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| Statement on competition in international markets - 26 March 2002 | |
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Chapter 1 Introduction Chapter 2 The consultation Chapter 3 Review of responses to the consultation document Chapter 4 Conclusions Chapter 5 Consultation on draft consents (e-auctions) only Annex A The legal framework Annex B Specific questions Annex C Responses Annex D Summary of responses to the consultation document Annex E Concert determination Annex F BT determination Annex G Category A routes (46 routes) Annex H BT consent Annex I Kingston consent Annex J C&W consent Annex K Draft BT consent Annex L Draft Kingston consent S.1 International telephony is a vital and growing part of the telecommunications market. It plays an essential role in facilitating international trade and UK businesses demand instant, reliable and high quality communication with their contacts overseas. In addition, the UK’s growing multi-cultural society has a need to keep in touch regularly with relatives and friends abroad on an affordable basis. S.2 Following the full liberalisation of international telecommunications in the UK in 1996, around 200 operators now offer international telecommunications services in the UK. This combined with the opening of overseas markets and the substantial investment in international submarine cables has led to a significant reduction in international call prices, particularly to the EU and US. S.3 This statement presents the conclusions of a review by Oftel of competition in international markets with a view to considering whether the current controls on operators are still appropriate. It relates to the regulatory requirements imposed on operators designated as having Significant Market Power or Market Influence in relevant markets for international telephony. It is made in the context of impending changes to the framework of regulation with new EU Directives covering electronic communications due to come into force in the very near future.
S.4 Oftel’s approach is to assess the competitive pressures in relevant markets to ensure that regulation remains appropriate to the level of competition. At present BT, C&W, Concert and Kingston are subject to greater regulatory controls on the provision of international services than most of their competitors. Generally, these additional controls relate to the prior publication and notification of price changes and to requiring consent to any proposed reduction of retail international prices below cost. S.5 The controls were imposed at a time when these operators had strong positions in the provision of international call services and were designed to prevent them using that position to the detriment of competitors and consumers. Oftel is concerned that some of these controls may actually be preventing these operators from competing sufficiently vigorously. The consultation document contained proposals to help address this and which were at the same time proportionate and designed to bring maximum benefit to consumers. S.6 Responses to the consultation document from BT and Concert welcomed a relaxation in regulation where proposed by Oftel, but argued that further de-regulation was appropriate and indeed necessary to secure the interests of effective competition in those relevant markets which it identified. Others supported the retention of some regulation on BT/ Concert to prevent it from distorting competition by leveraging market power from adjacent markets. S.7 Having considered the representations made, Oftel has concluded that its proposals set out in the consultation document of November 2001 remain appropriate and proportionate given the competitive conditions identified in those relevant markets. S.8 Accordingly, Oftel now reduces regulation of international markets as follows:
S.9 These measures now mean that regulation has been relaxed on routes covering approximately 83% of IDD traffic by volume. S.10 Furthermore, BT’s obligations in respect of retail IDD will reduce further on a trial basis in line with the proposals in Oftel’s concurrent review BT’s regulatory obligations to provide advance notification of price changes and to maintain a published price list. In summary, in terms of all retail IDD:
S.11 In carrying out this review Oftel has identified a further issue where deregulation may prove appropriate. This is in respect of electronic-auctions in effectively competitive retail business markets where the obligation to publish and notify prices in advance may prevent BT or Kingston from competing for such business. Oftel is therefore consulting on proposed consents enabling BT and Kingston to depart from published prices in respect of e-auction bids for retail IDD in competitive markets, with the proviso that any successful winning bid will be published and made available to other customers 24 hours after acceptance of that offer. This consultation period will run for 33 days until 29 April 2002. 
Introduction Background 1.1 Oftel’s strategy is to regulate only where it is necessary, to bring benefits for consumers and to keep regulation to the minimum necessary to obtain appropriate outcomes. This statement contains details of a relaxation in controls on certain international services that Oftel found to be effectively competitive following a review of the relevant markets. 1.2 Oftel issued a consultation document in November 2001 setting out in detail requests by BT and Concert to review the competitiveness of IDD services. It set out the methodological approach Oftel took in considering these requests and Oftel’s conclusions regarding the relevant market definitions. It considered an assessment of market power at both wholesale and retail IDD levels in relation to the relevant markets. Oftel’s conclusions on these issues fed through into its assessment of the competitiveness of the relevant routes under analysis and, accordingly, the proposals set out for consultation in the document. Scope 1.3 This statement discusses the responses received to Oftel’s consultation and sets out Oftel’s conclusions. It further considers a specific request made by BT in responding to the consultation document. 1.4 Chapter 2 reviews the aim of the consultation document, Chapter 3 reviews the responses to the consultation document, while Chapter 4 summarises the Director’s conclusions following the consultation. Chapter 5 describes the procedure for consultation on the additional proposed draft consents. European legislation and relationship with other Oftel projects 1.5 The conclusions in an Oftel statement BT’s regulatory obligations to provide advance notification of price changes and to maintain a published price list (March 2000) will also effect the regulatory requirements imposed on BT in respect of retail IDD. 1.6 A new regime of European legislation will soon be introduced in the UK. The purpose of the new Directives is to establish a harmonised framework for regulation across Europe and establish a set of procedures to ensure the harmonised application of the regulatory framework throughout the Community. The Directives will enter into force when they are published in the Official Journal of the European Communities (this is currently expected to be in April 2002). From entry into force, Member States and National Regulatory Authorities (NRAs) have 15 months in which to transpose the Directives into national law and bring all processes and procedures in line with the new Directives. A summary of the new Directives can be found in Oftel’s draft management plan for 2002/03, a copy of which is on Oftel’s website at: www.oftel.gov.uk/publications/about_oftel/2001/man1201.htm. 1.7 The new framework will oblige Oftel to review markets, SMP designations and regulatory measures currently in place in all electronic communications markets ready for when the Directives enter into national law. Accordingly, Oftel will need to consider again the obligations relating to international traffic in 2002/03. 1.8 Oftel is not in this statement reviewing the broad scope of price publication and notification obligations (such matters are dealt with in Oftel’s concurrent review referred to in paragraph 1.5 above), but specifically the application of such obligations dependent upon the relevant competitive conditions of the IDD routes in question. BT / Concert restructuring 1.9 In October 2001, BT announced that Concert (which is a joint venture between BT and AT&T) is to be dissolved and that BT and AT&T will each take direct ownership of substantially the same business and assets that they originally contributed to the Concert joint venture. Each company will also assume direct ownership of the customer and supplier contracts that they originally contributed to Concert. This is due to take place shortly. 1.10 Oftel does not consider at this time that these new arrangements affect the analysis or conclusions reached in the consultation document.
