Statutory Consultation on Proposed Modifications to BT’s Licence to give effect to Charge Controls for Single
Tandem FRIACO - 17 August 2001

                                                        Contents

Explanatory Document

Statutory Consultation on Proposed Modification to BT’s Licence

Annex A – Proposed Modification to Condition 69 of BT’s Licence

Annex B – Notice under Section 12(2) of the Telecommunications Act 1984

Explanatory Document

E1 Flat rate Internet access call origination (FRIACO) is an unmetered call origination interconnection service, i.e. operators pay a set charge to utilise BT’s network and are not charged on a per minute basis. The FRIACO interconnection service makes it viable for BT Retail and its competitors to offer unmetered Internet services over BT’s network to end customers.

E2 Oftel required BT to offer a flat rate interconnection service at the local exchange (DLE) in its Direction of 26 May 2000. BT was required to introduce the FRIACO service to enhance competition in the provision of dial-up Internet access. BT was specifically required to introduce FRIACO because Oftel found that BT was dominant in call origination, the interconnection service that provides the link between the end-user’s premises and the DLE. As this interconnection service is non-competitive, Oftel proposed to subject the charges for it to RPI-X controls. RPI-X controls ensure that BT has the incentive to reduce its costs in relation to the provision of non-competitive services, whilst giving competitors’ certainty over future movements in charges. Oftel proposed that FRIACO at the DLE (DLE FRIACO) should be subject to a charge control set at RPI-7.5%. It proposed to apply these controls from 1 October 2001 and that they should be applied at the component level.

E3 However, Oftel believed that DLE FRIACO did not on its own meet operators’ requirements. BT’s competitors can choose to build out to the DLE level and are likely to do so if they believe that this makes economic sense. It is, though, unrealistic to expect all operators to interconnect with BT at the DLE level and BT remains dominant in the provision of conveyance between its local and tandem exchanges. DLE FRIACO would not therefore fully meet the needs of operators who wished to purchase unmetered interconnection from BT. Accordingly, Oftel has required BT to provide a flat rate service at the tandem (DMSU) layer of its network, which is where the majority of its competitors connect to its network.

E4 In November 2000, Oftel published a draft Direction under which it proposed that BT should be required to provide an unmetered interconnection service between its DLEs and DMSUs (ST FRIACO). This interconnection service in combination with DLE FRIACO allows operators connected at the tandem layer to offer unmetered Internet retail services to customers who are connected to BT’s network.

E5 In Determination relating to a dispute between British Telecommunications and Worldcom concerning the provision of a Flat Rate Internet Access Call Origination product ("FRIACO"), February 2001, Oftel set charges for ST FRIACO to apply up to 30 September 2001 and proposed a different set of charges to apply from 1 October 2001. Oftel proposed that with effect from 1 October 2001 the charges for ST FRIACO should be subject to a charge control using the RPI-X formula. Oftel believed that the value of ‘X’ for ST FRIACO should be set at 11.75%.

E6 This proposal involved a rise in the charge for ST FRIACO on 1 October 2001 of just over 2%. However, this proposed rise reflected much larger percentage increases in the charges for the local-tandem circuit and FRIACO port at the tandem switch of almost 12% and 19% respectively. The difference in the proposed charges partly reflected different methodologies used in the calculation of the charges pre- and post-October. The pre-October charges were calculated by projecting forward cost data from 1997/1998 and projections of minutes per circuit based on 1994/1995 data, whilst the post-October charges were based on 1999/2000 cost and volume data supplied by BT. The main reason for the difference, however, was the allowance of a relatively high rate of return in the post-October charges in order to make the charges for ST FRIACO consistent with those for metered local-tandem conveyance and so avoid distorting the choice between metered and unmetered access.

E8 Oftel has calculated charges for the local-tandem circuit and tandem port to apply from 1 October 2001 by inflating the pre-October charges by RPI-5% per annum for six months. This allows for efficiency gains and inflation up to 1 October 2001, which is consistent with the derivation of the pre-October charges described in paragraph E6. This change in the charges results in proposed charges to apply from 1 October 2001 as follows:

• Local-tandem circuit (excluding FRIACO port at the tandem exchange) - £101.49

• FRIACO port at the tandem exchange - £35.66

E9 Oftel’s approach to charge controls is to set them so that BT earns its cost of capital in the last year of the cap. Oftel is proposing a roll-forward of existing charges, which leads to a lower starting charge in the new period than was proposed in the February document. This means that, in order to allow BT to earn its cost of capital in the final year of the controls, the value of ‘X’ must be reduced compared with the earlier proposal. This results in a value of ‘X’ to be applied to each of the component charges for ST FRIACO of 8.75. These controls are to apply for four years from 1 October 2001 and should initially apply to those charges set out above.

