Determination under Condition 69.2 of the Public Telecommunications Licence granted to British Telecommunications plc

Contents

Determination

Explanatory memorandum

Annex A: More complex methodology

Determination under Condition 69.2 of the Public Telecommunications Licence granted to British Telecommunications plc

WHEREAS

1. The Secretary of State granted to British Telecommunications on 22 June 1984 a licence (‘the BT Licence’) under section 7 of the Telecommunications Act 1984 (‘the Act’) for the running of the telecommunication systems specified in Annex A to that licence;

2. By virtue of Section 109 of and paragraph 20 of Schedule 5 to the Act, the BT Licence has effect as if granted to British Telecommunications plc (‘BT’);

3. Flat Rate Internet Access Call Origination (‘FRIACO’) is an unmetered interconnection service available from BT that provides virtual capacity from originating customers to the point of connection of an operator. The operator may choose to purchase FRIACO at the Digital Local Exchanges (‘DLE FRIACO’) or at tandem switches (‘Single Tandem FRIACO’);

4. Condition 69.2(d) Category D states that:

5. Condition 69.2(d) Category F states that:

6. Whereas Condition 69.2(d) states that the AR (LECO) may be reviewed by the Director and amended by him after consultation with Interested Parties from time to time;

7. The value of the AR (LECO) reflects the pattern of FRIACO traffic and its relationship to the pattern of other traffic carried on LECO circuits;

8. The Director considers that it is consistent with Condition 69.2 of BT’s licence for the value of AR (LECO) to differ between DLE and Single Tandem FRIACO. Condition 69.2(d) Category D sets out the following formula for the total DLE FRIACO charge:

"[D(i) x AR (LECO)] + D(ii) + D(iii)";

9. Condition 69.2(d) Category F sets out the following formula for the total Single Tandem FRIACO charge:

"[D(i) x AR (LECO)] + [(D(ii) + F(i)) x AR (LT)] + D(iii) + F (ii)";

10. Consequently, the charge for Single Tandem FRIACO is based upon two FRIACO adjustment ratios: AR (LECO) and AR (LT).

11. AR (LECO) is defined under Category D as:

12. There is no specific reference to either a DLE FRIACO port or a Single Tandem FRIACO port in the above definition. The Director is of the view that "each FRIACO port" includes "each DLE FRIACO port" or "Single Tandem FRIACO port" as the case may be, and that consequently the adjustment ratio for DLE FRIACO and Single Tandem FRIACO can be different;

13. Annex 3 to the Explanatory Memorandum attached to the Director’s Direction made on 13 February 2001 and published on 15 February 2001 sets out the values of AR (LECO) and AR (LT);

14. Based on the information currently before him, the Director has concluded that the updated value of AR (LECO) for the purposes of Condition 69.2(d) Category D is 1.78;

15. At the time of this review detailed information on FRIACO traffic patterns has been available for DLE FRIACO but not for Single Tandem FRIACO. The charge for Single Tandem FRIACO depends on two adjustment ratios: AR(LECO), the number of LECOs required per FRIACO port, and AR(LT), the number of local-tandem circuits required per FRIACO port. In the absence of information on FRIACO traffic patterns at the tandem switch the Director is not proposing to change the values of the two adjustment ratios (i.e. AR(LECO) and AR(LT)) for Single Tandem FRIACO; and

16. For the reasons given in these recitals and set out in more detail in the explanatory memorandum accompanying this Determination, and having considered the representations made in response to the draft of this Determination published on 20 February 2002 the Director believes that it is appropriate to make this Determination.

THEREFORE

Pursuant to Condition 69.2 of the BT Licence the Director General of Telecommunications makes the following Determination:

1. The value of AR (LECO) for the purposes of Condition 69.2(d) Category D is 1.78.

2. This Determination shall enter into force on the date of its publication.

3. Except as otherwise defined in this Determination:

3.1 paragraph 4 of the BT Licence shall, with the necessary changes, apply to this Determination as it applies to the BT Licence; and

3.2 terms defined in the BT Licence or in the recitals hereto shall have the same meanings for the purposes of this Determination.

Chris Kenny
Director of Compliance

A person authorised under Paragraph 8 of Schedule 1 to the Telecommunications Act 1984

15 July 2002

Explanatory memorandum

Introduction

1.1 Flat Rate Internet Access Call Origination (FRIACO) is an unmetered interconnection service available from BT that provides virtual capacity from originating customers to the point of connection of an other licensed operator (OLO). The OLO may choose to purchase FRIACO at Digital Local Exchanges (DLE FRIACO) or at tandem switches (Single Tandem FRIACO).

