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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 15Flat Rate Internet Access Call Origination (FRIACO)Introduction 15.1 Further to the remedies considered in Chapter 10, this Chapter assesses options for a specific Flat Rate Internet Access Call Origination (FRIACO) remedy to be imposed in response to the initial finding of SMP in the call origination market and local-tandem conveyance and transit market discussed in Chapters 5 and 6. Background 15.2 BT currently provides FRIACO at the local exchange (DLE FRIACO) and tandem exchange (Single Tandem (ST) FRIACO). There are close links between the supply of these services and competition in the narrowband unmetered Internet termination market. Oftel is separately reviewing that market and has identified the availability of FRIACO products as an important consideration when assessing competition in that market. Aims of regulation 15.3 Chapter 14 has discussed remedies for NTS call origination in order to promote competition in downstream markets including retail metered narrowband Internet access. However, as discussed in Chapter 5, retail metered narrowband Internet access services are in a separate market on the demand side to retail unmetered Internet access services. With no or limited demand side substitutability between retail metered and unmetered Internet access, a regulated wholesale charge for metered Internet call origination (such as NTS) will not limit the ability of BT to raise its charges for wholesale unmetered Internet call origination. 15.4 Therefore, this chapter considers the options for wholesale unmetered call origination remedies in order to promote competition in the downstream markets for retail unmetered Internet access services and wholesale unmetered narrowband Internet termination. Options for regulation – BT 15.5 Chapter 10 has already set out a number of remedies that the Director considers appropriate and proportionate to impose in the call origination and local-tandem conveyance and transit markets in response to the initial findings of SMP. These are:
These obligations apply to all call origination and local-tandem conveyance services including FRIACO services discussed below. 15.6 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. 15.7 In addition to the requirement to provide access, the Director may consider it appropriate to specify that a particular product be provided. The options considered below in respect of BT are:
Option 1 – No specific ex ante regulation for unmetered access 15.8 This option considers whether in the absence of unmetered access products, the remedies proposed in Chapters 10 and 14, are sufficient to promote competition in unmetered narrowband Internet termination. Benefits and advantages 15.9 The regulatory costs associated with providing a regulated wholesale product, for example monitoring of compliance and provision of information, would be eliminated. Costs and disadvantages 15.10 Oftel believes that the absence of appropriate unmetered access products would be detrimental to competition in unmetered narrowband Internet termination and also retail Internet access. As discussed in EU market Review: Wholesale unmetered narrowband Internet termination, March 2003, competing unmetered termination services currently rely on operators being able to purchase FRIACO as an input to their unmetered termination services. 15.11 If operators had to rely on purchasing metered wholesale call origination from BT as an input to their unmetered termination products, they would be exposed to forecasting risks as they have no certainty about the extent to which their unmetered services will be used. If call volumes exceed their forecasts, operators’ payments to BT will increase directly in line with the higher volume of calls, but their (flat-rate) income from ISPs will remain the same. The lack of an unmetered wholesale call origination product therefore has the potential to create a situation under which an operator offering an unmetered termination service would suffer a margin squeeze. 15.12 Oftel takes the view that BT does not face similar risks when its position is assessed on an end-to-end basis. Any losses incurred by BT’s unmetered termination operation would be purely notional and offset by notional profits in its call origination business. There are two main reasons for this. First, the proposed metered wholesale charges paid to BT are based on an average cost. This wholesale charge is substantially above the marginal cost incurred by BT in providing the additional call volumes (at any time of day). This means that BT’s actual costs do not rise with call volumes in the same way as payments by other operators using metered call origination. 15.13 Secondly, marginal network costs do not grow proportionally with call volumes originating from individual customers. A large increase in call volume from an individual customer is likely to entail greater use of the network’s off-peak period. During the off-peak period, the network has spare capacity. Hence, the marginal cost to BT of such a call is at (or not materially different from) zero. An increase in call volume from each individual customer would not necessarily therefore cause BT’s costs to rise in line with increased call volumes (or, indeed, at all). However, if other operators only have a metered call origination service available from BT, they would be required to pay on a pence-per-minute basis for such extra calls. 