The consultation BT and Concert requests2.1 The legal framework that currently applies to Concert and BT in respect of the provision of wholesale and retail IDD services, respectively, is set out in Annex A. Concert request for wholesale IDD services 2.2 Concert requested that the Director General determine the market for wholesale IDD services to be effectively competitive in its entirety. In the alternative, Concert asked that only routes where Concert’s market share is above 40% be considered when assessing the case for any continued Concert-specific regulation. Determination as Competitive Standard Services 2.3 Concert requested that the Director General make a determination that wholesale IDD services not be ‘Standard Services’. ‘Standard Services’ are defined in Concert’s licence and may be referred to generally as the various interconnection services which Concert is obliged to offer to any Annex II operator (see also paragraphs A.2 to A.5 of Annex A). 2.4 Condition 66 of Concert’s licence sets out the requirements relating to Concert’s Standard Services. In particular, Concert must:
2.5 As an alternative, Concert made representations under condition 66 of its licence for the Director General to determine that the remainder of the wholesale IDD routes be determined effectively competitive. The effect this has on Concert’s price publication obligations and price control constraints is set out below. Price notification and publication 2.6 At present, condition 66.18 of Concert’s licence requires Concert to give at least 28 days’ notice (both to the Director General and to all other operators with which it has entered into an interconnection agreement) of a change to the charges for any Prospectively Competitive Standard Services. In the case of Competitive Standard Services, the prior notice period is one day. If the Director General determines that wholesale IDD services are effectively competitive (ie that they are Competitive Standard Services), then the prior notice period for amendments to Concert’s charges becomes one day. 2.7 In addition to the request that wholesale IDD services be determined as Competitive Standard Services, Concert requested that for all Competitive Standard Services there no longer be a prior publication requirement. BT request for retail IDD services 2.8 BT’s requested Oftel consider whether the provision of retail IDD services in respect of all routes is effectively competitive. BT also requested that Oftel reduce the regulatory controls applying to the remainder of retail IDD routes (ie all routes other than the 23 retail IDD routes already found effectively competitive by Oftel in 2000, on which controls have already been reduced). 2.9 BT sought that Oftel, in relation to all retail IDD routes:
Price notification and publication 2.10 BT’s price publication requirements are set out in conditions 54.5 and 58 of its licence. Under these conditions, BT must publish a notice specifying the prices for its services. Notices of a proposal to amend any price must be published not less than 28 days before the change is to become effective, unless the Director General has consented otherwise. Most other operators offering international services are not, in practice, required to provide prior notice of their price changes, although Kingston has the same 28 day notification period and, on the retail IDD routes for which C&W has been determined as having market influence, C&W must provide one days’ prior notice. 2.11 Both conditions 54.5 and 58.1 of BT’s licence give the Director General discretion to vary the price publication requirement by written consent. BT requested that the Director General exercise his discretion under each condition to reduce BT’s obligation to give notice to the Director General of, and to publish, changes to prices from 28 days to one day in relation to the remainder of the retail IDD routes. 2.12 In addition, condition 54.6 of BT’s licence requires BT to place a copy of any amendments to its prices in a publicly accessible part of every BT ‘Major Office’ in such a manner and in such place that it is readily available for inspection free of charge by members of the general public. Condition 58.5 imposes a similar requirement in respect of BT’s obligations under Part B of its licence (relating to BT’s universal service obligations). Since September 1999, BT has provided an Internet version of the Price List with Oftel’s agreement. BT asked Oftel to confirm that by placing new prices next to or linked to current price list entries on BT’s Price List on its website, rather than putting such entries in a separate notifications file of the Price List, BT would be meeting its publication obligations. Undue preference and undue discrimination 2.13 Condition 57 of BT’s licence prohibits BT from exercising undue discrimination and undue preference. Condition 57 applies to all services which BT is obliged to provide under its licence, all markets in which the licensee has been determined as having market influence, and all markets where the licensee has been determined as having Significant Market Power (SMP). The condition therefore applies to the retail IDD services offered by BT. 2.14 BT requested that the Director General exercise his discretion pursuant to condition 57 to determine that for the purposes of condition 57, in respect of retail IDD calls, any discriminatory offerings on these services would be less likely to be interpreted as undue. Ability to price below cost 2.15 Condition 71 of BT’s licence requires BT to obtain the Director General’s prior consent to certain proposed retail prices which are below cost (see also paragraphs A.21 to A.25 of Annex A). This condition applies to proposed retail IDD prices that are below cost. Condition 71.15 of BT’s licence provides the Director General with discretion to consent in writing to the disapplication of condition 71. 2.16 BT requested that the Director General exercise his discretion under condition 71.15 of BT’s licence and consent to the disapplication of condition 71 in respect of all IDD calls from residential and business exchange lines. This would enable BT to offer below cost prices on any retail IDD routes to which the consent applies without the need to first seek the Director General’s consent, although any such prices would be subject to normal competition rules.
Methodological approach Market definition 2.17 Oftel’s analysis identified the relevant markets set out below. A detailed explanation of these findings and Oftel’s conclusions was set out in Annex B to the consultation document issued in November 2001 and is not repeated here. Wholesale IDD 2.18 Although Oftel believed that the existence and increasing use of hubbing and bandwidth exchanges may have the effect of widening the geographical market definition for wholesale IDD calls in the future, Oftel still considered that Wholesale IDD calls on each route constituted a separate relevant market. Retail IDD 2.19 Because the competitive conditions across all retail IDD routes are not the same, Oftel’s conclusion was that there are two types of retail IDD routes: those which are competitive at the wholesale level and those which are not. As a result, Oftel considered that the relevant markets for the provision of retail IDD services were as follows:
Assessment of market power Wholesale IDD 2.20 Oftel analysed in detail 42 wholesale IDD routes. Oftel first of all chose 30 of these routes on the basis that they covered those most likely to be found to be competitive and also to cover different competitive conditions at the far end. Oftel then gave Concert the opportunity to comment on the 30 routes chosen and to add to the list any that Concert thought should also be included. Concert proposed a further 12 routes. This produced what Oftel considers to be a reasonable selection of routes covering a wide range of countries (both high and low volume) for which competition could be assessed. 2.21 Oftel reviewed the competitive factors on each of these 42 routes. Such factors included market shares and trends in market share, the number of competitors, barriers to entry, correspondent agreements, cable capacity, cable station access and backhaul, and consumer behaviour/ countervailing buyer power. Oftel concluded on this basis that 20 of the 42 routes analysed were effectively competitive, the remaining 22 routes increasingly competitive. Retail IDD 2.22 On the basis that the only factor preventing a single global retail IDD market definition is the availability of wholesale IDD at cost-oriented prices, and because of the difficulties in obtaining data in a more disaggregated form, Oftel analysed the remaining competitive factors for the retail IDD market as a whole. The analysis Oftel conducted of the wholesale IDD markets formed the basis for the remainder of its analysis of the retail IDD market. 2.23 Oftel reviewed the competitive factors in both residential and business markets. Such factors included market shares and trends in market shares, the number of competitors, access to wholesale inputs, consumer behaviour and inertia, branding, barriers to switching suppliers, potential for leverage of market power, countervailing buyer power, and supplier behaviour. Oftel concluded that the residential retail IDD market was increasingly competitive on all routes, even those which were effectively competitive at the wholesale level. On the business side, Oftel concluded that the business retail IDD market was effectively competitive for those routes competitive at the wholesale level. On all other business retail IDD routes the market was increasingly competitive. Conclusions and proposals 2.24 As a result of these conclusions, Oftel proposed to reduce regulation of the international markets further as follows:
