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| BT’s regulatory obligations to provide advance notification of price changes and to maintain a published price list - 28 June 2001 | |
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28 June 2001 Chapter 1 Introduction Chapter 2 The legal framework Chapter 3 The impact of mandatory price publication Chapter 4 The views of other authorities Chapter 5 Options for the future Chapter 6 Consultation S.1 Oftel is reviewing BT’s current obligations to publish its prices for telecommunications services and to provide advance public notification of price changes. A major impetus for this review is the concern, which has been expressed by some authorities in recent years, that publication of prices and/or the provision of advance warning of price changes may increase the likelihood of tacit collusion and price following. Such behaviour would mute competition, to the detriment of customers. Oftel’s approach, as set out in its Strategy, is to regulate only where this is likely to bring benefits to consumers, and to keep regulation to the minimum necessary to obtain appropriate outcomes. Against that background, it is important to ensure that the benefits of price publication outweigh the costs and, in particular, to ensure that the current rules are not themselves inhibiting competitive behaviour. S.2 All providers of telecommunications services are obliged to publish details of charges for the use of telephone services which are made publicly available to consumers. ‘Consumers’ in this context means personal customers, and the term excludes business users and all other corporate customers. Oftel has no plans to review this basic consumer protection requirement which, in any event, is required by European law. S.3 More powerful operators such as BT, and in some circumstances Kingston Communications, Cable and Wireless, Vodafone and BTCellnet, are also required to maintain a published price list for other services, including services offered to business users, and they are obliged to provide advance notification of price changes, in some instances being required to give as much as 28 days notice to both Oftel and the wider public. It is these obligations which Oftel is reviewing. The review focuses on the rules which require advance notification of price changes and publication of prices in respect of BT’s fixed public telephone services and leased lines, whether supplied directly to end users or to other providers of telecommunications services which, in turn, resell them as part of a telecommunication service offered to others. Oftel is not reviewing in this consultation exercise BT’s obligations in respect of interconnection services offered to other operators, nor is it reviewing BT’s obligation to publish prices and other information in respect of local loop unbundling. S.4 BT has submitted to Oftel a discussion document which proposes, generally, that the notice periods which it must respect should be reduced. BT has also made more specific and formal proposals for wide-ranging deregulation in the inland business calls, Dial IP services and inbound voice services markets. BT is arguing that competition in these markets is sufficiently well developed to allow Oftel to remove a variety of different regulatory controls, including obligations to publish prices. Oftel does not accept that it is possible to draw any firm conclusions about the strength of competition in a market without conducting a full and proper market review. Nevertheless, Oftel agrees that a generic review of the usefulness of the present price publication rules should be undertaken. Oftel also recognises that price publication may, conceivably, be more beneficial in markets which have certain structural characteristics which can be determined without a full market review. S.5 . This consultation document seeks information and views on the merits of BT’s obligation to publish, 28 days in advance of launch, details of price changes and new tariffs for certain telecommunications services. If the costs of this form of advance price publication are found to outweigh the benefits, then Oftel will need to decide what changes should be made. One of the options might be to require BT simply to publish an up-to-date price list, observing a nominal 1 day period of notice before implementing tariff changes. Alternatively, it might be thought desirable to withdraw regulation still further by removing all obligations to publish prices. If this latter option was adopted BT would still be required, however, to publish tariffs for a significant range of services, where price publication is required by legislation, and the scope for deregulation of this nature is, therefore, limited. S.6 Although the review is focussed narrowly on BT’s obligations, and the text of this document has been written accordingly, any decision to relax the present regulation of BT might also have implications for the regulation of other operators; it would not be appropriate to subject operators with similar or lesser market power to more onerous regulation. S.7 If the Director General decides to relax the present advance price notification and/or price publication obligations, he may propose specific modifications to BT’s licence and, where appropriate, the licences of other operators, or he may grant consent, under the terms of the present licences, to revised advance notification and publication arrangements. A formal change to the present licences offers the licensees the advantage of regulatory certainty but, in the event of unforeseen adverse consequences, re-imposition of the present licence obligations would require a time-consuming submission to the Competition Commission (assuming that re-imposition of the present obligations was not accepted voluntarily by the licensees concerned). On the other hand, consent, under the terms of the present licences, could be granted for a limited period on a case by case basis to enable the impact of this deregulatory action to be assessed. S.8 Oftel is seeking responses to the following questions;
S.9 The initial consultation period will run until 21 September 2001, after which there will be a further period of 14 days during which comments on the responses of others may be submitted.
Introduction 1.1 All providers of publicly available telephone services, including BT, are obliged to publish information for Consumers (see note 1) on their standard terms and conditions. Publicly available telephone services (see note 2) include services for originating and receiving voice and low speed data calls, but they do not include Value Added services (see note 3). This publication requirement is intended to ensure that personal users of telecommunications services can find out what they are committing to when they use these services. The requirement does not apply to terms and conditions for use of services by corporate or business customers and does not require telecoms companies to provide advance warning of price changes or new product launches. 1.2 More powerful providers of telecommunications services, which have either been designated as having a form of market power, or have Universal Service obligations, are subject to additional obligations and must publish the terms and conditions on which they provide public telephone services and leased lines to corporate and business customers, as well as consumers, and they must also provide Oftel and the wider public with advance notice of price changes and new tariffs. BTCellnet, Vodafone, Kingston Communications, Cable and Wireless and BT have been designated as having market power in specified markets, and Kingston Communications and BT also have Universal Service obligations. Where an operator with market power is providing mobile telephony services it is obliged to give 1 day’s advance notice of changes to mobile telephony tariffs. Operators with market power which are providing fixed telephony services are obliged to give 28 days advance notice of changes to tariffs for services within those markets. However, in all instances the Director General can consent in writing to a departure from these obligations, and he has done so in respect of tariffs for services on certain International Direct Dial (IDD) and International Private Leased Circuit (IPLC) routes offered by BT and Cable and Wireless. Here, the required period of notice has been reduced to 1 day. 1.3 Obligations to publish prices and provide advance notification to customers and/or the regulatory authorities are common across the world in many regulated industries. In Europe, most national telecommunications regulatory authorities require operators with market power to publish in advance the terms on which they provide telecommunications services. Even where there is no specific regulatory obligation, there are usually contractual commitments to notify customers before implementing tariff changes. The type of services to which regulatory obligations apply varies a little from country to country, and in some instances a distinction is drawn between price increases and price decreases. 1.4 BT has been obliged to provide advance public notification of tariff changes ever since it was granted its operating licence in 1984; well before the UK was subject to European directives. Nevertheless, some economists argue that, rather than protecting the interests of customers, advance notification can hamper the development of competition, by encouraging price following and increasing the risk of tacit collusion to keep prices high. There may, therefore, be merit, in reviewing the rationale for maintaining this obligation. 1.5 Oftel is exploring in this consultation exercise the possibility that customers might be better served if licence obligations which currently oblige BT to provide 28 days’ notice of changes to the prices of fixed public telephone services and leased lines, and prices for the use of the fixed public telephone network, were relaxed. Oftel’s approach, as set out in its Strategy, is to regulate only where this is likely to bring benefits to consumers, and to keep regulation to the minimum necessary to obtain appropriate outcomes. Against that background, it is important to ensure that the benefits of price publication outweigh the costs and, in particular, to ensure that the current rules are not themselves inhibiting competitive behaviour. If the costs of advance price publication, represented by an increased risk of tacit collusion and price following, are found to outweigh the benefits offered by price transparency, then it may be appropriate for Oftel to propose changes to BT’s licence or, failing that, to give consent to departures in specific product areas. Oftel will be particularly interested in the views of BT’s competitors and the experience of users of telecommunications services.