15.14 Oftel also believes that competition in the retail market is dependent on the ready availability of wholesale unmetered termination products. BT also has a vertically integrated ISP business, and therefore restriction of competition in the wholesale market could also have a negative impact on competition in the retail market, for example if BT only made unmetered wholesale services available to its own ISP. Option 2 – Obligation to provide DLE FRIACO 15.15 This option considers the costs and benefits of an obligation to provide DLE FRIACO as a remedy for BT’s SMP in call origination. DLE FRIACO enables calls originating on BT's network to be conveyed to a DLE and handed over to a terminating operator for a flat rate charge. DLE FRIACO should be provided at any DLE where BT separates Internet traffic from other calls and no per minute charges should be made for the conveyance of this traffic. Charges 15.16 The basis for cost recovery that Oftel has proposed in chapter 10, namely LRIC plus an appropriate mark-up would be relevant to any FRIACO products supplied, subject to the specific pricing methodology set out below. 15.17 The pricing methodology for FRIACO reflects the fact that it is a capacity based service. In the case of DLE FRIACO, network capacity used includes local exchange call origination (LECO) circuits and the DLE port. However, since ports carry more traffic than local exchange circuits in the busy hour (which is the relevant period for network dimensioning), each FRIACO port will require more than one LECO circuit to support it, if the Grade of Service on the local exchange circuits is not to be reduced. The Adjustment Ratio (AR) adjusts for the number of LECO circuits required per DLE port. In addition there is a charge for product management, policy and planning (PPP). Therefore the total charge calculated by the following formula:
[D(i) x AR(DLE)(LECO)] + D(ii) + D(iii)
where:
D(i) = local exchange call origination (LECO) circuit excluding FRIACO port at the Local Exchange; D(ii) = FRIACO port at the Local Exchange; D(iii) = PPP per FRIACO port; AR(DLE)(LECO) = the adjustment ratio for DLE FRIACO use of the LECO circuit
15.18 The charges for the LECO circuit, FRIACO port at the DLE and PPP have previously been charge controlled. Chapter 10 explains Oftel’s proposals for the retention of the current charge controls. 15.19 Note that the derivation of both DLE FRIACO and ST FRIACO charges (below) assume equivalent payment terms for metered and unmetered call origination services. The terms for the payment of the FRIACO charge should, therefore, be equivalent to those for corresponding metered call origination services and should therefore consist of some form of payment in arrears. Adjustment ratio 15.20 Oftel’s approach is that the adjustment ratio should be reasonably stable and sustainable. This is important because business planning is facilitated by reasonable predictability. Oftel has previously consulted on the most appropriate methodology to use for calculating the adjustment ratio and believes that the methodology used in its July 2002 statement is still a reasonable approach. 15.21 In that statement, Oftel indicated that the adjustment ratio need not be reviewed more frequently than annually unless warranted by specific circumstances. This reflects the fact that the adjustment ratio aims to reflect the stable mature usage of FRIACO and therefore is not inherently subject to change. Therefore Oftel believes that it is still appropriate to use value for the adjustment ratio as set out in its July 2002 statement ie AR(DLE)(LECO) for DLE FRIACO = 1.78. 15.22 Although Oftel proposed that the next review would commence in Spring 2003, Oftel now plans to commence the adjustment ratio review no earlier than Summer 2003 following the publication of its statements on the EU market reviews. Intelligent Network charge 15.23 Oftel will be separately consulting on the Intelligent Network (IN) charge for FRIACO services. Benefits and advantages 15.24 The main benefits of a regulated DLE FRIACO are the development of competition in the wholesale unmetered narrowband Internet termination market and in the corresponding retail market. As discussed in the consultation document Review of the wholesale unmetered narrowband Internet termination market, March 2003, operators offer competing unmetered termination services based on DLE FRIACO, and the Director’s initial conclusion is that this market is effectively competitive. Oftel’s statement on retail Internet access published in January 2002 also concluded that there is effective competition in the retail market. 15.25 As well as creating benefits for competing operators and ISPs, competition in these markets has created benefits for UK consumers in terms of the price and availability of unmetered services. 