Contents

The Direction

Explanatory Memorandum

Chapter 1 Summary

Chapter 2 Background to the dispute

Chapter 3 Responses to the draft Direction and the Director’s Comments

Chapter 4 The Director’s decisions and reasons

Annex A Schedule of BT’s applicable discounts to PRS

Glossary

Direction under the provisions of Regulation 6(6) of the Telecommunications (Interconnection) Regulations 1997 of a dispute between Cable & Wireless Communications (Mercury) Limited ("C&W") and British Telecommunications plc ("BT") over BT’s average Premium Rate Service discounts.

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 of the Act the BT licence has effect as if granted to British Telecommunications plc ("BT");

(C) The Secretary of State has granted to Cable & Wireless Communications (Mercury) Limited ("C&W") on 5 December 1991 a licence under section 7 of the Act for the running of telecommunications systems specified in that licence;

(D) C&W entered into a Standard Interconnect Agreement ("the Agreement") with BT on 1 May 1998;

(E) The Agreement covers charges BT pays C&W for interconnect services and provides for BT or C&W 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) C&W proposed to BT by way of an OCCN on 20 August 2001 a revised charge for Premium Rate Services by varying the value of the discount used in calculating the charge with effect from 3 September 2001;

(G) BT rejected C&W’s proposal set out in the OCCN dated 20 August 2001 and a dispute has arisen;

(H) Regulation 6(6) of the Telecommunications (Interconnection) Regulations 1997 ("the Regulations"), provides that where there is a dispute concerning interconnection between organisations, the Director General of Telecommunications ("the Director") shall, at the request of either party, take steps to resolve the dispute within six months of the date of the request. The direction which the Director makes to resolve the dispute must represent a fair balance between the legitimate interests of the parties, and must be notified to the parties in accordance with Regulation 8(3). The parties are entitled to a full statement of the reasons on which the direction is based;

(I) On 28 September 2001, in accordance with the provisions of Regulation 6(6) of the Regulations, C&W referred the dispute to the Director for determination;

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

(K) The Director issued a draft of this Direction and the explanatory memorandum that contains the Director’s reasons on 15 February 2002 and responses were invited by 15 March 2002;

(L) Comments were received as detailed and discussed in section 3 of the explanatory memorandum which accompanies and is published with this Direction. These comments have been taken into consideration by the Director in making this Direction;

NOW, THEREFORE, THE DIRECTOR, 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 C&W AND BT:

(1) For the purposes of calculating the charge BT pays C&W for Premium Rate Services, the Deemed Retail Price shall be the retail price charged by BT for such calls (exclusive of VAT) minus BT’s average discounts for such calls of 0.3% based on BT’s relevant revenue figures, minus a further 4.4% to compensate for bad debts;

(2) The charges in this Direction shall have effect from 15 October 2001;

(3) If the net amount payable by BT is higher than that previously payable, BT shall pay to C&W the amount of the difference together with interest calculated in accordance with Clause 13.13 of BT’s Standard Interconnect Agreement;

(4) If the net amount payable by BT is lower than that previously payable, C&W shall pay to BT the amount of the difference together with interest calculated in accordance with Clause 13.13 of BT’s Standard Interconnect Agreement;

(5) The parties shall modify their interconnect agreement to give effect to this Direction; and

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

CHRIS KENNY
DIRECTOR OF COMPLIANCE

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

27 March 2002

Explanatory Memorandum

Chapter 1

Summary

1.1 The Director General of Telecommunications (‘the Director’) has issued a Direction in accordance with the provisions of Regulation 6(6) of the Telecommunications (Interconnection) Regulations 1997 (‘the Regulations’) for the resolution of a dispute between C&W and BT under the terms of their Standard Interconnect Agreement (SIA). This Direction sets out the level of BT’s discounts which the Director applies to C&W’s interconnect charges for calls to Premium Rate Services (PRS), with effect from 15 October 2001. The Direction also sets out the decision regarding C&W’s request that the Director should retrospectively determine BT’s out-payments to C&W in respect of PRS calls since October 1997 on the basis of recalculated discounts.

