Issued by the Director General of Telecommunications

Contents

The Direction

Chapter 1 Summary

Chapter 2 Background

Changes to the NTS regime from 1 January 2000
OCCN process
Internationally originated calls to 0845 and 0870

Chapter 3 History of the dispute

Prior history
Disputes referred to the Director General
Information sought by the Director General

Chapter 4 Responses to the draft Direction

Chapter 5 The Director General’s decision and reasons

Relevant market(s) and the position of the parties
The Director General’s decision and reasons

Annex A Schedule of Operators in dispute with BT  

Direction under Regulation 6(6) of the Telecommunications (Interconnection) Regulations 1997 relating to disputes between British Telecommunications plc ("BT") and 90 licensed operators ("the Operators") over termination charges for internationally originated calls to UK 0845 and 0870 numbers

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 and paragraph 20 of schedule 5 to 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 set out in Annex A to this direction ("the Operators") a licence under section 7 of the Act for the running of a telecommunications system as specified in that licence;

(D) Each of the Operators entered into a Standard Interconnect Agreement ("the Agreements") with BT on the dates set out in Annex A to this direction;

(E) The Agreements cover charges that BT pays to the Operators for interconnect services and provides for BT or the Operators to propose a revised charge and the date on which the variation is to become effective by way of issuing an Operator Charge Change Notice ("OCCN");

(F) BT proposed to the Operators by way of an OCCN on 14 January 2002 a revised charge for the termination of internationally originated calls to UK 0845 and 0870 numbers;

(G) The Operators either rejected or failed to agree to BT’s proposal set out in the OCCN dated 14 January 2002 and a dispute has arisen;

(H) On 10 May 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 General of Telecommunications ("the Director General") for determination;

(I) Regulation 6(6) of Regulations provides that where there is a dispute concerning interconnection between organisations, the Director General 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 General 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 General 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 that accompanies and is published with this direction;

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

(L) The Director General issued a draft of this direction and the explanatory memorandum that contains the Director General’s reasons on 30 August 2002 and responses were invited by 30 September 2002;

(M) Comments were received as detailed and discussed in section 4 of the explanatory memorandum which accompanies, and is published with, this direction. These comments have been taken into consideration by the Director General in making this direction;

NOW, THEREFORE, THE DIRECTOR GENERAL, PURSUANT TO REGULATION 6(6) OF THE REGULATIONS AND HAVING CONSIDERED THE VIEWS OF THE PARTIES AND THOSE MATTERS SET OUT IN REGULATION 6(8) OF THE REGULATIONS, HEREBY MAKES THE FOLLOWING DIRECTION TO RESOLVE THE DISPUTE BETWEEN BT AND THE OPERATORS:

(1) The Operators shall not be required to sign and return the OCCN of 14 January 2002 issued by BT or to apply the charges for call termination set out therein.

(2) Charges shall remain as currently set out in the Agreements.

HEATHER CLAYTON
DIRECTOR OF INVESTIGATIONS

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

4 November 2002

Chapter 1

Summary

1.1 The Director General of Telecommunications ("the Director General") has issued a Direction under Regulation 6(6) of the Telecommunications (Interconnection) Regulations 1997 ("the Regulations") for the resolution of a dispute between British Telecommunications plc ("BT") and the 90 Operators at Annex A to the Direction ("the Operators") under the terms of their Standard Interconnect Agreements ("SIAs"). This Direction sets out the decision the Director General has made to resolve a dispute concerning the Operators’ charges, payable by BT, for the termination of internationally originated calls to UK 0845 and 0870 numbers.

1.2 BT referred this dispute to the Director General on 10 May 2002. The Director General considered the submissions made by BT and the Operators (see note one below) and issued a draft Direction and Explanatory Memorandum on 30 August 2002 to the industry as a whole for consultation. Comments were received and have been taken into account in making this final Direction.

1.3 The details of the Director General’s consideration of the responses to the draft Direction, together with the reasons why the Director General makes this final Direction, are set out in Sections 4 and 5. The Director General directs that the Operators shall not be required to sign and return BT’s OCCN of 14 January 2002 proposing charges for termination of internationally originated calls to 0845 and 0870. Charges shall remain as currently agreed in the SIA of BT and each Operator.

1.4 The Director General stresses that his decision resolving these disputes is not imposing a permanent solution on industry to the problems identified by these disputes in current commercial arrangements for internationally originated 0845 & 0870. The risk that calls to service providers will not be carried from all international locations is a result of the current tension between the termination rate payable for such services in the UK and the amount paid by international originating operators to terminate those calls in the UK. The Director General accepts arguments that commercial arrangements at some level need to be changed if this service is to be continued. However, the Director General has not been convinced by the arguments put forward by BT that what BT has unilaterally proposed to the industry by way of its OCCN represents a reasonable solution to

the identified problem. The Director General believes that BT’s proposal is likely to adversely affect competition in the market for the supply of NTS services for a voice telephony service in the UK, which will ultimately be to the detriment of end users.

