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| Review of the fixed narrowband wholesale exchange line, call origination, conveyance and transit markets, consultation - 17 March 2003 | |
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Chapter 11Carrier Pre-SelectionIntroduction 11.1 Further to the remedies considered in Chapter 10, the following chapter considers a Carrier Pre-Selection (CPS) remedy to be imposed in response to the initial findings of SMP in the call origination market discussed in chapter 5. Background 11.2 CPS is a mechanism which allows users to select, in advance, alternative communications providers to carry their calls without having to dial additional codes (whilst keeping their existing telephone line). The customer subscribes to the services of one or more CPS operators (CPSOs) and chooses the type of calls (eg all national calls) that will be routed through the network of the alternative operator. A customer can over-ride the CPS service at any time by dialling a pre-fix before the number they wish to dial, as long as they have an agreement with the operator to whom the access code belongs. Aims of regulation 11.3 In the analysis of the retail markets in chapter 4 of the consultation document, Review of fixed narrowband retail markets, March 2003, the Director has set out his initial view that competition in the provision of fixed retail services is not yet effective and that BT continues to have SMP in the provision of access and calls for business and residential customers. 11.4 As discussed in Chapter 4, there are significant entry barriers to providing a direct access network and most competition is provided by cable operators whose geographic reach extends to only 50 per cent of the population and is therefore limited in scope. CPS stimulates competition in the calls markets in the absence of direct access network build, and enhances competition in areas with only limited direct access competition. 11.5 Although indirect access (IA) discussed in Chapter 12 below also stimulates competition in the calls market, IA requires either that the customer dial a prefix in order to route a particular call via the IA operator, or that the customer install an auto-dialler. These aspects of IA, while not necessarily a barrier to switching for all customers, are nevertheless significant. Oftel research conducted in November 2002 (published January 2003) showed that nine per cent of Small and Medium Enterprises (SMEs) surveyed considered that dialling a pre-fix was a reason for not switching to IA. CPS avoids such sources of customer inertia, since calls are automatically routed via the chosen CPS operator. In this sense, there is ‘dialling parity’ with the direct access provider. 11.6 CPS does not, however, render IA redundant. Once a CPS operator is selected for a particular call option (ie national and/or international or ‘all calls’), IA over-ride is nevertheless possible. IA over-ride allows customers to exploit particular prices or discounts for certain types of calls and possibly at certain times of day. Current impact of CPS 11.7 At the end of December 2002, there were nearly 700,000 lines enabled with CPS. These are all BT customers, as there are no CPS customers on Kingston's network in the Hull Area at present. Oftel understands that current industry forecasts estimate approximately 4.8 million CPS orders in the year January 2003 to December 2003. 11.8 However, these orders may include customers changing from one CPS provider to another or having their CPS service removed. In addition, the percentage of actual orders in relation to forecasted orders has rarely exceeded 50 per cent, although there has been in general a month on month improvement in the proportion of actual orders to forecasts since changes to the CPS customer ordering process in July 2002. 11.9 In the year April 2001 to March 2002, the number of calls made using CPS totalled 25.6 million, with the volume of call minutes totalling 57.8 million. Oftel's published market information shows that in the same period there were 311 billion fixed call minutes. Therefore, CPS traffic in this year was less than 0.1 per cent of the total volume. It should be noted, however, that not all call types are subject to CPS, such as calls to certain unmetered Internet access numbers. Even if these call types are excluded from total call volumes, CPS traffic would still represent a low overall share. 11.10 The latest figures available to Oftel show a significant increase in the use of CPS. In the first six months of 2002/2003, there were 399 million calls using CPS, with call minutes totalling 932 million. Oftel does not yet have confirmed data for total call volumes over this period, however the first six months show a 15-fold increase in CPS traffic compared to the whole proceeding year. Therefore, Oftel expects that CPS traffic will figure more significantly in total call volumes in the next few years. Remedies 11.11 Chapter 10 has already set out a number of remedies that the Director considers appropriate and proportionate to impose in the call origination market following a finding of SMP. These are:
These obligations apply to all call origination services including origination for CPS. 11.12 The Universal Service Directive requires that the Director impose an obligation on providers with SMP in markets relating to the provision of fixed services to allow their customers access to CPS services. The Director has come to the initial view that both BT and Kingston have SMP in fixed call origination (see chapter 5) and in fixed retail access and calls (see chapter 4 of the consultation document, Review of the fixed narrowband retail markets, March 2003) and it is therefore necessary to require that BT and Kingston ensure CPS services are available to their customers. 11.13 Under Clause 86 of the Communications Bill, the Director must impose on the dominant provider such SMP conditions relating to CPS as he thinks fit. Such conditions can include requiring the dominant provider to make relevant connection facilities available, cost recovery provisions and the manner in which CPS is to be made available. The CPS obligation 11.14 The proposed CPS condition can be found in annex A. It requires dominant providers to provide CPS to its customers and relevant wholesale interconnection facilities to CPSOs on reasonable terms and in accordance with the CPS Functional Specification. It further provides that the charges for such interconnection facilities are reasonably derived from the costs of providing those services and that the costs must be calculated on a forward looking incremental cost approach. For further explanation of what this means please refer to paragraph 10.22. The CPS condition also sets out the principles to be applied in the recovery of costs incurred in the provision of CPS. 11.15 The new CPS condition does not cover ‘interim’ carrier pre-selection (ICPS). ICPS was a form of CPS provided by means of auto-diallers that was made available by BT from April 2000 to December 2001. It was only necessary while upgrades were made to BT exchanges to allow ‘switch-based’ CPS to be fully available. ‘Switch-based’ CPS has been fully available since December 2001 and there is no longer a need for BT to provide ICPS. However, the new CPS condition contains a provision for the recovery by BT of the costs of ICPS. This is because BT is recovering these costs by means of a ‘pence-per-minute’ surcharge on all relevant BT originated calls that commenced in 2002, and has an estimated five year life span. 11.16 The consultation period required when issuing a direction will change. Under the previous regime, when the Director planned to issue a determination under Condition 50A of the licences of BT and Kingston, he was required to allow 28 days for comments from interested stakeholders following a notice of determination. This was then followed by a further 28 days within which stakeholders could make 'comments on comments' then, after considering these further comments, the Director could issue a draft determination with a further 14 days for final comments. 11.17 Under changes introduced in the Communications Bill, it is proposed that the length of consultation period for issuing directions should be a minimum of one month. This applies to the issuing of all directions and is not specific to CPS. 11.18 The Director considers that the proposed CPS condition meets the tests set out in the Communications Bill. The Director in proposing this condition has considered all the Community requirements set out in Clause 4 and in particular the requirement to promote competition and to secure efficient and sustainable competition as set out in paragraph 11.4. 11.19 Clause 43 requires conditions to be objectively justifiable, non-discriminatory, proportionate and transparent. The proposed condition is objectively justifiable, in that it relates to the need to ensure that competition develops to the benefit of consumers. It does not discriminate, in that it is imposed equally on both BT and Kingston and no other operator has SMP in these markets. It is proportionate, since it only requires BT and Kingston to provide access on reasonable terms. It is transparent in that it is clear in its intention to ensure that BT and Kingston provide CPS, as set out in paragraph 11.14. Functional Specification 11.20 In order to enable the efficient implementation of CPS, certain technical and other principles need to be established. At present, this is done in the CPS Functional Specification that identifies, for example, the CPS call options and the types of calls that fall within each option. The obligation in the proposed CPS condition to comply with the CPS Functional Specification concerns the manner in which CPS and relevant wholesale interconnection facilities are made available. A condition imposing such an obligation is permitted by Clause 86(5) of the Communications Bill. 11.21 Under the proposed condition in Annex A, the Director may direct from time to time (following due consultation in accordance with Clause 45 of the Communications Bill) compliance with a particular version of the CPS Functional Specification for the purposes of this condition. 