Contents

The draft direction

Schedule 1 Measures arising out of the draft direction

Schedule 2 Operators in dispute with BT

Explanatory Memorandum

Chapter 1 Summary

Chapter 2 Background

Chapter 3 History of the dispute

Chapter 4 Submissions of the parties

Chapter 5 The Director’s considerations

Chapter 6 Consultation and timetable for responses

Annex Operators which made submissions to the Director

DRAFT DIRECTION UNDER THE PROVISIONS OF REGULATION 6(6) OF THE TELECOMMUNICATIONS (INTERCONNECTION) REGULATIONS 1997 OF A DISPUTE BETWEEN BRITISH TELECOMMUNICATIONS PLC ("BT") AND THE OPERATORS LISTED IN SCHEDULE 2 REGARDING THE CREDIT VETTING SUPPLEMENTAL AGREEMENT

Whereas:

(A) The Secretary of State granted to British Telecommunications plc on 22 June 1984 a licence (the "BT licence") under section 7 of the Telecommunications Act 1984 ("the Act") for the running of telecommunications systems specified in that licence;

(B) By virtue of section 109 of, and paragraph 20 to, Schedule 5 of the Act the BT licence has effect as if granted to British Telecommunications plc ("BT");

(C) The Secretary of State has granted to each of the operators listed in Schedule 2 a licence under section 7 of the Act for the running of telecommunications systems specified in that licence;

(D) The operators listed in Schedule 2 entered into a Standard Interconnect Agreement ("SIA") with BT on the dates set out in the Schedule;

(E) On 17 December 2001, BT issued a contractual review notice ("Review Notice") to Operators under the terms set out in the SIA. The Review Notice sought to introduce certain Credit Vetting provisions into the SIA designed to limit BT’s exposure to bad debt arising from interconnecting operators during their first year of operation and to introduce protective measures where existing operators incur poor payment records;

(F) Discussions took place between BT and industry representatives but no general agreement could be reached on the matter;

(G) On 15 May 2002, BT issued the Supplemental Agreement of 13 May 2002 (the "Supplemental Agreement") to 228 operators, which sought to implement the proposed Credit Vetting provisions. 27 operators formally accepted the Supplemental Agreement. Seven operators formally rejected the Supplemental Agreement. The remaining 194 operators were deemed to have rejected the agreement by failing to sign within the agreed contractual timescales. During the period of investigation, eight operators formally accepted BT’s proposals and ceased to be in dispute with BT. Therefore, as of the date of this draft direction BT was in dispute with a total of 193 operators.

(H) On 14 June 2002 in accordance with the provisions of Regulation 6(6) of the Telecommunications (Interconnection) Regulations 1997 ("the Regulations"), BT referred the dispute to the Director for determination;

(I) Regulation 6(6) of the Regulations provides that where there is a dispute concerning interconnection between organisations, the Director General of Telecommunications ("the Director") shall, at the request of either party, take steps to resolve the dispute within six months of the date of the request. The direction, which the Director makes to resolve the dispute, must represent a fair balance between the legitimate interests of the parties, and must be notified to the parties in accordance with Regulation 8(3). The parties are entitled to a full statement of the reasons on which the direction is based;

(J) The Director has considered, inter alia, the information provided by the parties and the matters set out in Regulation 6(8) of the Regulations. The principal points are summarised in the explanatory memorandum which accompanies, and is published with, this direction;

(K) The Regulations place upon the Director the general responsibility to encourage and secure adequate interconnection in the interests of all users;

(L) The Director issued a draft of this direction and the explanatory memorandum which contained the Director’s reasons on 21 November 2001 and responses were invited by 19 December 2001;

(M) Non-confidential comments were received from [xx] as detailed and discussed in Chapter […] of the explanatory memorandum which accompanies and is published with this direction. The Director in making this direction has taken these comments into account;

THEREFORE:

Pursuant to Regulation 6(6) of the Regulations, and having considered, inter alia, the views of the parties and those matters set out in Regulation 6(8) of the Regulations, the Director makes the following direction to resolve the dispute between BT and the operators listed in Schedule 2 :

1. BT can implement its credit vetting proposals set out in its Supplemental Agreement and its Credit Vetting Policy Interconnect Document of 13 May 2002 (the "Policy Document") provided it incorporates the changes as specified in Schedule 1 of this direction.

2. Except as otherwise defined in this direction, words or expressions used shall have the same meaning as in the Act, the BT licence or BT’s Standard Interconnect Agreement as appropriate.