1.5 Furthermore, the Director General is aware that the proposals made by BT would only represent a partial solution to the problem of possible call blocking. In the case of BT Group, Communications Networking Services ("CNS") contracts with overseas operators to carry calls into the UK and charges the overseas operator for onward transit and termination of the call within the UK. CNS hands the call to BT at a Digital International Switching Centre (‘DISC’) and the call transits the BT network to its destination. Calls via operators competing with CNS function in broadly the same way. An operator will contract with overseas originating operators to carry the calls into the UK and either hand the traffic to TNOs direct if a direct interconnection exists, or else pass the traffic via BT for transit to its destination. Under BT’s current proposal, internationally originated 0845 & 0870 calls sent for termination in the UK via competitors to CNS would continue to face out-payments reflecting ‘standard’ UK termination charges. These are the termination charges that BT is seeking to reduce for traffic carried by CNS, but would still be payable by other, competing, operators who would still be faced with the need to raise charges to overseas operators or else carry the traffic at a loss. Under BT’s proposed solution, therefore, there would remain the likelihood of calls being blocked and only a partial service available to service provider customers at the far end.

1.6 The Director General believes it is in the interests of all parties that all calls are successfully completed and carried to their destination. However, in the case of internationally originated 0845 & 0870 traffic, the commercial arrangements have not been in place to make this a truly viable service. Until now calls have been completed only because one or more transit operators in the middle of the payment chain have made a loss on each and every minute of a call. Commercial arrangements will have to change if internationally originated 0845 & 0870 remains a viable service in the long term – otherwise it is likely that calls will be blocked at some point in the chain. CNS and BT have proposed a solution that changes these commercial arrangements, but the Director General does not believe that what BT and CNS have proposed is reasonable, particularly as it is likely to have an adverse effect on competition in the market for the supply of NTS services. The Director General also believes that there may be as yet unexplored potential solutions to this problem that may be resolved through commercial negotiation. While the Director General therefore directs that BT’s proposal should be rejected, he encourages industry to negotiate and reach an agreed solution to enable the service to continue in the long term. The Director General intends to raise the issue on the agenda of the next NTS Focus Group meeting as a means to set the process moving forward.

1.7 Having considered the facts specific to this dispute and the matters set out in Regulation 6(8) of the Regulations, this 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 General’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.

Note:

1. Not all of the Operators made submissions to the Director General –see paragraph 3.5 of this explanatory memorandum.

Chapter 2

Background

2.1 The term Number Translation Services (NTS) describes a range of specially tariffed services such as those operating within the number ranges 080x (Freefone), 0845 (local call fee access or LCFA), 0870 (national call fee access or NCFA) and 0900/0901 (Premium Rate Services or PRS). These services are offered at specific price points in order that customers calling from any fixed network will be able to associate the number range with a particular pricing arrangement. For example, 080X calls are free to the caller. Please note that this draft Direction relates only to LCFA (0845) and NCFA (0870) calls.

2.2 In previous NTS directions Oftel has given a detailed description of the NTS revenue sharing arrangements and how they were arrived at. Most operators are now familiar with this narrative and it is not, therefore, repeated in this document. Anyone wishing to read the detailed description can refer to Oftel’s earlier NTS directions (also known as determinations) listed under Publications on Oftel’s website.

Changes to the NTS regime from 1 January 2000

2.3 In December 1999 Oftel published Statement on the Relationship between Interconnection Charges and Retail Prices for Number Translation Services, now known as 'the NTS Statement'. This can be found on Oftel’s website at: www.oftel.gov.uk/publications/1999/pricing/nts1299.htm.

2.4 This statement followed a lengthy discussion and consultation exercise in response to a general industry view that the NTS formula constrained the ability of terminating operators ("TNOs") to exercise sufficient control over their NTS revenues. The new regime was intended to allow terminating operators to establish the price at which they would be remunerated for NTS calls. This price would then be added to BT’s regulated call origination charge plus any transit charges, where appropriate, to establish the retail price for their service.

OCCN Process

2.5 Clause 13 of the SIAs describe the process used by operators, including BT, for offering and amending charges in payment for access to another operator’s services, including NTS. Where BT (as an originating operator) proposes to change either its retail price or its interconnect charge for call origination (in a way which results in a change to the price paid to the terminating operator for terminating calls) it issues an Operator Charge Change Notice ("OCCN"). Similarly, where a terminating operator proposes a change to its terminating payment it issues an OCCN to BT proposing the new charge.

2.6 The operator receiving the OCCN has 14 days to decide whether to accept or reject the proposed new charge and to notify the originator of the OCCN. Failure to notify within 14 days signals a rejection of the proposal. Where the proposal is rejected, both operators have a further 14 days to settle the resulting dispute. If after this second period the dispute remains unsettled, either operator may refer the dispute to the Director General. On referral of a dispute, the Director General is under an obligation to carry out a full investigation and take steps to determine the outcome within six months.

Internationally originated calls to 0845 and 0870

2.7 Calls originated outside the UK are originated by overseas operators not subject to the NTS regulatory regime in the UK or to Oftel’s Numbering Conventions (see note two below). A call originated outside the UK may be carried into the UK by the same operator if its business carries on in both the originating country and the UK, and if a direct path for conveyance of the call exists. More usually, however, a call will be passed from the overseas originating operator to an intermediary for conveyance into the UK. In the case of BT Group, Communications Networking Services ("CNS") contracts with overseas operators to carry calls into the UK and charges the overseas operator for onward transit and termination of the call within the UK. CNS hands the call to BT at a Digital International Switching Centre (‘DISC’) and the call transits the BT network to its destination at the relevant TNO. Calls via operators competing with CNS function in broadly the same way. An operator will contract with overseas operators to carry the calls into the UK and either hand the traffic to TNOs direct if a direct interconnection exists, or else pass the traffic via BT for transit to its destination.