1.2 The adjustment ratio (AR) is used in the derivation of the regulated charges for FRIACO. For example, in the case of DLE FRIACO it captures the average number of local exchange call origination (LECO) circuits required per FRIACO port at the DLE. More specifically, the charge for DLE FRIACO is derived as follows:

Notes:
1. PPP (product management, policy and planning) relates to interconnect specific costs.
2. A charge for use of BT’s Intelligent Network is also applicable.

1.3 The value of the adjustment ratio reflects the pattern of FRIACO traffic and its relationship to the pattern of other traffic carried on LECO circuits. The initial value of the adjustment ratio was originally set at a level of 2 using a proxy, in the absence of detailed information on FRIACO traffic patterns, and the Director stated that he would review the value of the adjustment ratio when such information became available. The original intention was that a review would be conducted six months after the initial Direction on FRIACO of May 2000. However, at that time little or no useful information was available on FRIACO traffic patterns and so the review was deferred until this year. As the market matured and FRIACO traffic became measurable, the Director issued a consultation document in February 2002, proposing a revised adjustment ratio taking into account observed utilisation patterns in June/July 2001 and October 2001 (see www.oftel.gov.uk/publications/internet/2002/fria0202.htm).

1.4 The Director proposed in the consultation that the updated value of the adjustment ratio should be 1.81 and that this updated adjustment ratio take effect from the date of publication of the final Determination. With more updated information being available, the Director proposes in this final Determination that the adjustment ratio should be 1.78, which will have the effect of reducing the current DLE FRIACO charge by 8.5%. The Director does not propose to make any changes to the ST FRIACO charge in this final Determination because of the lack of detailed information on traffic patterns for that product.

1.5 In preparing the final determination the Director has considered:

• the appropriate methodology to derive the value of the adjustment ratio including the responses to the consultation; and
• the updated value of the adjustment ratio for DLE FRIACO.

1.6 To explore the methodology for the adjustment ratio, Oftel issued a discussion paper in November 2000 (Methodology for calculating FRIACO Adjustment Ratio,November 2000, see www.oftel.gov.uk/publications/pricing/fria1100.htm). The responses to that paper have been considered during the review.

1.7 At the time of this review, detailed information on FRIACO traffic patterns has been available for DLE FRIACO but not for Single Tandem FRIACO. The charge for Single Tandem FRIACO depends on two adjustment ratios: AR(LECO), the number of LECOs required per FRIACO port, and AR(LT), the number of local-tandem circuits required per FRIACO port (see Determination relating to a dispute between British Telecommunications and Worldcom concerning the provision of a Flat Rate Internet Access Call Origination product (FRIACO), 15 February 2001, www.oftel.gov.uk/publications/internet/fria0201.htm). In the absence of information on FRIACO traffic patterns at the tandem switch, the Director is not proposing to change the values of the adjustment ratios for Single Tandem FRIACO (see also paragraphs 1.30-1.32 below).

Adjustment ratio methodology

Relevant principles

1.8 The adjustment ratio methodology reflects the importance of deriving FRIACO charges that:

• capture cost causation; and
• are reasonably stable and sustainable.

1.9 Cost causation is important so that appropriate price signals are provided to operators considering purchasing FRIACO to encourage efficient use of resources. For example, an operator’s choice between metered interconnection and FRIACO should reflect the relative costs of the two forms of interconnection and not be distorted by the charge for one being artificially high or low. As has been emphasised to the Director by a number of operators, stability and sustainability are important because business planning is facilitated by reasonable predictability.

Current methodology

1.10 The current methodology, which has been used to derive the adjustment ratio in Directions relating to FRIACO, is to take the ratio of the utilisation or Erlangs per circuit (EPC) of FRIACO ports and LECO circuits. This provides a reasonable measure of the number of LECO circuits required per FRIACO port and so reflects cost causation. A more detailed discussion of the rationale for this methodology is set out in the FRIACO Direction of May 2000 and the discussion paper.

1.11 More specifically, the denominator of the adjustment ratio is the EPC of LECOs in the network busy hour. The numerator is the maximum EPC of FRIACO ports (or the best available proxy) ie the EPC in the busy hour for FRIACO ports. AR (LECO) = FRIACO EPC in FRIACO BH÷LECO EPC in network BH.