11.22 The most recent issue of the CPS Functional Specification was published in Oftel's Statement on Directory Enquiries and Carrier Pre-Selection, October 2002. Oftel does not consider that it is necessary to make any substantive changes to the principles set out in the CPS Functional Specification or the way CPS currently operates. 11.23 The Director proposes to give the draft direction set out in Annex B. The effect of that direction is to require compliance with the CPS Functional Specification annexed to the direction under obligations imposed on BT and Kingston under the proposed condition in annex A. The reason for the proposed direction is to enable the efficient provision of CPS. 11.24 Representations on the draft direction must be made within the deadline and in such manner as set out in chapter 17 of this consultation. For the purposes of Clause 45(9) of the Communications Bill, the Director considers that the publication of this consultation document on Oftel’s website and as otherwise available as explained in chapter 17, together with the sending of copies of the same to BT and Kingston, is appropriate for bringing the contents of this direction to the attention of such persons as the Director considers appropriate. 11.25 The Director considers that the proposed direction meets the tests set out in the Communications Bill. The Director in proposing this direction has considered all the Community requirements set out in Clause 4 and in particular the requirement to promote competition and to secure efficient and sustainable competition by ensuring the efficient implementation of CPS. 11.26 The Director considers that the proposed draft direction (and the obligations set out therein) satisfies the tests set out in Clause 45(2) of the Communications Bill. It is objectively justifiable in that it relates to the need to ensure the efficient provision of CPS and therefore that competition develops to the benefit of consumers. It does not discriminate, in that it is imposed equally on both BT and Kingston and no other operator has SMP in these markets. It is proportionate, since it requires BT and Kingston to provide CPS in a manner that is in the Director’s view efficient and technically feasible. It is transparent in that it is clear in its intention to ensure that BT and Kingston efficiently provide CPS. Existing CPS determinations 11.27 There are a number of existing determinations relating to the prices charged by BT for various aspects of the provision of CPS. Details of these determinations can be found in annex D. The charges determined by the Director are now included in BT's Carrier Price List and form part of the standard interconnection agreement between BT and other operators. 11.28 Should BT seek to modify the published prices after July 2003, and were a CPS provider to object to such modification and raise a dispute with the Director, the Director would be able to resolve the matter using his dispute handling procedures under Clauses 180 to 186 of the Communications Bill. 11.29 In any case, the Director anticipates that he will, at some stage in the future either on his own initiative or as a result of a dispute brought to him by a CPS provider, need to re-set some or all of the charges for CPS using the direction-making powers in the new CPS condition (and other powers if relevant). This is because some of the costs used in the calculation of the relevant charges (under existing determinations) were based on best estimates of probable order volumes and of BT's likely costs incurred. It is likely that, once CPS is a more established product, any new direction will be based on actual order volumes and costs. When the demand for CPS and its costs have fully stabilised, Oftel will consider whether CPS charges should become part of the charge control regime, which will avoid the need for repeated re-directions. 11.30 The BT CPS surcharge (levelled on wholesale call origination tariffs to recover the costs to BT of setting up CPS on its network and operational support systems) applies both to other operators and to BT’s retail activities. The Director expects that, under the new regime, this will continue. As with the other charges that have been determined by the Director under the existing regime, the BT surcharge is published on the BT Carrier Price List. 11.31 As there is currently no active CPS offering on the Kingston network, the Director has not determined charges for Kingston for the purposes of the existing licence condition 50A.
Chapter 12Indirect accessIntroduction 12.1 Further to the remedies considered in chapters 10 and 11, the following chapter considers carrier selection, otherwise known as indirect access (IA), to be imposed in response to the initial findings of SMP in the call origination market discussed in chapter 5. Background 12.2 IA is a mechanism that allows users to select alternative communications providers to their access line provider on a call by call basis by dialling a short pre-fix before the number they wish to dial. Aims of regulation 12.3 In the analysis of the retail markets in chapter 4 of the consultation document, Review of fixed narrowband retail markets, March 2003, the Director has set out his initial view that competition in the provision of fixed retail services is not yet effective and that BT continues to have SMP in the provision of access and calls for business and residential customers. 12.4 As noted in the previous chapter, both IA and CPS services stimulate competition in the calls market and enhance competition in areas with only limited direct access competition. 12.5 While CPS offers ‘dialling parity’ with the access provider, in the sense that the customer does not need to dial a pre-fix or install an auto-dialler, IA provides the opportunity for customers to more narrowly select alternative call providers, particularly on the basis of price. 12.6 The ability to make expenditure minimising carrier selection for every call is particularly relevant for some business and residential customers who make use of ‘least-cost routing’. Least-cost routing involves the use of ‘intelligent’ auto-diallers (and in some cases associated software) which can be programmed to select the cheapest IA suppliers for particular calls at particular times of day. This is possible even for CPS customers, given that CPS includes a facility for customers to over-ride the pre-selected provider on a call-by-call basis. Current impact of IA 12.7 Consumers’ use of IA appears to have remained steady at 11 per cent of total call volumes over the last two years. 12.8 Oftel research conducted in November 2002 (published January 2003) showed that 16 per cent of residential customers and SMEs use IA services. Whilst residential usage of IA services has remained fairly steady, business usage appears to have fallen (27 per cent in November 2001). This may be due to various problems encountered with switching to and using IA and it is also possible that some may have switched to using CPS. Remedies 12.9 Chapter 10 has already set out a number of remedies that the Director considers appropriate and proportionate to impose in the call origination market following a finding of SMP. These are:
These obligations apply to all call origination services including IA call origination. 12.10 The Universal Service Directive requires that the Director impose an obligation on providers with SMP in markets relating to the provision of fixed services to allow their customers access to IA services. The Director has come to the initial view that both BT and Kingston have SMP in call origination (see chapter 5) and in retail access and calls (see chapter 4 of the consultation document, Review of Narrowband Retail Markets, March 2003] and it is therefore necessary to require that BT and Kingston ensure IA services are available to their customers. 12.11 Under Clause 86 of the Communications Bill, the Director must impose on the dominant provider such SMP conditions relating to IA as he thinks fit. Such conditions can include requiring the dominant provider to make relevant interconnection facilities available, cost recovery provisions and the manner in which IA is to be made available. The IA obligation 12.12 The proposed IA obligation can be found in annex A. It requires that IA is provided on reasonable terms at the request of any customer and that relevant wholesale interconnection facilities are provided that will allow an alternative communications provider to provide IA services. It further provides that the charges for such interconnection facilities are reasonably derived from the costs of providing those services and that the costs must be calculated on a forward looking incremental cost approach (for further explanation of this, please refer to paragraph 10.22. 12.13 The Director considers that the proposed IA condition meets the tests set out in the Communications Bill. The Director in proposing this condition has considered all the Community requirements set out in Clause 4 and in particular the requirement to promote competition and to secure efficient and sustainable competition as set out in paragraph 12.4. 12.14 Clause 43 requires conditions to be objectively justifiable, non-discriminatory, proportionate and transparent. The proposed condition is objectively justifiable, in that it relates to the need to ensure that competition develops to the benefit of consumers. It does not discriminate, in that it is imposed equally on both BT and Kingston and no other operator has SMP in these markets. It is proportionate, as it only requires BT and Kingston to provide access on reasonable terms. It is transparent in that it is clear in its intention to ensure that BT and Kingston provide IA, as set out in paragraph 12.12.