1.2 C&W referred this dispute to the Director on 28 September 2001. The Director considered the submissions made by C&W and BT and issued a draft Direction in respect of the dispute on 15 February 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’s consideration of the responses to the draft Direction made by BT, C&W and Energis, together with the reasons why the Director has made this Direction, are set out in Sections 3 and 4. In summary, the Director hereby directs that:

1. from 15 October 2001, BT’s average discount applicable on calls to PRS shall be 0.3%; and
2. there shall be no recalculation of BT’s average PRS discounts before this date and previous out-payments to C&W shall not be retrospectively determined.

1.4 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, represents a fair balance between the interests of the parties in each case, having regard to the Director’s wider duties to promote the development of the telecommunications industry in the UK and to encourage and secure adequate interconnection in the interests of all users in a way that provides maximum economic efficiency and gives the maximum benefit to end users.

Chapter 2

Background to the dispute

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.

2.2 In previous determinations of NTS charges 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) which can be found on Oftel’s website. Two such documents can be found at:

www.oftel.gov.uk/publications/1999/pricing/btfc499.htm

www.oftel.gov.uk/publications/pricing/ntsd0901.htm

Changes to the NTS regime from 1 January 2000

2.3 In December 1999, Oftel published its 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

This followed a lengthy discussion and consultation exercise in response to a general industry view that the NTS formula constrained the ability of terminating operators 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. The new regime de-coupled the retail prices of NTS calls from the originating operators’, hitherto, fixed local and national rates and created price ranges from within which terminating operators could choose to position their services.

2.4 In practice operators select a retail price for calls to their services which will, as near as possible, deliver their required revenue after call origination and transit costs have been removed. However, this revenue is also subject to the discounts BT offers to its retail customers. These discounts form part of BT’s means of meeting its retail price control requirements. The combination of headline price reductions and discounts enable BT to achieve its overall ‘RPI-X’ target.

2.5 Discounts take the form of ‘Inclusive Call Allowances’ and price reductions and are also used by BT as an incentive to help retain its customer base in the face of price competition from other operators. Over the years BT has continually extended the range and type of discounts it offers and has increased the proportion of its customer base who benefit from them.

History of the dispute

Prior history

2.6 On 30 January 1996 the Director published a determination of Interim Charges for BT’s Initial Standard Services for the year ending 31 March 1996. This determination described the original NTS formula at Annex 6 of the determination.

2.7 Addendum 8 to the determination prescribed that, for PRS, the Deemed Retail Price should be BT’s retail price minus 5% for the effect of average discounts and 6% to compensate for bad debts.

2.8 On 12 November 1996, the Director published a determination of Interim Charges for BT’s Standard Services for the year ending 31 March 1997 in which, at Addendum 6, the determined discount for PRS was set at 3.5%.

2.9 On 28 July 1997, the Director published a determination of Interim Charges for BT’s Standard Services for the year ending 31 March 1998 in which, at Addendum 5, the determined discount for PRS was confirmed at 3.5%. On 1 October 1997 the Network Charge Control regime came into effect with the result that the July 1997 statement was effective only for the period until 30 September 1997.

2.10 Although the determinations applied to access to BT’s services, the principles set out were agreed and adopted by other operators for their charges to BT for access to their NTS services.

Previous disputes (non-PRS) NTS discounts

2.11 On 13 November 1998 and 3 February 1999 BT issued Operator Charge Change Notices (OCCNs) proposing changes in payments to terminating operators for local and national NTS calls resulting from a recalculation of BT’s contemporaneous average NTS discounts of 11.45% with effect from 9 January 1999 and 11.75% with effect from 1 April 1999 respectively. A number of operators rejected BT’s proposals and both disputes were referred to the Director for determination. The Director concluded, in determinations issued on 13 September 1999, that BT’s NTS discounts should be increased by the amounts and on the dates proposed by BT.