1.12 The value of the adjustment ratio before this Determination was 2.0, derived as 0.7 (FRIACO EPC) divided by 0.35 (LECO EPC).

1.13 Some operators have suggested that a better reflection of cost causation would be obtained by using as the numerator the EPC of FRIACO ports in the network busy hour, rather than in the individual busy hour of FRIACO ports. This approach would result in a different (and lower) adjustment ratio because the evidence obtained by the Director shows that nearly all FRIACO ports have their individual busy hour in the evening, whereas BT’s network busy hour currently occurs in the afternoon. However, the Director does not propose to modify the adjustment ratio formula, because of the importance of the second principle noted above, stability and sustainability.

1.14 As part of the February 2002 review, detailed information on the traffic patterns of DLE FRIACO ports and LECOs was obtained from BT. Such information related to two periods during 2001 (June/July and October). As part of this final Determination, Oftel has obtained further information from BT in order to take account of the most updated information available. This information relates to two periods of three weeks each in January/February 2002 and March 2002 respectively.

1.15 Although the overall network busy hour occurs in the afternoon, many LECOs experience their individual peaks at other times, such as the evening. As shown in table 1, although the EPC of LECOs is highest in the afternoon, the figures in the morning and evening are only slightly lower. As FRIACO traffic grows, the overall volume of traffic on LECOs in the evening will increase relative to other times of day. It is not unlikely that the network busy hour will shift from the afternoon to the evening period.

Table 1: EPCs of LECOs in morning, afternoon and evening

Source: BT (information relates to the average of three weeks in each of the periods shown).

1.16 If the formula for the adjustment ratio used the EPC of FRIACO ports in the network busy hour, such a shift in the timing of the network busy hour might lead to a significant increase in the adjustment ratio and the charge for FRIACO. This outcome could be disruptive and undesirable. The Director therefore considers it preferable in this final Determination, to use the EPC of FRIACO ports in its individual busy hour (evening) in the calculation of the adjustment ratio.

More complex methodology

1.17 In the discussion paper, a more complex methodology to derive the adjustment ratio was discussed. Additional traffic on LECOs will only give rise to a requirement for additional LECO circuits if it arises in the individual busy hour of those LECOs. The more complex methodology would use disaggregated information on the EPCs of LECOs and FRIACO ports and traffic patterns in the attempt to build up the number of LECO circuits required on average per FRIACO port.

1.18 The advantage of the more complex methodology is that it should provide a closer reflection of cost causation. A key disadvantage is that some of the information required to implement the more complex methodology is not available. This information is the volume of FRIACO Erlangs in the morning (afternoon, evening) that originate on LECOs which have an individual busy hour in the morning (afternoon, evening). It is not available, because BT is unable to distinguish traffic on LECOs between FRIACO and non-FRIACO. In the absence of this information, assumptions would need to be made to implement the more complex methodology.

1.19 In the responses to the discussion paper both BT and OLOs expressed a preference for the current methodology over the more complex methodology, either because it was better understood or because information to implement it was more readily available. The focus in the review has therefore been to update the value of the adjustment ratio retaining the current methodology. Nevertheless the Director has explored the implications of using the more complex methodology to provide a cross-check on the reasonableness of the updated adjustment ratio. This is set out in Annex A.

Updated value of the adjustment ratio

LECO EPC

1.20 The denominator in the formula for the adjustment ratio is the EPC of LECOs in the network busy hour. As shown in table 1, this was 0.349 in June/July 2001 and slightly higher at 0.357 in October 2001. Based on this information, the Director had proposed in the draft Determination an EPC for LECOs of 0.353 (the average of the two data points). However, more recent information shows an increase in the utilisation of the LECOs to about 0.378 in January/February 2002 and 0.368 in March 2002. A simple average of the LECO EPCs for June/July 2001, October 2001, January/February and March 2002 is 0.363, which is a higher figure than the average EPC set out in the draft Determination. The Director has decided to take account of the more up-to-date information and so has increased the figure for the EPCs of the LECOs in the adjustment ratio to 0.363.

FRIACO EPC

1.21 The numerator in the formula for the adjustment ratio is the EPC of FRIACO ports in their individual busy hour. The EPCs of FRIACO in each of morning, afternoon and evening busy hour periods is shown in table 2. This information reflects the use of FRIACO ports by both BT and OLOs. Traffic through FRIACO ports reaches its peak in the evening period. Oftel has obtained further updated information from BT on the EPCs of FRIACO ports in January/February 2002 and March 2002.