1.6 One of the options might be to require BT simply to publish an up-to-date price list, observing a nominal 1 day period of notice before implementing tariff changes. Alternatively, it might be thought that it is appropriate to withdraw regulation still further by removing all obligations to publish prices. If this latter view was adopted BT would still be required, however, to publish tariffs for a wide range of services; as was explained in paragraphs 1.1 and 1.2 above, legislation requires all providers to publish their terms and conditions, including tariffs, for the provision of telephone services which are publicly available to consumers, and legislation also prohibits operators with significant market power from implementing changes to tariffs for fixed public telephone services and for the use of the fixed public telephone network without first observing a public notice period. Operators with significant market power in the leased line markets too must publish tariffs, and other information, in respect of those services.
1.7. In parallel with this consultation exercise, and subsequently, Oftel will continue with its programme of reviews of competition in specific markets and, where competition has strengthened, may propose change to the regulatory framework, including changes to price publication rules. Obligations to provide advance notification of tariff changes may also fall away entirely where an operator is deemed no longer to have market power. Proposals to alter price publication rules might therefore flow either from the present generic review of the merits of price publication or from specific assessments of competition in selected markets. 1.8 Oftel is not reviewing the merits of BT’s price publication obligations in respect of interconnect services as the reciprocal nature of these services which are not offered to the wider public, and the regulatory framework within which they are provided, is very different from the circumstances under which BT supplies services to end users and service providers. Nor, for similar reasons, is Oftel reviewing BT’s obligation to publish prices, and other information, in respect of local loop unbundling. 1.9 If the Director General decides to relax the present advance price notification and/or price publication obligations, he may achieve this in one of two ways. He may propose specific modifications to BT’s licence and, where appropriate, the licences of other operators, or he may grant consent, under the terms of the present licences, to revised advance notification and publication arrangements. A formal change to the present licences offers the licensees the advantage of regulatory certainty but, in the event of unforeseen adverse consequences, re-imposition of the present licence obligations would require a time-consuming submission to the Competition Commission (assuming that re-imposition of the present obligations was not accepted voluntarily by the licensees concerned). On the other hand, consent, under the terms of the present licences, could be granted for a limited period on a case by case basis to enable the impact of this deregulatory action to be tested. Notes to chapter
1
The legal framework 2.1 To the extent possible, all licences issued under the Telecommunications Act share a common format irrespective of the market position of the licence holder. Many conditions which it would not be appropriate to apply to smaller licensees apply only where the Director General has made a determination which triggers their application. Reflecting its powerful position in many telecommunications markets, BT is subject to more triggered conditions than most of its competitors and the web of licence obligations is, therefore, complex. Many of these provisions reflect the requirements of European Directives. Publication requirements which derive from the Revised Voice Telephony Directive 2.2 In common with all providers of telephone services, BT is obliged by condition 7.1 of its licence to publish, for consumers, details of its standard terms and conditions for use of its publicly available telephone services. Condition 7.1 also requires the licensee to send copies of this information to any consumer that asks for it. This general obligation reflects the requirements of the Revised Voice Telephony Directive. Oftel has no plans to review these general obligations. This provision of the Directive and condition 7.1 of the licence apply only to publicly available telephone services offered to consumers; they do not apply to any services supplied to business or other corporate customers, they do not apply to Value Added Services, and they do not apply to bespoke services which are not publicly available to the generality of customers. 2.3 Additionally, as an operator which has been determined to have Significant Market Power (SMP) for the purpose of the Revised Voice Telephony Directive, BT is prohibited from implementing tariff changes for the use of the fixed public telephone network or for fixed public telephone services, whether offered to business customers or consumers, until after an appropriate period of public notice has been observed. Fixed public telephone services include those services which are reliant on the use of the public network which is used to carry the generality of conventional voice calls. The term does not include either Value Added Services or other specialist services, such as those based on Asynchronous Transfer Mode or Frame Relay technology, which are run on discrete dedicated networks. The Directive allows the national regulatory authority to set the period of public notice, and the Director General has specified a period of not less than 28 days. That obligation is contained in condition 54 of the PTO licence. Oftel now wishes to review whether the minimum notice period remains appropriate. If, after this consultation exercise is concluded, the Director General takes the view that the notice period should be altered for some or all services, he may achieve this either by modifying the licence or by giving written consent to a shorter notice period being given in specific circumstance. Such consent was given last year in respect of BT’s services on specified IDD and IPLC routes. Kingston Communications’ current obligation to give 28 days notice of changes to prices in those markets where it has SMP would need to be reviewed if the Director General decided to alter BT’s wider obligations. Publication of prices for Universal Services 2.4 As an operator with Universal Service obligations, BT is obliged by condition 58 of its licence to provide 28 days notice of any changes to the charges, terms and conditions on which it offers to provide the telecommunication services to which the Universal Service obligations relate. In practice it is likely that most services covered by condition 58 are also covered by the condition 54 publication and notification obligations referred to in the preceding paragraph. If the Director General decides that it is appropriate to change the advance notification requirements imposed by condition 54, it would, however, be necessary also to make changes to the requirements of condition 58. Changes to the notification period required by condition 58 may be achieved either by a licence amendment or by giving specific consent to a different period of notice being given in specific instances. Publication requirements which derive from the Leased Lines Directive 2.5 The Leased Lines Directive requires that all providers of Leased Lines which have Significant Market Power must publish the terms and conditions under which their services are offered. The directive also allows National Regulatory Authorities to specify suitable periods of notice. These requirements are enforced through condition 55 of the PTO licences and BT is obliged to give not less than 28 days notice of tariff