3. The parties shall modify their interconnect agreements to give effect to this direction.

4. This direction shall take effect on the day it is published.

HEATHER JULIE CLAYTON

DIRECTOR OF INVESTIGATIONS

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

………. 2002

SCHEDULE 1 – MEASURES ARISING OUT OF THE DRAFT DIRECTION

1. BT shall remove the following paragraphs of the Supplemental Agreement;

• paragraph 14B.4.1(a);
• paragraph 14B.4.2;
• paragraph 14B.4.3; and
• paragraph 14B.4.4;

2. BT shall include the following measures within the Supplemental Agreement and/or the Policy Document as necessary;

• BT shall ensure that an operator can understand how any credit limit has been set. If BT has relied on internal information for the purposes of setting an operator’s credit limit, the Director considers that such information shall be made available to that operator, for example in the form of an executive summary;
• BT shall ensure that dispute resolution procedures comparable to those which apply to disputed invoices under the SIA should also apply to disputes arising from disputed credit vetting reports;
• BT shall ensure that an operator is given written notice when a late payment, sufficient to infringe a provision of BT’s Supplemental Agreement, has been made; and
• BT shall ensure that paragraph 14B.6.3 of its Supplemental Agreement shall apply only when the Credit Vetting Report indicates that there is something adverse, in line with paragraph 5.1 of BT’s Policy Document.

3. BT shall amend its Supplemental Agreement and/or Policy Document to ensure that the measures set out in paragraphs 1 and 2 of this Schedule are applied reciprocally between BT and operators.

4. Having considered the facts specific to this dispute and the matters set out in Regulation 6(8) of the Regulations, this draft direction, in the opinion of the Director General, represents a fair balance between the interests of the parties in each case, having regard to the Director’s wider duties to promote the development of the telecommunications industry in the UK and to encourage and secure adequate interconnection in the interests of all users in a way that provides maximum economic efficiency and gives the maximum benefit to end users.

SCHEDULE 2 – OPERATORS IN DISPUTE WITH BT

Explanatory memorandum

Chapter 1

Summary

1.1 The Director General of Telecommunications ("the Director") has issued a draft direction in accordance with the provisions of Regulation 6(6) of the Telecommunications (Interconnection) Regulations 1997 ("the Regulations") for the resolution of a dispute between British Telecommunications plc ("BT") and the 193 operators as set out in Schedule 2 to the draft direction.

1.2 BT referred this dispute to the Director on 14 June 2002. The Director has considered the submissions made by BT and the Operators and has issued a draft direction and Explanatory Memorandum. Comments are requested and will be taken into account in making a final direction.

1.3 The Director is minded to decide that it is reasonable in principle for BT to have a credit vetting policy. BT has stated that its proposals are designed to give it a degree of protection without unduly restricting market entry for New Operators or restricting growth for Existing Operators. The Director considers that such an objective is reasonable. However, having taken into account the views of BT and a number of other operators, the Director considers that certain changes should be made to BT’s Credit Vetting Review Supplemental Agreement of 13 May 2002 ("the Supplemental Agreement") and/or BT’s Credit Vetting Policy Interconnect Document of 13 May 2002 ("the Policy Document").

1.4 These changes are set out in Schedule 1. In summary, the Director considers that BT should remove the "reduced due date scheme" from its proposals. In addition, BT should take certain measures to increase the transparency of its proposals. Furthermore, operators should be able to dispute credit vetting reports and have a right of appeal within the Standard Interconnect Agreement ("the SIA"). The Director considers that these changes should be made in order to ensure that BT’s credit vetting proposal is proportionate, and consistent with its stated objectives.

1.5 The Director proposes to direct that BT should be permitted to implement its credit vetting proposals as set out in the Supplemental Agreement and its Policy Document, incorporating the changes set out in Schedule 1.

Chapter 2

Background

2.1 As a result of having been designated with Significant Market Power ("SMP") under the EC Interconnection Directive (97/33/EC), BT is obliged to meet all reasonable requests for interconnection from operators seeking access to its network.

2.2 Operators interconnecting with BT may purchase interconnect services from (and sell interconnect services to) BT in accordance with the terms and conditions that are set out in the SIA.