15.26 Oftel's international benchmarking study of Internet access (dial-up and broadband), 6 December 2002, has shown that, of the countries benchmarked, unmetered dial-up services are only widely available in the UK and the US (although they are starting to be offered in France). This is reflected in the fact that prices for high usage residential Internet consumers in the UK have been consistently cheaper than the other countries surveyed. For business services, unmetered dial-up is again only widely available in the UK and the USA. UK prices are significantly lower than in France or Sweden, lower than in Ohio, although higher than in California. Costs and disadvantages 15.27 As discussed in option 1, the main costs of an obligation to provide DLE FRIACO are BT's overheads associated with its continued supply. Option 3 – Obligation to provide Single Tandem FRIACO in addition to DLE FRIACO 15.28 The draft condition relating to this option can be found in Annex A. This option considers the costs and benefits of an unrestricted obligation to provide Single Tandem FRIACO (ST FRIACO), as a remedy for BT’s SMP in local-tandem conveyance and call origination, in addition to DLE FRIACO. ST FRIACO is similar to DLE FRIACO, the main difference is that traffic is carried to BT's tandem exchange. Charges
15.29 The principles as outlined above for DLE FRIACO are also relevant to ST FRIACO. Two further charges are specified for ST FRIACO, as follows: F(i): Local-tandem circuit excluding FRIACO port at tandem exchange; and F(ii): FRIACO port at tandem exchange. 15.30 Therefore, the charge for ST FRIACO is given by: [D(i) x AR(ST)(LECO)] + [(D(ii) + F(i)) x AR(LT)] + D(iii) + F(ii);
where:
AR(ST)(LECO) = adjustment ratio for ST FRIACO use of the LECO circuit AR(LT) = adjustment ratio for ST FRIACO use of the Local-tandem circuit Adjustment Ratios for ST FRIACO 15.31 In the same way as the DLE FRIACO adjustment ratio takes account of the number of LECO circuits needed per DLE port, the local-tandem adjustment ratio takes account of the number of local-tandem circuits needed per tandem layer FRIACO port. It is calculated as the ratio of the average busy hour erlangs per circuit (BHEPC) of the operator interconnect port to the average BHEPC of the local-to-tandem circuit. 15.32 In addition, since ST FRIACO makes use of the LECO circuit at the DLE, it is necessary to consider an adjustment ratio for the number of LECO circuits needed per DLE for the provision of ST FRIACO. However, the appropriate value of AR (LECO) for ST FRIACO can be different from that for DLE FRIACO because the EPC of FRIACO ports might be different at DLEs and tandem exchanges. For example, it might be possible to achieve higher utilisation of FRIACO ports at tandem switches, because of the benefits of greater concentration of traffic and larger route sizes. 15.33 Oftel has based the values of AR(ST)(LECO) and AR(LT) on the methodology and data provided for Oftel's February 2001 Direction on ST FRIACO. Since then there has been limited take-up of ST FRIACO and any traffic flowing would not have reached a mature and stable level. Therefore, Oftel believes that it is still appropriate to use the existing values of AR(ST)(LECO) and AR(LT) for ST FRIACO. Accordingly, the adjustment ratios that Oftel proposes are used to calculate the ST FRIACO charge are AR(ST)(LECO) = 2 and AR(LT) = 1.19. 15.34 Oftel will consider whether the adjustment ratios for ST FRIACO are still appropriate when it conducts its next review of adjustment ratios commencing in summer 2003. Benefits and advantages 15.35 ST FRIACO reduces barriers to entry by enabling operators to achieve an efficient national rollout with a lower volume of traffic than that would be required using DLE FRIACO alone. Therefore ST FRIACO allows smaller players to enter the market effectively. Oftel is currently aware of two smaller players that are using ST FRIACO to support the provision of wholesale unmetered services. 15.36 In the absence of ST FRIACO, operators need to interconnect with all of BT’s local exchanges in order to achieve national coverage. Although there are economies of scale associated with converting switched traffic to IP traffic at the local exchange level (using DLE FRIACO), for areas with low traffic volumes there are significant benefits arising from concentrating traffic at the tandem level. These include route thickness and granularity effects (discussed in [ref to Internet termination review]), non-coincident busy hours and uncertainty of geographic distribution. 15.37 Non-coincident busy hours. Each DLE will typically exhibit a different traffic profile through the day, such that the busy hours are non-coincident, and the total capacity required out of the tandem switch is less than the sum of the capacities into the switch. 15.38 Geographic distribution. There are also arguments in respect of uncertainty (or variability) in geographical distribution of demand across DLEs. Operators using DLE FRIACO are obliged to estimate the geographical breakdown of traffic to the individual local exchange level. There will be some uncertainty in this estimate, and operators need to provide safety-margin capacity to ensure that grade of service is maintained. Tandem level interconnection reduces this uncertainty and therefore the required safety-margin capacity. 