Table 2: EPCs of FRIACO ports in morning, afternoon and evening

Source: BT (information relates to the average of three weeks in each of the periods shown).

1.22 In the draft Determination, the Director set out his view that the numerator of the adjustment ratio should reflect a reasonable view of the mature EPC of FRIACO ports in order to derive a sustainable and relatively stable charge. Following responses from the operators on the mature level of the EPC, the Director proposed a more reasonable approach than just observed EPCs of FRIACO ports. This approach was to take the mid-point of upper and lower bounds. For the upper bound, the Director proposed to use 0.7 which was not only close to the figure in the current adjustment ratio, but was also the figure that BT viewed as the mature level. For the lower bound the Director proposed that a figure of 0.577 be used, which was the highest observed figure in October 2001 and a figure which was broadly consistent with the views of the OLOs on the lower bound. The proposed EPC of FRIACO ports was 0.639, which was the mid-point between the upper and lower bounds.

1.23 The Director notes that the simple average of the evening EPCs of FRIACO ports for the two most recent periods (ie the data obtained subsequent to the draft Determination) is 0.6395. This is very close to the figure proposed in the draft Determination. However as table 2 shows, the EPC of FRIACO has continued to increase, although the rate of increase has slowed down. It is unclear whether the EPC will continue to rise above the level in March 2002. The Director has decided therefore to use 0.646 as the numerator for the updated adjustment ratio. If the EPC does increase further, this will be taken into account in the next adjustment ratio review.

Responses to the draft Determination

1.24 In response to the draft Determination, BT has argued that a February EPC of 0.633 shows a trend of stronger growth and that FRIACO ports are still far from being mature and therefore the EPC of a mature route is likely to rise above 0.7. BT has further suggested that the EPC of a mature route is likely to be as high as 0.891. This is based on the assumption that ISPs will obtain a high utilisation on FRIACO routes, whilst maintaining a reasonable quality of service, by overflowing FRIACO traffic onto metered routes. Since BT does not permit such overflow on its own network, BT argues that ISPs will implement this overflow using autodiallers at the end users site. BT suggests using a lower bound of 0.633 and an upper bound of 0.891 to obtain a revised EPC figure of 0.762, resulting in a revised adjustment ratio of 2.16.

1.25 The Director notes that whilst it is certainly possible in principle to obtain high utilisation by the provision of overflow, BT provides no evidence that this is happening in practice with FRIACO routes. This would be a dangerous approach to take from a network planning point of view, since it can result in sudden and unpredictable increases in the loading of metered routes. This is precisely why BT has refused to permit overflow from FRIACO to metered routes within its own network. It would also be a dangerous commercial strategy for an ISP to adopt, since it would be difficult to predict the level of call origination charges associated with the overflow to metered routes. An ISP which accepted such an unstable cost base, whilst offering a flat rate internet access to end users, would clearly be subject to substantial commercial risk. The Director does not view it reasonable at this time to change his position on the level of EPCs of mature FRIACO routes. If indeed the average EPCs of FRIACO routes keep increasing with time, the Director shall consider using all available information during the next review of the adjustment ratio.

1.26 AOL believes that the costs incurred by BT for the provision of FRIACO capacity should be based on the levels of EPC actually achieved. It also believes that BT has been using the capacity inefficiently (that is, ordering more capacity than the demand required) but has received revenue higher than the incremental costs of FRIACO circuits provided to BT’s own termination operations because the AR has so far been based on an EPC of 0.7. As a result, AOL claims, BT has been able to build out its network more aggressively and gain strategic advantage. AOL therefore believes that a level of EPC of 0.58 be used. The Director reiterates that a primary objective of setting the adjustment ratio is stability and so considers it more appropriate to derive the adjustment ratio based on a reasonable estimate of mature usage of FRIACO.

1.27 AOL has also reiterated support for using the network busy hour and not the port busy hour because of its belief that with the takeup of broadband, there was less risk of the ‘shifting peak’ occurring. The Director believes that it is too early to determine the level of migration from narrowband to broadband that would enable the adjustment ratio to remain stable using only the network busy hour. The Director therefore concludes that the methodology adopted in the draft Direction captures cost causation and is reasonably stable and sustainable.

The Director’s conclusion

1.28 For the reasons set out above, the Director concludes that the updated value of the adjustment ratio should be 1.78, calculated as 0.646 divided by 0.363. The Director proposes that this updated adjustment ratio will take effect from the date of publication of this Determination.