2.3 In any industry, whether subject to regulatory control or not, a certain level of bad debt is to be expected, and this is regarded as a normal cost of doing business. Depending on the level of exposure, companies will adopt a number of strategies both to reduce the risk of bad debt occurring and to alleviate the worst effects of bad debt, or attempt to recover it when it does occur. BT has recently souught to introduce two measures:

Credit Vetting proposal

• to introduce credit vetting procedures designed to limit BT’s exposure to bad debt arising from interconnecting operators purchasing interconnect services during their first year of operation and to introduce protective measures where existing operators incur poor payment records; and

Transit Risk proposal

• to eliminate the risk incurred where BT provides only transit services, by enabling it to claw back any termination payments already made to terminating network operators, or to cancel payments not yet made, where originating network operators default on their payments to BT. Parallel measures would apply whereby another operator, as the transit operator, would be able to claw back payments made, or due, to BT as the terminating operator.

2.4 BT has introduced each of these measures in separate Supplemental Agreements to the SIA. This direction deals only with BT’s request for determination on the Credit Vetting Review Supplemental Agreement although, in making the draft direction, Oftel has considered the extent to which the two proposals interact with each other.

2.5 On 24 May 2002, BT referred to the Director a dispute between it and a number of operators which were deemed to have rejected the Transit Risk Review Supplemental Agreement. The Director issued his draft direction in respect of this dispute on 31 October 2002.

Chapter 3

History of the dispute

3.1 On 17 December 2001, BT issued a contractual Review Notice to Operators, under the terms of the SIA. The Review Notice sought to introduce certain Credit Vetting provisions into the SIA.

3.2 Discussions took place between BT and industry representatives but no general agreement could be reached on the matter.

3.3 On 15 May 2002, BT issued the Supplemental Agreement and Policy Document to 228 operators, which sought to implement the proposed Credit Vetting and Credit Control provisions. By 14 June 2002, 27 operators had formally accepted the Supplemental Agreement. Of the 201 operators which had not, seven had formally rejected the Supplemental Agreement, and the remaining 194 were deemed to have rejected the agreement by failing to sign within the agreed contractual timescales.

3.4 BT referred this dispute to the Director in a letter of 14 June 2002. It sought a determination on whether it should be able to implement its credit vetting proposals.

3.5 During the period of the Director’s investigation, eight operators formally accepted BT’s proposals and ceased to be in dispute with BT on this matter. Therefore, as of the date of this draft direction BT was in dispute with a total of 193 operators.

Information sought by the Director

3.6 On 1 July 2002, the Director wrote to the operators which had not signed the Supplemental Agreement, advising that he would be making a determination on this dispute in due course, and requested comments. A number of operators responded, and their views are summarised in Chapter 4.

3.7 A meeting with BT was held at Oftel on 17 July 2002, to discuss the relationship between this dispute and the dispute over BT’s Transit Risk Review Supplemental Agreement, the background to the proposals, and possible solutions.

3.8 A meeting with interested operators was held at Oftel on 19 July 2002 to discuss their concerns about the both the Transit Risk and Credit Vetting proposals, and this included discussion of alternative solutions to address BT’s concerns. The Director also met with other operators in relation to this matter.

3.9 On 9 August 2002, the Director wrote to BT requesting information on a number of issues in connection with this dispute. The Director requested information from BT in the following broad categories:

• the objectives of BT’s credit vetting Supplemental Agreement;
• BT’s bad debt expense for the years to March 2001 and March 2002;
• whether or not BT has accounted for bad debts, including accumulating a bad debt provision, within the cost base for wholesale interconnect charges;
• BT’s bad debt arising out of insolvencies and bankruptcies by operator and interconnect product for the financial year to 31 March 2002;
• possible alternatives to BT’s credit vetting Supplemental Agreement;
• issues arising out of the definition of ‘New Operators’ and ‘Existing Operators’;
• legal queries arising out of BT’s credit vetting proposals;
• billing issues and the procedure for dealing with potential ‘disputes’;
• mechanisms for setting credit limits and securities; and
• retention of revenues.

3.10 BT made an initial response to this letter on 28 August 2002, providing some, but not all of the information requested. BT provided further information on 13 September 2002 and supplied the remainder of the requested information on 27 September 2002.

3.11 The Director requested further information from BT in a letter of 17 October 2002. BT responded to the Director’s information requests in letters of 29 October 2002 and 5 November 2002.

Chapter 4

Submissions of the parties

Operators

4.1 The operators which made submissions to the Director in connection with this dispute are listed in full at the Annex. The submissions of these operators are summarised below.

4.2 Certain operators maintained that BT’s proposals do not address their stated aims, and are disproportionate to the perceived risk. Furthermore, it was stated that the proposals are designed to allow BT to im