2.12 On 7 July 2000 BT issued an OCCN proposing a further increase in its local and national NTS discounts from 11.75% to 16.8% with effect from 1 September 2000 (this was the first increase in the discount since the introduction of the ‘new’ NTS arrangements earlier that year). A number of operators rejected BT’s proposals and the dispute was referred to the Director for determination. The Director concluded, in a Direction issued on 5 September 2001, that BT’s local call (LCFA) and national call (NCFA) NTS discounts should be disaggregated and set at 14.8% for LCFA and 2.4% for NCFA calls respectively.

The present dispute

2.13 On 20 August 2001 C&W issued an OCCN to BT proposing to change the termination charges payable by BT to C&W for PRS calls by removing the effect of BT’s average discounts. The new charges were proposed to be effective from 3 September 2001. C&W’s OCCN effectively proposed to set BT’s average PRS discounts at 0% (notwithstanding C&W’s concurrent dispute with BT to ‘opt-out’ of all BT’s NTS discounts, as discussed in paragraph 2.14). BT rejected C&W’s OCCN on 4 September 2001, stating that it would adhere to Oftel’s previously determined figure of 3.5% for PRS discounts. The resulting dispute was referred to the Director for resolution on 28 September 2001.

C&W opt-out of BT’s discount schemes

2.14 The Director is currently resolving a concurrent dispute between C&W and BT in respect of a proposal by C&W for it to opt-out of all of BT’s NTS discounts (including PRS). The charges payable for termination by BT to C&W for NTS would then remove the effect of all BT’s NTS discounts. The Director has determined to treat these two matters distinctly and will issue a separate Direction resolving this issue. In practice, however, the dispute concerning opt-out of NTS discounts may directly impact upon this dispute relating to the level of PRS discounts. If C&W were to opt-out of all BT’s NTS discounts (including PRS), then the effective figure impacting on the charges payable by BT would be 0%, irrespective of the Director’s decision in resolving this dispute. However, this concurrent dispute remains and the Director is under a duty to resolve the matter.

Regular review of all NTS discounts

2.15 Both C&W and BT have put forward an argument for establishing a regular review process of all BT’s NTS discounts. The Director is aware that other operators have expressed similar views in previous consultations on NTS disputes. The Director believes that these suggestions should be explored further and proposes to conduct a separate consultation exercise in this respect in the first quarter of 2002/03.

Chapter 3

Responses to the draft direction and the Director’s comments

BT

3.1 BT accepted that changes to its discounts packages have resulted in a reduction in the average PRS discount rate to 0.3% of gross revenue. BT argued, however, that data provided to Oftel also demonstrated that its LCFA discounts have increased from 14.8% to 22.2%, and its NCFA discounts from 2.4% to 2.8%. BT believed that any decision to amend the average rate of discounts applicable to PRS should also therefore agree to the update of all applicable average discount figures.

3.2 BT supported the effective date from which the revised PRS discount figure would be applicable as this was in keeping with OCCN notice periods set out in the BT/ Operator Charge Change Service Level Agreement. BT stated, however, than in respect of the form of the direction itself, it was sufficient to require C&W and BT to modify their interconnect agreement to give effect to the direction. BT argued that a requirement that C&W should modify its OCCN of 20 August 2001 was not only superfluous but incorrect, as an OCCN is by definition forward looking and can only take effect at a date in the future from when it is issued.

The Director’s comments

3.3 The dispute referred to the Director for resolution in this matter was in relation to C&W’s OCCN proposing charges for termination of calls to PRS which, in effect, applied a figure of 0% to reflect the cost to BT of its average PRS discounts. The level of BT’s LCFA and NCFA discounts were not raised as matters in dispute between the parties at this time. Nevertheless, Oftel recognises the issue of BT’s LCFA and NCFA discounts and proposes to consult with the industry in this respect in the first quarter of 2002/03.