15.39 Although unmetered termination services have, to date, primarily utilised DLE FRIACO, one operator has already entered the market using a combination of DLE and ST FRIACO to achieve nationwide coverage. 15.40 Oftel understands from operators that the take up of ST FRIACO has at least partly been restricted by the necessary conditions placed on 'Stage 1' of ST FRIACO (see Oftel’s February 02 direction on ST FRIACO). The ending of these 'Stage 1' conditions should, in Oftel's view, make ST FRIACO a more attractive proposition for new entrants in the future. Costs and disadvantages 15.41 There will be ongoing regulatory costs associated with the availability of ST FRIACO, although Oftel notes that these are likely to have reduced now that ST FRIACO is established and that the 'Stage 1' requirements no longer apply. Option 4 – Obligation to provide ST FRIACO with 'stranded assets' clause, in addition to DLE FRIACO 15.42 This option considers the requirement to make an allowance for stranded assets when placing an obligation on BT to supply ST FRIACO. This would require all users of ST FRIACO to pay a charge that reflects the risk of investments being stranded if it was necessary for BT to purchase one or more additional switches in order to meet demand for ST FRIACO. Oftel estimates the cost of one tandem exchange and associated equipment to be £2,500,000 and considers this amount to be a significant capital cost. Advantages and benefits 15.43 When ST FRIACO was originally introduced there was substantial concern about the impact of this product on BT’s tandem switches. This arose from two factors. Firstly, there was an expectation of very rapid growth in the volume of FRIACO traffic being handed over to OLOs at BT’s tandem exchanges. Secondly, there was a concern about the limited amount of spare port capacity on the existing tandem exchanges (DMSUs). The solution that was proposed was that BT would, where necessary, construct new tandem exchanges specifically to handle ST FRIACO traffic. 15.44 This however raised a third concern, which was that the high volume of demand for ST FRIACO traffic might last for a limited period only, due to migration to other forms of interconnect, such as DLE or IP based interconnect. The stranded asset would arise if BT was denied the opportunity to recover the costs of its investment in these additional switches. The aim of setting a stranded asset charge was to ensure that BT was able to share the risk of investing in tandem switches which might become obsolete before costs were recovered. This would ensure that appropriate pricing signals were sent to users of tandem capacity to feed through into their pricing decisions. Costs and disadvantages 15.45 Although a risk of stranded assets was identified when ST FRIACO was originally introduced, Oftel now considers the risk of "stranded assets" is negligible for two reasons. 15.46 Firstly, market research and feedback from operators indicates that unmetered traffic is now growing relatively slowly with the bulk of initial rapid growth having already occurred using DLE FRIACO capacity. 15.47 Secondly, the DMSU tandem exchange which were in use when ST FRIACO was introduced are now being replaced by NGS tandem exchanges. The potential for upgrading the port capacity of these exchanges is significantly greater than was the case for the DMSUs. 15.48 It therefore appears that any necessary upgrade in network capacity to handle ST FRIACO is likely to be provided by upgrading the port capacity of existing switches, rather than by providing new switches. This will have a much lower cost than the purchase of new switches. 15.49 The existence of a 'stranded asset' clause would create uncertainty for operators, even if the risk of the charge being applied is very low. This uncertainty would effectively cause operators to associate a higher cost with ST FRIACO than would be without a stranded assets clause. Initial conclusions 15.50 The Director's initial view is that Option 3 is the appropriate remedy in response to the initial findings that BT has SMP in wholesale call origination and local-tandem conveyance. DLE FRIACO has clearly been a key contributor to the development of competition in the unmetered narrowband Internet termination market and its withdrawal would cause considerable damage to competition in that market. 15.51 Although the experience with ST FRIACO has been less conclusive, the Director considers that its benefits are likely to outweigh the costs and that it is an important product for facilitating entry into the market. The Director is aware that at least one operator has used it to complete its national FRIACO coverage, an important factor when entering the wholesale unmetered narrowband Internet termination market. In particular, its true value has probably not been exploited yet due to the initial conditions imposed on its supply. By reducing entry barriers, it can contribute to the competitiveness of the unmetered termination market. Therefore, Option 1, supply of DLE FRIACO only, is unlikely to be the most effective method of promoting competition in downstream markets. 15.52 The original inclusion of a stranded assets clause for ST FRIACO was due to exceptional circumstances that no longer exist. Therefore, the Director believes that Option 4, the inclusion of a stranded assets clause is now inappropriate and unnecessary and that it would place an unreasonable cost on operators as a result of the uncertainty it creates. 15.53 Clause 4 of the Communications Bill sets out the Community requirements for regulation. The Director in proposing this condition 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 15.4 and 15.24 to 15.26. 15.54 The Director considers that the proposed option 3 meets the tests set out in Clause 43 of the Communications Bill for the following reasons:
15.55 In addition, the Director has taken into account all the factors set out in Clause 83(4) and in particular, the economic viability of service providers building out their own networks and the feasibility of providing FRIACO. 15.56 The Director further considers that the proposed requirements relating to FRIACO charges meet the criteria set out in Clause 84 of the Bill. As noted in Chapter 10, 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 by enabling competing providers to buy unmetered wholesale services at levels that might be expected in a competitive market. In addition, the FRIACO charge takes account the extent of the investment of BT (as required by Clause 84(2) we set out in paragraph 10.67. Options for regulation – Kingston 15.57 Chapter 10 has already set out a number of remedies that the Director considers appropriate and proportionate to impose on Kingston in the call origination market in response to the initial findings of SMP. These obligations apply to all call origination services including FRIACO services. 15.58 In addition to the general requirement to provide network access, the Director may consider it appropriate to specify that a particular product be provided. The options considered below in respect to Kingston are:
Option 1 – No requirement to provide a specific product for unmetered access 15.59 A FRIACO product is currently not available in the Hull Area. This option considers the scenario in which no specific requirement is placed on Kingston to provide a FRIACO product. Advantages and benefits 15.60 Any initial costs incurred by Kingston in introducing a FRIACO product would be avoided and no ongoing regulatory costs would be incurred. At present, only a small number of operators interconnect with Kingston and none of these have so far requested a flat rate wholesale product similar to FRIACO. Costs and disadvantages 15.61 The absence of a FRIACO product may have had an impact on the competitive conditions in the unmetered Internet termination market in the Hull Area. Oftel's review of the wholesale unmetered narrowband Internet termination has reached the initial view that Kingston has SMP in that market. Without a FRIACO product, it seems unlikely that other terminating operators would enter the market in the Hull Area. Option 2 – Specific requirement to provide FRIACO 15.62 Kingston would be required to provide a FRIACO product, where Internet traffic would be originated for a flat rate charge. However, given the nature of Kingston's network, the distinction between DLE and ST FRIACO products is unlikely to be appropriate. Advantages and benefits 15.63 Oftel believes that the arguments in favour a FRIACO product in the Hull Area are broadly similar to those outlined for the rest of the UK, ie the promotion of competition in the downstream markets for retail unmetered narrowband Internet access and wholesale unmetered narrowband Internet termination. If a FRIACO product was available from Kingston, it might help terminating operators provide wholesale narrowband unmetered Internet termination products to ISPs and promote the competition in the supply of retail unmetered narrowband Internet access services. Costs and disadvantages 15.64 Kingston would incur some initial costs in developing a suitable product. It is difficult to assess what these costs would be, however, they may not be substantial if the necessary technical infrastructure is already in place, for example if Kingston already separates Internet traffic for its own purposes. 15.65 In the rest of the UK, there is a clear demand for FRIACO from competing providers. However, at present, only a small number of providers interconnect with Kingston and none of these have requested a flat rate wholesale product similar to FRIACO. Without a clear request for a product, it would be difficult to identify the detailed requirements for such a product and therefore there would be a risk that the product would be unsuitable for use by competing providers. Initial conclusions 15.66 The Director's initial view is that Option 1 is preferred because it would not be appropriate to require Kingston to supply FRIACO without reasonable demand first having been demonstrated. 15.67 However, in Chapter 10, the Director has proposed a number of obligations on Kingston, including the requirement to provide network access on reasonable request. A request for network access could include a request for a FRIACO product. When considering whether such a request is considered reasonable, the Director would take account of the criteria set out in Oftel’s Access Guidelines, including whether the request is technically feasible and whether it represents an ‘undue burden’ on the operator supplying it.