Review of responses 3.1 This chapter reviews the responses to the consultation and considers the arguments raised in respect of the main issues. Fuller details of the responses are set out in Annex D. Market definitions and analysis 3.2. BT comments that Oftel took too narrow a view of the retail IDD market in dismissing substitute services. It argues that Oftel’s rationale for excluding mobile calls, on the basis of the higher price of such calls, is technically flawed. As outlined in a recent NERA report for the OFT, products do not need to sell at similar prices for them to be effective demand side substitutes. 3.3 BT believes a more effective approach and consultation would have been for Oftel to seek other operators to identify those routes where they felt they had no, or limited, choice of wholesale supplier. Such routes would then warrant further investigation. It argues Oftel’s current approach considered only 20% of routes where regulation still applied and on the remainder, regulation was to be maintained without further analysis. BT believes this was not consistent with a strategy to "regulate only where necessary". 3.4 Concert expresses disappointment that Oftel had not sought to reflect its conclusions in respect of its analysis on 42 routes onto the remaining routes not considered by the review. Concert believes that Oftel was continuing to regulate routes without knowing whether such regulation served any purpose. 3.5 Oftel understands the principle outlined by NERA in its report that for products to be effective demand side substitutes does not require that they sell at the same price. NERA relates this principle in its report to the interplay of price and quality differentials between two products, ie that a consumer previously willing to accept a lower quality product in return for a lower price may no longer be prepared to accept lower quality if the cost of trading up to a superior product is reduced by an increase in the price of the cheaper product. However, Oftel has not seen evidence to suggest that calls from mobiles are effective substitutes to fixed line IDD calls given the level of price differential that exists between the services. Furthermore, the ‘quality’ differential between fixed and mobile calls is not clear. Whereas a perceived ‘higher’ quality of a mobile call may be related to its convenience to the caller, there are additional issues such as coverage, quality of reception and the availability of data transmission that must also be considered. 3.6 Oftel notes the arguments of BT and Concert in respect of the number of routes chosen for consideration of deregulation. However, Oftel deliberately selected those routes on which it was considered that competition was most likely to be established. If all or all but a few routes were found to be effectively competitive then Oftel would have been prepared to extend the list further. Concert and BT were fully involved in the process of selecting the appropriate routes on this basis and, indeed, Concert proposed additional routes to be considered as part of this process which were included in the final assessment. Oftel considers it has acted reasonably and in a proportional fashion in assessing those routes considered most likely to be competitive. Market power in wholesale IDD services 3.7 Concert states the international interconnect revenues of BT Wholesale, Concert’s agent in selling IDD to other operators, accounted for only 5% of outgoing interconnect revenue. Operators, in 95% of cases, choose an alternative wholesale supplier. Concert considers it can not, therefore, have market power over such operators. 3.8 Concert believes Oftel’s conclusions in rejecting a market definition of a single global IDD market on the basis of Concert’s behaviour, namely, that it does not set wholesale IDD charges on the basis of net accounting, is unsound. The suggestion is that Concert is choosing to set prices that are too high. Concert argues that if prices are set too high and other operators subsequently choose to use other suppliers, then market power cannot be being exercised. 3.9 Concert comments that under the Access and Interconnection Directive due to be implemented in 2003, National Regulatory Authorities (NRAs) must take into account "the technical and economic viability of using or installing competing facilities". Concert believes that such facilities are manifestly available and being used by other carriers. 3.10 Oftel considers that Concert’s low share of the addressable market is directly attributable to its decision not to compete on price in such markets in order not to attract outgoing IDD call minutes where there is no prospect of any associated incremental increase in incoming minutes. This is a direct result of Concert’s practice of setting interconnection charges using gross accounting where it takes as a cost the full settlement rate paid to the overseas operator for terminating a call. However, a more accurate cost base is net accounting as this reflects the fact that payments under the international settlements regime are made on the basis of the balance in traffic (ie revenue only flows in the direction of the positive balance). Because settlement rates are not cost oriented and high profits are earned on terminating incoming international calls, net accounting gives a lower cost base than gross accounting. Using gross accounting Concert may be able to charge in excess of competitive rates while fulfilling its regulatory obligations. 3.11 Concepts of market power and dominance are generally defined in terms of the ability of a firm or undertaking to take unilateral action without need to consider the pricing actions of its competitors. In pricing at the level that it chooses, and still earning a high Return on Capital Employed (ROCE) of 54% for the year ended 31 December 2000 in respect of the sale of wholesale Standard Services to UK operators and from the sale of wholesale non-regulated services to other Concert businesses, Oftel considers that Concert can be demonstrated to be acting in such a fashion. 3.12 Oftel has taken into account the technical and economic viability of using or installing competing facilities in reaching its conclusions. Oftel notes, however, the likelihood of whether such facilities exist is heavily dependent on whether the route in question is to a country at the far end that has liberalised its telecommunications infrastructure. Market power in retail IDD services 3.13 BT comments that Oftel’s analysis concludes that BT’s market share and high rates of return imply that the market is not yet effectively competitive. BT understands that Oftel attributed its market power to a disinclination of residential consumers to switch and to BT’s strong brand name. BT believes Oftel’s conclusions did not suggest that there were structural features of the market impeding competition, but that customer contentment with BT’s service warranted regulation. In 1999 Oftel reduced regulation on certain routes notwithstanding customers disinclination to switch and BT’s strong brand name. 3.14 Oftel’s conclusions that the residential retail IDD market is not yet effectively competitive took into account BT’s continued high market share which, while falling, remains significantly higher by revenue than its market share by volume, and BT’s ability to maintain a high ROCE. According to its most recent set of Financial Statements (for 2000/2001), BT’s ROCE for the International Calls activity within the Retail Systems Business was 100% for 1999/2000 and 1,054% for 2000/2001. Although comparative returns are not available on the same basis for these two years (the 1999/2000 return is calculated on a year in which there is the part year effect of Concert’s establishment in January 2000), it would appear that BT is capable of maintaining a high ROCE on this business activity. 3.15 In the consultation document issued in November 2001 Oftel took into account the results of consumer research outlined in Annex E to that document. This included qualitative research into the importance of branding in telecoms. This research found that BT certainly had a brand advantage, but that telecoms consumers do seem open to switching to other brands, at least to other known and trusted brands. To be a successful telecoms provider, however, a brand would have to establish itself, as there does appear to be reluctance among consumers to switch to anonymous brands. When shown the brands of different telecoms providers in the UK, there was not a high level of recognition nor of identification of the brands with any particular values. This lack of familiarity with brands could be seen as a barrier to consumers’ switching at the retail level. However, it should be noted that other consumer research conducted by Oftel specifically in connection with international calling seems to show that certain groups of consumers with significant levels of international call spend are much more aware of different companies’ offerings and are more prepared to switch between them. This may depend upon their pattern of calling, however, and whether they regularly call one or two specific countries or a whole range. Price publication: wholesale IDD services 3.16 Concert does not agree with Oftel’s proposals to retain a price publication obligation on routes deemed to be competitive. Concert argues Oftel has not justified asymmetric treatment of Concert in this regard (see paragraph 3.28 below). Concert believes Oftel had dismissed Concert’s concerns over asymmetric regulation because of its own concerns about vertical integration. Concert argues that if a market is found to be competitive, then vertical integration issues do not arise since competitors are not dependent on wholesale components from Concert. 3.17 Concert requests that if Oftel decides to maintain price publication obligations, it sought clarification on what the Director General would consider reasonable in terms of compliance with such obligations. 3.18 WorldCom comments that although competition in international routes is generally quite vigorous, there are lingering concerns in respect of operators with market power regarding their ability to leverage market power from adjacent markets into effectively competitive international markets. WorldCom agrees, therefore, that such operators should still be subject to one-day notification requirements in such markets. 3.19 Oftel’s consideration of Concert’s concerns in respect of asymmetric regulation is detailed in paragraph 3.29 below, and its reasons for retaining a price publication requirement in effectively competitive markets is discussed at paragraph 3.38. Concert must consider itself whether its actions remain compliant with its regulatory obligations and the Director General cannot fetter his discretion of such in advance. However, Oftel’s view on whether any discriminatory offerings are less likely to be interpreted as ‘undue’ is set out in paragraphs 4.3 to 4.6 of this statement. 28 days’ notification for prospectively competitive standard services 3.20 Concert and BT both argue long notice periods prevent any supplier from competing as effectively as it could when similar obligations are not placed on its competitors. A default notification period of 28 days was therefore considered to be no longer appropriate. 3.21 Concert argues that in a market characterised by competitive tendering for short-term contracts, advance price publication effectively excludes Concert from bidding. Concert believes its experience in attempting to operate fixed volume offers demonstrates the impeding effect of advance price notification and its restriction on Concert’s ability to compete. Concert argues it has no market power in the carrier’s carrier market, therefore the regulatory requirements effectively excluding Concert from competing cannot be justified. 3.22 On the other hand, C&W argues that BT/ Concert’s potential to leverage market power in wholesale IDD into adjacent markets is sufficiently high to outweigh other factors in concluding whether a market is, in fact, effectively competitive. In the absence of price publication obligations, competitors would lose visibility of whether BT or Concert is following wholesale obligations to prevent discrimination in favour of its own retail services. C&W questions whether the indicators of effective competition in retail IDD markets were in fact indicators of effective regulation, either in the relevant or adjacent markets. In the absence of regulation, those same markets may no longer be effectively competitive. 