Contents

The direction

Schedule 1 Changes to be incorporated into the Supplemental Agreement and/or Policy Document

Schedule 2 Operators in dispute with BT

Explanatory Memorandum

Chapter 1 Summary

Chapter 2 Background

Chapter 3 History of the dispute

Chapter 4 The Director’s decision and reasons

Annex 1 Responses to the draft direction

Annex 2 Respondents to the draft direction

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

Whereas:

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

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

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

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

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

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

(G) On 15 May 2002, BT issued the Supplemental Agreement of 13 May 2002 (the "Supplemental Agreement") to 228 operators, which sought to implement the proposed Credit Vetting provisions. As of the date of this direction, 175 operators had not signed the Supplemental Agreement and therefore were in dispute with BT on this matter.

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

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

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

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

(L) The Director issued a draft of this direction and the explanatory memorandum which contained the Director’s reasons on 21 November 2002 and responses were invited by 19 December 2002;

(M) Non-confidential comments were received from the respondents as detailed and discussed in Annex 1 of the explanatory memorandum which accompanies and is published with this direction. The Director in making this direction has taken these comments into account;

THEREFORE:

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

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

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

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

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

HEATHER JULIE CLAYTON

DIRECTOR OF INVESTIGATIONS

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

19 February 2002

SCHEDULE 1

CHANGES TO BE INCORPORATED INTO THE SUPPLEMENTAL AGREEMENT AND/OR POLICY DOCUMENT

1. BT shall remove the paragraphs of the Supplemental Agreement which refer to BT’s ability to automatically reduce payment periods for invoices. These paragraphs should include, but not necessarily be limited to;

• paragraph 14B.4.1(a);

• paragraph 14B.4.2;

• paragraph 14B.4.3; and

• paragraph 14B.4.4;

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

• BT shall ensure that an operator can understand how any credit limit has been set. If BT has relied on internal information for the purposes of setting an operator’s credit limit, the Director considers that such information shall be made available to that operator;

• BT shall ensure that appropriate dispute resolution procedures apply to disputes arising from disputed credit vetting reports;

• BT shall ensure that an operator is given written notice when a late payment, sufficient to infringe a provision of BT’s Supplemental Agreement, has been made. Such notice will be issued after BT has received both the first and the second late payment in question;

• BT shall ensure that paragraph 14B.6.3 of its Supplemental Agreement shall apply only when the Credit Vetting Report indicates that there is something adverse; and

• BT shall not credit vet an operator solely as a result of novation if, prior to that contractual change, and in the absence of a structural change that may lead to that operator being considered a financial risk, the operator’s payment record was not sufficient to infringe BT’s credit vetting provisions.

3. BT shall ensure ensure reciprocal application of these measures, as appropriate

SCHEDULE 2

OPERATORS IN DISPUTE WITH BT

  Chapter 1

Explanatory memorandum

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 British Telecommunications PLC (‘BT’) and the operators set out in Schedule 2 to this direction.

1.2 BT referred this dispute to the Director on 14 June 2002. BT requested a determination that it should be able to introduce certain credit vetting and credit control provisions into the Standard Interconnect Agreement (‘SIA’). These provisions are located in two documents, namely the Credit Vetting Supplemental Agreement of 13 May 2002 (the ‘Supplemental Agreement’) and the Credit Vetting Policy Document of 13 May 2002 (the ‘Policy Document’).

1.3 Following BT’s referral, the Director sought the views of the parties to the dispute and considered the submissions that had been made. The Director issued a draft direction in respect of this dispute on 21 November 2002 to the industry as a whole for consultation. This draft direction stated that the Director considered it is reasonable in principle for BT to have a credit vetting policy. However, the Director also proposed that certain changes should be made to the Supplemental Agreement and Policy Document. These changes are set out in Schedule 1 to the draft direction.

1.4 Comments were requested and have been taken into account in making a final direction. In summary, the Director does not intend to alter the existing proposals set out in the draft direction. However, the nature and scope of these measures are clarified in this Explanatory Memorandum. In summary, the measures are as follows:

• remove the contractual provisions regarding BT’s ability to automatically reduce payment periods for invoices;
• include provisions requiring BT to provide information to an operator to enable that operator to understand how a credit limit has been set;
• ensure that written notice is given to an operator when a late payment, sufficient to infringe a provision of the Supplemental Agreement has been made. For the avoidance of doubt, such notice will be issued after BT has received both the first and the second late payment in question;
• ensure that appropriate dispute resolution procedures should apply to disputes arising from disputed credit vetting reports, and
• amend its Supplemental Agreement to ensure that BT can only require a form of security from an operator if a credit vetting report is adverse.

1.5 In addition, and after reviewing responses to issues set out in the draft direction, BT is required to incorporate a provision within its proposals giving rise to the following measure;

• BT shall not credit vet a company solely as a result of novation if, prior to that contractual change, and in the absence of a structural change that may lead to that company being considered an increased financial risk, the company’s payment record was not sufficient to infringe BT’s credit vetting provisions.