changes, unless the Director General consents otherwise. Oftel wishes to review whether this period remains appropriate in all cases and, if the Director General concludes that the obligation should be altered, here again, this may be achieved either by a licence amendment or by giving consent to a different period of notice in specific cases. Different rules would apply to wholesale partial private circuits. BT is currently negotiating with other operators to provide such products. Here, any obligations to publish prices and to provide advance notification of price changes would be those which apply to other interconnect services, and these are not being reviewed in this consultation exercise. Publication requirements which apply where an operator has Market Influence 2.6 Similar publication obligations also arise where it is determined that an operator has Market Influence in a market specified by Oftel. These requirements, like those imposed on operators with Universal Service obligations, are enforced through condition 58 of BT’s licence. However, given BT’s designation as an operator with Significant Market Power for the purposes of the Interconnection Directive, the Revised Voice Telephony Directive and the Leased Lines Directive, it has not been necessary also to determine that BT also has Market Influence in any market. Operators which have been designated as having market influence are, however, obliged by this designation to provide advance notice of price changes and, unless the Director General consents otherwise, operators of fixed networks must give 28 days notice of price changes and operators of mobile networks must give one day’s notice. Vodafone, BTCellnet, and Cable and Wireless have all been designated as having power in specific markets. The Director General has given consent to Cable and Wireless giving just one day’s notice in respect of retail prices for the use of services on those IDD routes where Cable and Wireless has Market Influence. Other publication requirements imposed on BT 2.7. Condition 69 requires BT to provide advance notice of changes to network charges, i.e. the prices charged to other operators for interconnect services. The notice period varies from one day for Competitive Standard Services, 28 days for Prospectively Competitive services and 90 days for others. This consultation document is not intended to review whether these notification periods are appropriate. 2.8 The EC Regulation on unbundled access to the local loop requires notified operators to publish information, including prices for access to their local loops and related facilities. Condition 83 of BT’s licence, which requires BT to provide unbundled local loops, also requires BT to publish information, including prices, for these facilities, and to keep this information updated. This consultation document is not reviewing whether this obligation is appropriate. 2.9 In most of the examples cited in paragraphs 2.2 to 2.8 above, BT is obliged to provide advance notification to both Oftel (see note 4) and the general public. In addition, condition 71 requires BT to notify Oftel of all changes to tariffs for "General Prices", and to provide a cost breakdown. General Prices are the retail prices for the taking over and use of a phone line. This condition prohibits BT from publishing more widely any General Price where the price is less than the aggregate of certain specified costs, unless the Director General has given his prior written consent. Oftel is not reviewing this obligation. Future requirements of new European Directives 2.10 The European Commission has proposed a package of new directives which will create a new framework for regulation of electronic communication networks and services. The package is currently being negotiated by the Council of Ministers and in the European Parliament. The directives are intended to ensure a harmonised approach across Europe, although member states will retain some discretion to decide how regulation should be applied. They are expected to come into force in the spring of 2002, replacing the existing directives which were referred to in the preceding paragraphs of this consultation document. Existing national regulatory structures will be maintained, however, until reviews of the relevant markets have been completed; in general these reviews are expected to be completed by the middle of 2003. Although the forthcoming changes at a European level create a degree of uncertainty about future regulation, timescales for implementing the new directives, and the expected high degree of flexibility where price publication and notification rules are concerned, are such that Oftel believes the present consultation exercise can usefully contribute to the long term development of regulatory policy. 2.11 Under the proposed new Universal Service directive, member states would be obliged to ensure the availability of transparent information about prices and standard terms and conditions for access to and use of publicly available telephone services; how that information is made available and, in particular, which information is published by the provider and which by the National Regulatory Authority, would be a matter for each member state. Current proposals, under the new Access and Interconnection directive, envisage that providers with Significant Market Power may be subject to more onerous obligations than other providers and, for example, the directive envisages that providers with Significant Market Power may be obliged to provide information about prices, terms and conditions for wholesale services, including interconnection. National Regulatory Authorities are expected to have discretion to specify the information which is to be made available, the level of detail and the manner in which this information is published. Table 1: Summary of legal obligations contained in BT’s licence and all other PTO licences
Notes to chapter
2
The impact of mandatory price publication 3.1 It is generally assumed that the price transparency afforded by price publication helps customers to make informed decisions when selecting a supplier and helps them to control their expenditure after a supplier has been selected. It is also generally assumed that competitors can compete more effectively when the prices of a supplier with market power are made highly visible, for example, by exposing prices which are above the competitive level and particularly susceptible to competitor attack. Where a supplier is subject to other regulation, such as prohibitions on undue discrimination or margin squeeze, an obligation to publish prices can also facilitate policing of those other obligations by the regulator, competitors and customers. Furthermore, if prices are published some time in advance of their application this may enable customers to revise earlier buying decisions, competitors to devise an appropriate counter strategy and regulators to scrutinise the proposed new prices. These were the assumptions made when BT’s licence was granted in 1984. The actual impact of price publication, with or without advance notification, should, however, be considered more carefully. Protecting the interests of customers 3.2 Most consumers need some means to ascertain the prices charged for the services which they buy, particularly where charges are billed in arrears and vary widely according to time of day, call destination, service plan etc. BT is obliged to maintain a price list which is to be made available at each of its public offices. Whether a price list held at each of the supplier’s offices helps customers to understand the prices charged by that supplier is uncertain. Personal notification of price changes and new tariffs to individual customers may have much greater direct value to customers than any centralised price list. Nevertheless, the existence of a uniform central price list may provide customers with the comprehensive and objective information which they require in the event of a dispute with the supplier. 