3.23 Oftel believes the rationale for price publication requirements for Prospectively Competitive Standard Services still holds in wholesale markets where BT/Concert acts as a vertically integrated operator with market power to protect downstream competitors who are dependent on wholesale components supplied by the vertically integrated operator. In such a market, the ability of downstream operators to compete may be severely damaged by unexpected changes to the prices of wholesale components supplied by the vertically integrated operator. Alternative to stack test 3.24 Oftel invited responses in the consultation document on whether there may be a more appropriate alternative to the stack test to ensure that BT’s prices are not anti-competitive. BT itself suggests the Competition Act is sufficient to ensure BT did not price anti-competitively. Alternatively, if ex-ante tests are to apply, then BT suggests Oftel consider imputation tests which focus only on the services produced by those assets which are in any way bottlenecks for competing operators. 3.25 It is recognised that change to the stack test may be warranted for IDD (as was detailed in the consultation), but further consideration has concluded that a full appraisal may be best served under the reviews of appropriate markets and the regulatory regime under the impending European Directives. The stack test raises particular oddities in IDD markets when an across the board price change by BT may, because of the averaging effect of retail charge bands, require consent for pricing changes on one or two very small routes such as to Wake or the Virgin Islands. C&W market influence determination 3.26 C&W expresses continuing concern at regulations applying to its activities in international markets following determinations of Market Influence. In particular, C&W believes Oftel had not taken full account of the importance of hubbing in considering relevant market definitions and market analysis. 3.27 Oftel outlined in the consultation document issued in November 2001 that it believed that the existence and increasing use of hubbing and bandwidth exchanges may have the effect of widening the geographical market definition for wholesale IDD calls in the future. However, despite asking operators for such, Oftel has been able to obtain minimal information on the nature and extent of hubbing and the relative prices of direct and hubbed routes. Asymmetric regulation 3.28 BT and Concert believe that Oftel’s proposals in respect of C&W were reasonable and pragmatic. Concert states that there are asymmetries between how Concert and C&W are regulated, however. On competitive routes, Concert is subject to one-day advance publication and notification, C&W, Worldcom and other operators are not. On prospectively competitive routes Concert is required to publish prices, terms and conditions 28 days in advance, whereas on routes where it has Market Influence, C&W does not have to publish its wholesale charges in advance. Concert believes Oftel’s approach to regulating C&W has been to deregulate where it considers C&W does not have market power. In considering regulation applying to Concert, however, Oftel has considered the overall competitiveness of the markets rather than Concert’s own position. As a result, there are a number of routes where Concert has low market share but regulation on Concert is unchanged because the route is not considered effectively competitive overall.
3.29 Whilst Oftel considers that in certain circumstances there can be justification for different regulatory treatment of operators based on the effect of their overall position across a range of integrated and adjacent markets, the particular asymmetrical approach identified here by Concert is necessitated by the current EU regulatory framework of SMP. The regulatory framework will change under the new directives and the implications on IDD considered under the appropriate market review. Currently Concert may be subject to regulation on a particular route because that route cannot be considered to be effectively competitive due to another operator having market power. Paradoxically, for Concert to qualify for a relaxation of regulation on such a route may require it to increase market share at the expense of a dominant operator. Such issues will be addressed under the market reviews required by the impending EU directives. Relationship between wholesale and retail markets 3.30 BT believes that Oftel had linked the competitiveness of retail markets to that of wholesale markets due to the vertical relationship between BT and Concert. BT argued that a downstream market can still be competitive even in the presence of dominance (or SMP) upstream if regulation is in place to address the possible effect of upstream dominance on the downstream market. BT believed Oftel customarily justifies non-discrimination requirements to this end. BT argued, therefore, that the wholesale market does not need to be competitive as a prerequisite for effective competition to develop in the downstream retail market. 3.31 Oftel’s analysis concluded that a key determinant of the competitive conditions at the retail level is the competitive conditions at the wholesale level because this affects supply side substitution possibilities at the retail level. Where wholesale routes are effectively competitive, cost based interconnection is freely available to retailers who wish to provide services on any particular route. However, where competition at the wholesale level is not effective, and as Concert’s interconnect charge may be set on the basis of gross accounting rather than net accounting (see paragraph 3.10), retailers are less likely to be able to obtain competitively priced interconnect services to compete with those operators owning international facilities. A retailer wishing to switch into the provision of services on a route that was not effectively competitive at the wholesale level could therefore face a barrier to entry. Impact on consumers 3.32 BT states Oftel’s consultation primarily considered aspects relating to fair competition rather than consumer protection. BT believes that consumers would be the beneficiaries of removing obligations to pre-announce price changes, for example, through improvements to discount packages more responsive to changing market conditions. BT believes its potential to undermine competition through lower prices is remote in competitive markets and that Oftel in any case has recourse to the Competition Act if it had concern over aspects of BT’s pricing. 3.33 Oftel’s strategy is to achieve the best deal for consumers through effective competition. Oftel’s approach in this statement is fully consistent with that aim. BT’s position raises important issues regarding its ability to leverage market power from adjacent markets and price publication is an important tool in protecting competitors and ultimately consumers from the effects of anti-competitive pricing. BT’s request to the Director General 3.34 In making its response to the consultation document of November 2001, BT made a further request to the Director General in respect of the regulatory obligations imposed upon it in Effectively Competitive markets. 3.35 In relation to wholesale markets that are effectively competitive, BT requests that the Director General confirm that, in the event of any failure by BT to adhere to Condition 69.2(a) in relation to those routes that are effectively competitive, the Director General would consider that it was precluded by his other Section 3 duties from taking enforcement proceedings, as provided for by Section 16.5 of the Telecommunications Act 1984, and that such failure would not be considered to breach any obligation of BT in relation to nondiscrimination 3.36 In relation to retail markets which are effectively competitive, BT requests that the Director General amend his draft consent under Condition 58 of BT’s Licence so that the Director General waives entirely the publication obligation whilst amending the Condition 54.5 notification obligation to one day. This would also remove the requirements under Condition 58 to adhere to prices on the routes found to be effectively competitive. BT also requests that the Director General adopt this approach in relation to the 23 routes found to be effectively competitive in the business market in the March 2000 Statement. 3.37 BT’s response also raises the issue of electronic auctions (or e-auctions) in which customers (usually large corporate customers) may offer contracts subject to an online bidding process where start times between bidding rounds may be as little as ten minutes apart. BT’s advance notification and publication requirements may be effectively preventing it from competing for such business where there is not sufficient period between a bid being made and the service being taken for it to publish and notify prices 24 hours in advance. Oftel’s response to BT’s requests 3.38 Oftel does not believe that BT’s further requests in respect of adherence, notification and publication obligations are consistent with the requirements of the current regulatory regime. Oftel remains of the view that even where markets are effectively competitive, given BT’s position, there is genuine potential of leverage from adjacent markets which are not yet effectively competitive which may have a detrimental effect on competition. The Director General is not prepared to fetter his discretion in advance and confirm that any discrimination undertaken by BT in its pricing policy in effectively competitive markets will not be considered to be undue. However, Oftel can confirm that any discrimination in such markets is less likely to be interpreted as ‘undue’ as set out in paragraphs 4.3 to 4.6. 3.39 Oftel is concerned, however, in respect of the specific issue of e-Auctions raised by BT in its response to the consultation, that obligations to notify and publish prices in advance may effectively be preventing BT from competing for such business if there is no intervening period between a price being offered by BT and accepted by a customer, in which BT is able to meet its advance publication and notification obligations. Although Oftel understands that the prevalence of e-Auctions remains relatively small, this may become a growing feature of the market in future years. 3.40 Oftel therefore proposes, in relation to business retail IDD routes found to be effectively competitive only, that the Director General issues a consent to BT removing its obligation to notify and publish prices in advance where a customer is purchasing its services through an e-auction. This consent would be conditional, however, on the obligation that BT published and notified any such price accepted (effectively the winning bid) within 24 hours of that price being taken and at least 24 hours before the services were provided at the prices agreed. BT would also be required to offer any such price on a nondiscriminatory basis to all customers meeting similar criteria. 3.41 A draft of this consent is at Annex K. There will be a period of consultation on the form of the consent (see chapter 5).