2.8 In terms of equivalence with the NTS regime and a call originating and terminating in the UK, BT is acting solely as a transit operator in this scenario (although BT does, of course, also operate in the NTS termination market as well). CNS and its competitors are essentially also transit operators carrying a call from an overseas originating operator and either handing it over direct to a TNO, or else to BT for onward transit and termination. In order to cover costs transit operators must ensure that charges to overseas originating operators are sufficient to cover their own costs of conveyance plus out-payment for termination in the UK.

Note:

2. Numbering conventions for the United Kingdom - Issue 4, 1 March 2002, see www.oftel.gov.uk/publications/numbering/2002/cons0302.htm.

Chapter 3

History of the dispute

Prior history

3.1 In October 2001 CNS, trading as Concert Communications at the time, gave notice to BT that it proposed to significantly reduce payments made to BT for the onward transit and termination of internationally originated calls to UK 0845 and 0870 number ranges. CNS issued an OCCN to BT dated 2 November 2001 proposing a reduction in BT’s charges which BT subsequently accepted. The revised charges came into effect on 12 March 2002. Having agreed to the charges proposed by CNS in advance of negotiating appropriate revision of charges paid by BT to TNOs, BT was potentially placing itself in the position of carrying the relevant traffic at a loss from 12 March 2002.

3.2 As a result of BT’s potential loss making position in carrying internationally originated 0845 and 0870, BT sought to review charges payable to TNOs in the UK. At a meeting of the Standard Contract Forum on 13 December 2001, operators were briefed on the issue by CNS. BT issued an Industry Notice on 17 December 2001 stating that it intended to issue an OCCN to operators reducing the payments made to TNOs for terminating internationally originated 0845 and 0870 calls.

3.3 On 14 January 2002 BT issued an OCCN to 129 operators proposing a decrease in charges payable to TNOs for internationally originated 0845 and 0870 with effect from 12 March 2002. The effect of the OCCN would be to reduce TNOs’ receipts for terminating internationally originated traffic significantly, by up to approximately 90% less than the equivalent payment for UK originated traffic. 107 operators initially either rejected or failed to accept BT’s OCCN. A number of operators have subsequently agreed to BT’s OCCN but 90 remain in dispute.

Disputes referred to the Director General

3.4 On 10 May 2002 BT referred disputes with the Operators to the Director General for resolution. On 30 August 2002 the Director General issued a draft direction setting out the decision he proposed to make in resolving these disputes (see www.oftel.gov.uk/publications/licensing/2002/nts0902.htm). Comments were sought from interested stakeholders by 30 September 2002.

Information sought by the Director General

3.5 Following referral of these disputes by BT the Director General has sought information from the parties concerned. A number of parties to the dispute, however, have failed to provide any submission to the Director General in respect of this dispute or to provide reasons for failing to accept BT’s proposals as set out in its OCCN. The Director General sought the views of such operators by letter dated 30 May 2002 sent by recorded mail. On 2 July 2002 the Director General wrote again by recorded mail to those among the Operators who had failed to provide a response to his initial letter. On 30 August 2002 the Director General issued a draft direction to BT and all the Operators setting out his proposed decision and inviting comments by 30 September 2002. The Director General considers he has made reasonable endeavours to solicit an understanding of all operators’ positions in respect of this matter before reaching his conclusions outlined in the Direction and accompanying explanatory memorandum.

Chapter 4

Responses to the draft Direction

BT

4.1 BT expressed disappointment with the Director General’s draft decision. BT considered that acceptance of revised international rates was by far the easiest and least damaging of options to operators and their Service Provider (‘SP’) customers. BT believed that the proposed solution puts the power and onus on TNOs who will have the responsibility to explain to SP customers that they have supported a solution which could result in 0845 and 0870 inbound international traffic no longer being generally available.

4.2 BT accepted that there are a number of issues still to be addressed regarding the identification of traffic. BT believed that the impact of the proposals put forward by Oftel, however, will undoubtedly have grave consequences for the market at large. BT considered that those wider market issues have not been sufficiently addressed in the draft Direction.

4.3 BT stated that it had accepted the solution proposed by CNS in the interests of SP customers of TNOs. BT expressed surprise that C&W should consider that the impact would be minimal on such customers. BT believed that there was no evidence supplied by C&W or any other operators that SPs were happy with the possibility that the supply of internationally originated 0845 & 0870 could cease. BT stated it was fully aware from its own inbound services that this option was not supported by its own SP customers who were seriously concerned about the impact of operators barring international calls. BT provided in confidence to Oftel a number of e-mails demonstrating the views of its SP customers.

4.4 BT argued that the proposal put forward by the Director General may result in inbound international 0845 & 0870 calls being barred from overseas. BT believed that this would penalise those operators who have signed the BT OCCN and who may wish to continue to receive this traffic at the revised rates.

4.5 BT argued that should the Director General reconsider and support its OCCN, then call barring will become the prerogative of SPs should they wish to take this approach, putting the decision in the hands of the Inbound Services customer rather than those of international carriers. SPs would also have the option of making commercial decisions that could alleviate the impact of lower rates. These options would apply equally to all operators in the market.

4.6 BT rejected suggestions that its proposal transfers losses incurred by CNS onto TNOs in the UK. It argued that the solution it had put forward was taken after consideration of the situation within the international arena for these products.