1.6 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 the development of the telecommunications industry in the UK and the encouragement of adequate interconnection in a way that provides maximum economic efficiency and gives the maximum benefit to end users

Background

2.1 As a result of having been designated with Significant Market Power

("SMP") under the EC Interconnection Directive (97/33/EC), BT is obliged to meet all reasonable requests for interconnection from operators seeking access to its network.

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

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

Credit Vetting proposal

Transit Risk proposal

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

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

2.5 On 24 May 2002, BT referred to the Director a dispute between it and a number of operators which were deemed to have rejected the Transit Risk Review Supplemental Agreement. The Director issued a direction in respect of this dispute on 16 January 2002. This Direction stated that BT should not be permitted to implement its Transit Risk Review Supplemental Agreement.

Chapter 3

History of the dispute

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

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

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

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

3.5 During the period of the Director’s investigation, 26 operators formally accepted BT’s proposals and ceased to be in dispute with BT on this matter. Therefore, as of the date of this direction BT was in dispute with a total of 175 operators.

Chapter 4

The Director’s decision and reasons

4.1 As set out in the draft direction, the Director does not propose to comment on every aspect of BT’s credit vetting policy, and addresses here only those matters about which views have been submitted, or issues raised in respect of this dispute. The Director’s discretion, particularly in respect of those provisions that have not been commented on, and any unforeseeable issues that might arise as a result of the practical application of credit vetting policy, cannot be fettered.

4.2 Details of responses to the draft direction are set out in Annex 2. The draft direction set out the Director’s proposed view that it is reasonable in principle for BT to have in place a credit vetting policy. Only a small minority of respondents considered that view was incorrect. In light of this, the reasoning set out in paragraphs 5.3 to 5.7 of the draft direction remains relevant.

4.3 This section addresses;

• both the additional issues raised in response to the draft direction;
• requests for the Director to elaborate on or reconsider certain conclusions set out in the draft direction; and
• the Director’s response to new issues raised in response to the draft direction are also set out. These are issues that relate to an aspect of BT’s Supplemental Agreement and Policy Document, but were not expressly commented on in the draft direction.

Implementation

4.4 Before setting out and explaining the final position on matters relevant to the resolution of this dispute, it is necessary to comment on the implementation of this Direction. This direction sets out the measures that BT should incorporate within its credit vetting proposal, but does not set out the exact form that such a proposal should take. The Director does not propose to specify the detail of the measures in this direction. However, BT should ensure that the measures are implemented in a reasonable and proportionate manner, as soon as practicable after the date of this direction, after having consulted with the industry as appropriate. The Director notes that discussions have already taken place between BT and the Operator Group on certain related issues.

4.5 In addition, the Director wishes to make it clear that should an operator be in danger of going into insolvency and consequently be experiencing difficulty in meeting its financial obligations to BT, BT would be expected to endeavour to agree terms with that operator that would enable that operator to continue trading. Such terms may include more frequent payments, the set-off of payments, or any other terms that may be agreed between the parties. The facts of each particular case will no doubt differ, and what may be appropriate for one operator may not be appropriate for another. Differences in arrangements that do not give rise to competition concerns are unlikely to be considered discriminatory, providing that any measures adopted to suit the position of a particular operator are reasonable and justifiable in the circumstances.

4.6 Furthermore, the Director wishes to set out the distinction between the practices of credit vetting and profile monitoring at this stage, as certain respondents indicated that they were not clear about the application of the two terms.

4.7 Credit Vetting is the practice whereby BT can undertake a review of the financial position of an operator, with a view to determining whether it is necessary for it to request some form of security from that operator. BT has confirmed that an adverse credit vetting report is ‘information or data generated either/both internally and/or externally which indicates that the Operator is high risk and/or has a history of poor payment’.

4.8 Profile Monitoring enables BT to manage the financial safeguards for the portion of the operator’s business that is in excess of its usual profile. In BT’s Policy Document, the process of profile monitoring is described as: ‘actual level of invoicing by BT in the month will be monitored against the Credit Limit for that month. Where there is a significant variance between the actual invoicing by BT and the Credit Limit, as appropriate, additional deposit may be required or a reduction in deposit may be agreed’.

The Director’s proposals as set out in Schedule 1 to the draft direction

4.9 The majority of respondents welcomed the five proposals set out in Schedule 1 of the draft direction. The final position for each of these proposals is set out below:

Proposal one: Schedule 1, paragraph 1 – the removal of provisions relating to the reduction of payment periods for invoices

4.10 BT’s Supplemental Agreement outlines two remedies that BT can adopt as a result of late payment of invoices by an operator.