3.3 BT claims that customers have access to a substantial body of information relating to price changes, and states that few customers consult the published price list. BT has also cited the fact that the US Federal Communications Commission expressed a similar view in 1996 when it reviewed the price publication obligations then imposed on AT&T (see note 8). Oftel’s own work in the area of price transparency has indicated that few customers make use of the published price list and most rely exclusively on marketing literature produced by suppliers. 3.4 Some customers, potentially, may benefit from advance notification of price increases by being able to make alternative arrangements with other suppliers in advance of price increases coming into force. As is summarised in Chapter 4 to this consultation document, some national regulatory authorities distinguish between price increases and price decreases, and require only details of price increases to be notified to customers some days in advance. These authorities often take the view that there should be no hindrance to operators implementing reductions in the prices of existing services or implementing additional new tariffs. BT is currently obliged to give 28 days notice of price reductions as well as price increases. Question 1: What value do customers and organisations which represent the interest of telecoms users place on the obligation imposed on BT to maintain a published price list at all major public offices and the requirement to publish, 28 days in advance of launch, a notice drawing attention to price reductions, price increases and new tariffs? If the direct interests of customers are not being best served by these obligations, what new form should these requirements take? Allowing the regulator, and others, to monitor compliance with licence obligations 3.5 Operators with market power may not unduly discriminate or show undue preference in the supply of certain telecommunications services, nor may they favour to a material extent a business carried on by themselves. These prohibitions, and the associated rules which govern the application of unfair cross subsidy and margin squeeze, are intended to prevent operators with influence in upstream markets (e.g. a wholesale market) from leveraging that power unfairly into downstream markets (e.g. a retail market). The rules and prohibitions can be policed most effectively where Oftel has access to a comprehensive price list. That pricing information need not necessarily be made public. However, to the extent that competitors too look for evidence of breaches of these rules, and in doing so rely on comprehensive pricing information, the existence of a published price list may be helpful. 3.6 Where the regulator is required to consent to the application of new prices or other terms and conditions, advance notification is needed to allow the regulator to assess the proposed changes. Oftel, however, does not approve or authorise price changes by telecoms companies, except in some limited circumstances, such as where BT proposes to offer certain services at prices which would fail to cover specified costs and, in any event, in these specific instances, Oftel’s consent to the prices is required before they may be publicly notified. In general, providers of telecoms services are expected to ensure for themselves, without help from the regulator, that they are compliant with their legal obligations. The Competition Act, which provides for the fining of companies which engage in anti competitive behaviour, imposes a further discipline on dominant players. Although Oftel does review planned price changes during the 28 day advance notice period and, on occasions, has warned BT that the changes could be anti-competitive, removal of the obligation to provide advance notice of new prices is unlikely to hinder significantly Oftel’s enforcement activities. However, it can be argued, conversely, that advance public notification of price changes enables competitors to draw to Oftel’s attention price changes, which they consider to be anti competitive and potentially damaging, before they are launched and before any damage is done. It is conceivable that, in the absence of an obligation to provide advance notification of price changes, an operator might judge that his interests are best served by inflicting lasting damage on competitors before action can be taken by the regulatory authority, even where that operator is exposed to the risk of being fined under the Competition Act. Question 2: Have BT’s competitors found the published price list helpful when considering whether to bring to Oftel’s attention allegations of anti-competitive behaviour? Do competitors believe that in the absence of an obligation to publish prices, operators with market power would be more likely to breach rules concerning undue preference and unfair discrimination? Does the obligation to publish details of tariff changes 28 days in advance of their implementation significantly help competitors to prevent anti-competitive behaviour, or would a shorter period of notice suffice? Helping competitors to compete with operators with market power 3.7. Conventional wisdom also suggests that where a supplier with market power is obliged to publish his prices, smaller competitors are able to compete more effectively, choosing which markets to enter and where to set their own prices in the light of the prices charged by the supplier with market power. Furthermore, advance publication of prices by a player with market power may give less powerful players an opportunity to respond to announced changes before the more powerful supplier is able to implement the revised tariff structure. It is often assumed that competitive behaviour such as that engendered by mandatory price publication, operates to the ultimate benefit of customers. This is likely to have been the main rationale for including price publication obligations in BT’s operating licence in 1984. There is, however, a possible downside to such behaviour by less powerful players, and this is discussed in paragraphs 3.9 to 3.13 below. Question 3: To what extent do BT’s competitors rely on the existence of BT’s published price list when determining their own trading strategy? How is information from the published price list used? Is the 28 day advance warning of tariff changes important to competitors? 3.8 BT’s obligations to publish Network Charges (the charges payable by other operators for the use of BT’s network) are not included in the scope of this review. However, some other telecommunications services supplied by BT, such as its Surfport and Webport products, are used by other providers of telecommunication services as a component of the services which they, in turn, provide to end users (see note 9). Furthermore, some of the other services supplied by BT to providers of telecommunications services, such as Calls and Access, are priced on a retail-minus basis by reference to the prices of comparable services offered by BT to end users. Where downstream competitors to a vertically integrated operator with market power are dependent on wholesale components supplied by that operator, their ability to compete may be severely damaged by unexpected changes to the prices of those components. Oftel also recognises the anxiety expressed by some downstream competitors to BT that information about impending tariff changes and product launches might sometimes be shared with other divisions of BT before it is disclosed to BT’s downstream competitors (not withstanding rules which prohibit discriminatory disclosure of information). Such competitors may feel that advance public notification of tariff changes and new product launches provides