3.4 BT’s comments regarding the form of the Direction are accepted and the final Direction here issued by the Director takes this matter into account.

C&W

3.5 C&W welcomed the proposal to reduce the level of BT’s average PRS discounts but expressed concern that its request for retrospective application was rejected. C&W argued that Oftel’s proposals effectively reward BT for failing to comply with the existing regulatory structure for calculating BT’s retention in that BT is able to retain significant amounts of retail revenue which should have been passed to C&W.

3.6 C&W questioned Oftel’s rationale for dismissing its claims for retrospection on the basis that C&W could have made estimate of BT’s PRS discounts at an earlier stage. C&W argued that this view ignored the significance of Oftel’s non-PRS NTS discounts directions that gave clear indication that PRS discounts may have been overstated. C&W said that this Direction triggered its work on BT’s PRS discounts figure and, before this time, it was far from clear that 3.5% might overestimate the true discount figure.

3.7 C&W further argued that while it may be transparent that PRS calls receive less of a discount than non-PRS calls, how much less of a discount was not clear. C&W stated it had no means of estimating when BT’s customer base was moved from its Premierline packages to Together and therefore no way to estimate when this would have a significant impact on the level of BT’s average PRS discounts. C&W believed this lack of transparency enabled BT to over-recover significantly on its calculated PRS discounts and that C&W had no reasonable way of challenging this until Oftel’s non-PRS NTS discount directions were issued.

The Director’s comments

3.8 The Director accepts C&W’s argument that it could not have been in a position until the issue of Oftel’s non-PRS NTS discounts directions to make an accurate calculation of the level of BT’s PRS discounts. This is not the Director’s argument, however. The Director believes that C&W and operators had access to information in BT’s price list to make an estimation of whether BT’s average PRS discounts were likely to have changed over a period of time given the change in BT’s discounts packages. This could then have been raised with BT or Oftel as appropriate in order to make assessment of any change.

3.9 C&W, in its original submission, argued that PRS discounts must have changed over time on the basis that, given BT’s LCFA and NCFA discounts had changed (as evidenced by proposals by BT and the various disputes considered by Oftel since November 1998), it was illogical to assume that discounts applying to PRS calls had remained the same. It is not clear why this was not a logical conclusion for C&W to reach at such time as BT’s non-PRS discounts were being recalculated, and the matter raised accordingly at this point if C&W had concerns.

3.10 Notwithstanding the above, the Director’s conclusions that retrospection shall not apply in this case beyond the issue of an OCCN are not based solely upon whether an operator had access to information upon which to challenge BT’s level of PRS discounts or not. The Director took into account whether there is an expectation in the minds of the parties that retrospective calculation of charges would apply and the potentially negative effects of imposing retrospection in the market. On the basis of this analysis the Director concluded that retrospection was not justified or desirable in this instance.

Energis

3.11 Energis welcomed the decision to revise downwards the average retail discount applicable to PRS, but disagreed with the decision not to apply revised rates retrospectively.

3.12 Energis raised the concern that Oftel’s calculation of the appropriate discount rate applicable to PRS was made on the basis of inadequate information supplied by BT. Energis questioned how BT could argue that it had applied a discount rate for PRS that formed part of its regulated retention as determined by the Director, if it was unable to provide sufficient information to support its view that it was not under or over-recovering such.

3.13 Energis believed that Oftel appeared to put the onus on operators to monitor BT’s correct application of the NTS formula rather than expect BT to follow the rules as determined by that formula. Energis argued that the knock-on effect of this is that if operators do not closely scrutinise BT’s published prices then BT can over-recover because any misapplication of the NTS formula will not be remedied retrospectively. Energis argued that BT has been in breach of the determination setting out the NTS formula in over-recovering on its PRS discounts, in particular the calculation of ‘D’ in that formula.