Conclusions 4.1 Oftel has fully considered the representations received in response to the consultation, and assessed the views and evidence available to it. Having taken into account all relevant details, Oftel does not consider, except for the case of pricing for e-auctions on effectively competitive routes in the retail business market, that it needs to alter its original proposals. Accordingly, Oftel concludes that:
4.2 BT’s obligations in terms of price publication and notification obligations on retail IDD routes will further reduce in accordance with the conclusions reached in Oftel’s concurrent statement on BT’s regulatory obligations to provide advance notification of price changes and to maintain a published price list (March 2002). In summary, in terms of retail IDD:
Undue preference and undue discrimination 4.3 Oftel confirms the view it expressed in the March 2000 Statement on Competition in International Markets that on international markets which are competitive and where BT or Concert does not have market influence, any discriminatory offerings are less likely to be interpreted as ‘undue’ under condition 57. 4.4 In particular, as the business market of the Category A routes is effectively competitive, any discriminatory offerings for business consumers on these routes are less likely to be considered undue than a discriminatory offering to residential consumers on those routes. BT would still be required to ensure that any tariffs were not anti-competitive before being introduced and Oftel would investigate the tariff fully in the event of any complaint that a particular offering had an anti-competitive effect. 4.5 In addition, BT would also be required to publish the details of all such offerings (under the price publication and notification procedures discussed above), which would need to show the criteria that would have to be satisfied to qualify for the prices offered. 4.6 For discriminatory offerings to groups of customers where BT faces less competition (eg residential consumers and business consumers for Category B routes), Oftel does not make any presumption that any offerings will be undue. Oftel has acknowledged previously that properly constructed volume-based discounts could have positive welfare effects. However, each case will have to be considered on a case by case basis. Application to other operators 4.7 In accordance with the proposals outlined in the consultation document issued in November 2001, the Director General issues a consent under condition 57 of C&W’s licence (see Annex J) consenting to the non-publication of changes in charges, terms and conditions for the relevant routes identified (Egypt, Hungary, Indonesia, Thailand and the Ukraine). With respect to C&W’s obligation not to show undue preference or undue discrimination, Oftel confirms that for those markets found to be effectively competitive, discriminatory offerings are less likely to be interpreted as ’undue’ under condition 57 of C&W’s licence. 4.8 In addition, as Oftel does not intend for any other licensed operator to be left in a position where it could potentially and without justification be subject to more onerous licence obligations than BT, Oftel has also granted a consent to Kingston (see Annex I), the only other operator so affected, in similar terms to the consent granted to BT, in terms of its price publication and notification obligations. 4.9 A draft of an additional consent in respect of e-auctions is set out at Annex L. There will be a period of consultation on the form of the consent (see Chapter 5).
Consultation on draft consents (e-auctions) only 5.1 Oftel seeks the views of customers and the industry on the draft consents at Annex K and Annex L of this statement only by Monday 23 April 2002. 5.2 Where possible, comments should be made in writing and sent by e-mail to richard.thompson@oftel.gov.uk. However, copies may also be posted or faxed to the address below. If any interested parties are unable to respond in one of these ways, they should discuss alternatives with the Oftel contact named below: Richard Thompson Tel: 020 7634 8983 e-mail: richard.thompson@oftel.gov.uk Further copies of this document 5.3 Paper copies of this document and alternative formats such as large print, Braille, disc and audio cassette can be made available on request. Please contact Oftel’s Research and Information Unit by phoning 020 7634 8761 or by sending an e-mail to infocent@oftel.gov.uk. Publication of comments made by stakeholders 5.4 On this occasion, Oftel is not programming a formal period during which interested parties may comment on the responses made by others. Nevertheless, in the interests of transparency, comments will be published, except where respondents indicate that a response, or part of it, is confidential. Respondents are therefore asked to separate out any confidential material into a confidential annex which is clearly identified as containing confidential material. Oftel will take steps to protect the confidentiality of all such material from the moment that it is received at Oftel’s offices. However, in the interests of transparency, respondents should avoid applying confidential markings wherever possible. 5.5 Non confidential responses can be viewed on Oftel’s website in the Publications section under Responses to Oftel consultations. Comments can also be viewed at Oftel’s Research and Information Unit. Appointments must be made in advance (see contact details in paragraph three). e-mail notifications 5.6 Oftel has a free e-mail based mailing list to help people stay informed about the work that Oftel is doing. Each time an Oftel document is published and placed on Oftel’s website, subscribers to the list receive an e-mail alert. To register, please go to the What’s New section of the website and access the electronic form.