some protection from such action. This may be the case, for example, with the wholesale ADSL products that BT supplies to service providers, including its own service provider business. Given that all of these service providers are BT’s customers, one would expect them to be given notice of any tariff changes or new product launches at the same time and for such notice to be reasonable. Service providers may feel, however, that advanced publication requirements provide a necessary safeguard. Question 4: Do downstream competitors to BT believe that BT should continue to be obliged to provide extended notice of tariff changes for services which are used as components of services provided by others? Do competitors believe that any distinction should be made between price increases, price reductions or new product launches? Negative impact on competition 3.9 Whilst price publication may offer immediate benefits to customers, and might conceivably help smaller competitors to establish themselves, in the longer term there may be a cost arising from the dulling of competition. There are 3 main aspects to this concern; (i) in a market consisting of a limited number of influential players (commonly known as an oligopolistic market), visibility of tariffs published by each player may lead to tacit (see note 10) collusion to keep prices high, (ii) in a market dominated by one player, if the dominant player is obliged to publish its prices, smaller players may follow those prices rather than compete more boldly and (iii) the loss of first mover advantage, which is particularly apparent where a dominant player must provide advance notification of tariff changes, may remove the dominant player’s incentive to compete on price; making it more profitable to maintain prices at a relatively high level in return for a modest loss of market share. In none of these cases will customers enjoy the benefits of vigorous competition. Collusion 3.10 The risk of collusion arising from price publication per se is at its greatest in oligopolistic markets which are shared by a few influential suppliers, often protected from further competition by high entry barriers. In the extreme case, publication of prices by all major players may be used to prevent individual members of a cartel from making secret price cuts, as any price cuts will be observable by the other firms in the cartel. As a result, price cutting is deterred and collusion enforced. There have been a number of well publicised examples of such behaviour and the response by the relevant competition authorities has included not merely withdrawal of mandatory price publication rules but also prohibitions on even voluntary price publication. In 1991, some 5 years before AT&T was deemed to be no longer dominant, the US Federal Communications Commission (FCC) removed from AT&T its obligations to file prices (see note 11), on the basis that the risks were thought to outweigh the benefits. In 1996 the FCC took this thinking a stage further by prohibiting voluntary price filing. The FCC had become concerned that price filing increased the likelihood of tacit collusion and, in the case of operators without market power, had little benefit for policing of discrimination or margin squeeze, as such operators are unable to discriminate unduly. 3.11 A further, exceptional, variant of collusive behaviour was observed by US competition authorities in a case involving the (US) Airline Tariff Publishing Company and eight US airlines (see note 12). In this case, it was found that the airlines used advance price notification to test the response of competitors before accepting orders from customers and, where appropriate, pre-announced tariffs were modified or revoked in the light of responses from competitors. The process was very interactive and sometimes involved a series of pre-announced ‘offers’ and ‘counter offers’ by the airlines. It should be noted, however, that although, in this instance, advance notification coupled with the absence of any contractual commitment facilitated a form of collusive behaviour, it is conceivable that in other circumstances the absence of contractual commitment would make advance notification less useful as a means of enforcing collusion; much depends on the intentions of the colluding parties. Oftel has no evidence of collusive behaviour by BT and its competitors but mandatory price publication may, in theory, increase the risk of collusion in markets which have oligopolistic features. Price following 3.12 In a market where one supplier has a strong position, collusion and the formation of cartels is less likely. The transparency of the dominant player’s prices, achieved through mandatory or voluntary price publication, may, however, encourage price following by other, less powerful, competitors, particularly if tariff changes are publicised well in advance. Here competitors may pitch their prices marginally below the prices of the dominant operator when advance notification of price changes is given, rather than competing more boldly to attract new customers. Concern was expressed in Oftel’s March 2000 Statement on Competition in International Markets that the 28 day notice period was encouraging competitors to follow BT’s prices. In a less certain world, where the operator with market power changes his prices without notification, smaller operators might be more likely to take the initiative. Disincentives arising from loss of first mover advantage 3.13 Where a dominant operator becomes aware that less powerful competitors are consistently engaging in price-following, he may be less likely to reduce his own prices, knowing that price reductions give him little or no competitive advantages. In these circumstances, the dominant operator may decide that the best strategy is to accept a loss of market share in return for maintaining high prices and profits. The alternative strategy of attempting to maintain market share through price cuts may be less profitable. Thus, it is possible that advance notification of the dominant operator’s prices may hamper the development of competition and keep prices high, to the detriment of customers. BT has argued, along similar lines, that the obligation to provide advance public notification of price changes reduces its own incentives to reduce prices, as competitor visibility of the company’s plans removes its ability to enjoy first mover advantage. Question 5: Can respondents supply evidence to support or disprove the view that BT’s obligation to publish prices is having a dulling effect on competition, by encouraging price following by BT’s competitors, by reducing the incentives on BT to cut its prices or by increasing the risk of tacit collusion? If so, can respondents supply any evidence that the obligation to publicise tariff changes 28 days in advance of implementation, rather than, say, one day in advance, is worsening the negative impact of price publication. Regulation appropriate to different market structures 3.14 As the preceding paragraphs have indicated, advance public notification and/or publication of prices may be more useful, or at least less damaging, in markets which display particular characteristics. It is possible, for example, that public notification of price changes for business calls may be more or less appropriate than public notification of price changes for residential calls where BT faces fewer competitors. It is possible that markets characterised by relatively few large players, such as the business market, may be made more dynamic by removing or shortening public notification periods. Question 6: Can respondents point to any evidence to support, or refute, the view that price notification and/or publication obligations should be varied according to the characteristics of the market concerned? If so, what are the relevant criteria? Impact of previous deregulatory action in the UK 3.15 In March 2000, following an investigation of the extent of competition in the IDD and IPLC markets, Oftel gave specific consent for BT to provide just 1 day’s notice of planned changes to the retail prices for calls to 23 IDD destinations and for 19 IPLC routes and backhaul circuits. This consent was granted on the basis that in the business market all 23 IDD routes were effectively competitive and in the residential market they were increasingly competitive. The 19 IPLC routes also were considered to be increasingly competitive. As well as relaxing the price publication rules, Oftel removed BT’s obligation to provide it with a breakdown of costs for services on the 23 retail IDD routes prior to publication of price changes and the obligation to seek the Director General’s consent to prices which are below cost. Furthermore, Oftel also confirmed that as the business IDD market for all 23 routes is effectively competitive, any discrimination in the terms offered to different customers was less likely to be considered undue and, consequently, in breach of licence obligations. 