Chapter 13 Introduction BT 13.1 Further to the remedies proposed in Chapter 10, the following chapter considers imposing on BT a specific requirement to provide wholesale line rental (WLR) in response to the initial findings of SMP in chapter 4 in the following markets in the UK excluding the Hull Area:
Kingston 13.2 In chapter 4, the Director also initially concluded that Kingston has SMP in the following markets in the Hull Area:
13.3 A WLR product is currently not available in the Hull Area. Although the arguments for a such a product to be available in the Hull Area are likely to be similar to those detailed below for BT, the Director believes that it would not be reasonable to require Kingston to supply wholesale line rental without reasonable demand first having been demonstrated. 13.4 In Chapter 10, the Director has proposed imposing an obligation on Kingston to provide network access in the exchange line markets in which it has initially been found to possess SMP. Kingston is required under this obligation to provide wholesale services to third parties that reasonably request it. The Director considers that this obligation is sufficient to ensure that Kingston provides a wholesale line rental product should a reasonable request be made for such a product. Aims of regulation 13.5 In the analysis of the retail markets in the Review of fixed narrowband retail markets, March 2003, Oftel has set out its initial view that competition in the provision of fixed retail services is not yet effective and that BT continues to have SMP in the provision of access and calls (analogue and ISDN) for business and residential customers. 13.6 The analysis has shown that significant competition in access for residential customers is provided only by cable operators. BT continues to have SMP in the market for residential analogue access, with a market share of 86 per cent. This market share is unlikely to change substantially in the near future, since:
13.7 Competitive conditions in the markets for access to business customers are very different, in that the cable networks have not challenged the dominance of BT’s copper access network. Other access technologies (eg fibre, radio, LLU, wholesale xDSL, wholesale leased lines) are available to competing service providers. However, as discussed in more detail below, these are only likely to be cost-effective for bandwidths in excess of 2Mbit/s, and so are only relevant to the business market for ISDN30. Even in the market for ISDN30, BT continues to have SMP, with a current market share of 72 per cent. 13.8 The lack of competition in exchange lines raises concerns over BT’s potential to leverage its dominance in access into the associated markets for calls. It can do this because, unlike IA and CPS operators, it provides both calls and access as a bundled service. This has several advantages for consumers:
13.9 This ability to bundle calls and access is likely to be one of the reasons for BT being able to maintain call prices at a sufficiently high level to achieve returns well in excess of its cost of capital, despite increasing competition from IA and CPS operators. 13.10 The aim of WLR is therefore not just to address BT’s SMP in the access markets, but also to enhance the effectiveness of the IA and CPS remedies, detailed in Chapters 11 and 12, in the markets for calls. With a WLR product, providers effectively lease BT’s exchange line and decide how best to route the customer’s calls. Providers therefore take on the full retail relationship with the customer and offer a ‘single bill’ to end users for all basic telecommunications services. Background 13.11 In August 2002, the Director required BT to provide a Wholesale Line Rental (WLR) product to competing providers. Although BT introduced a basic analogue WLR product in September 2002, Oftel was of the view that this basic product needed to be enhanced in order for it to be an effective mass-market product that was commercially attractive to service providers and end-users. Oftel has developed with industry a product and process specification; the statement, Wholesale Line Rental: Oftel’s conclusions, March 2003, sets out the conclusions of this work. As an incentive to BT to offer WLR in accordance with the final specification, Oftel has indicated that it will relax the current retail price control when BT has introduced a fit-for-purpose product that is being actively taken up by providers. Options for remedies 13.12 Chapter 10 has already set out a number of remedies that the Director considers appropriate and proportionate to impose in the exchange line markets in which BT has initially been found to have SMP. These are:
13.13 For the reasons set out in Chapter 10, the Director does not propose imposing a charging basis for wholesale ISDN30 exchange line services. Oftel is also not proposing a charge control on wholesale business ISDN2 exchange line services and wholesale ISDN30 exchange line services. 13.14 Clause 83(3) of the Communications Bill allows the Director to impose appropriate SMP conditions requiring the dominant provider to provide network access, to allow use of the relevant network and to make available the relevant facilities. 13.15 In order to address BT’s SMP in the exchange line markets and concerns with BT’s potential to leverage dominance in the exchange line markets into associated call markets, the options for remedies considered below are:
Option A: No specific requirement to provide WLR 13.16 Although the Director has already proposed a requirement on BT to provide network access on reasonable request in the exchange line markets in which it has initially been found to have SMP, it is appropriate to consider alternatives to imposing a specific requirement on BT to provide WLR. These are:
Alternative access 13.17 Oftel has considered whether alternative wholesale products would be more appropriate than requiring the provision of a WLR product. Analogue and ISDN2 13.18 Both analogue and ISDN2 access services are delivered directly over BT’s copper access network, therefore, the only product that might be relevant is local loop unbundling (LLU). Oftel believes, however, that it is extremely unlikely that either analogue or ISDN2 services could be delivered in a cost-effective manner using LLU. This is because the cost of using LLU to provide ISDN services is likely to be similar in magnitude to the cost of using LLU to provide xDSL. However, the bandwidth would be much lower, making it difficult to generate as much revenue per line as xDSL. ISDN30 13.19 Service providers with their own switched network could, at least in principle, deliver an ISDN30 service over any 2Mbit/s leased line. Several other wholesale access products could also be used for this purpose, such as PPCs, SDSL over LLU and SDSL via ATM interconnect. Oftel therefore needs to consider whether an additional requirement to provide a wholesale ISDN30 access service is proportionate. 13.20 Oftel has carried out a detailed analysis of the cost effectiveness of a service provider delivering ISDN30 over a 2Mbit/s PPC, compared to the cost-effectiveness of BT’s own ISDN30 service. The main practical difference between the two is that BT delivering its own ISDN30 service is able to concentrate traffic at its local exchanges. Traffic is therefore only carried in a non-concentrated form over the local tail circuit from the exchange to the customer’s site. However, when a service provider provides ISDN30 over a PPC, the traffic must be carried in a non-concentrated form over the entire length of the PPC. This is typically a much longer distance than that covered by BT’s local tail circuit. 13.21 Whether it is cost-effective to deliver ISDN30 over a PPC therefore depends on the length of the PPC and the extent to which the PPC is under-utilised. The utilisation of the PPC depends, in turn, on the number of ISDN channels that are provisioned. Figure 1 below summarises the PPC length that is acceptable if an ISDN30 service is to be cost-effective plotted as a function of the number of channels provisioned. Figure 13.1
Source: Oftel estimates based on published prices 13.22 This graph suggests that:
13.23 There are several service providers who are likely to be able to provide their own ISDN30 service over a PPC, if the ISDN30 service has a high utilisation. However, Oftel understands from BT that the average number of channels provisioned over ISDN30 lines is 20, implying that a substantial proportion of ISDN30 lines are provisioned with a small number of channels. It is unlikely to be possible to provide these in a cost-effective manner over PPCs. Infrastructure-based competition Residential market 13.24 As noted above, significant infrastructure-based competition in access for residential customers is provided only by cable operators who have had some success in winning market share within their coverage areas. However, the financial difficulties currently being experienced mean that they are unlikely in the near future either to extend the coverage of their networks or aggressively acquire new customers within their existing coverage areas. It therefore does not appear possible to rely on infrastructure-based competition from cable operators to further erode BT’s dominance in the residential market. Business markets 13.25 There are a number of alternative forms of infrastructure that can be used to provide access services to the business market. These include fibre, Broadband Fixed Wireless Access (BFWA) and point to point radio links. However, these forms of alternative infrastructure will typically only be cost-effective in cases where multiple 2Mbit/s links are required to a single site. These are therefore only likely to be relevant to the part of the business market requiring multiple fully provisioned ISDN30 exchange lines and this represents a small part of the total market. Calls and Access Analogue 13.26 BT currently provides an unregulated analogue Calls and Access product that enables service providers to take on the full retail relationship with the customer and provide them with both access and calls. Oftel does not consider BT’s analogue Calls and Access product to be a satisfactory alternative to a WLR product for the following reasons:
ISDN2 13.27 Oftel does not consider BT’s ISDN2 Calls and Access product to be a satisfactory alternative to an ISDN2 WLR product primarily due to the price charged by BT that is currently set at £75 per quarter. Oftel is currently of the view that an appropriate LRIC-based charge for ISDN2 line rental is likely to lie in a range of £38 to £50 per quarter and that the current price is set at too high a level to enable service providers to compete in the business retail calls and access markets. Further details of Oftel’s analysis are contained in Chapter 4. ISDN30 13.28 Oftel does not consider that an ISDN30 Calls and Access product (currently being trialled) will be a satisfactory alternative to an ISDN2 WLR product. The trial price for wholesale ISDN30, including a quota of 10 DDI numbers per channel, is £46.40 per channel per quarter. The charge made by BT for the equivalent retail service is £52.08 per channel per quarter. Thus, the wholesale price proposed by BT for ISDN30 is only 11 per cent below the equivalent retail price. Oftel considers that this provides an insufficient margin for service providers to be able to compete. Oftel is currently of the view that an appropriate LRIC-based charge for ISDN30 line rental is likely to lie in the range of £21 to £25 per quarter. Further details of Oftel’s analysis are contained in chapter 4. Conclusion – Option A: No specific requirement to provide WLR 13.29 The Director does not consider that any of the alternatives to imposing a requirement on BT to provide a WLR product are sufficient to address BT’s market power in the exchange line markets or its potential to leverage market power from these markets into calls markets. Option B1: Fit for purpose analogue WLR product provided on an incentive basis 13.30 This option requires BT to provide an analogue WLR product and gives it an incentive to provide a product that is fit for purpose by proposing to relax the proposed retail price control, once a fit for purpose product is being taken up in volumes by providers. The proposed retail price control is contained in the consultation document, Review of fixed narrowband retail markets, March 2003. 13.31 Oftel has developed with industry a WLR product and process specification. The statement, Wholesale Line Rental: Oftel’s conclusions, March 2003, sets out the conclusions of this work. The specification sets out what line types and line features need to be included and also sets out a number of process improvements that are required if service providers are to be able to compete effectively with BT. 13.32 The advantage of this approach is that, if the incentive of a reduction in regulation is a real one, BT will be encouraged to finalise and implement a fit for purpose WLR product as quickly and efficiently as possible. The risk is that the relaxation of the retail price control is not a sufficient incentive for BT to introduce a fit for purpose WLR product. 13.33 Under the current regime, Oftel believes that there is a reasonable expectation that BT will introduce a fit for purpose analogue WLR product on an incentive basis. The current status of this is set out in the statement, Wholesale Line Rental: Oftel’s conclusions, March 2003. Option B2: Fit for purpose business ISDN2 WLR product provided on an incentive basis 13.34 Oftel believes that the ability of service providers to address the business markets for exchange lines depends critically on an ISDN2 WLR product. The absence of an ISDN2 WLR product would affect not just the market for business ISDN2 access but also the market for business analogue access. This is because service providers selling into the business market will frequently be selling bundles of services and a bundle that excludes ISDN2 is unlikely to be acceptable to many business customers. 13.35 Based on BT’s response to the current project to implement WLR under the existing regime, Oftel does not consider that BT will introduce a fit for purpose ISDN2 WLR product on an incentive basis. Further details of the exclusion of ISDN2 from the current implementation project are contained in the document Wholesale Line Rental: Oftel’s conclusions, March 2003. Option B3: Fit for purpose ISDN30 WLR product provided on an incentive basis 13.36 Oftel also believes that the ability of service providers to address the business markets for exchange lines requires the inclusion of an ISDN30 variant of WLR. The arguments are similar to those set out above for ISDN2. The main difference between ISDN2 and ISDN30 is that service providers have alternatives means of delivering ISDN30, as discussed above. However, these alternatives are only likely to be cost effective in cases where the number of channels provided is high. This is only likely to be the case for perhaps 50 per cent of the ISDN30 market and therefore this does not remove the need for an ISDN30 variant of WLR. 13.37 Based on BT’s response to the current project to implement WLR under the existing regime, Oftel does not consider that BT will introduce a fit for purpose ISDN30 WLR product on an incentive basis. Conclusion – Options B1, B2 and B3: Fit for purpose WLR product provided on an incentive basis 13.38 Given that the Director considers that there is a reasonable expectation that BT will introduce a fit for purpose analogue WLR product on an incentive basis, he is proposing this approach as one of the options for the introduction of a fit for purpose analogue WLR product. The second option is discussed under Option C1 below. 13.39 The Director does not consider that BT will introduce fit for purpose ISDN2 or ISDN30 WLR products on an incentive basis. Option C1: Obligation to provide an analogue WLR product in accordance with a functional specification as determined by the Director 13.40 This option requires BT to provide an analogue WLR product in accordance with a Functional Specification as determined by the Director. The Specification sets out the precise scope of the product and the processes that it has to include. 13.41 This approach would provide certainty to service providers that BT would introduce a fit for purpose product. However, BT would not have an incentive to introduce a fit for purpose WLR product as quickly as possible and ensure that the end product was commercially viable. 13.42 Although BT may implement a fit for purpose analogue WLR product on an incentive basis, as discussed above under Option B1, there is a risk that BT will not fully implement the specification, if the incentive provided by the relaxation of retail price controls is insufficient. Option C2: Obligation to provide a business ISDN2 WLR product in accordance with a functional specification as determined by the Director 13.43 Given that BT is unlikely to implement a fit for purpose ISDN2 variant of WLR on an incentive basis, Oftel considers that it is necessary to impose an obligation on BT to provide an ISDN2 version of WLR in accordance with a functional specification. Option C3: Obligation to provide an ISDN30 WLR product in accordance with a functional specification as determined by the Director 13.44 Given that BT is unlikely to implement a fit for purpose ISDN30 variant of WLR on an incentive basis, Oftel considers that it is necessary to impose an obligation on BT to provide an ISDN30 version of WLR in accordance with a functional specification. Conclusion – Options C1, C2 and C3: WLR product in accordance with a functional specification as determined by the Director 13.45 Although BT may implement a fit for purpose analogue WLR product on an incentive basis, as discussed above under Option B1, if the incentive provided by the relaxation of retail price controls is insufficient, there is a risk that BT will not fully implement the specification. The Director therefore proposes an obligation on BT to provide an analogue WLR product in accordance with a functional specification, as set out in Option C1. 13.46 The Director does not consider that BT will introduce fit for purpose ISDN2 or ISDN30 WLR products on an incentive basis and therefore proposes an obligation on BT to provide business ISDN2 and ISDN30 WLR products in accordance with a functional specification, as set out in Options C2 and C3. Conclusion: Options for remedies 13.47 The Director considers that it is appropriate to consult on two proposed conditions for the implementation of fit for purpose analogue, ISDN2 and ISDN30 WLR products:
13.48 Both the proposed conditions set out provisions for cost recovery as discussed below. Cost recovery 13.49 The proposed condition sets out provisions for cost recovery. Oftel expects that each element of cost of WLR will fall into one of four categories: system set-up costs, per operator set-up costs, per operator ongoing costs, and per customer line set-up costs. Oftel has considered how these costs should be recovered in the light of its six principles for cost recovery:
13.50 Oftel has applied the six principles of cost recovery to each of the cost categories and its analysis is summarised below. Cost causation 13.51 It is arguable that BT only incurs the costs arising from system set-up if WLR service providers require the WLR product and therefore these operators should bear the system set-up costs. However, the system set-up costs of WLR will be caused by the proposed regulatory obligation flowing from BT's market power and on this interpretation, the principle of cost causation could be taken to imply that BT should bear a share of the costs. On balance, the cost causation principle does not point strongly either to recovery of system set-up costs from service providers alone or across all lines. 13.52 Per provider set-up costs, per provider ongoing costs and per line set-up costs arise from the decision of an individual service provider to enter the market and therefore these costs should be recovered from WLR service providers. Cost minimisation 13.53 BT will primarily determine its own costs. Recovery of at least some of these costs from BT is required if it is to have an incentive to minimise these costs. This could be achieved by spreading all costs across all BT lines. Distribution of benefits 13.54 The provision of WLR will result in increased competition and hence benefits to those customers who remain with BT. There is therefore a case, on the basis of distribution of benefits, for recovering system set-up costs from all WLR and BT retail customers. 13.55 The benefits to competition and hence to customers generally of an individual service provider or customer taking the WLR service are unlikely to be significant. Hence per provider set-up costs, per provider ongoing costs and per line set-up costs should be recovered from WLR service providers alone. Effective competition 13.56 The method of recovery of WLR costs should be competitively neutral between BT and WLR service providers. Therefore, system set-up costs should be recovered across all lines. 13.57 Per provider set-up costs, per provider ongoing costs and per line set-up costs should be recovered across all lines, unless BT already has to bear equivalent costs, in which case they should be recovered from WLR service providers alone. Reciprocity 13.58 This is not a relevant principle, as WLR is not provided reciprocally. Practicality 13.59 It is likely that the easiest system to implement is one where BT and WLR service providers bear all costs, as this reduces the sensitivity of charges to forecasts of WLR take-up. Conclusions: cost recovery 13.60 The Director currently considers that there are strong arguments, based on the principles of cost minimisation, distribution of benefits, effective competition and practicality, for system set-up costs to be recovered across all BT lines. The principle of cost causation does not point strongly either to recovery of system set-up costs from service providers alone or to recovery across all BT lines. The Director therefore proposes that system set-up costs be recovered across all BT lines. 13.61 The Director currently considers that there are strong arguments, based on the principle of cost causation and distribution of benefits, for per provider set-up costs, per provider ongoing costs and per line set-up costs to be recovered from service providers alone. The principles of cost minimisation and practicality point towards the recovery of these costs across all BT lines, whilst the principle of effective competition is broadly neutral. The Director proposes that per provider set-up costs, per-provider ongoing costs and per line set-up costs be recovered from WLR service providers only. Communications Bill tests 13.62 The proposed conditions for both options can be found in Annex A. 13.63 The Director considers that the proposed condition for each option meets the tests set out in the Communications Bill. The Director in proposing both these conditions has considered all the Community requirements set out in Clause 4 and in particular the requirement to promote competition, to secure efficient and sustainable competition and to secure the maximum benefits for persons who are customers of communications providers as set out in paragraph 13.10. 13.64 Clause 43 requires conditions to be objectively justifiable, non-discriminatory, proportionate and transparent. Both the proposed conditions are objectively justifiable, in that they relate to the need to ensure that competition develops to the benefit of consumers. Although these conditions are only proposed for BT, they are not discriminatory for the reasons set out in paragraphs 13.3 and 13.4. The conditions are proportionate, in that they are necessary to enable competition but are not unduly burdensome on BT. They are transparent in that they are clear in their intention to ensure that BT provides a fit for purpose WLR product as set out in paragraphs 13.47, 13.60 and 13.61. 13.65 In addition, the Director has taken into account the factors set out in Clause 83(4) and in particular the economic viability of service providers building an alternative direct access network and the feasibility of providing WLR. 13.66 The Director considers that the tests in Clause 84 have been met. As noted above, there is a risk that, in situations where SMP is persistent, pricing will be distorted and not at competitive levels. The proposed conditions are necessary in order to promote competition and provide benefits to end users by enabling providers to buy wholesale services at levels that enable them to compete in these markets. 13.67 The extent of investment of the dominant operator has been taken into account as set out in Clause 84(2) and the proposed conditions provide for cost recovery against Oftel’s six cost recovery principles. Functional Specification 13.68 The requirement to comply with the Wholesale Analogue Line Rental Functional Specification and the Wholesale ISDN Line Rental Functional concern the manner in which WLR services are to made available. 13.69 Under the proposed WLR condition in annex A, the Director may direct from time to time (following due consultation in accordance with Clause 45 of the Communications Bill) compliance with a particular version of such specification for the purposes of this condition. 13.70 The content of the Functional Specifications has been set out in detail in the statement, Wholesale Line Rental: Oftel’s conclusions, March 2003. 13.71 The Director is consulting on the draft directions set out in Annex C. The effect of each direction, is to require compliance with the WLR Functional Specification annexed to each direction under obligations imposed on BT and Kingston under the proposed condition in Annex A. The reason for the proposed directions is to enable the efficient provision of WLR. 13.72 Representations on the draft directions must be made within the deadline and in such manner as set in Chapter 17 of this consultation. For the purposes of Clause 45(9) of the Communications Bill, the Director considers that the publication of this consultation document on Oftel’s website and as otherwise available as explained in chapter 17, together with the sending of copies of the same to BT and Kingston, is appropriate for bringing the contents of the directions to the attention of such persons the Director considers appropriate. 13.73 The Director considers that the proposed directions meet the tests set out in the Communications Bill. The Director in proposing this direction has considered all the Community requirements set out in Clause 4 and in particular the requirement to promote competition and to secure efficient and sustainable competition. 13.74 The Director considers that the proposed draft directions (and the obligations set out therein) satisfy the tests set out in Clause 45(2) of the Communications Bill. They are objectively justifiable, in that they relate to the need to ensure that competition develops to the benefit of consumers. Although these directions are only proposed for BT, they are not discriminatory for the reasons set out in paragraphs 13.3 and 13.4. They are proportionate, in that they do not require BT to provide WLR services in a manner that is not technically feasible. They are transparent in that they are clear in their intention to ensure that BT efficiently provides WLR services.