4.7 BT did not agree with the analysis that the effect of TNOs accepting reduced rates would result in a two-tier charging system that would undermine the UK NTS system. BT believed the volume of overseas originated calls is too small a proportion of NTS calls to be significant. BT argued that international operators are not bound by strictures that support the UK NTS regime and therefore calls generated by such operators cannot be bound to support the UK regime.

4.8 BT took issue with paragraph 5.26 of the draft direction that stated BT was "asking each of the Operators to accept restriction on its termination charges to subsidise the cost of internationally originated calls on behalf of the calling party". BT argued that there was no question of subsidy of network costs here, but of the relevance of the NTS regime to international calls. BT argued that international operators are likely to be unsympathetic to the impact of differential rates on the UK when faced with an increase in charges payable themselves.

4.9 BT agreed that within the UK the NTS regime enables TNOs to have control over their revenues. BT argued that acceptance of its OCCN supported this point by allowing TNOs to set charges that would nullify the effect of international capped rates.

4.10 BT accepted that currently only CNS has dedicated points of connection for international inbound traffic and the current inability of other suppliers to verify the status of their inbound non-geographic calls as international or otherwise results in an unbalanced position. BT believed this problem is one of the key drivers to finding a solution to the international call identification problem. BT stated that it was still diligently pursuing a solution to call identification issues but expressed disappointment and surprise that it had received notice from C&W that C&W was no longer keen to pursue the possibility of an industry wide solution to call identification.

4.11 BT noted C&W’s argument that disputed whether SPs would prefer call completion as an alternative to blocking. BT believed that C&W appeared reluctant to offer such a choice to its SP customers. BT said that this choice could only be made possible if C&W accepted BT’s OCCN as then SPs would have been in a position to accept the revised rates (and make any necessary commercial arrangements) or ask for the calls to be barred.

4.12 In response to the Director General’s comments in the draft Direction that there appeared to have been little negotiation between BT and operators on this subject, BT contended that this had not been intentional or necessarily the case. BT believed that because of the nature of the problem the best way to manage the provision of information and further discussion was within the appropriate fora. BT said that this was intended to be undertaken at those fora where Oftel would also have a presence to avoid misunderstanding.

4.13 BT said that CNS initially presented to Oftel on 13 September 2001 and the subject was then put on the agenda for the initial Oftel Forum on 2 November 2001. It was removed by Oftel as the purpose of the meeting had changed and then rearranged as an agenda item for the Oftel Policy Forum on 13 December 2001, which was cancelled. BT said that the subject was also placed on the agenda of the NTS Focus Group by which time CNS had concluded their consideration of other options and issued BT with an OCCN. Prior to issuing its own OCCN, BT sent an e-mail to all operators explaining the rationale for the change in rates. BT stated that there was little or no response to that correspondence. BT further stated that arguments put forward by operators who did respond, including at the Standard Contract Forum on 13 December 2001 had already been the subject of earlier discussion and fully explained. BT argued that in the case of problems affecting the whole industry, it believed that individual bilateral negotiation is neither practical nor appropriate in the view of the risk of inconsistent solutions being adopted by different operators.

4.14 BT disagreed with the Director General’s conclusions that if he were to support BT’s proposals he would be setting the charges of non-dominant TNOs on the basis of ensuring that CNS was not making a loss. BT stated it was the level of current international settlement rates which impacts on the profitability of TNO charges, not the fact that CNS or BT may be making a loss on these calls. BT believed that alternative solutions suggested by Oftel could restrict the ability of SPs to decide what action they may prefer as an alternative to barring.

4.15 BT urged the Director General to reconsider the impact on UK 0845 and 0870 terminating businesses should international operators refuse to accept higher settlement rates for these calls. Many of these international operators are trading outside of the influence of the EU and are not bound by actions or regulations within that area. BT argued that the resulting impact on businesses and their end-customers relying on these numbers could be significant. BT believed this would not be necessary if operators were encouraged to accept BT’s revised rates and allow their SPs the option of choice.

The Director General’s comments

4.16 The Director General is disappointed that BT has sought in its response to cast his proposed decision in resolving these interconnection disputes as an Oftel ‘solution’ to the problems currently identified with internationally originated 0845 & 0870. The Director General has been requested to resolve an interconnection dispute with 90 operators as referred by BT and has resolved that dispute by concluding that BT’s proposals are unreasonable as they stand and are likely to adversely affect competition in the market for the supply of NTS services. The Director General recognises that this is not a final solution to the problem and he is not mandating such given that industry needs to take the first steps in determining that solution itself and attempt to resolve matters through commercial negotiation.

4.17 The Director General notes BT’s comments that a number of TNOs have already accepted the charges proposed in BT’s OCCN and that the proposed decision would, in BT’s view, penalise such operators. It is not clear to the Director General, however, that the preferences of one group of TNOs as opposed to another (in relation to receiving internationally originated traffic at revised rates and where that traffic cannot be identified) is of greater significance to the other. It does not appear to be a strong argument, however, supporting a proposal that the Director General set the charges of non-dominant operators in resolving this dispute.

4.18 The Director General notes BT’s argument that the decision to bar calls should be the prerogative of SPs. Under current arrangements, however, without the ability to identify internationally originated traffic as separate from UK originated, SPs could only choose to bar all or nothing of traffic terminating on 0845 & 0870. It would not be possible to provide a UK based service behind 0845 & 0870 without exposure to arbitrage opportunity through tromboning of calls via an international operator.