3.16 This deregulatory action went much further than that being considered by the present consultation exercise, having been based on a thorough review of competition in specific markets. It might be expected, nevertheless, that it would be possible to draw from the impact of this action some conclusions about the likely impact of a more general reduction in the period of advance notification of price to be provided by BT. 3.17. However, in the year since the rules were relaxed in respect of these IDD and IPLC routes, BT has made very few changes to the prices for these services. Prices for services on the 23 IDD routes were altered significantly only once, in September 2000. In this period, BT also launched a number of new tariff packages for residential and business customers, including additions to the BTTogether set of products and various BT Customer Commitment options aimed at corporate users. As would be expected, the BTTogether and BT Customer Commitment packages include discounts, relative to standard packages, for IDD as well as inland calls, but the frequency of price reductions does not appear to have been significantly greater in respect of the 23 IDD routes than the frequency seen in respect of other services. It appears therefore that few conclusions can be drawn from BT’s behaviour during this period, beyond noting that removal of the obligation to provide advance public notification of price changes seems to have had little impact on BT’s behaviour. Whilst Oftel does not believe that the absence of any favourable impact would justify a re-imposition of the old price notification and publication rules, it appears that this experience cannot be used to inform a wider debate on the costs and benefits of this form of regulation. 3.18 With the exception, in limited circumstances, of Cable and Wireless and Kingston Communications, BT’s competitors in the fixed telephony markets are not obliged to notify price changes to Oftel. Therefore, Oftel has limited visibility of any impact of last year’s relaxation on the pricing behaviour of BT’s competitors. Oftel has market information which suggests that BT share of call minutes on the 23 IDD routes which were deemed to be effectively competitive in March 2000 has fallen a little faster than its share of call minutes on other IDD routes. However, changes of market share in both categories are fairly small and the difference between the two categories may be explained by the pre-existing strength of competition on the routes which were deregulated. It is not possible, therefore, to draw from these statistics any conclusions about the likely impact of a removal or modification of the present rules governing advance public notification of price changes in other areas. Question 7: Do respondents have any market information, which might indicate whether there has been a change in the frequency or scale of price changes by BT and its competitors in respect of the 23 IDD routes and 19 IPLC routes determined to be competitive or increasingly competitive in March 2000. Can respondents detect any changes in the pattern of price changes, including, for example, changes to any patterns of price leading? Notes to chapter
3
The views of other authorities Price publication obligations imposed by other telecommunications regulators 4.1 The approach taken by other telecommunication regulators varies widely across Europe, in terms of the number of days notice, if any, which must be given before applying the new prices, the method of publicising price changes and the services which are subject to price publication rules. In accordance with the requirements of the Revised Voice Telephony Directive, all EC national telecoms regulators require operators with SMP to notify customers of changes to tariffs for fixed public telephone services in advance of launch and require all providers of publicly available telephone services to publish their prices for consumers. Some national regulators require general publication of price changes in national newspapers or in a nationally available price list, while others appear to allow providers to notify customers individually instead of more widely publicising the price changes. Notice periods vary widely, from as little as 1 day to as many as 45 days. A summary of current obligations can be seen at the end of this chapter. 4.2 The obligation imposed on BT to provide not less than 28 days notice is similar to the one month’s notice required by the German authorities, but is significantly exceeded only by the Greek authorities which require not less than 45 days advance notice to be provided. The authorities in Belgium, Denmark and Portugal distinguish between price increases and price reductions, the latter being subject to much shorter periods of advance notification. 4.3 The services to which the advance price notification rules apply are broadly similar across Europe. Some authorities, notably the French and German authorities, have, however, applied these rules only to voice telephony and have excluded data services Views of other regulatory authorities 4.4 Compared with other areas of economic regulation, little has been written about the impact of advance price notification or price publication. Literature exploring the costs and benefits of advance price notification, as distinct from price publication, is particularly scarce. Rotemberg and Saloner (see note 14) have considered the pattern of pricing in situations where price changes are first announced by one firm and then matched by its rivals. They conclude that collusion is more likely to be seen where there is also information asymmetry, i.e. where price followers do not hold the same degree of information on the determinants of the leader’s prices as the leader does. Rotemberg and Saloner also found that the leader tended to earn higher profits than the follower. As a result of the leader-follower relationship and of the presence of asymmetric information, prices may be changed infrequently, and overall welfare may be even lower under collusive price leadership than under overt collusion. Kuehn and Vives (see note 15), while arguing that communications about intended future prices without commitment should be considered anti-competitive, were favourably disposed to publication of (maximum) prices. Kai-Uwe Kuehn (see note 16) has also written elsewhere about the impact of communication and price announcements but generally in contexts other than those encountered in the regulated sector of the telecommunications industry. Papers by US authorities were also cited in paragraphs 3.10 and 3.11 above. Table 2: Summary of advance price publication obligations imposed by other national telecommunications regulators on operators with market power (see note 17).