Chapter 14NTS call originationIntroduction 14.1 Further to the remedies considered in chapters 10, 11, 12 and 13, the following chapter considers specific remedies relating to the origination of Number Translation Services (NTS) calls (NTS call origination) to be imposed in response to the initial findings of SMP in the call origination market discussed in chapter 5. This chapter considers remedies in respect of BT and Kingston. Background 14.2 NTS calls are used for the provision of a variety of value-added services, for example the provision of information services and Internet access. In this chapter, 'NTS calls' refers to calls to the following numbers: Special Service numbers (including freephone, special local rate and special national rate) and Premium Rate Services (PRS) (services currently provided under 090 and 091 number ranges). Within these ranges calls to 0844 04 numbers for Surftime Internet access services and calls to 0808 99 for FRIACO (Flat Rate Internet Access Call Origination – see chapter 15) are excluded. 14.3 Other non-geographic call types, for example, calls to personal numbering services, do exist. Oftel has not to date set charges for the origination of these other types of non-geographic calls, and does not deal with them here. However, the Director is separately investigating a dispute relating to BT's charges for originating calls to 118XXX numbers for directory enquiry services and expects to publish a draft direction in respect of this case shortly. Aims of regulation 14.4 Chapter 5 has discussed that there are separate retail and wholesale markets on the demand side for geographic and non-geographic call origination. However, the fact that typically only one fixed provider supplies a range of call origination services to a customer means that these services are linked by a common pricing constraint. Wholesale call origination services can therefore be considered part of one single market and the Director's initial view is that BT has SMP in that market. 14.5 Chapter 10 has proposed a number of remedies to address SMP in call origination. However, the requirements of operators purchasing non-geographic call origination and in particular NTS call origination, differ from those purchasing geographic call origination. This is because the model of competition for the provision of NTS services differs distinctly from the model of competition for other retail calls. For other retail calls, operators and service providers compete to provide calls to individual end users. In contrast, for NTS services, service providers compete to provide a particular service, for example traffic information, to a wide range of end users who are not directly known to them. In the absence of demand side substitutability between the two call types, regulating call origination for one call type is unlikely to limit the potential for BT to raise the prices of call origination for the other type. So it is necessary to consider a separate remedy for non-geographic calls. 14.6 The specific requirements for NTS call origination arise because NTS terminating operators do not have a commercial retailing relationship with the caller. Therefore operators purchasing NTS call origination will require the retail operator (the operator that has the retail relationship with the end user) to undertake the retailing of these calls on their behalf. 14.7 This chapter discusses options for regulating NTS call origination, and in particular the regulation of associated retailing services, in order to promote effective competition in downstream markets that depend on such call origination. Options for regulation - BT 14.8 Chapter 10 has already set out a number of remedies that the Director considers appropriate and proportionate to impose in the call origination market on BT. These are:
These obligations apply to all services within the call origination market including NTS call origination. 14.9 Clause 83(3) of the Communications Bill allows the Director to impose appropriate SMP conditions requiring the dominant provider to provide network access, to allow use of the relevant network and to make available the relevant facilities. In addition, Clauses 83(9) and (10) and Clause 84 of the Communications Bill allow the Director to impose appropriate charge controls in relation to matters connected with the provision of network access. 14.10 Although the Director has already proposed a requirement on BT to provide network access on reasonable request, it may be appropriate to specify that a particular product be provided. The options considered below in respect of BT are:
– (A) Retail uplift charge control fully based on current retail uplift methodology; – (B) Retail uplift charge control with glide path from the current retail uplift charge (based on a 1994/1995 cost allocation established in the 1996 price control review) to a charge based on BT’s most recent Fully Allocated Cost (FAC) data; and – (C) Retail uplift charge control with base charge and target charge based on BT’s most recent FAC data. Option 1 – No specific regulation for NTS call origination 14.11 For this option, there would be no specific regulation relating to the amount that BT could retain in respect of NTS calls that originate on BT's network and terminate on another operator’s network. The price to the customer, the out payment and BT’s retention would all be the result of commercial negotiations between BT and the terminating operator. Benefits and advantages 14.12 Without any specific regulation relating to NTS calls, all those regulatory costs specifically associated with the ongoing regulation of the NTS regime would be avoided (see also the costs of option 2 below). Costs and disadvantages 14.13 In this scenario, BT would have the incentive to set an excessively high charge for the call origination service and this would lead to excessively high prices paid by consumers. 14.14 BT could also leverage its market power from call origination into downstream markets by imposing a margin squeeze on terminating operators. Other terminating operators would then be unable to compete with BT in the provision of downstream services, for example voice NTS services and metered Internet termination services, enabling BT to assert market power in downstream markets. As set out below, consumers currently enjoy significant benefits from competition in these markets. Oftel therefore considers that there could be significant consumer detriment, including higher prices and reduced choice, arising from the reduction of competition in these markets. 14.15 Use of Indirect Access (IA) by terminating operators is unlikely to provide a competitive constraint on BT’s behaviour. This is because each terminating operator would have to establish a billing relationship with each calling party, resulting in many bills being sent to each consumer. The economies of scale and scope present in retail billing mean that it would not be feasible to enter the market in this way. Oftel is not aware of operators using IA for this purpose. Option 2 – Regulated retention for NTS call origination with annually derived retail uplift 14.16 This option proposes that the principles behind the current regulation of NTS call origination be retained. This requires that BT undertakes the retailing of NTS calls on behalf of the terminating operator and passes the retail revenue, net of a retention for its wholesale charges, including a 'retail uplift' charge for retail services (such as billing), to the terminating operator. 14.17 Under this approach, the charges that BT can make for the provision of wholesale NTS call origination, and hence the retention that it can keep, comprise of charges for conveyance and charges for associated retail services. These charges are explained below. Charges for conveyance 14.18 In chapter 10, Oftel has proposed that the charges for call origination services, including origination of NTS calls, are regulated by a charge control. For NTS call origination, BT should retain an amount to cover the charges for conveyance services used for each call. 14.19 Currently, BT’s billing system is unable to identify the conveyance services used by NTS calls, so a system of estimation is used. The Network Charge Differential (NCD) is used to provide an estimated relationship between the number of points of interconnection between BT and a terminating operator and the volume of double tandem traffic. This is used to calculate the amount that BT retains for the origination of NTS calls. However, the arrangements for the future use of the NCD and the use of BT’s Interconnect Call Accounting system (INCA) are currently subject to review within the industry and are not discussed here. Charges for retail services 14.20 The retailing activity undertaken by BT, including billing and revenue collection from the customer, on behalf of terminating operators purchasing NTS call origination is necessary to enable those operators to make effective use of the call origination service. As discussed in option 1, this is because it would be impractical and costly for each terminating operator to establish a billing relationship with each calling party, due to the economies of scale and scope present in retail billing. For example, a consumer might end up receiving several bills, each one relating to a small number of calls. 14.21 The ‘retail uplift’ is the charge that BT can make for these retailing services. As this retailing is a necessary part of NTS call origination, and the proposed remedies in chapter 10 encompass the supply of NTS call origination, Oftel’s proposed remedies in chapter 10 would also apply to the retail uplift. This includes the requirement that the charge for the retail uplift should be equal to LRIC plus an appropriate mark-up. 14.22 The approach to regulating the retail uplift charge proposed for this option relies on Oftel updating the charge on an annual basis to reflect movements in costs. Further explanation of the methodology is presented in Annex G. 14.23 In addition, for calls to Premium Rate Services (PRS), an additional retention can be made by BT as an allowance for bad debt, known as a 'bad debt surcharge.’ This is because PRS calls are high value type calls, and therefore result in BT incurring greater bad debt expenses where these are expressed on a per minute basis compared to the average NTS call. The surcharge is calculated as a percentage of the retail price of the call, net of any discounts. As set out in annex H, the Director proposes that the bad debt surcharge should be set at 2.05 per cent. 14.24 Note that the Director has recently consulted on the PRS bad debt surcharge under the current regulatory framework and is still considering some issues that have been raised in response to that consultation. Retail prices 14.25 Terminating operators have two alternative approaches to setting the retail price for their NTS calls:
In addition, operators can opt out of BT’s retail discounts for their NTS calls by using number blocks that are exempt from BT’s discounts. Benefits and advantages 14.26 The ability of terminating operators to offer competing deals to retail customers encourages competition and innovation in downstream markets, resulting in benefits to consumers. 14.27 The benefits of this regulatory option can be demonstrated by examining the competitive conditions that the current NTS regulations have fostered in downstream markets. Competition in the following markets is likely to have generated substantial benefits for consumers. 14.28 Voice NTS services. These services relate to the provision of end-to-end voice NTS calls for the purposes of providing information or value-added services. These range from freephone charitable helplines to premium rate information services. Oftel’s effective competition review of voice NTS services in March 2002 concluded that the market was effectively competitive. The review noted that the barriers to entry into the relevant market are low, as evidenced by the extent of entry in recent years and that there were over a hundred potential suppliers of NTS services. The benefits to customers of NTS services (ie the companies or individuals that use NTS services in order to provide callers with services using non-geographic numbers) include prices that have fallen in recent years, and a wide range of services, including tailor-made packages with features such as call management, call routing and call information. 14.29 Wholesale metered Internet call termination. Oftel’s Internet market review statement in January 2002 noted that terminating operators agreed that they had been able to compete in the provision of wholesale metered Internet call termination services based on NTS (the finding of market power in Internet call termination took into account the effect of the move towards unmetered services). As for voice services, the provision of metered Internet call termination is characterised by relatively low entry barriers and a large number of suppliers. 14.30 Retail dial-up Internet access. Oftel’s Internet market review also concluded that the retail market was effectively competitive and that residential and business dial-up Internet consumers were getting a good deal for dial-up Internet access, in particular that UK consumers benefited from a wide range of metered packages and prices that compare with the best in the world. 14.31 More recent research has continued to show that UK consumers continue to benefit from a wide choice of ISPs and prices that compare well internationally (see International benchmarking study of Internet access, 6 December 2002). Costs and disadvantages 14.32 The rapid growth of markets dependent on NTS has led to terminating operators' continued dependence on the details of the implementation of the NTS regime. This has necessitated continuing regulatory involvement, for example relating to the setting of the retail uplift, resulting in regulatory costs for BT and terminating operators. Option 3 – Regulated retention for NTS call origination with retail uplift charge control 14.33 The proposed conditions corresponding to this option are set out in Annex A. 14.34 This option proposes that the principles of NTS call origination as set out in option 2 are implemented with the addition of an RPI-X charge control on the retail uplift. Oftel would set a base year charge, derived from 01/02 financial data, for the charge control. From 25 July 2003, BT would be allowed to increase the retail uplift charge by the inflation rate minus an X factor. The charge control would be in effect for 4 years. 14.35 The base year charge and the value of X for the charge control depend on the methodology used for the charge control. Oftel is consulting on three proposed alternatives, which give three different possible controls. The relative merits of these approaches are set out in sub options, 3A, 3B and 3C, and the details of the methodology are given in Annex F. 14.36 However, before consideration of the various sub options, the general benefits and costs of a charge control compared to an annually derived charge (option 2) are considered. In addition, Oftel has considered the general merits of using RPI-X charge control compared to rate of return control in Chapter 10. Benefits and advantages 14.37 A charge control provides greater certainty for terminating operators as it allows them to know what the value of the retail uplift will be over the period of the charge control. A charge control also provides incentives for BT to improve its efficiency and reduce costs during the capped period, as it will benefit from any additional efficiency it can achieve. 14.38 Once in place the charge control should ensure lower regulatory costs for all players in the industry. The charge would not need to be revisited until the end of the charge control period, ie July 2007. This is in contrast to the high level of regulatory intervention that has been required to set the retail uplift over the last 4 years. Costs and disadvantages 14.39 The main disadvantage with a charge control is that it inevitably has to be based on forecasts. Forecasts may be subject to a degree of error, and charge controls may result in charges being either above or below actual costs. Options for retail uplift charge control 14.40 There are three options for the retail uplift charge control which are summarised in Figure 14.1 below. Figure 14.1: Summary of retail uplift (RU) charge control options Option 3A – Retail uplift charge control fully based on current retail uplift charge methodology (1994/1995 cost allocation underlying the 1996 price control review) 14.41 This option consists of a charge control with the base year based on the current retail uplift, which is derived from a forward projection of the cost allocations underlying the 1996 price control review. The target year would be based on this charge projected forward, using NTS volume forecasts. The details of this methodology are set out in Annex F. Benefits and advantages 14.42 One advantage of this approach would be that it uses an existing methodology. Therefore, there are lower regulatory costs in continuing to use this approach compared to undertaking a rigorous reassessment of costs in order to develop an alternative methodology. 14.43 The use of the current methodology for calculating the retail uplift would also provide continuity, which is likely to be beneficial with regard to the stability of services offered by terminating operators in downstream markets (see below). Costs and disadvantages 14.44 This methodology uses a baseline of costs from 1994/5. The original rationale for this was to prevent retail common costs being recovered by the NTS retail uplift while also being recovered from the 1996 price control. However, this concern may be of limited relevance to the projected target charge for the charge control in 4 years time. Option 3B – Retail uplift charge control with glide path from the current methodology to BT FAC allocation 14.45 This option has the same starting year charge as options 2 and 3A, but with the target year cost forecasted by projecting forward the current BT Fully Allocated Cost (FAC) allocation for non geographic calls. This would allow a smooth adjustment or glide path from the current methodology to the BT FAC allocation. The details for this methodology are set out in annex F. Benefits and advantages 14.46 The use of Fully Allocated Costs from BT's current financial statement may be more relevant compared to the 1994/5 cost allocation for the purposes of deriving the target charge for the retail uplift. This is because of the potentially changing nature of cost allocations over time, and the issue of remaining consistent with other current regulation based on up to date data from BT's regulatory accounts. 14.47 In the past, an up to date FAC approach for the setting of the retail uplift was not considered appropriate because of the existence of the 1996 price control review (PCR). It was important that other retail regulation such as the retail uplift was consistent with the retail cost allocations underlying the 1996 PCR. The use of up to date FAC costs would have been inconsistent with the PCR that was in force at the time, because up to date cost allocation allows a different allocation of costs between geographic and non-geographic calls. This would have had the effect of BT over-recovering in retail costs, once through the price control review, and then again through the NTS retail uplift. 14.48 However, the situation is different now, given the 2002 price control review. The problem of over recovery through the use of up to date FAC data no longer precludes the use of more up to date data because the 2002 price control review is already based on up to date FAC data. However, the use of the current methodology (1994/5 baseline) is also not inconsistent, because the 2002 retail price cap is not expected to be the primary constraint on call prices. The main constraint on BT’s retail prices is expected to be provided by competition. Accordingly, the costs that BT can recover are governed by competition rather than by the allocation of costs between geographic and non-geographic calls. This implies that there are no significant problems of inconsistency in using either approach; i.e. the previous allocation underlying the 1996 PCR, or the up to date cost allocation. 14.49 On balance, however, Oftel considers it beneficial to phase in the up to date FAC approach, because there is now no longer any compelling reason to maintain the current methodology, and going forward, it is sensible to use more up to date data. The charge will be phased in with the use of a charge control over four years, and a glide path from the current charge to the up to date FAC approach. 14.50 Although this approach would move to a new cost allocation, the change to the new allocation would be through a smooth adjustment rather than a step change, allowing services to be gradually migrated to new tariffs or number ranges if necessary. Costs and disadvantages 14.51 This approach relies on a rigorous assessment of relevant retail costs in the Financial Statement, which may be difficult to undertake. Oftel has undertaken a preliminary assessment but would expect to receive the relevant information from BT during the consultation period. Option 3C – Retail uplift charge control with base charge and target charge based on BT FAC allocation. 