The legal framework A.1 This annex sets out the legal framework that currently applies to Concert and BT in respect of the provision of wholesale and retail IDD services, respectively and also considers the extent to which the Director General is able to vary these obligations within the ambit of the current legal framework. It should be noted that all of Concert’s wholesale obligations also apply to BT and any changes which Oftel proposes to Concert’s obligations would also be made for BT at the same time. Concert: Wholesale IDD Determination as Competitive Standard Services A.2 The Interconnection Directive (ICD) provides that operators who are authorised to provide public telecommunications networks and/or publicly available telecommunications services (which includes the originating and receiving of international calls) and who have significant market power (SMP) must provide certain interconnection services on request. Prior to the formation of Concert, these obligations were imposed on BT, as an operator with SMP, through the Interconnection Regulations (S.I. 1997 No. 2931) and BT’s licence. The relevant services include interconnection to the cablehead, interconnection to the digital international switching centre (DISC) and the conveyance of IDD interconnect traffic. A.3 At the time that Concert was formed, Oftel consulted on the regulatory requirements to be imposed on Concert (see consultative document BT/AT&T proposed joint venture, June 1999). Due to the fact that Concert was to be providing a number of regulated services in the UK (which up until then had been provided by BT) and in view of Concert’s continuing close relationship with BT, Oftel proposed that certain regulatory requirements imposed on BT be carried over to Concert and its licence was modified accordingly on 22 December 1999. One of these was BT’s obligation to provide interconnection services relating to the provision of IDD services. This is set out in condition 66 of Concert’s licence. A.4 As a result of the publication of the Statement on Competition in International Markets in March 2000, the Director General determined 26 wholesale IDD routes to be ‘Competitive Standard Services’. The remaining wholesale IDD routes are currently classified as ‘Prospectively Competitive Standard Services’. A.5 There is no provision in Concert’s licence for the Director General to determine that a ‘Standard Service’ is no longer a ‘Standard Service’. From the definition of ‘Standard Service’ in Concert’s licence, it is clear that such a service is either a ‘Competitive Standard Service’, a ‘Prospectively Competitive Standard Service’, a ‘New Standard Service’, or any other service which a Schedule 2 Public Operator has requested Concert to offer to enter an agreement to provide under condition 66.2 of Concert’s licence. Price publication and notification A.6 As with BT, as a PTO, Concert is required by condition seven of its licence to publish details of its prices for the use of telephone services that are made publicly available to residential consumers (that is, not business consumers). A.7 In addition, pursuant to the ICD, NRAs must ensure the publication of reference interconnection offers (RIOs) by SMP operators. As noted above, at the time that Concert was formed, Oftel consulted on the regulatory requirements to be imposed on Concert and proposed that certain regulatory requirements imposed on BT be carried over to Concert. A.8 So, while Concert has not been determined as being an SMP operator, its licence contains a number of provisions similar to those that would apply to such an operator. Condition 66 of Concert’s licence, requires it to publish a RIO every 6 months specifying, amongst other things, the charges for all Standard Services (which include individual wholesale IDD routes) and to give notice of changes to these charges. Although the ICD does not make reference to a period of prior publication, condition 66 specifies the relevant notice period to be 28 days for ‘Prospectively Competitive Services’ and one day for ‘Competitive Standard Services’ (this was reduced from 28 days by a licence modification following the Statement on Competition in International Markets, March 2000). A.9 Condition 66 does not provide the Director General with any scope for consenting to a shorter period of notice. Accordingly, a reduction in the notice period imposed under condition 66 would require a licence modification. Charge control A.10 As Standard Services, wholesale IDD services provided by Concert are subject to the charge control regime set out in conditions 66.42 to 66.44 of Concert’s licence. Following Oftel’s publication Proposals for Network Charge and Retail Price Controls from 2001, Standard Services which are deemed to be ‘prospectively’ competitive will be subject to ‘safeguard’ caps set at RPI+0% and Standard Services deemed to be competitive will not be subject to any controls. A.11 Therefore, for those wholesale IDD routes that were deemed competitive in the Statement on Competition in International Markets, Concert is allowed to offer prices for those services outside of the Network Charge Control’s ceiling control. However, Concert will still be subject to standard competition law and the generally applicable conditions of its licence. All other wholesale IDD services (by time of day and route) will be subject to the RPI+0% control. BT: Retail IDD A.12 BT has been determined as an operator having SMP under the Revised Voice Telephone Directive (RVTD). As such, BT generally has obligations additional to those imposed on operators who do not have SMP with respect to the publication of its prices, undue preference and discrimination, and pricing below cost. Price notification and publication A.13 As for all PTOs, BT is required by virtue of condition seven of its licence to publish details of its prices, terms and conditions for the use of telephone services that are made publicly available to residential consumers. This obligation is required by the RVTD and does not apply to prices for the use of such services by business consumers and does not require PTOs to provide advance warning of price changes or new product launches. A.14 The RVTD also prohibits operators designated as having SMP implementing changes to tariffs for fixed public telephone services and for the use of the fixed public telephone network without first observing an ‘appropriate’ public notice period set by the national regulatory authority (NRA). This requirement applies to the provision of retail IDD services by BT. By virtue of condition 54 of its licence, unless the Director General consents otherwise in writing, BT is not permitted to implement any changes to its prices without first having given 28 days public notice of those changes. Condition 58 contains a similar obligation in relation to services covered by Part B of BT’s licence (which sets out BT’s universal service obligation) requiring BT to give 28 days’ prior notice of any changes to those services (which includes IDD prices). A.15 Under the Telecommunications (Open Network Provision) (Voice Telephony) Regulations (S.I. 1998 No. 1580), the Director General can disapply the requirement for a notice period where he is satisfied that there is effective competition in fixed public telephone services in a specific geographical area. This does not include a particular international call route or series of routes. The Director General cannot therefore disapply the requirement for "an appropriate notice period" for specific retail IDD routes. A.16 However, conditions 54 and 58 each allow the Director General to consent to a shorter notice period. Following Oftel’s Statement on Competition in International Markets in March 2000, the Director General consented to the reduction of BT’s price publication notice period from 28 days to one day for the 23 retail routes. Accordingly, if it is thought that the market conditions are such that it is ‘appropriate’ for the notice period to be shorter, the Director General is able to achieve this either by giving written consent under each of these conditions in relation to the specific circumstances. A.17 Even if the Director General considered that a reduction in the notice period was appropriate, he would not be able to remove the obligation in its entirety. The requirements of the RVTD provide little scope to removing the obligation to publish prices for retail IDD services (as opposed to the obligation to provide advance notification of price changes for these services), as they are fixed public telephone services or services provided by means of the fixed public telephone network. BT would, under EU legislation, still be required to publish prices for publicly available telephone services provided to residential consumers and, to the extent that it continues to have SMP, BT would be required to observe an appropriate notice period. A.18 BT’s price publication obligations require BT to ‘publish’ a notice detailing the relevant prices, terms and conditions for the use of its telephone services and any changes to them. These notices are required to be made publicly available in BT’s ‘Major Offices’ for inspection free of charge by members of the general public. A.19 BT’s licence defines a ‘Major Office’ as BT’s registered office and such other offices as the Director General may agree from time to time. There are no other specifications in the licence as to the method or form of publication. Since September 1999, BT has provided an Internet version of the Price List with Oftel’s agreement. In particular, there is no specific requirement in BT’s licence that it must place proposals for new prices in a separate notifications file of the Price List as opposed to merely annotating the main body of the Price List. See also paragraph 6.19 in relation to Oftel’s current consultation on this matter. A.20 See also Oftel’s consultation document BT’s regulatory obligations to provide advance notification of price changes and to maintain a published price list, June 2001 for a more detailed explanation of the legal framework that applies to BT’s price publication and notification obligations. Ability to price below cost A.21 The RVTD requires that SMP operators follow the basic principles of cost-orientation. This is reflected in condition 54 of BT’s licence. A.22 In addition to conditions seven, 54 and 58 discussed above, where BT proposes a change to any of its ‘General Prices’ (essentially access and voice calls), it is required by condition 71 of its licence to provide the Director General with a ‘Price Change Notice’ (PCN or ‘cost stack’). Where the result of the proposed change is that the