Notes to chapter 4 14 Rotemberg, JJ,
Saloner, G, "Collusive price leadership", Journal of Industrial
Economics, 39(1), September 1990,
Options for the future The approach 5.1 As was stated in the summary, the main impetus for the review is the concern, which has been expressed by some authorities, that publication of prices may increase the likelihood of tacit collusion or may otherwise mute competition. Oftel wishes to ensure that the benefits of price publication, which flow from price transparency, outweigh the costs represented by the risks of tacit collusion and muted price competition 5.2 Despite generalised concern about the risks of tacit collusion and price following, national regulatory authorities are not in general agreement about the costs and benefits of price publication. Furthermore, the impact of the loosening of regulatory constraints on BT last year in respect of certain IDD and IPLC routes appears to be inconclusive. However, all forms of regulatory control have a cost and where there is evidence that certain forms of regulation may, at least, be unnecessary and, at worst, actually damaging to the development of competition, then the regulatory framework should be reviewed. 5.3 BT has submitted to Oftel a confidential discussion document in which it proposes, generally, that the notice periods which it must respect, should be reduced to 14 days, with a lesser, unspecified, period to apply to price reductions. The paper also proposes that price changes should be publicised by an annotation in the relevant section of the price list rather than, as at present, in a distinct price change notice appended to the published price list. Although, to some extent, BT’s discussion document shares the generic approach of the present consultation exercise, BT’s conclusions are based upon factors which include what BT refers to as "the development of a competitive telecommunications industry, especially compared to the situation in 1984 when the notice period was first introduced". BT also asserts that the obligations are disproportionate given "the competitive nature of the telecommunications industry in the UK". Thus, although BT’s proposals are not based on a detailed analysis of competition in any specific markets, they are based on a number of generalised assumptions about the development of competition. Oftel does not accept that these form an adequate basis for deciding that changes should be made to the regulatory framework. 5.4 BT has also made other, more formal, requests that the Director General should consider whether the markets for inland business calls and Dial IP services are effectively competitive and that the application of certain regulations to those markets should be modified to reflect the state of competition in those markets. Subsequent discussion with BT has confirmed that BT is seeking to have the 28 day advance price publication obligation in respect of these services reduced to 1 day and that it should be permitted to incorporate new prices in the main body of the price list, rather than in a distinct section of the price list. Here again, although BT believes that these markets should ultimately be subjected to a rigorous competition review, the company asserts that the evidence which it has already presented is sufficient to warrant immediate changes to certain aspects of the regulatory framework, including the price publication rules. Oftel does not accept that this is an acceptable approach. 5.5 Oftel will continue to review the level of competition in specific markets and, where the prospects for effective competition are found to have improved, may propose deregulatory action in those markets. The present consultation exercise is not, however, reviewing the level of competition in any individual market, and any conclusions drawn will be based on a generic review of the merits of different forms of price notification and publication. Oftel does not accept that competition in any market has grown to such an extent, since the last formal review, that it is self evident that a satisfactory assessment of competition can be made from a limited set of headline figures. Oftel will continue to conduct formal competition reviews in accordance with the Effective Competition Review Guidelines. Maintenance of a published price list 5.6 If evidence submitted in response to this consultation exercise indicates that the benefits of price publication are outweighed by the costs then Oftel will consider relaxing the obligations to maintain a published price list. However, as has been explained earlier in this document, the Revised Voice Telephony Directive requires NRAs to ensure that all providers of publicly available telephone services publish the charges terms and conditions under which those services are provided to consumers. It also states that operators with SMP, such as BT, may not implement any tariff changes in respect of fixed public telephone services or the use of the fixed public telephone network until after an appropriate period of notice has been observed. On concluding this review, Oftel will not, therefore, release BT from its obligations to publish tariffs for these services and facilities. 5.7. It appears, therefore, that although the present review of the rationale for price publication may inform discussion at a European level, scope for early relaxation of the obligation to maintain a published price list across a significant number of product sectors is limited. Some clarification of which services and facilities are included within the scope of these requirements may, however, be helpful to all concerned. As was outlined in Chapter 2 of this consultation document, the term ‘fixed public telephone service’ excludes Value Added Services and other specialist services, such as those based on Asynchronous Transfer Mode or Frame Relay technology, which are run on discrete dedicated networks. Question 8: Setting aside the requirements of current legislation, do respondents see any merit in a withdrawal, on a generic basis, of the obligation to publish tariffs in respect of certain groups of services without first conducting a full review of competition in the relevant markets? Advance public notification of tariff changes 5.8 Even if a broad based modification of the present obligations to publish prices is considered inappropriate, or is in contravention of European Directives, it may, nevertheless, be appropriate to modify the present obligations to provide 28 days notice of tariff changes. There appear to be 3 main factors which would need to be considered when reviewing the present advance notification requirements;
5.9 The obvious benefit to customers of early implementation of price reductions, which has been recognised by some regulators, may suggest that there is merit in a regulatory framework which distinguishes between price reductions/ new product launches and prices increases/ tariff withdrawals. It might, for example, be appropriate to require just 1 day’s advance public notification of price reductions and new product launches and to maintain a longer period, perhaps the existing 28 days, for advance notification of price increases and withdrawals of existing tariffs. Question 9: Do customers and groups which represent the interests of users of telecoms services believe that the period of notice, to be given before new tariffs are implemented, should be reduced and, if so, should a distinction be drawn between price increase and price reductions? How easily could such a distinction be made? What periods of notice would be appropriate? 5.10 Any decision to modify advance price publication rules, following the conclusion of this consultation exercise, would be taken on the basis that the practice of advance price publication, per se, does not, in the present circumstances, serve the long term interests of customers; the consultation exercise is not reviewing the development of competition in any particular market. It might therefore be appropriate to apply any temporary or permanent change in price publication rules to all of the telecommunications services which BT offers (excluding the Network Charges applied to interconnect services where the reciprocal circumstances are very different). 5.11 There may conceivably be differences, however, between the circumstances which apply to the supply of certain groups of services, other than differences which stem from the relative strength of BT’s competitive position in any given market. It is also possible that providers of competing telecommunications services might be seriously disadvantaged if BT could vary the prices of key components of these services without advance notice. There might, therefore, be reasons why a distinction should be drawn between services which are purchased predominantly by end users and those which are used as components of services provided to end users by third parties. However, as with changes to prices charged to end users, it may be that, even in these circumstances, price reductions could be applied without notice and without damaging the interests of companies which rely on these components. Question 10: Do respondents, including providers of telecommunications services which are reliant on other services purchased from BT, believe that, when reviewing price publication obligations on a generic basis, a distinction should be drawn between different types of service? If so, what distinctions should be recognised? Method of publicising tariff changes for competitors and for customers 5.12 As was summarised in Chapter 4 to this consultation document, some European regulatory authorities are satisfied if amended prices are substituted for the old prices in the main body of the supplier’s published price list. Others, however, require operators with market power to publish details of price changes in national newspapers. BT has asked Oftel to review whether it is appropriate that BT should be obliged to draw attention to price changes in a notice, rather than being obliged merely to annotate the main body of the published price list. It is unclear how significant are either the value to customers of formal notices appended to BT’s published price list or the damage which, it is alleged, such notices might cause to competition (presumably by facilitating price following). Some customers and competitors may, nevertheless, rely on these notices and may be disadvantaged if the obligation to draw attention to price changes in a notice was removed and BT was obliged merely to retain a comprehensive and up-to-date price list. On the other hand, the present arrangements may do little to ensure that customers are made aware of advantageous new tariffs. Question 11: Do respondents believe that the present arrangements, which require BT to append a price change notice to the published price list, offer any advantages to customers or competitors, over and above an annotation in the main body of the price list. If not, what improvements could be made? Next steps 5.13 Oftel’s review, so far, of the practices adopted by other regulatory authorities, the views of regulatory economists and the impact of deregulation of services on some IDD and IPLC routes has proved inconclusive. Responses to the consultation document may provide more conclusive evidence about the costs and benefits of the price publication obligations and may identify changes which should be implemented. If the evidence strongly supports a deregulatory approach, then it would be appropriate to propose permanent changes to BT’s licence and the licences of other operators. On the other hand, if the evidence remains equivocal, a more cautious approach, reliant on the granting of consents under the terms of the present licences, may be appropriate; consents granted on a time-limited basis might enable the costs and benefits to be assessed more confidently before permanent change are made to the relevant licences. Question 12: Is any evidence in favour of deregulatory action sufficiently robust to warrant Oftel proposing immediate and permanent changes to the price publication and/or advance price notification obligations contained in BT’s licence and the licences of other operators? If not, do respondents believe that an extended trial of reduced notice periods would be useful? Do respondents have any views on how the success or otherwise of the trial could be assessed? Are there other ways in which the merits of advance notification could be tested?