4.19 In rejecting BT’s OCCN TNOs have argued strongly that the result of BT’s proposals would be to undermine their revenue streams. The proportion of internationally originated traffic represented by calls tromboning from the UK is estimated to be anywhere between 15% and 50%. It is not unreasonable to assume that an increase in the visibility of the arbitrage opportunity offered by two-tier charging may result in additional traffic tromboning from the UK. The Director General does not therefore share BT’s view that the volume of overseas originated calls to 0845 & 0870 is too small to be significant to TNOs’ revenues.

4.20 While the Director General is aware that the UK NTS regulatory regime does not extend to international operators, TNOs providing voice NTS termination services in the UK operate in an effectively competitive market. Since this market is effectively competitive, TNOs are constrained as to the level of prices they can charge for their services, i.e., a TNO is not in a position to enforce an unreasonable charge.

4.21 The Director General notes BT’s suggestion that TNOs should offset the reduction in revenue from internationally originated calls by increasing charges for UK originated calls. It is possible that TNOs may be willing to consider this. However, the maximum UK termination charge is constrained by the effects of the Numbering Conventions that require the retail price of a call to be no more than an originator’s standard local/ national rate. In addition, the result of increasing the UK termination charge would be to increase the differential between UK and international termination rates and increase incentives for arbitrage and the tromboning of calls. This would in turn increase the volume of calls paid out at international termination rates which would, of course, require that TNOs increase UK termination charges further to subsidise the difference.

4.22 The Director General notes BT/ CNS’ abortive attempts to brief operators earlier at a number of industry fora. However, at a meeting where CNS presented its proposals to Oftel on 13 September 2001, Oftel suggested to CNS that this was an issue for industry to discuss and resolve. From the information provided by BT detailing the course of discussions between CNS and BT, however, it appears to the Director General that CNS had decided by early October of its intention to decrease payments to BT and began discussions with BT at this point. BT decided at an internal meeting on 1 November 2001 to accept CNS’ proposals. The earliest possible time that the issue would have been raised with the rest of the industry, however, appears to have been 2 November 2001 at the (subsequently cancelled) Oftel forum. OLOs complain that from this point on there was no ‘negotiation’ involved – BT and CNS simply presented their position and the reasons behind it while requests for further discussion were not followed up. In the Director General’s view, this does not constitute reasonable efforts to negotiate and in his opinion highlights the fact that there may be possible alternative solutions that as yet remain unexplored.

C&W

4.23 C&W supported the Director General’s proposed decision and noted an ongoing requirement on industry to take the issues forward into further negotiation. C&W supported this approach and indicated it would be actively involved in this process.

CNS

4.24 CNS stated that it was not immediately affected by the issues determined by Oftel. However, CNS expected that, should the proposed decision be confirmed in a final direction, that BT would issue an OCCN to CNS and CNS would have no course of action other than to increase its charges to international carriers. CNS believes from the views of international carriers it has sought that it is highly likely that UK service providers’ traffic will be temporarily or permanently affected.

4.25 CNS believed that Oftel’s draft direction was disappointing in that it made little reference to the views of SPs and the potential impact on their business from the loss of internationally originated traffic. CNS believed that written evidence from overseas carriers supplied to Oftel made it a logical conclusion that overseas carriers will choose not to send +44 845/870 calls to the UK if required to make higher payments. CNS accepted that some carriers will continue to send this traffic but this would result in patchy availability, defeating the object of using these numbers in the first place. Until overseas carriers took the decision whether to send these calls or not then CNS could not be certain of availability. CNS believed that in excess of 30% of volumes will disappear and any lack of availability from overseas operators will have a serious impact on those SPs who either provide services to travellers abroad or who use these numbers to sell services to customers overseas.

4.26 CNS argued that in making its representations to Oftel it had stressed the importance of internationally originated calls to SPs. CNS believed that SPs’ views seemed not to have been considered prior to publication of the draft direction. CNS suggested that SPs were consulted prior to a final determination being issued in order that the whole NTS community can agree on the importance or otherwise of access from overseas operators.

4.27 CNS argued that it had stressed throughout the potential impact on SPs and was concerned that SPs have not been publicly alerted to the possibilities. CNS pointed out that SPs need to be aware that a loss of traffic from a number of countries may be a possibility so that they can make alternative arrangements. CNS believed it is clear from the timeframes involved that SPs and their customers will suffer difficulties in the short to medium term.

4.28 CNS believed that reference should have been made in the draft Direction to abortive attempts to brief industry at both the Oftel Forum on 2nd November 2001 and the Oftel Policy Forum on 12^th December 2001. CNS believed both would have led to greater understanding of the issues involved.

4.29 CNS pointed out that in the draft Direction Oftel stated that CNS had consulted 143 international carriers. CNS clarified that it had informed 143 carriers of a change to their contract obliging them to pay a surcharge for terminating 0870 calls to the UK and consulted with a number of major carriers for their views who expressed strong reservations about paying a charge.

4.30 CNS argued that analogies between breaking out a different settlement rate for mobiles and doing the same for +44 845 & +44 870 were flawed. CNS pointed out that with +44 870 particularly there was a lack of any reciprocal arrangement to be entered into overseas. This lack of reciprocity has influenced the behaviour of overseas administrators who have expressed concerns that CNS is seeking to export UK arrangements outside the UK.