General Price will be less than the aggregate cost attributable to the provision of that service before the implementation of the proposed change, BT must send the PCN to the Director General and obtain the Director General’s written consent to the proposed change, before the publication of any notice required under conditions seven, 55 or 58 (as the case may be) or before making the price available to any customer. This obligation applies irrespective of whether the below-cost price relates to calls on international routes that the Director General believes is competitive. A.23 The aggregate cost is defined as including the ‘Retail Cost’, the delivery outpayment cost, the conveyance outpayment cost and the network cost. Retail Cost’ is defined in BT’s licence as the retail cost that is in the opinion of the Director appropriately attributed by BT to the provision of the retail service. At present, Oftel requires BT to seek consent under condition 71 for retail IDD prices that are below ‘Long Run Incremental Costs’ (LRIC). Condition 71 provides for BT to benefit from the allowance of net settlement rates (ie profits on incoming calls) in setting its retail prices. However, when considering requests from BT for below cost IDD prices since the creation of Concert, Oftel requires BT to also submit cost data on a ‘one-way’ basis with profits on incoming calls omitted. This is because, under its interconnection arrangements with Concert, BT does not benefit from any profits on incoming IDD calls as a result of high accounting rates. A.24 Condition 71 allows Oftel to analyse the introduction of certain retail prices that fall below cost, but is not an absolute prohibition on such pricing by BT. Condition 71 was included in BT’s licence because of its vertical integration and its strength in a number of markets. The condition has two purposes, both related to concerns about margin squeezes:
A.25 Following Oftel’s Statement on Competition in International Markets in March 2000, condition 71 of BT’s licence was amended so that it now provides the Director General with discretion to disapply condition 71 by giving his written consent. Undue preference and undue discrimination A.26 Under the RVTD, NRAs must ensure that SMP operators adhere to the principles of nondiscrimination when they make use of the fixed public telephone network for providing publicly available telecommunications services. As it is required by the RVTD, BT cannot be released from the undue preference/undue discrimination requirement on retail IDD routes that are deemed competitive. This is reflected in national legislation by the fact that condition 57 of BT’s licence does not give the Director General scope to disapply or remove BT’s obligations in this respect. The Director General must deal with any complaint on a case by case basis and cannot make any general finding disapplying the undue preference obligations to any route which is determined to be competitive. A.27 Oftel has previously confirmed (in its publication Oftel’s Statement on Competition in International Markets, March 2000) that, in terms of any international markets which are competitive, and where BT does not have any market influence, any discriminatory offerings are less likely to be interpreted as ‘undue’ under condition 57 since it is unlikely to have a materially adverse effect on competition. Further, the level of competition in a particular market will be an important factor in considering whether any preference or discrimination is ‘undue’. In particular, a discriminatory offering to consumers in a market which is effectively competitive would be less likely to be considered undue than a discriminatory offering to consumers in a market which is only increasingly competitive. New EU regulatory framework A.28 The European Council and Parliament has adopted a package of new directives, which will create a new framework for regulation of electronic communication networks and services. 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 shortly, replacing the existing directives, which are referred to in the preceding paragraphs of this consultation document. Existing national regulatory regimes will be maintained, however, until reviews of the relevant markets have been completed.
Specific questions B.1 In the consultation document which was issued on 29 November 2001, Oftel invited responses to the following specific questions:
Responses C.1 Oftel received responses to its consultation from the following organisations (in alphabetical order):
Summary of responses to the consultation document D.1 The responses to the consultation document are summarised below in relation to each question asked. The headings reflect those used in the consultation document. Additional matters raised in the responses are included at the end. Summary of responses Do you agree that the re-absorption of Concert will not affect the analysis, or the proportionality of the proposals, contained in this document? D.2 BT and Concert agree with Oftel’s position that re-absorption of Concert’s UK activities into BT would not affect the analysis carried out, since that analysis assumed vertical integration of Concert and BT. Do you agree with Oftel’s conclusions on the relevant market definitions and the analysis? D.3 BT believes Oftel took too narrow a view of the retail IDD market in dismissing substitute services. It considers that Oftel’s rationale for excluding mobile calls, on the basis of the higher price of such calls, was technically flawed. BT states a recent NERA report for the OFT detailed why products do not need to sell at similar prices for them to be effective demand side substitutes. D.4 BT agrees that where cost based (‘competitive priced’) interconnection is not available, this would give any supplier owning such facilities the ability to distort competition in downstream markets. It is therefore key to identify routes on which such conditions existed. BT argues that competitive interconnection services are available on many of the routes not considered by Oftel. A more effective consultation would have been for Oftel to seek other operators to identify those routes where they felt they had no, or limited, choice of wholesale supplier. Such routes would then warrant further investigation. BT argues Oftel’s current approach considered only 20% of routes where regulation still applied and on the remainder, regulation is to be maintained without further analysis. This was not consistent with a strategy to "regulate only where necessary". D.5 Concert believes there was some misunderstanding between it and Oftel over the scope of the analysis undertaken. Oftel considered only 42 routes of the 109 on which Concert provided data. Concert believed Oftel had determined to review a sample of routes to be used to provide a picture of the competitive status of the overall international wholesale market. Oftel had not sought, however, to reflect its conclusions in respect of its analysis on 42 routes onto the remaining 67 routes. Concert believes that Oftel’s view it is impractical to review all routes on which Concert was subject to regulation was unsustainable, given Oftel’s review of C&W’s position across all international routes in two discrete markets (retail and wholesale) in 1998, and a subsequent review of 72 routes on which C&W was subject to regulation. D.6 Concert disagrees with Oftel’s conclusion that the remaining routes Oftel had not looked at were less likely to be effectively competitive than those it had reviewed. It believes that given roughly half of those routes reviewed by Oftel were found to be competitive, that proportionately a number of those routes not considered by Oftel would also be competitive. Concert believes that Oftel was continuing to regulate such routes without knowing whether such regulation served any purpose. Do you agree with Oftel’s assessment of market power for the provision of wholesale IDD services? D.7 Concert states the international interconnect revenues of BT Wholesale, Concert’s agent in selling IDD to OLOs, accounts for only 5% of outgoing interconnect revenue. Operators, in 95% of cases, choose an alternative wholesale supplier. Concert does not consider, therefore, it has market power over such operators. D.8 Concert believes Oftel’s conclusions in rejecting a market definition of a single global IDD market on the basis of Concert’s behaviour, namely, that it does not set wholesale IDD charges on the basis of net accounting, is unsound. The suggestion is that Concert is choosing to set prices that are too high. Concert argues that if prices are set too high and other operators subsequently choose to use other suppliers, then market power cannot be being exercised. D.9 Concert argues that under the Access and Interconnection Directive due in force next year, NRA’s must take into account "the technical and economic viability of using or installing competing facilities". Concert believes that such facilities are manifestly available and being used by other carriers. Do you agree with Oftel’s assessment of market power for the provision of retail IDD services? D.10 BT states that Oftel’s analysis concludes that BT’s market share and high rates of return imply that the market is not yet effectively competitive. BT understands that its market power is attributed to a disinclination of residential consumers to switch and to BT’s strong brand name. BT believes Oftel’s conclusions did not suggest that there were structural features of the market impeding competition, but that customer contentment with BT’s service warranted regulation. In 1999 Oftel reduced regulation on certain routes notwithstanding customers disinclination to switch and BT’s strong brand name. D.11 BT believes that Oftel’s approach does not consider the precise purpose of specific regulation. For example, use of the stack test, imposing a retail price floor, is not designed to promote customer-switching and/ or lower retail prices. BT argues the stack test has purpose only where competition is ineffective at the wholesale level. Do you agree with the price publication proposals for the provision of wholesale IDD services? D.12 BT argues long notice periods prevent any supplier from competing as effectively as it could when similar obligations are not placed on its competitors. A default notification period of 28 days may no longer be appropriate. D.13 Concert does not agree with Oftel’s proposals to retain a price publication obligation on routes deemed to be competitive. Concert argues Oftel has not justified asymmetric treatment of Concert in this regard. Concert believes Oftel had dismissed Concert’s