E10 At Annex A, Oftel has set out proposed modifications to BT’s licence to give effect to charge controls for ST FRIACO. These are for statutory consultation, and Oftel invites comments on these proposed modifications.

E11 Oftel is also taking this opportunity to modify Condition 69 so that the total charge for DLE FRIACO is derived from the following formula:

[Local exchange call origination circuit x the adjustment ratio] + FRIACO port at the DLE + PPP per FRIACO port.

E12 Oftel proposes to replace the starting charge for DLE FRIACO at Condition 69.2(d)(iv) with the above formula. BT’s licence already sets out the starting charges for each component of DLE FRIACO. The charge for the DLE FRIACO service can therefore be calculated with reference to the above formula without setting the charge in Condition 69(d)(iv). Oftel does not consider that it is appropriate to establish the final charge for FRIACO services given that the charge for this service will be subject to change following movements in the component charges and the adjustment ratio. Oftel has set out the proposed modifications to give effect to ST FRIACO charge controls on the same basis.

                                                                      Statutory Consultation on Proposed Modifications to BT’s Licence

Comments on the proposed modifications should be sent in writing to:

Mike Galvin
Regulatory Policy
Oftel
50 Ludgate Hill
London
EC4M 7JJ

Tel: 020 7634 8869
Fax: 020 7634 8924

E-mail: mike.galvin@oftel.gov.uk

Written comments will be made publicly available on the web site and in Oftel’s Research and Intelligence Unit except where respondents indicate that the response, or parts of it, is confidential.

                                Annex A

The proposed modifications to BT’s licence

1. In Part J of Schedule 1 to the Licence, sub-paragraph (d) of Condition 69.2 shall be substituted by the following new sub-paragraph (d):

‘(d) the same amount is applied to a Network Component or Network Part, as the

2. In Part J of Schedule 1 to the Licence, Condition 69.6 shall be substituted by the following:

‘69.6 The Licensee shall take all reasonable steps to secure that, during any Relevant Year

(a) the aggregate of Charges for Call Origination Conveyance Standard Services;

(b) the aggregate of Charges for Call Termination Conveyance Standard Services;

(c) the aggregate of Charges for:

(i) data management amendments to allow the routing of emergency calls to Land Mobile Radio Service Operators;

(ii) interconnection extension circuits, in-span interconnection, and customer sited interconnection (for connection, rental and rearrangement); and

(iii) the amount applied to product management, policy and planning (PPP), except PPP as referred to in paragraph (iii) of Condition 69.6(d) below;

(i) the charge for a flat rate internet access local exchange call origination circuit (excluding the flat rate internet access call origination port at the local exchange);

(ii) the charge for a flat rate internet access call origination port at the local exchange; and

(iii) the charge for product management, policy and planning (PPP) per flat rate internet access call origination port; and

(e) the aggregate of Charges for single transit Conveyance Standard Services and Local-tandem Conveyance Standard Services,; and

(i) the charge for a flat rate internet access local-tandem circuit (excluding FRIACO port at the tandem exchange); and

(ii) the charge for a FRIACO port at the tandem switch

in each case remains such that:

(f)(g) if the Controlling Percentage for that Year (established in accordance with paragraph 69.13) is zero or positive, any Percentage Change which has taken place in the aggregate of the relevant Charges (calculated in accordance with paragraphs 69.15 and 69.16) at the end of each Period does not constitute an increase by more than the Controlling Percentage; or

(g)(h) if that Percentage is negative, there is no Percentage Change in the aggregate of the relevant Charges by way of increase and, before the end of that Year, there is such a Change by way of reduction of not less than that Percentage.’