4.31 CNS noted Oftel’s concern that the tromboning of calls could increase. CNS disagreed, though, with C&W’s view on the current level of tromboning. CNS stated its disappointment that Oftel made no comment regarding the practice of originating operators tromboning traffic that the draft direction identified could undermine the UK NTS regime. CNS requested that Oftel give an exposition of its powers with regard to tromboning and details of any proposed enforcement action, if any.

4.32 CNS believed that there may be a market for alternative services to +44 870 and +44 845 (such as International Shared Cost) in the future, but that in the short term such alternatives did not provide all the advantages and functionality of the current service.

4.33 CNS stated that it remained convinced that the route it had taken in seeking to reduce payments to UK operators remained the best option for all stakeholders of the UK NTS regime. CNS stated its willingness to work with all parties so that inconvenience is minimised but stressed it would not subsidise the activities of other UK operators. CNS urged Oftel to reconsider its views and gain the agreement of the whole NTS community to the final direction.

The Director General’s comments

4.34 The Director General is fully aware that due to current commercial arrangements for internationally originated 0845 & 0870 there is a risk of a deterioration in the service in that some calls may no longer be carried. However, in assessing CNS/BT’s proposed solution which BT sought to apply via the OCCN process (and subsequently referred to the Director General for dispute resolution), the Director General has concluded that the solution proposed is unreasonable as it stands, particularly as it is likely to adversely affect competition in the market for the supply of NTS services to the detriment of end users. At present internationally originated 0845 and 0870 services exist only because an operator somewhere in the transit chain is making a loss on those calls. In order for this situation to be resolved, either the retail price at origination of the call has to increase, or the charge for termination of the service has to decrease. The latter can only happen where internationally originated calls can clearly be identified as separate from UK originated calls. Where identification is not possible, TNOs who have no wish to offer an internationally originated service have no control over their revenues. Where identification is possible then TNOs can choose between accepting lower payment for the service or blocking the calls.

4.35 The Director General believes it is in the interests of all parties and end users that calls continue to be carried and the service continues with as full coverage as possible. The Director General recognises that many SPs would wish the service to continue with maximum coverage and also that some SPs may be prepared to subsidise the cost of the calls in order to do so. However, SPs are contracting for a service with TNOs operating in a competitive market. It is reasonable to assume that TNOs are best placed to judge how to meet their customers’ requirements. If not, it is unlikely that such operators will prosper in a competitive market. At present, internationally originated 0845 and 0870 exists on the basis that one or more operators in the transit chain carries the traffic at a loss. The Director General considers it likely that this situation cannot continue indefinitely. Either the retail customer has to pay more at the originating end, or else the SP has to subsidise the cost of termination, a tension that needs to be resolved if the service is to continue. CNS and BT’s proposals to deal with this tension are unreasonable, however, in that they would require TNOs who state they do not wish to carry internationally originated 0845 and 0870 calls at a loss, to accept this position by default. At present these TNOs would have no control over blocking internationally originated calls because they cannot identify the traffic separate from UK originated calls. Even if these TNOs’ services are unlikely to be marketed as international numbers, the TNO is at risk from UK traffic tromboning via an international carrier. The Director General cannot reasonably mandate that non-dominant TNOs carry traffic at a loss in order that a service provided by other TNOs is not affected, particularly when there may be other solutions available that have not been subject to industry negotiation.

4.36 If there is to be an economically viable market for an internationally originated service behind UK 0845 and 0870, then in the Director General’s view, this can only be achieved via an increase in the retail price charged to the caller or a decrease in the termination charge in the UK. This service is provided to SPs by TNOs in a competitive market. If TNOs set charges that are too high and international carriers refuse to carry the calls then this is a commercial decision for TNOs to consider.

4.37 Tromboning occurs due to an arbitrage opportunity created by the existence of a differential between the amount an originating operator must pay for termination of 0845 & 0870 calls in the UK and the smaller amount it can pay by sending the traffic via an international operator. The Director General’s view is that it is a matter for operators to ensure through commercial arrangements that arbitrage opportunities such as tromboning do not exist, rather than a specific regulatory concern for the Director General to address. However, when requested to resolve a dispute relating to the commercial arrangements of non-dominant operators, the Director General considers it would generally be unreasonable, and liable to adversely affect competition, to expose operators to the risk of tromboning by making a direction that changes those commercial arrangements so as to create arbitrage opportunity. If the effect of existing tromboning is alleged to be anti-competitive, however, then the Director General will investigate such a complaint using his powers under the Competition Act or sectoral powers as appropriate. (Please see Oftel’s recent Competition Act Strategy document for guidance on how the Director General determines which powers are most appropriate to use in particular cases.)

4.38 The Director General notes that CNS urged him to reconsider his views and gain the agreement of the whole NTS community to the final direction resolving these disputes. In fact, the draft Direction set out the Director General’s concerns that reasonable attempts to discuss and negotiate this issue with the wider NTS community had not been made in the first instance. It is the Director General’s view that if such negotiation had been carried out then a more reasonable solution might have been found and agreed upon, or at least a solution put forward by BT and CNS that addressed some of the Operators’ key concerns. In the absence of this, the Director General concludes that he is unable to support BT’s OCCN. The Director General’s decision in this case is not imposing a solution to the problems identified with internationally originated 0845 & 0870 traffic, but resolving an interconnection dispute between BT and each of 90 TNOs on the basis of an OCCN proposed by BT which, as it stands, the Director General considers unreasonable.