3.14 Energis argued that the revised retail discount relating to PRS should therefore be applied retrospectively to 1 April 2000 as a minimum and ideally to October 1997.

The Director’s comments

3.15 The information that Oftel has used to make its final calculation of the relevant PRS discounts figure is supplied by BT. The draft Direction set out where inadequacies remained in the information that BT had supplied and where full information had not been provided by the date of the draft Direction. If certain inadequacies identified and highlighted by Oftel remain, it is the Director’s view that, for the purposes of resolving this dispute, these are unlikely to have a material effect on the level of BT’s average PRS discounts calculated at 0.3%. If the Director were to receive information that indicated otherwise then he would, of course, take any appropriate action as required.

3.16 The Director has explained in paragraphs 3.8 and 3.9 above his views in this particular case on the relevance of the availability of information to C&W and other operators in determining that retrospection should not be applied in this case. Energis also considers, however, that BT has been in breach of the determination setting out the NTS formula in over-recovering on its PRS discounts. The NTS formula was originally established by Oftel in its determination of Interim Charges for BT’s Initial Standard Services for the year ending 31 March 1996. This determination described the original NTS formula at Annex 6. Although this determination applied to access to BT’s services, Annex 6 stated how the Director proposed that the rules set out should also apply to other operators for their charges to BT for access to their NTS services.

3.17 With effect from 1 January 2000, Oftel changed the way it regulated NTS payments. BT’s originating retention (but not that of other operators) would continue to be set according to the methodology within the NTS formula. ‘D’ in this formula is the Deemed Retail Price for the call and in the case of Premium Rate Services is BT’s retail price minus a percentage to allow for average discounts and a further percentage to compensate for bad debts. The last calculation made of BT’s average discounts was undertaken by Oftel in July 1997 which set the value at 3.5%. There is no obligation imposed by the NTS formula requiring BT to recalculate the level of any of its discounts as applied by the formula. Oftel has, though, been involved in resolving a number of disputes concerning the level of such discounts. BT has not, however, in continuing to apply a figure of 3.5% for PRS discounts, been misapplying the formula in terms of the requirements it imposes upon it.

Chapter 4

The Director’s decision and reasons

4.1 Having duly considered the representations of C&W and BT in response to this request for a Direction, the responses made to the draft Direction, and the matters set out in Regulation 6(8) of the Telecommunications (Interconnection) Regulations 1997, the Director concludes that:

1. from 15 October 2001, BT’s average discount applicable to charges payable to C&W for calls to PRS shall be 0.3%; and
2. there shall be no retrospective recalculation of BT’s average PRS discounts figure before this date and out-payments to C&W shall not be retrospectively determined.

a) BT’s average PRS discounts from 15 October 2001

4.2 C&W requested recalculation of BT’s average PRS discounts applied to out-payments made by BT to C&W for the termination of such calls. BT has accepted this recalculation. Accordingly, the Director has reviewed BT’s average PRS discount figure as described below. The Director confirms that the effective date of the new charges should be 15 October 2001 i.e. 56 days from the date of C&W’s OCCN of 20 August 2001. This is on the basis that C&W issued an OCCN, and the Director believes that C&W should therefore comply with the agreed practice of giving 56 days’ notice in the absence of reasonable justification for otherwise. The Director calculates that 56 days from 20 August 2001 is 15 October 2001. The Director therefore believes it is a fair balance between the parties in this case to apply the recalculated level of BT’s PRS discounts from 15 October 2001.

How BT’s PRS discounts were calculated

4.3 BT calculates the level of discounts for any telephony package by measuring the total retail revenue collected by BT, net of discounts, made in the period concerned. It then compares this to the gross revenue that would be associated with the ‘headline’ retail price of the calls. This determination takes account of discounts applied during the 3-month period 1 July to 30 September 2001. Oftel chose this as the most up to date time period in respect of which BT could prepare information for the purposes of this direction.

