centrica to information circulated by BT to the CPS Commercial Group in August and September 2000, the consultancy report prepared by a company called Albera (which is available on Oftel’s web site at www.oftel.gov.uk/publications/carrier/cps1000.pdf) and the information contained in Oftel’s January 2001 Determination of charges for CPS Standard Services. Clearly, only Oftel can have access to commercially sensitive information from BT. Oftel will not therefore be providing in this Determination additional details of the costs covered by the transaction charges.

1.21 Oftel also notes Centrica’s concerns as to whether the costs covered by the transaction charges have been correctly classified as per transaction costs. The classification of costs into per transaction costs, per operator costs and system set-up costs was investigated in detail by Oftel and Albera during the negotiation and determination of the current CPS charges in 2000 and early 2001. No changes have been proposed to the classification in this Determination, and Oftel continues to consider that BT’s costs have been assigned correctly into per transaction, per operator and system set-up categories.

WorldCom’s comments

1.22 WorldCom commented on Oftel’s Notice of 13th May. Overall, WorldCom supported Oftel’s intention to determine new per transaction charges for CPS, but noted that it was difficult to provide detailed comments due to the lack of detailed information about how the charges were calculated.

WorldCom suggested that Oftel should investigate whether the removal of the reply card from the CPS ordering process would have other cost implications for BT beyond simply the disappearance of reply slip processing costs. As an example, WorldCom asked if BT’s costs for validating CPS orders against data held in BT’s customer database CSS remained the same.

1.23 WorldCom supported Oftel’s proposal to limit the scope of this Determination to the cost implications of removing the reply card from the CPS ordering process, and to review issues such as the appropriate transaction volume to use in calculating per transaction charges at a later date. WorldCom noted that the current per transaction charges were based on an assumed volume of 80,000 transactions per month, and that at the time of writing, actual order volumes were likely to exceed this volume. WorldCom also noted that forecast order volumes had for some time exceeded 80,000 transactions per month, and argued that the CPS forecast penalties could therefore mean that BT was over-recovering its costs. WorldCom suggested that this might mean that a future review of per transaction charges would need to consider retrospection.

1.24 Following investigation of the new CPS charges proposed by BT, Oftel considers that the charges in this Determination accurately take into account the cost implications of removing the reply card from the CPS ordering process. In response to WorldCom’s specific question about CPS order validation costs, Oftel notes that validation of CPS orders against data held in CSS is still necessary under the new ordering process, albeit in some cases against different fields (billing postcode rather than account number). Oftel therefore considers that BT’s costs for CSS validation are unlikely to have changed materially.

1.25 In relation to the appropriate order volume to use in calculating the per transaction costs, Oftel welcomes WorldCom’s support for Oftel’s proposal to review this at a later date. Oftel notes WorldCom’s comments about possible over-recovery by BT, and the possible need to consider retrospection in any future review of these assumptions. Clearly these issues are a matter to be considered at the time of that review. Oftel would however point out that BT has presented detailed financial information to both Oftel and the CPS Industry (circulated to the CPS Commercial Group on 19th December 2001) showing that BT was not at that stage recovering its CPS transaction related costs, even taking into account forecast penalty payments from CPS operators. Oftel will be seeking and taking into account similar information from BT when reviewing order volume assumptions in future.

BT’s comments on comments

1.26 BT provided comments on comments during the 28 day period following Oftel’s publication of initial responses received on 21 June 2002.

1.27 BT noted Centrica’s concerns about the costs associated with removal of the reply card from the CPS ordering process. BT stated that, regardless of the removal of the reply card, it would still incur costs in relation to employing staff to handle forecast order volumes even if the forecast order volumes did not materialise.

1.28 In relation to Centrica’s request that detailed clarification of the proposed CPS charges be given, BT pointed to the conclusions of the Albera consultancy report into BT’s CPS charges in 2000, which had in general supported the level of charges proposed by BT. BT therefore considered that Centrica’s request for greater transparency was unfounded.

1.29 BT noted that both WorldCom and Centrica had commented that BT might be over-recovering its costs due to the order volume assumptions used in calculating the CPS transaction charges. BT stated that the penalty payments were intended to encourage CPSOs to provide accurate forecasts, and to allow BT to recover the costs of overstaffing in the event that forecasts were overestimated. BT also pointed out that on several occasions in the past, BT had not strictly enforced forecasting penalty charges, but had given CPS operators the opportunity to change their forecasts without incurring penalties.

1.30 Oftel notes BT’s response to the comments made by Centrica and WorldCom. Oftel has no further comments to make on BT’s response, as the points made by BT are largely encapsulated in Oftel’s own views, which have been set out above.

The consultation procedure

1.31 The Director has power to specify the charges for providing Carrier Pre-selection Standard Services under Condition 50A.4 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).

1.32 The Director published a Notice of Proposed Determination on 13 May 2002, and allowed a 28 day period for interested parties to comment on that Notice. On 21 June 2002, the Director published the representations received and allowed a further 28 day period for interested parties to comment on these representations. The Director has now prepared this draft Determination of modified charges for carrier pre-selection standard services, which he will consider imposing in the light of the outcome of consultation if the parties involved do not reach a commercial agreement.

1.33 After publication of the present draft Determination there will be a 14 day period ending at the close of the day on 14 August 2002 during which all interested parties may make representations. Oftel will publish the representations made at the end of this period and, if necessary, publish a final Determination.

1.34 Comments are invited on the present Draft Determination by close 14 August 2002. Written comments will be publicly available from Oftel’s Research and Intelligence Unit and on Oftel’s website, except where clearly indicated to be confidential. Respondents are therefore asked to separate out any confidential material in a clearly marked annex. In the interests of transparency, respondents are requested to avoid confidentiality markings wherever possible. Appointments to view written comments in Oftel’s Research and Intelligence Unit must be made in advance (tel: 020 7634 8761, fax: 020 7634 8946).

Comments should be addressed to:

Caroline Wallace
Chief Engineering Advisor
Oftel
50 Ludgate Hill
London
EC4M 7JJ

tel: 020 7634 8917
fax: 020 7634 8893
e-mail: caroline.wallace@oftel.gov.uk

Annex A – BT’s proposal of 22 April 2002 for revised per-line charges for CPS (excluding FeatureNet, FeatureLine and Embark)

(Current charges shown in brackets)

Annex B – BT’s proposal of 30 April 2002 for revised CPS charges for FeatureNet, FeatureLine
and Embark

(Current charges shown in brackets)

* There is no renumber process for BT’s FeatureNet customers

CLI = network calling line identity

MNN = Main Network Number (for FeatureNet). This is the main number of the FeatureNet site in question.

BG = main Business Group number (for FeatureLine). This is the Business Group number associated with the FeatureLine customer in question.

n = number extensions on which CPS is to be provided at the site (for FeatureNet)

n = total number of lines within the Business Group (for FeatureLine and Embark)