14.52 This option uses a base year charge and target year charge based on the current BT FAC allocation for non-geographic calls. There would be an initial step change due to the higher level of the charge based on this allocation compared to the current charge. The base charge for this option would be 0.28ppm and the charge control would be RPI+1.9 per cent. Further details are set out in Annex F. Benefits and advantages 14.53 The use of Fully Allocated Costs from BT's current financial statement would allow the retail uplift charge to be move to a more up to date allocation immediately rather than gradually as set out in option 3B. It also has advantages compared to the 1994/5 cost allocation because of the potentially changing nature of cost allocations over time, and the issue of remaining consistent with other current regulation based on up to date data from BT's regulatory accounts. Costs and disadvantages 14.54 This approach would break the continuity of the current methodology and the step change in the charge may be disruptive to current NTS services. For example, some NTS services may become unsustainable at their current tariffs as the higher retail uplift squeezes the margin available to terminating operators and service providers. The need to migrate to new tariffs and new numbers in a short period of time is likely to cause significant disruption for end users and terminating operators. 14.55 This approach also relies on a rigorous assessment of relevant retail costs in the Financial Statement, which may be difficult to undertake. Oftel has currently undertaken this assessment using estimates, but would expect to receive the relevant information from BT during the consultation period. Initial conclusions – BT 14.56 The Director's initial view is that Option 3B is the preferred option for the regulation of NTS call origination. This option comprises of the requirement to provide NTS call origination with a regulated retention and an allowance for a bad debt surcharge, and a charge control on the retail uplift, which is included in the charge control condition. 14.57 Firstly, the evidence indicates that the current regulated retention for NTS calls promotes competition and innovation in downstream markets, for example in retail metered narrowband Internet access. Secondly, the use of an RPI-X charge control avoids much of the ongoing regulatory costs and uncertainty associated with setting the retail uplift on an annual basis. Thirdly, the proposed methodology of gradually migrating onto a current BT FAC cost allocation, using a glide path, is preferable because the FAC cost allocation is more up to date and because the glide path process allows this migration whilst avoiding the disruption of a step change in the charge. 14.58 Clause 4 of the Communications Bill sets out the Community requirements for regulation. The Director in proposing this condition and the retail up lift charge control has considered all of the criteria in Clause 4, particularly the requirement to promote competition, to secure efficient and sustainable competition and to secure the maximum benefits for persons who are customers of communications providers as set out in paragraphs . 14.59 The Director considers that the proposed condition meets the tests set out in Clause 43 of the Communications Bill. It is objectively justifiable because it is necessary to promote competition and innovation in downstream markets. Although the Director's proposal is that Kingston should not be regulated in the same way as BT, his initial view is that this regulation would not be proportionate in respect of Kingston (see below). Therefore the difference in treatment of these operators is not discriminatory. It is proportionate, since it imposes the lowest costs on the parties involved while still being effective to promote competition and innovation in the downstream markets. It is transparent because the requirements on BT are clearly set out in this consultation document and the proposed condition. 14.60 The Director has set out in paragraphs 10.64 to 10.67 the reasons why he considers that the proposed charge control condition meets the tests set out in the Communications Bill. In addition, the Director considers that the charge control specifically in respect of the NTS retail uplift meets the tests set out in the Communications Bill as set out below. 14.61 The Director considers that the retail uplift charge control meets the tests set out in Clause 43 of the Communications Bill. The retail uplift charge control is objectively justifiable as an RPI-X control provides incentives to BT to minimise costs and reduces the regulatory costs associated with setting the retail uplift. In addition, the base year and target charges are both consistent with the proposed condition relating to the basis of charges (this is justified in paragraphs 10.30 to 10.33). Although this charge control is not proposed for Kingston, it is not discriminatory for the reasons set out in paragraphs 10.61 to 10.63 and 14.75. It is proportionate as it enables competitors to develop competitive services to the benefit of consumers, whilst at the same time allowing BT a fair rate of return and imposes lower regulatory costs than a charge which is set on an annual basis. Finally, the condition is transparent in that it is clear in its intention to control BT’s charges whilst creating efficiency incentives and the requirements are set out in this consultation document and in the proposed condition. 14.62 In addition, the Director has taken into account the factors set out in Clause 83(4) and in particular the economic viability of service providers establishing a billing relationship with each calling party and the feasibility of BT’s provision of retail billing. 14.63 The Director also considers that the tests in Clause 84 have been met. There is a risk that, in situations where SMP is persistent, pricing will be distorted and not at competitive levels. The proposed condition is necessary in order to promote competition and provide benefits to end users as it acts to control the charge for a wholesale input to a retail services in the absence of competition reducing prices. In addition, the proposal for an RPI-X control promotes efficiency as discussed in paragraphs 10.42 to 10.46. The extent of BT's investment is taken into account by setting X so that BT's projected rate of return on capital in the last year of the charge control is equal to BT's cost of capital (as discussed in paragraph 10.67). 14.64 Historically, Oftel has dealt with a significant number of disputes in relation to NTS traffic. In time scales beyond this market review process, Oftel expects to consider whether there is further potential for reducing the likelihood of disputes in the future and to explore the wider context of NTS. Options for regulation – Kingston 14.65 As discussed above, chapter 10 has already set out a number of remedies that the Director considers appropriate and proportionate to impose in the call origination market on Kingston within the Hull Area. These obligations apply to all services within these markets including the origination of NTS calls. 14.66 In addition to the general obligation to provide access, the Director may consider it appropriate to specify that a particular product be provided. The options considered below in respect of Kingston are:
Option 1 – No NTS specific regulation 14.67 As an originator of NTS calls, Kingston’s wholesale retention is currently constrained by the operation of NTS regulation within the rest of the UK. 14.68 Kingston interconnects only with BT and CWC but does not send NTS traffic to the latter. Therefore, all NTS traffic is handed to BT for termination or transit to the network of another terminating operator. In practice, the out payment that BT makes to the terminating operator is the same as the payment that is made for BT originated NTS calls (the regulation relating to these calls is discussed above), and seeks the same charge from Kingston. This is because BT’s interconnect billing system is currently unable to differentiate between BT originated calls and transit calls. Therefore, the payment from Kingston to BT for NTS calls is currently effectively constrained by the regulation that applies to BT in respect of NTS call origination. Benefits and advantages 14.69 The costs of detailed regulation of the charges for retail services are avoided. This level of regulation is not currently necessary since Kingston’s retention for NTS calls is currently dictated by the operation of the UK NTS regime. Kingston’s customers have ready access to any UK based NTS services at prices which compare with those charged by BT and other network operators. Costs and disadvantages 14.70 Although Kingston's payment to other operators is effectively constrained, there is no explicit constraint on Kingston's ability to set an excessive charge for NTS call origination. In addition, this constraint on the out payment is dependent on the current state of BT's billing system. Option 2 – Regulated retention for NTS call origination 14.71 This requires that Kingston undertakes the retailing of NTS calls on behalf of the terminating operator, passes the retail revenue to the terminating operator (possibly via a transit operator) and keeps a cost based retention for call origination and retailing. Kingston would recover its costs of call origination and retailing of NTS calls rather than the constrained out payment required by the operation of the current NTS regime. Benefits and advantages 14.72 Kingston would be prevented from setting an excessively high charge for NTS call origination, and therefore avoid consumers being charged excessive prices. Costs and disadvantages 14.73 Historically NTS terminating operators have rejected lower out payments so that originating operators other than BT cannot recover their costs without having to increase retail prices. Consequently, in order to accommodate the regulated origination charges plus the NTS out payment required by terminating operators, retail prices for NTS calls within Kingston may have to increase. 14.74 As noted above, the introduction of NTS regulation does introduce a number of regulatory costs, in particular, in this case, an appropriate retail uplift for Kingston would have to be set. In addition, there are likely to be significant practical difficulties in introducing new interconnect billing arrangements. Initial conclusions – Kingston 14.75 The Director’s initial view is that option 1 is preferred, because the current unregulated arrangements appear to be satisfactory for consumers and operators. Although option 2 may result in charges more closely reflecting costs, it is likely to introduce significant regulatory costs, practical difficulties and the risk of higher consumer prices. Consequently the Director's initial view is that option 2 would not meet the proportionality test in Clause 43 of the Communications Bill because this option is unlikely to bring significant benefits to consumers whilst incurring substantial costs in its implementation. However, Oftel may need to revisit this view if the current constraints on Kingston were no longer in place. | |||||||