Table 3: DLE FRIACO charges with current and updated adjustment ratios

Note: A further charge for use of BT's Intelligent Network is also applicable.

1.29 This change in the adjustment ratio would result in an updated charge for DLE FRIACO that was about 8.5% lower than the current charge. This is set out in table 3, using the DLE FRIACO charges stated by BT in the Network Charge Change Notice dated 24/12/2001 (see NCCN 303).

Single Tandem FRIACO

1.30 In principle, the appropriate value of AR (LECO) might be different as between DLE and Single Tandem FRIACO. This is because the EPC of FRIACO ports might be different at DLEs and tandem switches. 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. If so, a higher value of AR (LECO) should apply in the calculation of the charge for ST FRIACO compared to DLE FRIACO.

1.31 The Director proposes to retain the current value for the adjustment ratio of 2.00 in the calculation of the Single Tandem FRIACO charge, until specific evidence on the use of ST FRIACO ports becomes available and suggests that the value should be changed. Therefore, for the avoidance of doubt, the Director is not proposing any change in this draft determination that would alter the charge for Single Tandem FRIACO.

1.32 With the proposed change for DLE FRIACO, AR (LECO), the adjustment ratio reflecting the number of LECO circuits required per FRIACO port, will take on a different value for DLE FRIACO from that applicable for Single Tandem FRIACO.

Consistency with C69.2

1.33 The Director considers that it is consistent with Condition 69.2 of BT’s licence for the value of AR (LECO) to differ between DLE and Single Tandem FRIACO. Condition 69.2(d)/Category D sets out the following formula for the total DLE FRIACO charge:

1.34 Condition 69.2(d)/Category F sets out the following formula for the total Signal Tandem (‘ST’) FRIACO charge:

Consequently, the charge for ST FRIACO is based upon two FRIACO adjustment ratios: AR (LECO) and AR (LT).

1.35 AR (LECO) is defined under Category D as:

1.36 There is no specific reference to either a DLE FRIACO port or an ST FRIACO port in the above definition. The Director is of the view that "each FRIACO port" includes "each DLE FRIACO port" or "ST FRIACO port", and that consequently the adjustment ratio for DLE FRIACO and ST FRIACO can be different.

Frequency of adjustment ratio reviews in future

1.37 As noted in the network charge control Guidelines, the Director does not anticipate conducting reviews of the adjustment ratio more frequently than annually. However, reviews might need to be conducted more often than anticipated if warranted by specific circumstances (see paragraph 2.48 of Guidelines on the Operation of the Network Charge Controls from October 2001, 5 December 2001, www.oftel.gov.uk/publications/ind_guidelines/pcr1201.htm).

1.38 It is intended that the next review will cover the adjustment ratios for both DLE and Single Tandem FRIACO. Since this review has included consideration of data up to March 2002, the Director intends to commence the next review in Spring 2003.

Other points raised during consultation

Consultation on deferral of review

1.39 Energis had earlier complained that it had not been consulted on the deferral of the review from December 2000. However, the Director did consult on pushing back the review, as the second Direction on FRIACO (which was consulted on in November 2000) amended paragraph seven of the original Direction of May 2000 (which had stated the review would take place in December 2000). Also, as noted in paragraph three, it would not have been possible to conduct a proper review in December 2000, because relevant data on FRIACO traffic patterns would not have been available.

Should the updated adjustment ratio be applied retrospectively?

1.40 AOL has argued that BT has appeared to have over-recovered the costs of provisioning FRIACO by the setting of an adjustment ratio of 2. Since earlier EPC levels have been quite low, Oftel should set an EPC of 0.58 retrospectively as well. Another respondent has stated that Oftel should set a starting "immature" FRIACO charge for the period December 2000 to the date at which the mature FRIACO charge is introduced. Based on the average utilisation for this period, the adjustment ratio of 0.92 should be the immature charge that should be set retrospectively. The Director does not consider it appropriate in this instance to set the charges for DLE FRIACO retrospectively. Adjustment ratios can be adjusted upwards as well as downwards and a retrospective approach would need to be applied symmetrically to both directions of movement. One of the important principles adopted by Oftel in deriving FRIACO charges is that certainty about the charge should be promoted to facilitate business planning. Therefore, the Director considers that changes in the adjustment ratio should not apply retrospectively.

Annex A – More complex methodology

A.1 In this Annex, the application of the more complex methodology is explored. This provides a cross-check on the reasonableness of the updated value for the adjustment ratio for DLE FRIACO derived using the current methodology.