4.4 For PRS discounts BT identifies gross revenues, gross discounts and option fees on an accruals basis in order to pass on the appropriate revenue to PRS terminating operators after deduction of its conveyance and retail costs. This is consistent with NTS principles that require that the originating operator (in this case BT) must recover its costs associated with originating NTS calls from call revenues. Once these have been deducted the remaining revenue is passed to the terminating operator as an out-payment.

4.5 Oftel requested that BT provide revenue, option fee and discount data required to calculate the percentage discount rate for each of the 6 quarters up to September 2001. BT has provided this to Oftel. Data for the four quarters to 31 March 2001 was requested as it was the latest information available that had the potential to be reconciled to revenue figures appearing in the 2001 Financial Statements (for which the basis of preparation should be detailed in the publicly available supporting accounting documentation). BT has not provided in time for this Direction a detailed reconciliation of the data for the four quarters to 31 March 2001 for Oftel to review. Oftel also requested, in the absence of a detailed explanation of revenue and discount attribution methodologies within the accounting documentation supporting the 2000/01 Financial Statements, for BT to provide the full methods of attribution necessary to derive the appropriate revenues, option fees and discounts. BT has provided an overview document on the preparation of the revenue, option fee and discount data, although this falls short of a complete and detailed description necessary for Oftel to fully understand BT’s calculations.

4.6 In this instance Oftel believes that this additional information is unlikely to materially affect the calculation and should not delay issue of this Direction resolving the dispute. The information is still sought from BT to inform a consultation in respect of NTS discounts. Following receipt of this information Oftel reserves the right to revisit this Direction and the application of the revised PRS discount figure to 15 October 2001, if the information suggests that further revision is appropriate.

4.7 BT has also provided, at Oftel’s request, a schedule of the applicability of discounts to PRS under its various customer options as at 31 March 2001. This data is drawn from BT’s Price List. The applicability of discounts is shown both in terms of their impact at the individual call level and, where relevant, whether any related inclusive call allowances can be applied to such calls. This information is attached at Annex A and has been updated since the draft Direction to take account of missing information identified by Oftel in the schedule previously supplied by BT.

4.8 Oftel has reviewed the data provided by BT. In reviewing this data relating to discounts for LCFA and NCFA services in September 2001, Oftel considered the impact of inclusive call allowances (ICAs). PRS calls, however, cannot be offset against ICAs and therefore ICAs will have no impact on the average level of PRS discounts.

4.9 Over six quarters from April 2000 to September 2001 the discount rate as calculated by BT fell from 1.2% of gross revenue to 0.3%. The principal reason for the fall was that over this period the PremierLine residential customer option was being withdrawn from BT’s portfolio and, in the main, being replaced by BT’s Together options, none of which provided discounts on PRS calls. For business customers, the only options as at 31 March 2001 which provided discounts were Business Choices, Corporate Choices, Tier 2000 and Embark, all at 5% of gross revenue, and ISDN reduced minimum fee.

4.10 Oftel also considered ascertaining separate discount rates for different categories of calls within PRS number ranges, for example, between pay for product calls, calls capped at £5 maximum for each call or fixed fee up to £1 per call. BT could not provide this level of detail, however, as it only analyses PRS discounts as a single total. In view of the low overall incidence of PRS discounts, Oftel did not consider that further disaggregation would be proportionate at this time. This picture might change, however, if BT were to further restrict discounts in relation to certain subsets of PRS calls, for example, if BT were to exclude pay for product PRS calls from all discounts.

The determined discount figure and interest charges

4.11 Further to the above, the Director directs that, from 15 October 2001, the discounts that apply to BT’s terminating out-payments to C&W in respect of PRS calls shall be 0.3%.