Consultation Oftel seeks the views of customers and the industry on the proposals contained in this consultation document by 25 September 2001. There will then be a two-week period during which comments on the representations made during the first period of consultation are invited; this period will end on 9 October 2001. Comments should be made by e-mail to andrew.walker@oftel.gov.uk. or sent to: Andrew Walker Tel 020 7634 8909 Written comments will be made publicly available in Oftel’s Research and Intelligence Unit except where respondents indicate that their responses, or parts of it, are confidential. Respondents are therefore asked to separate out any confidential material into a confidential annex which is clearly identified as containing confidential material. In the interests of transparency, respondents are requested to avoid confidentiality markings wherever possible. Appointments to view written comments in Oftel’s Research and Intelligence Unit, which must be made in advance, can be arranged by ringing: 020 7634 8761 (fax: 010 7634 8946). Oftel would like to set up a link between this Consultative Document and any responses placed on respondents own Internet pages. Please contact Jo Hamilton at Oftel on 020 7634 8755 or by e-mail at web.oftel@gtnet.gov.uk to arrange this. 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 web site subscribers to the list receive an e-mail informing them about the document. Alternative Formats Copies of the full Consultative Document are available on disk. The Summary is available in large print, Braille, and tape formats. Please contact the Oftel Research and Intelligence Unit on 020 7634 8761, or by e-mail at infocent@oftel.gov.uk, or call textphone 020 7634 8769 for more information. Cabinet office code of practice on written consultation Oftel considers that this document meets the Cabinet Office code of practice on written consultation documents. The code is reproduced below for convenience. If you have any comments or complaints about this consultation process please contact: Oftel Co-ordinator for the code of practice: Robert Jex, E-mail: Rob.Jex@Oftel.gov.uk Tel: 020 7634 5340 1) Timing of consultation should be built into the planning process for a policy (including legislation) or service from the start, so that it has the best prospect of improving the proposals concerned, and so that sufficient time is left for it at each stage. 2) It should be clear who is being consulted, about what questions, in what timescale and for what purpose. 3) A consultation document should be as simple and concise as possible. It should include a summary, in two main pages at most, of the main questions it seeks views on. It should make it as easy as possible for readers to respond, make contact or complain. 4) Documents should be made widely available, with the fullest use of electronic means (though not to the exclusion of others), and effectively drawn to the attention of all interested groups and individuals. 5) Sufficient time should be allowed for considered responses from all groups with an interest. Twelve weeks should be the standard minimum period for consultation. 6) Responses should be carefully and open-mindedly analysed, and the results made widely available, with an account of the views expressed, and reasons for decisions finally taken. 7) Departments should monitor and evaluate consultations, designating a consultation co-ordinator who will ensure that all the lessons are disseminated.
(These definitions are for guidance only and have no legal standing. For precise definitions please refer to the relevant licence or legislation). Consumer: Any natural person who uses a Publicly Available Telephone Service for purposes which are outside his trade, business or profession. The term therefore excludes business users and corporate customers generally. EC Regulation on local loop unbundling: A European Regulation which requires Member States to ensure that notified operators meet reasonable requests for unbundled access to their local loops. Regulation (EC) No 2887/2000 of the European Parliament and of the Council of 18 December 2000. Fixed Public Telephone Network: The public switched telecommunications network which supports voice calls and low bandwidth data. Leased Lines Directive: A European Directive which is concerned with the provision of Leased Line throughout the EC. ONP Leased Lines Directive 92/44/EC Market Influence: A form of power where, in a specified market, the possessor has the ability to raise prices above the competitive level for a non transitory period without losing sales to such a degree as to make this unprofitable. Condition 56 of BT’s licence, and the licences of other operators, summarises some of the factors which might be taken into account when deciding whether the licensee has Market Influence. Publicly Available Telephone Services: Services for originating and receiving national and international calls, including voice telephony and certain associated services. The term excludes Value Added Services and any other services which are offered on a bespoke basis and, therefore, are not publicly available. Revised Voice Telephony Directive: A European Directive which is concerned with the provision of voice telephony and universal services across the EC. ONP Revised Voice Telephony Directive 98/10/EC Significant Market Power: A form of power which European Directives presume is possessed by an organisation when it has a share of more than 25% of a particular telecommunications market in a geographical area. National regulatory authorities, however, have some discretion in applying this test and may take into account certain factors specified in the relevant directives. Tacit collusion: The deliberate co-ordination of behaviour, such as price setting or product withdrawal, by a group of competitors with a view to restricting competition. Unlike explicit collusion, where the parties reach an explicit agreement on the strategy, tacit collusion is usually based on the signalling of intentions in a manner which cannot be regarded as explicit. Value Added Services: Telecommunications services which provide for more than just the basic conveyance of messages. They include, for example, services which provide for the storage or manipulation of messages or the provision of information.
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