Easynet

4.39 Easynet agreed strongly with the Director General’s proposed decision resolving this dispute.

4.40 Easynet noted that BT had agreed to CNS’ proposals before it presented those proposals to the Standard Contract Forum on 13 December 2001. BT had therefore already decided which option to implement before it presented its proposals to the industry. Easynet believed that any loss making position in which BT finds itself is therefore entirely of its own making.

4.41 Easynet did not believe that the proposed decision would result in the blocking of international incoming calls for reasons described by other Operators in the draft direction. Easynet further believed that any rise in the retail price of internationally originated 0845 & 0870 calls would have little effect on the demand for such calls – Easynet’s experience was that these types of call are primarily made by UK users calling back to the UK whilst abroad and, in this scenario, users are less price sensitive.

4.42 Easynet stressed that the inability of a TNO to identify internationally originated 0845 & 0870 is very significant where TNOs receive different out-payment for internationally originated calls. Without ability to identify these calls, TNOs would not be able to reconcile their bills from BT and would not be able to choose to block such traffic terminating on their networks.

Energis

4.43 Energis supported the proposed decision of the Director General. In particular, Energis stressed a number of key points:

• BT should not be allowed to seek to reduce the revenues of its competitors while protecting its own businesses;
• TNOs have no control over the origin of calls to their NTS services;
• CNS should properly seek to recover sufficient amounts from originating operators to cover out-payments in the UK; and
• TNOs should not be required to accept lower termination payments when they are unable to identify incoming traffic separately from that originating in the UK.

4.44 Energis stated its willingness to participate in the development of an industry wide solution such that traffic can be identified to and by TNOs.

Reality Telecom

4.45 Reality commented that it was essential for it to have confidence that the income it receives through revenue share will be consistently applied and not adversely affected by tromboning via international routes. The revenues received are an important part of the overall income of its business.

4.46 Reality stated that although the overall volume of calls from overseas to 0845/0870 is currently small, its customers expect callers to be able to dial their number from anywhere in the world. Reality said that it was not acceptable for calls to be barred in certain countries, as this would detract from the utility of the service.

4.47 Reality argued that where there continued to be a differential between terminating fees for national and international originated calls there will be pressure for arbitrage from operators within the UK. The objective should therefore be to remove this incentive by increasing the charges that overseas operators pay.

4.48 Reality recognised, however, that there are some practical issues that make it difficult for CNS to implement an increase in charges to overseas operators in the short term. Reality believed there was past experience in the case of mobile networks, however, where significant arbitrage caused due to differential UK and overseas termination rates was resolved by originating operators charging their customers more for calls to overseas mobiles.

4.49 Reality therefore proposed that in order to resolve this issue:

• The long-term objective should be to remove all arbitrage opportunity by increasing charges to overseas operators. The industry should agree a timetable for completion with BT/CNS.

• During the interim period before new charges are implemented, there will be a cost impact to transit operators since they will receive less for internationally originated calls than they pay for UK termination. Some of these costs should be passed on to TNOs in the form of a reduction in revenues received.

The Director General’s comments

4.50 The Director General welcomes Reality’s offer of constructive proposals for a way forward on this issue and the commitment of all respondents to the draft direction to seek to find a solution moving forward. The Director General believes that at the heart of this issue are a number of fundamental questions:

iv) Would the kind of services destined to attract internationally originated calls be more appropriately based away from 0845 and 0870 number ranges?

4.51 The Director General believes these questions are a matter for the whole industry to resolve and that the interests of SP customers may best be met in the long term through this process.

Chapter 5

The Director General’s decision and reasons

5.1 Having duly considered the representations of the parties, the responses to the draft Direction and the matters set out in Regulation 6(8) of the Telecommunications (Interconnection) Regulations 1997, the Director General concludes that BT’s proposals as set out in its OCCN of 14 January 2002 cannot, in light of the circumstances, be reasonably applied by the Director General in resolving the dispute. Further, the Director General considers that BT’s proposed solution is likely to have an adverse effect on competition in the market for the supply of NTS services for a voice telephony service in the UK, to the detriment of end-users. The Director General also believes that there may be as yet unexplored potential solutions to this problem that may be resolved through commercial negotiation. Accordingly, the Director General directs that the Operators’ charges for terminating internationally originated 0845 and 0870 traffic should remain as currently agreed in the SIA of each Operator and BT.

5.2 The Director General would stress that his decision resolving this dispute is not imposing a formal solution upon industry to the problems identified in current commercial arrangements for internationally originated 0845 & 0870. The risk that calls to SPs will not be carried from all international locations is a result of the current tension between the termination rate payable for such services in the UK and the amount paid by international originators to terminate those calls. The Director General accepts CNS’ argument that commercial arrangements at some level need to be changed if this service is to be continued. However, the Director General has not been convinced by the arguments put forward by CNS and BT that what BT has proposed to TNOs by way of its OCCN represents a reasonable solution.