concerns over asymmetric regulation because of its own concerns about vertical integration. Concert argues that if a market is found to be competitive, then vertical integration issues do not arise since competitors are not dependent on wholesale components from Concert. D.14 Concert comments that NRAs in Germany, Italy and France have responded to similar applications to reassess the level of appropriate regulation by removing price publication obligations from Concert’s European peers, even where their market position is stronger then Concert’s own. Concert further refers to the new EU regulatory framework due in force next year, specifically requirements that where a NRA concludes that a market is competitive, it shall not impose or maintain specific regulatory obligations. Concert believes there is little justification in making proposals for regulatory change in 2002 that will need to be changed again in 2003. D.15 Concert states that if Oftel determined to maintain price publication obligations, it sought clarification on what the Director General would consider reasonable in terms of compliance with such obligations. In particular, do you believe that the requirement for 28 days notification for changes to the prices of wholesale IDD calls which are Prospectively Competitive Standard Services may be preventing Concert from competing effectively? D.16 Concert believes that advance notification of price changes on Prospectively Competitive Routes may be preventing it from competing effectively. In a market characterised by competitive tendering for short-term contracts, Concert states that advance price publication effectively excludes it from bidding. Concert believes its experience in attempting to operate Fixed Volume Offers demonstrates the effect of advance price notification and its restriction on Concert’s ability to compete. Concert argues it has no market power in the carrier’s carrier market, therefore the regulatory requirements effectively excluding Concert from competing cannot be justified. Do you believe there is a more appropriate way of regulating BT’s prices on the Category B routes given that the stack test is not always the most reliable way of assessing whether BT’s IDD prices are anti-competitive? D.17 BT argues that Oftel’s rationale behind the obligation on BT to seek consent before pricing below cost on access and call services was to address the concern that BT would have the potential to engage in price squeezing because of its vertical integration. BT states that as only 5% of OLO traffic is routed via Concert’s network, it is clear that BT, via Concert, does not have market power in the upstream market which it could use to distort competition in the downstream market. There was clearly spare capacity in international call conveyance to which competitors could simply switch. D.18 BT believes that justification of Condition 71 on the basis that it enables Oftel to monitor BT’s pricing behaviour and because of BT’s strengths in a number of markets does not justify its continuation. BT believes this does not fit with Oftel’s strategy to apply regulation only where necessary. D.19 BT further argues that the stack test takes no account of competition in the wholesale market, ease of substitution for retail suppliers seeking to obtain other wholesale conveyance services, the possibility of least cost routing or the prevailing competitive price in the retail market. As such, the test makes no assessment of the materiality of any suspected price squeeze. BT believes the Competition Act now enabled Oftel to act against BT were it to behave in an anti-competitive manner. The threat of fines and public censure was a clear deterrent to the behaviour the stack test was designed to prohibit. D.20 BT argues that change to the test is warranted and Oftel should consider imputation tests focussing on the services produced by those assets acting as bottlenecks for competing services. This would ensure, BT argues, that it is covering its costs for these key strategic assets in its retail prices, while competition should determine the extent of any margin on related downstream activities. Do you consider the proposals in relation to C&W’s market influence determination reasonable in light of the conclusions and proposals set out in this document? D.21 BT and Concert agree that Oftel’s proposals were reasonable and pragmatic. Concert believes there are asymmetries between how Concert and C&W are regulated, however. On competitive routes, Concert is subject to one-day advance publication and notification, C&W and other OLOs are not. On prospectively competitive routes Concert is required to publish prices, terms and conditions 28 days in advance, whereas on routes where it has Market Influence, C&W does not have to publish its wholesale charges in advance. Concert believes Oftel’s approach to regulating C&W has been to deregulate where it considers C&W does not have market power. In considering regulation applying to Concert, however, Oftel has considered the overall competitiveness of the markets rather than Concert’s own position. As a result, there are a number of routes where Concert has low market share but regulation on Concert is unchanged because the route is not considered effectively competitive overall. Proportionality D.22 BT states that, including the additional routes deemed effectively competitive in this review, the 46 routes now deregulated account for a total of 83% of retail IDD based on volumes. This leaves some 180 routes that are still regulated and account for, on average, under one thousandth of all international calls. Many of the routes are too small for Oftel to publish data on. BT argues that continuing with a route-by-route approach may not therefore be proportionate or represent an effective use of resources. BT believes a more focussed approach would be appropriate, rather than maintaining detailed regulation as a status quo approach when specific routes are considered too small to make them worthwhile assessing. Relationship between wholesale and retail markets D.23 BT states that Oftel had linked the competitiveness of retail markets to that of wholesale markets due to the vertical relationship between BT and Concert. BT argues that a downstream market can still be competitive even in the presence of dominance (or SMP) upstream if regulation is in place to address the possible effect of upstream dominance on the downstream market. BT believes Oftel customarily justifies non-discrimination requirements to this end. BT argues, therefore, that the wholesale market does not need to be competitive as a prerequisite for effective competition to develop in the downstream retail market. Harmonisation across Member States D.24 BT believes there are disparities in the approach and regulatory policy outcomes when comparing France, Germany and Italy with the UK. Where Oftel has found a market to be effectively competitive, BT and Concert are still subject to price publication and notification requirements. In contrast, other NRA’s have removed all such obligations from equivalent operators in markets found to be competitive. Application of regulation in effectively competitive markets D.25 BT expresses concern at the continuation of price publication, notification and adherence requirements in markets that are effectively competitive. BT argues that such obligations may distort competition and act against the interests of customers. BT argues this is particularly the case where competition for business was primarily on the basis of bespoke pricing, competitive tendering, or electronic auctions. BT believes having a price point in the public domain can act to dampen the competitive nature of a market. D.26 WorldCom comments that, although it believes competition on international routes to be generally quite vigorous, it has remaining concerns that BT’s position of market power may have anti-competitive effects in terms of its ability to leverage market power into international markets. WorldCom therefore states it agrees that BT should be subject to one-day price change notification for routes found to be effectively competitive at the wholesale and retail level. Impact on consumers D.27 BT states Oftel’s consultation primarily considered aspects relating to fair competition rather than consumer protection. BT believes that consumers would be the beneficiaries of removing obligations to pre-announce price changes, for example, through improvements to discount packages more responsive to changing market conditions. BT believes its potential to undermine competition through lower prices is remote in competitive markets and that Oftel in any case has recourse to the Competition Act if it had concern over aspects of BT’s pricing. BT’s request to the Director General D.28 In relation to wholesale markets that are effectively competitive, BT requests that the Director General confirm that, in the event of any failure by BT to adhere to Condition 69.2(a) in relation to those routes that are effectively competitive, the Director General would consider that it was precluded by his other Section 3 duties from taking enforcement proceedings, as provided for by Section 16.5 of the Telecommunications Act 1984, and that such failure would not be considered to breach any obligation of BT in relation to non-discrimination. D.29 In relation to retail markets which are effectively competitive, BT requests that the Director General amend his draft consent under Condition 58 of BT’s Licence so that the Director General waives entirely the publication obligation whilst amending the Condition 54.5 notification obligation to one day. This would also remove the requirements under Condition 58 to adhere to prices on the routes found to be effectively competitive. BT also requests that the Director General adopt this approach in relation to the 23 routes found to be effectively competitive in the business market in the March 2000 Statement. The relevance of hubbing D.30 C&W believes that past Oftel assessments have failed to take into account the importance of hubbing in relation to both initial market definition and subsequent market analysis. The practise of hubbing traffic through third countries undermines markets defined solely in terms of bilateral country-country routes. Market analysis should take into account the effects of indirect traffic flows. Leveraging market power D.31 C&W argues that BT’s potential to leverage its market power in wholesale IDD into adjacent markets was sufficiently high to outweigh other factors in concluding whether a market is, in fact, effectively competitive. In the absence of price | |||||||