Chapter 16Cost accounting and accounting separation16.1 This chapter covers financial reporting obligations that may be imposed on the proposed dominant providers, BT and Kingston, to ensure that a number of the proposed obligations set out in chapter 10 are met. In particular, obligations of cost orientation, price controls and non-discrimination can require the imposition of financial reporting regimes to monitor dominant providers’ compliance with these obligations. In particular, this chapter covers the imposition of obligations for cost accounting systems and accounting separation. 16.2 The Director is of the view that it is appropriate to impose cost accounting and accounting separation obligations in the markets covered in this review. The two sub-sections below outline why these financial reporting obligations are required. 16.3 However, the processes of cost accounting and accounting separation are complex, covering issues such as cost attribution methodologies, accounting standards, audit, transparency, disaggregation, reconciliation and publication of information. These practical processes are distinct from the questions of principle, such as the level of regulation in the market, the remedies to be applied, etc. For example, the decision on whether to impose a cost accounting obligation and the level of information required is made on the basis of the findings of the market review. However, the practical processes must be consistent across all markets susceptible to regulation to ensure that there is certainty for the Director, the dominant providers and other persons in the market regarding regulatory financial information requirements. 16.4 Therefore, the Director will be carrying out a separate consultation – Financial reporting in SMP markets: A consultation on accounting separation and cost accounting systems – on the nature of the obligations necessary for implementing the processes of cost accounting systems and accounting separation. The scope of this consultation will be to address the issues of how the requirements for cost accounting and accounting separation will be implemented. It will also address the level of granularity required for such obligations to be imposed in a proportionate and appropriate manner. That consultation will contain the draft cost accounting and accounting separation obligations. The Director intends to carry out this consultation towards the end of the market review process so that the requirements of the accounting separation condition and the cost accounting condition can reflect the findings of the individual reviews. Cost accounting systems 16.5 Under clauses 83(9) to 83(11) and 84 of the Communications Bill, appropriate cost accounting obligations may be imposed on dominant providers in respect of the provision of network access, the use of the relevant network and the availability of relevant facilities. Cost accounting rules may be made in relation to charge controls, the recovery of costs and cost orientation. 16.6 In paragraphs 10.20 to 10.36, the Director is proposing that charges in certain markets and a technical area should be cost-oriented on the basis of LRIC with an appropriate mark-up for the recovery of common costs. As explained in that section, this is to ensure that the charges of dominant providers are constrained to enable competitors purchasing such services to compete with the dominant providers in downstream markets. In particular, paragraphs 10.20 to 10.23 describe why LRIC with an appropriate mark-up for the recovery of common costs, is a justifiable and proportionate response to the extent of competition in the markets analysed. 16.7 In addition, in paragraphs 10.37 to 10.67, the Director is proposing charge controls for BT for certain markets and a technical area. As explained in those sections, such charge controls are necessary to ensure that competition develops to the benefit of consumers and to encourage network efficiency. In particular, paragraphs 10.37 to 10.54 describe why the charge control is a justifiable and appropriate response to the extent of competition in the markets, and why the level of the charge control is proportionate, respectively. It should be noted that the Director is not proposing a charge control on the wholesale services offered by Kingston for the reasons given in paragraphs 10.61and 10.62. 16.8 Given the imposition of LRIC with an appropriate mark-up for the recovery of common costs, and a charge control for BT, the Director is proposing that BT should maintain a cost accounting system, that demonstrates that the obligations of cost orientation and the charge control are being met. This will enable the Director to monitor compliance with those obligations. 16.9 The cost accounting obligations for BT would apply to the markets and the technical area identified in paragraph 10.26 for which BT must demonstrate that its charges are set on the basis of LRIC plus an appropriate mark-up for the recovery of common costs. These are:
16.10 The cost accounting obligations for Kingston would apply to the markets and the technical area identified in paragraph 10.26 for which Kingston must demonstrate that its charges are set on the basis of LRIC plus an appropriate mark-up for the recovery of common costs. These are:
16.11 BT ‘s cost accounting system is also necessary to monitor its charge control obligations and therefore must cover the markets and technical areas listed at paragraph 10.56. 16.12 In order to demonstrate cost orientation of a service or product, it is necessary for the dominant provider to establish cost accounting systems that capture, identify, value and attribute relevant costs to its services and products in accordance with agreed regulatory accounting principles, such as cost causality. A key part of this process is the stage which identifies those parts of the underlying activities or elements that directly support or are consumed by those services or products. These elements are referred to as network components. As these components are frequently used to provide more than one product or service, it is also necessary to determine how much of each component is used for each service or product that should be cost-oriented. The service/product costing methodology applies the utilisation of these components (which are characterised by common usage measures) to the appropriate service product. For example, the call origination local exchange segment (including operator assistance) service uses six distinguishable underlying cost components – the local exchange concentrator, the local exchange processor, remote to local transmission, remote to transmission length, inland operator assistance and emergency operator assistance – which all require analysis in the cost accounting system. Therefore, for each of these components, it would be necessary to produce a financial statement, that sets out costs and volumes that demonstrate that this information has been properly prepared, in addition to the financial statement for the call origination local exchange segment (including operator assistance) service. 16.13 Clause 4 of the Communications Bill sets out the Community requirements for regulation. The Director has considered all of the criteria in Clause 4 of the Communications Bill. In particular, the imposition of a cost accounting obligation would specifically be justifiable and proportionate to promote competition; and to ensure efficient and sustainable competition and the maximum benefit for the persons who are customers of communications providers. This is because the imposition of a cost accounting obligation will ensure that obligations designed to curb potentially damaging market power can be effectively monitored and enforced. 16.14 In addition, the Director has considered the tests laid out in Clause 84 of the Communications Bill. From the market analysis (see chapters 4 to 7), it appears to the Director that there is a relevant risk of adverse effects arising from price distortion. In particular, the market analysis has shown that BT and Kingston might fix and maintain some or all of their prices at an excessively high level, or impose a price squeeze so as to have adverse consequences for end-users. In the light of this analysis, and taking into account the level of investment of the dominant providers, the Director is of the view that a cost accounting obligation is appropriate for the purposes of promoting efficiency, promoting sustainable competition, and conferring the greatest possible benefits on the end-users of public electronic communications services. 16.15 Clause 43 of the Communications Bill requires conditions to be objectively justifiable, non-discriminatory, proportionate and transparent. The Director believes that given the importance of cost orientation and charge controls in these markets (as described in paragraphs 10.20 to 10.36 and 10.37 to 10.67, respectively) the imposition of a cost accounting obligation is objectively justifiable. That is, in order to ensure that the obligations of cost orientation and charge control are met and the benefits are realised, it is essential that the Director is able to monitor the obligations via a cost accounting obligation. Furthermore, the cost accounting obligation does not discriminate between providers of the same class. That is, BT and Kingston are the only dominant providers identified by this market review and are the only providers on whom cost orientation or charge control obligations are proposed. 16.16 The proportionality and transparency of the obligation will be dealt with in more detail in the separate consultation document Financial reporting in SMP markets: A consultation on accounting separation and cost accounting systems. In this document, the Director will propose the amount of information required and the processes needed to ensure that the information is fit for purpose, relevant and reliable. The Director will ensure that the cost accounting obligation imposed is both proportionate and transparent. Accounting separation 16.17 Under clauses 83(7) and 83(8) of the Communications Bill, appropriate accounting separation obligations may be imposed on the dominant provider in respect of the provision of network access, the use of the relevant network and the availability of relevant facilities. That is to say, the dominant provider may be required to maintain a separation for accounting purposes between such different matters relating to network access or the availability of relevant facilities. 16.18 In paragraphs 10.12 to 10.19, the Director is proposing that dominant providers should have an obligation to not unduly discriminate across a range of markets and a technical area. This is because where a dominant provider is vertically integrated it has an incentive to provide wholesale services on terms and conditions that discriminate in favour of its own retail activities in such a way that may have a material effect on competition. 16.19 Therefore, given the importance of this issue in ensuring an effectively competitive marketplace in the UK, the Director believes that it is necessary that BT and Kingston should be obliged to have accounting separation obligations. These obligations will enable Oftel to monitor whether they are unduly discriminating against or between other providers or not, by making visible the wholesale prices and internal transfer prices of their services and products. Therefore, the accounting separation obligations for BT and Kingston will apply to the markets and the technical area identified in paragraph 10.16 as being subject to the obligation to not unduly discriminate. 16.20 In relation to BT, these are:
16.21 In relation to Kingston, these are:
16.22 Clause 4 of the Communications Bill sets out the Community requirements for regulation. The Director has considered all of the criteria in Clause 4 of the Communications Bill. In particular, the imposition of an accounting separation obligation would specifically be justifiable and proportionate to promote competition; to ensure efficient and sustainable competition and the maximum benefit for the persons who are customers of communications providers. This is because the imposition of an accounting separation obligation will ensure that obligations designed to curb potentially damaging market power can be effectively monitored and enforced. 16.23 Clause 43 of the Communications Bill requires conditions to be objectively justifiable, non-discriminatory, proportionate and transparent. The Director believes that given the importance of non-discrimination in these markets (as described in paragraphs 10.12 to 10.19) the imposition of an accounting separation obligation is objectively justifiable. That is, in order to ensure that the obligation to not unduly discriminate is met and the benefits are realised, it is essential that Oftel is able to monitor the obligations via an accounting separation obligation. Furthermore, the accounting separation obligation does not discriminate between operators of the same class. That is, BT and Kingston are the only dominant providers identified by this market review and are the only providers with proposed obligations to not unduly discriminate in their relevant markets. 16.24 The proportionality and transparency of the obligation will be dealt with in more detail in the separate consultation document Financial reporting in SMP markets: A consultation on accounting separation and cost accounting systems. In this document, the Director will propose the amount of information required and the processes needed to ensure that the information is reliable. The Director will ensure that in imposing an accounting separation obligation it is both proportionate and transparent. 16.25 As non-discrimination must be capable of being implemented, where appropriate, on a service or product basis it is not sufficient for monitoring to be carried out only at the market level, as this would not enable Oftel to identify whether products and services are being provided on a non-discriminatory basis. 16.26 As an example, in order to ensure that FRIACO (a product within the call origination market) is being provided on a basis that was not unduly discriminatory, it would be necessary to make visible the wholesale prices and internal transfer prices of FRIACO – not just the whole call origination market – on an equivalent basis. The same is true of other products within SMP markets where there is an obligation to not unduly discriminate. The consultation document on financial reporting will go into these issues of granularity in more detail and provide justification for the level of granularity in each market.
Consultation17.1 The Director seeks the views of interested parties on the analysis and proposals contained in this consultation document. The Director will then publish a statement setting out his conclusions. 17.2 With reference to regulation 6(6) of the Regulations, a consultation period of six weeks has been permitted for representations. Representations must arrive at Oftel no later than close of business on 30 May 2003. Representations received after this time will not be taken into account, and no extensions of the deadline will be permitted. 17.3 Where possible, comments should be made in writing and sent by e-mail to selina.chadha@oftel.gov.uk. However, copies may also be posted or faxed to the address below. If any stakeholders are unable to supply their comments in one of these ways, please use the contact details below to discuss alternatives. Selina Chadha tel: 020 7634 5307 17.4 Confidential responses should not be sent via the Internet. Responses will be published on Oftel's website in the Publications section under Responses to Oftel consultations except where respondents indicate that the response, or part of it, is confidential. Appointments to view written comments in Oftel's Research and Information Unit must be made in advance (see contact details below). Respondents are therefore asked to separate out any confidential material into a clearly marked annex. In the interests of transparency, respondents are requested to avoid confidential markings wherever possible. 17.5 On this occasion, the Director is not inviting stakeholders to comment on the representations made by others. Further copies of this document 17.6 This document can be viewed on Oftel’s website, www.oftel.gov.uk. Paper copies and more accessible formats such as large print, Braille, disc and audio cassette can be made available on request. Please contact Oftel’s Research and Information Unit by telephoning 020 7634 8761 or by sending an e-mail to infocent@oftel.gov.uk. E-mail notifications 17.7 Oftel has a free e-mail based mailing list to help people stay informed about the work that Oftel is doing. Each time an Oftel document is published and placed on Oftel’s website at www.oftel.gov.uk, subscribers to the list receive an e-mail alert. To register, please go to the What’s New section of the website and access the electronic form.
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