4.11 The first remedy gives BT, inter alia, the ability to reduce the time that an operator has for payment of invoices. This remedy becomes active if that operator makes two late payments, between 7 and 14 days after the due date of an invoice, in a rolling six month period. If an operator makes such late payments it will be issued with a payment period notice. Such a notice initially reduces the timescale for invoice payment from 30 to 21 days. This payment period can eventually be reduced to 7 days if subsequent payment period notices are issued.

4.12 The second remedy gives BT the ability to require an operator to place a form of security with BT if that operator has made two late payments, on or after a date 14 days after the due date of the relevant invoice, in a rolling 12 month period. If an operator makes such late payments it will be issued with a security notice. Such a notice gives BT the ability, inter alia, to require a form of deposit, or agree advance payments terms from the operator.

4.13 The Director’s action in this instance relates to the reasonableness of BT’s proposal to reduce an operator’s payment periods, ie. the first remedy.

4.14 In the draft direction the Director proposed to remove the provisions relating to BT’s ability to automatically reduce payment periods for invoices when an operator has been issued with a payment period notice. In response to the draft direction BT asked the Director to:

The removal of the provisions relating to the reduction of payment periods for invoices

4.15 The rationale given in the draft direction for the Director’s removal of the provisions relating to reduced payment periods was that it constitutes a disproportionate measure that is inconsistent with the stated aim of BT’s proposal, which is to limit BT’s financial exposure resulting from both financially unsound new operators entering the market and existing operators who are likely to become insolvent.

4.16 Furthermore, in forming a position in the draft direction, the Director considered the effect that such arrangements might have on operators’ cashflows. BT had previously stated that operators habitually paid late up to 14 days after the date of the invoice because (a) the cost of credit from BT is cheaper than from a financial institution; or (b) the operator had cash flow problems. The Director was keen to ensure that any provisions adopted by BT represent an appropriate balance between the legitimate interest of BT to guard against bad debt, and the need for operators to be able to manage their cashflows.

4.17 It does not appear to the Director that the interests of the industry as a whole are best served by the retention of obligatory reduced payment periods in the SIA. It remains the Director’s opinion that the reduction of payment periods could have an adverse impact on the cashflows of smaller operators, who might occasionally miss a payment as a result of the absence of key personnel eg. accounts payable staff, or those that can authorise payments

4.18 Furthermore, if an operator is in serious financial trouble, and late payment is the trigger that will be used to identify this fact, it appears to the Director that in all likelihood that operator will make more serious late payments sufficient to enable BT to issue an operator with a security notice. Such a notice is issued when payments have been made on or after 14 days after the due date of the relevant invoice. These missed payments would enable BT to credit vet that operator, and require a form of security if necessary. Evidence provided to the Director during the course of the investigation has demonstrated the speed at which an operator can go into serious financial trouble. In such an instance it appears that the reduction in payment periods would not have had a material impact on BT’s ability to limit its bad debt risk.

4.19 In addition, and as set out in the draft direction, the Director notes that provisions for reduced payment periods do not form part of BT’s Credit Vetting policies either for Wholesale Telephony Products and Calls & Access Service Providers, or for Local Loop Unbundling.

4.20 The Director considers that the removal of the provisions regarding reduced payment periods for invoices is in line with the wishes of a number of operators. Prior to the draft direction being issued, it was put to the Director that the benefit to BT arising out of the implementation of a reduced payment invoice periods was out of all proportion to the cost it would place on the operator concerned. This was the opinion of Energis, ntl, Global Crossing, Colt, Thus, Your Communications, Kingston, Hutchinson 3G, Redstone, Isle of White Cable, Omne Communications, Telewest, Inclarity, Vartec Telecom (UK) Ltd, and Tiscali UK Ltd.

4.21 However, the Director is aware that certain operators considered that increased frequency of payment could constitute an appropriate remedy. For example, Cable & Wireless stated that ‘an operator, who is in breach of the credit control terms, should have the opportunity to choose between reduced payment terms and security payment’. In addition, a joint response by Cable & Wireless, Colt, Energis and Worldcom stated that credit vetting arrangements should conform to the principles of flexibility and proportionality, and that dominant operators should be required to give operators the option of making more frequent payments, prior to the imposition of ‘more onerous financial security arrangements’.

4.22 The Director has considered these points. As set out above, BT’s proposals outline remedies that BT can adopt in the event of the issue of (a) a payment period notice, and (b), a security notice. The Director’s action to remove the provisions relating to reduced invoice payment periods relates to a remedy that BT proposes to implement as a result of (a). In this case the Director has been asked to consider whether it is reasonable for BT to be able to contractually require any operator to reduce payment periods if that operator has been issued with a payment period notice. For the reasons that have been given, the Director does not consider that it is.

4.23 In response to the draft direction, Cable & Wireless stated that an operator should be able to ‘choose between reduced payment terms and security payment’. However, if an operator is issued with a security notice there are a number of options for provision of a form of payment security by that operator, and one such option relates to an advance payment scheme which enables that operator to make more frequent payments. The Director does not consider that the payment options that have been proposed are unreasonable.