5.3 In light of the fact that, in the Director General’s opinion (as set out in detail in the draft Direction), little attempt seems to have been made to negotiate around the issue involving the whole industry, the Director General concludes that, in resolving interconnection disputes between BT and 90 TNOs, BT’s proposal to unilaterally reduce TNO’s termination charges is unreasonable. The Director General considers that there may be as yet unexplored potential solutions that are realistic alternatives to the proposal put forward by BT. Such alternatives may carry less risk of adversely impacting on competition in the market for the supply of NTS services and should be explored more thoroughly through the commercial negotiation process.

Relevant market(s) and the position of the parties to the dispute

5.4 BT is in dispute with 90 operators concerning termination charges for internationally originated 0845 and 0870. BT’s relationship with each of the Operators in terms of this dispute is as a transit operator of 0845 and 0870. BT has been determined as having Significant Market Power ("SMP") in fixed voice telephony markets and Inter-Tandem Transit is a Prospectively Competitive Service within Oftel’s Network Charge Controls. Prospectively competitive services are services in markets in which competition is developing but is not yet effective. BT therefore has a position of market power in the provision of inter-tandem transit services.

5.5 The Operators compete in the market for the supply of NTS services for a voice telephony service in the UK (BT also competes in this market). Oftel’s review of number translation services of 27 March 2002 (see note four below) found this market to be effectively competitive. No TNO is likely, therefore, to hold market power in the provision of such termination services.

5.6 In terms of this dispute, therefore, BT as an operator with market power in the provision of inter-tandem transit services and with a presence in both the upstream (CNS) and the downstream (NTS termination services) markets, is seeking to reduce the charges it pays to 90 non-dominant TNOs active in a competitive market for the supply of NTS call termination services.

The Director General’s decision and reasons

5.7 The Director General directs that BT’s OCCN of 14 January 2002 should be rejected and that the current contractual arrangements between BT and the Operators should remain until an industry wide solution has been negotiated.

5.8 Having considered the submissions of BT and the Operators and the responses to the draft Direction, the Director General considers that the charges proposed by BT in its OCCN are unreasonable and are likely to have an adverse effect on competition in the market for the supply of NTS services for a voice telephony service in the UK, to the detriment of end users. This conclusion is based upon:

(iii) the fact that in the absence of the ability of CNS’ competitors to terminate traffic via BT on the same terms as provided to CNS, BT’s proposals as set out in its OCCN would only partly solve the issue of call blocking by international operators (i.e. CNS’ competitors would still be faced with the situation CNS now finds itself in and calls via these operators may be blocked as a result. Service Providers would still not be guaranteed of receiving all calls).

5.9 The Director General accepts that there is a real issue identified by BT and CNS in the commercial arrangements currently in place for internationally originated 0845 & 0870. The Director General also believes it is in the interests of all parties that all calls are successfully completed and carried to their destination. However, in the case of internationally originated 0845 & 0870 traffic, the commercial arrangements have not been in place to make this a truly viable service. Until now the calls have been completed but only because one or more transit operators in the middle of the payment chain have been making a loss on each and every minute of a call. Commercial arrangements will have to change if internationally originated 0845 & 0870 remains a viable service in the long term – otherwise it is likely that calls will be blocked at some point in the chain. CNS and BT have proposed a solution that changes these commercial arrangements, but the Director General does not believe that what BT and CNS have proposed is reasonable. While the Director General therefore directs that BT’s proposal should be rejected, he encourages industry to negotiate and reach an agreed solution to enable the service to continue in the long term. The Director General intends to raise the issue on the agenda of the next NTS Focus Group meeting as a means to set the process moving forward.

5.10 BT has referred an interconnection dispute between itself and 90 operators to the Director General for resolution. It is on these terms that the Director General must take steps to resolve this dispute. BT is seeking that each of the Operators accepts a reduction in its termination charges for internationally originated calls. A number of TNOs in rejecting BT’s proposals have stated they would prefer not to carry such calls as an alternative to their termination revenues being undermined and open to further reduction through arbitrage opportunity.

5.11 BT has placed itself in a potential loss-making situation in the transit of internationally originated 0845 and 0870 by virtue of its commercial decision to accept charges proposed by CNS. If the Director General rejects BT’s OCCN in resolving this dispute, however, BT retains the option to seek to increase its charges to CNS once again for the onward transit and termination of calls, such that it is not placed, as a transit operator, in the situation of carrying the traffic at a loss. In the Director General’s opinion, therefore, neither party, BT nor any TNO, is placed at a disadvantage by the Director General’s decision.

5.12 The Director General’s decision in resolving this dispute has been based on legal advice, an analysis of the facts and on the balance of the interests of the parties. It has also been based on consideration of the criteria set out in Article 9(5) of the Interconnection Directive 97/33/EC (as implemented in Regulation 6(8) of the Telecommunications (Interconnection) Regulations 1997), in particular the relevant market position of the parties and the promotion of competition. In the view of the Director General this proposed Direction represents a fair balance between the interests of the parties.

Note:

4. Effective competition review of number translation services, 27 March 2002, see www.oftel.gov.uk/publications/numbering/2002/nts0302.htm.

Annex A

Schedule of Operators in dispute with BT

Glossary

Local Call Access Fee (LCFA) – Calls to non-geographic NTS services for which calling customers are charged at the local call rate

National Call Access Fee (NCFA) – Calls to non-geographic NTS services for which calling customers are charged at the national call rate

Number Translation Service (NTS) – the process associated with the routing of a non-geographic number to a network termination point, eg the number is translated from its non-geographic format into a geographic or mobile number to enable it to be routed to a geographic location or to a mobile phone.