4.12 In accordance with Clause 13.13 of the SIA, this Direction provides that BT, which since 15 October 2001 has been making payments to C&W for terminating PRS calls based on average discounts of 3.5%, will pay to C&W the amount of the difference plus interest from that date. The applicable annual rate set out in Clause 13.13 as the ‘Oftel Interest Rate’ is the London Inter-Bank Offered Rate (LIBOR) plus 3/8 per cent.

b) Retrospective recalculation of PRS discounts from October 1997

4.13 In considering whether retrospection would be appropriate in this case, the Director has taken into account the balance of the interests of the parties and the criteria set out in Regulation 6(8) of the Telecommunications (Interconnection) Regulations 1997, in particular the relevant market position of the parties and the promotion of competition, including the potentially negative effect on the market of a decision to allow retrospection. He has also considered whether the parties have a legitimate expectation that retrospection will apply in this case. The Director notes that there has been no agreement between the parties that retrospection will apply (other than to the dates proposed in the relevant OCCN) and therefore there can be no such expectation.

4.14 In deciding whether retrospection ought to apply in this case, the Director has also taken into account the availability of information to the parties since 1997, and notes particularly that C&W has had access to a certain level of information such that it has now been able to refer this dispute to Oftel with initial evidence that the figure of 3.5% may have overestimated the level of BT’s PRS discounts during the period since October 1997. The Director has taken into account comments in response to the draft Direction in this regard (as discussed in Chapter 3) but remains of the view that his conclusions are valid in respect of the information available to C&W and other operators.

4.15 It is clearly not possible for C&W, or any other operator, to be able to make detailed calculation of BT’s average PRS discounts. To do so requires access to BT’s gross and net revenue information that is of a commercially confidential nature. However, it appears to the Director that it is reasonable to assume that C&W could have made a reasonable informed estimate of BT’s PRS discounts by reference to BT’s published price information, and certainly to make consideration of whether BT’s discounts may have fallen over time, and either approach BT to seek a recalculation of this discount figure or request that Oftel make a determination of such.

4.16 In issuing its OCCN to BT of 20 August 2001 and then subsequently referring this dispute to the Director, C&W has made such an analysis. By referring to BT’s published price list and assessing which of BT’s discount packages apply to calls to PRS, C&W has, through a relatively simple process, been able to make estimate of the level of BT’s average PRS discounts, and conclude that the level of PRS discounts, as set by previous Oftel directions, was no longer appropriate. Whereas a detailed calculation of the level of BT’s PRS discounts may not have been possible until the issue of Oftel directions resolving non-PRS NTS disputes, an informed estimate as to the likely trend in the figure, it is reasonable to assume, could have been made before.

4.17 In view of the circumstances of this case and the matters referred to in paragraph 4.13, the Director concludes that retrospection is not justified in these circumstances.

4.18 The Director’s decision in this case, both in deciding to recalculate the level of PRS discount applicable to C&W’s interconnect charges for calls to PRS, and in deciding to reject C&W’s request to recalculate charges retrospectively to 1997, has been based on legal advice, an analysis of the facts and a review of the accounting information supplied by BT, 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 this direction represents a fair balance between the interests of the parties.

Annex A

Schedule of BT’s applicable discounts to PRS

Discounts applicable at 31 March 2001 (source: BT)

Note – Home and Business Highway revenues are reflected in their equivalent PSTN package, eg BT Together

Glossary

(These definitions are for guidance only and have no legal standing. For precise definitions please refer to the relevant licence or legislation).

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

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

Number Translation Services (NTS): the process associated with the routing of a non-geographic number to a network termination point, e.g., 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

Operator Charge Change Notice (OCCN): the process used by operators, including BT, for offering and amending charges in payment for access to another operator’s services

Originating operator: operator on whose network the call originates, i.e. the operator with the line to the customer.

Premium Rate Service (PRS): services, including recorded information and live conversation, run by independent service providers. All calls to these companies are charged at a higher rate than ordinary calls to cover the companies' costs in providing the content of the call and the operator's cost for the special network facilities needed.

Terminating operator: the operator on whose network the call terminates.