3. In Part J of Schedule 1 to the Licence, Condition 69.11 shall be substituted by the following:

‘69.11 Where, notwithstanding the obligation imposed on the Licensee by paragraph 69.6, there has taken place a change in Charges of a kind not permitted under paragraph 69.6(f) or 69.6(g)69.6(g) or 69.6(h), the Licensee shall make such adjustments in Charges (or leave them unchanged), for the period, whether in the year in question or the following year (and whether or not that year is a Relevant Year), as may be reasonably required to satisfy the Director that the matter has been remedied. Such adjustments shall not be relevant for the purpose of establishing compliance with paragraph 69.6 in a following Relevant Year.’

4.In Part J of Schedule 1 to the Licence, Condition 69.13 shall be substituted by the following:

‘69.13 Subject to paragraphs 69.14, 69.18 and 69.19, the Controlling Percentage in relation to any Relevant Year is the amount of the change in the Retail Prices Index in the period of 12 months ending on 30^th June immediately before the beginning of that Year, expressed as a percentage (rounded to two decimal places) of that Index as at the beginning of that period ("RPI"), reduced:

(a) for Category A services, by 10;

(e) for Category E services, by 13.; and

4. In Part J of Schedule 1 to the Licence, Condition 69.18 shall be substituted by the following:

‘69.18 If the Licensee imposes a specific charge or an increased charge in relation to any goods or service which up to the time when the charge or increased charge is first imposed had been provided without charge or at a lower charge and the Director determines that some or all of the costs properly attributable to that service had previously been attributed to services to which paragraph 69.6 applies and that it would be proper in the circumstances for the newly introduced or increased charge to be controlled, that charge shall, unless the Director determines otherwise, be a Charge within the same relevant paragraph 69.6(a), 69.6(b), 69.6(c), 69.6(d), or 69.6(e) or 69.6(f) and this Condition shall have effect subject to the following provisions:

Annex B

NOTICE UNDER SECTION 12(2) OF THE TELECOMMUNICATIONS ACT 1984

PROPOSED MODIFICATIONS TO THE LICENCES OF BRITISH TELECOMMUNICATIONS PLC (BT)

1. The Director General of Telecommunications (the "Director"), in accordance with Section 12(2) of the Telecommunications Act 1984, as amended by the Electronic Communications Act 2000 (the "Act"), hereby gives notice that he proposes to make modifications to the licence granted to British Telecommunications plc ("BT") on 22 June 1984.

2. The effect of the proposed modifications to BT’s licence would be to set starting charges for and bring under regulatory control the charges for flat rate internet access call origination (FRIACO) at the tandem exchange, by incorporating the charge for FRIACO at the tandem exchange into the network charge controls from 1 October 2001. The proposed modifications take the form of changes to Condition 69 of BT’s Licence. Condition 69 was last modified on 27^th March 2001. Some of the changes introduced in March are not to take effect until 1^st October 2001. Some of the modifications proposed by this Notice have the effect of making changes to the March modifications.

3. The Director is making these proposals because competition is not effective in the provision of flat rate internet access call origination either at the local exchange or the tandem exchange.

4. The proposed modifications and their effects are set out in full in Statutory Consultation on Proposed Modifications to BT’s Licence to give effect to Charge Controls for Single Tandem FRIACO, which was published on 17 August 2001. The document is available via Oftel’s website (www.oftel.gov.uk). The Director is seeking comments on the proposed modifications to the licence of BT. Interested parties have 28 days from the day after publication of this Notice to make representations on the proposed modifications. In accordance with Section 12(6D) of the Act, representations made against the proposed modifications shall be taken to constitute an objection only if a written statement that they are to be so taken accompanies them.

5. The proposed modifications are also available from Mike Galvin at Oftel, 50 Ludgate Hill, London, EC4M 7JJ, telephone (00 44 (0)20) 7634 8869, facsimile (00 44 (0)20) 7634 8924, e-mail mike.galvin@oftel.gov.uk.

6. The Director is required by Section 12(2) of the Act to consider any representations or objections on the proposed modifications duly made and not withdrawn. Subject to such consideration, and to the consent of BT for the respective modifications, the Director proposes to make the modifications as soon as practicable after the statutory consultation is completed.

7. Representations on the proposed modifications can be made to Mike Galvin by 17 September 2001.

8. Any confidential material should be clearly marked as such and separated out into a confidential annex. All representations and objections received by Oftel, with the exception of material marked confidential, will be made available for inspection in Oftel’s Research and Intelligence Unit.

DAVID ALBERT EDMONDS

DIRECTOR GENERAL OF TELECOMMUNICATIONS