Source data

A.2 The more complex methodology considers the coincidence between FRIACO traffic on LECOs at times of day when those particular LECOs are experiencing their individual busy hours ie the morning, afternoon and evening. When LECOs are outside their individual busy hours no additional capacity is needed to serve FRIACO traffic. Table 4 shows the EPCs in the morning, afternoon and evening busy hour periods for each of three categories of LECOs: those experiencing their individual busy hours in respectively the morning, afternoon and evening. The focus of interest is on the figures on the diagonal of table 4 (shown in bold), the EPCs of LECOs when they are experiencing their individual busy hours.

Table 4: LECO EPCs (March 2002)

Source: BT

A.3 Table 5 shows, the proportion of traffic in each of the morning, afternoon and evening busy hour periods that arises on each of the three categories of LECOs. Again, the interest is on the figures on the diagonal, because this is the traffic that arises on LECOs inside their individual busy hours. Ideally, the information in table 5 would relate specifically to FRIACO traffic. However, BT is unable to supply such data, so table 5 shows the proportions for all traffic on LECOs, including both FRIACO and non-FRIACO traffic. It is not known how this information compares to the pattern of FRIACO traffic on LECOs and, in principle, the figures on the diagonal could overstate or understate the true figures.

Table 5: Proportion of total traffic on LECOs (including non-FRIACO) in each time of day that originates on LECOs in individual busy hour

Source: Oftel from information provided by BT.
Note: Figures are derived from Table 4 (eg 28% = 0.334 x 27.5%/0.331).

A.4 The other relevant information to implement the more complex methodology is the amount of FRIACO traffic in each of the morning, afternoon and evening busy hour periods. This is shown in table 6 (which repeats the data in table 2 relating to March 2002).

Table 6: EPCs of FRIACO ports in morning, afternoon and evening

Source: BT (information relates to the average of three weeks in the period shown).

Illustrative results using more complex methodology

A.5 An illustrative calculation using the more complex methodology is set out in Table 7. Row A is the information on FRIACO EPCs from table 6. Row B is the diagonal from table 5 and row C is the diagonal from table 4. The number of LECOs required on average per FRIACO port is then calculated in the bottom row. It is the number of Erlangs of FRIACO traffic per port originating on LECOs experiencing an individual busy hour (A x B). This is divided by the Erlangs per circuit for that category of LECO experiencing its individual busy hour at that time of day (C). No additional LECO circuits are required for those LECOs that are outside of their individual busy hours. With the data and assumptions in tables 4 to 6, summing across the circuit requirements in each busy hour period yields an adjustment ratio using the more complex methodology of 1.61.

Table 7: Illustrative calculation of adjustment ratio using lower bound FRIACO Port EPCs

A.6 As noted above, row B is only a proxy for the relevant information on FRIACO traffic. A sensitivity is therefore also shown in table 7 inside square brackets. Since FRIACO ports have an evening busy hour, it is possible that a large proportion of FRIACO traffic in the evening originates on LECOs that have an evening busy hour. If this proportion is assumed to be 90%, the implied adjustment ratio rises to 1.83.

A.7 This sensitivity only represents one of the possibilities. It might be that FRIACO traffic is highly correlated with LECO individual busy hours, in which case all of the figures in row B should be increased and the implied adjustment ratio would be larger. Or FRIACO traffic might generally originate on LECOs outside of their individual busy hours, in which case the figures in row B should be reduced and the implied adjustment ratio would be significantly lower.

A.8 The EPCs of FRIACO ports in table 7 reflect the measured figures for March 2002. Table 8 shows illustrative calculations using figures that reflect a higher figure for FRIACO EPCs ie an uplift has been applied to the figures in row A in table 7 to increase the EPC in the evening to 0.70 and the EPC in the other periods by the same percentage. With these assumptions the adjustment ratio is 1.74 or 1.99 with 90% of FRIACO traffic originating on LECOs with an evening busy hour.

Table 8: Illustrative calculation of adjustment ratio using upper bound FRIACO port EPCs

Conclusion

A.9 It would not be appropriate to draw a firm conclusion from this analysis of the application of the more complex methodology. This is because of the non-availability of some of the relevant information ie the proportion of FRIACO traffic in each period that originates on LECOs experiencing their individual busy hours.Nevertheless the analysis suggests that the updated adjustment ratio of 1.78, derived using the current methodology, is reasonable. It lies within the range of plausible values of about 1.61 to 1.99, obtained from the illustrative calculations.