Direction under the provisions of Regulation 6(3) of the Telecommunications (Interconnection) Regulations 1997 regarding BT’s NTS Discounts for calls to 0844 and 0871 numbers with effect from 1 October 2002

Issued by the Director General of Telecommunications 

Contents

The Final Direction

Explanatory memorandum

Chapter 1 – Summary

Chapter 2 – Background

Chapter 3 – Information submitted by BT and calculation of discount levels

Information sought by Oftel and submitted by BT
BT’s calculations

Chapter 4 – Comments received to the draft proposals and Oftel’s responses

BT
Energis
Easynet
Cable & Wireless
Thus on behalf of itself, Easynet, Kingston and Your Communications

Chapter 5 – The Director’s Final Decision

Exceptional Circumstance
The requirements of the Regulations
The Final Decision
Date of Application
Implementation of the Direction

Annex A – Applicability of BT Option Schemes by Call Type

Annex B – Methodology for the production of NTS Discount information

Direction under the provisions of Regulation 6(3) of the Telecommunications (Interconnection) Regulations 1997 regarding BT’s NTS Discounts for calls to 0844 and 0871 numbers with effect from 1 October 2002

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) BT, in accordance with Condition 45 of its licence, has entered into interconnection agreements with a number of Operators. Those interconnection agreements include provisions concerning Number Translation Services ("NTS"). The term "Operators" in this direction shall refer to those operators that have entered into an interconnection agreement with BT;

(D)The Secretary of State has granted to each of the Operators a licence under section 7 of the Act for the running of a telecommunications system specified in that licence.

(E) The Director General of Telecommunications ("the Director") has previously stated his intention to review the discounts that apply in relation to the NTS number ranges 0844 and 0871;

(F) Regulation 6(1) of the Telecommunications (Interconnection) Regulations 1997 ("the Regulations") provides that the Director shall encourage and secure adequate interconnection in the interests of all users and that he exercises his functions in a way that provides maximum economic efficiency and gives maximum benefit to end-users having regard to the matters set out in Regulation 6(1)(a) to (g) of the Regulations;

(G) Pursuant to Regulation 6(3) of the Regulations the Director may intervene at any time in order to make a direction specifying issues which must be covered in an interconnection agreement, or to make a direction that specific conditions be observed by one or more parties to such an agreement. The Director may in exceptional circumstances make a direction that changes be made to interconnection agreements already concluded where it is justified to ensure effective competition or interoperability of services for users or both;

(H) The Director has considered inter alia, the information provided by BT and has had regard to the matters set out in Regulation 6(1) of the Regulations. The principal points are summarised in the explanatory memorandum which accompanies, and is published with, this direction.

(I) The Director issued a draft of this direction and the explanatory memorandum which contained the reasons on 23 December 2002 and responses were invited by 30 January 2003;

(J) Non-confidential responses were received from BT, Energis, Easynet, Cable & Wireless and Thus (on behalf of itself, Easynet, Kingston Communications and Thus Communications) as detailed and discussed in Chapter 4 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(3) of the Regulations, and having regard to the matters set out in Regulation 6(1) of the Regulations, the Director makes the following direction:

1. For the purposes of calculating the charge BT pays the Operators for NTS services the retail price is the net retail price after discounts charged by BT which for calls to 0844 and 0871 numbers, shall be:

(i) in the case of calls to Internet services, the retail price charged by BT (exclusive of VAT) minus BT’s average discounts for such calls of 17.8 per cent based on BT’s relevant revenue figures;

(ii) in the case of calls to non-Internet services, the average retail price charged by BT for such calls (exclusive of VAT) minus BT’s average discounts for such calls of 0.1 per cent based on BT’s relevant revenue figures;

(ii) in the case of calls to non-discounted services, the average retail price charged by BT for such calls (exclusive of VAT) minus BT’s average discounts for such calls of 0.0 per cent based on BT’s relevant revenue figures;

2. This direction shall have effect from 1 October 2002.

3. If the net amount payable by BT to the Operators is greater than that previously payable, BT shall pay to the Operators the amount of the difference together with interest calculated in accordance with Clause 13.13 of the Standard Interconnection Agreement.

4. If the net amount payable by BT to the Operators is lower than that previously payable, BT shall pay to the Operators the amount of the difference together with interest calculated in accordance with Clause 13.13 of the Standard Interconnection Agreement.

5. In accordance with paragraphs 5.11 to 5.18 of the explanatory memorandum which accompanies and is published with this direction, BT shall alter the Carrier Price List so that it accords with this direction.

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.

Heather Julie Clayton
Director of Investigations

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

25 March 2003

Explanatory memorandum

Summary

1.1 The Director General of Telecommunications ('the Director') has issued a final direction, in accordance with the provisions of Regulation 6(3) of the Telecommunications (Interconnection) Regulations 1997 ('the Regulations'), proposing changes to BT’s average NTS discount for calls to services offered by operators using 0844 and 0871 number ranges.

1.2 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'. The NTS Statement had effect from 1 January 2000 and made available two new NTS number ranges designed to enable operators to offer services at a variety of new price points. These 'new NTS' number ranges were given as 0844 for calls priced at up to five pence (per minute (ppm) and per call (ppc)) and 0871 for calls up to 10 ppm or ppc.

1.3 On 5 September 2001 Oftel published the Direction relating to a dispute between BT and a number of operators over BT’s proposal to increase its NTS Discounts with effect from 1 September 2000 ('NTS Discounts Direction (2001)'). This direction was made in response to the rejection by operators of BT’s proposal, made on 7 July 2000, to increase the average level of discounts from 11.75 per cent to 16.8 per cent for all NTS call types with effect from 1 September 2000.

1.4 The NTS Discounts Direction (2001) directed that the discounts that applied to calls made to services operating on Local Call Fee Access ('LCFA') numbers should be 14.8 per cent and for calls to National Call Fee Access ('NCFA') numbers 2.4 per cent. These discounts had effect from 1 September 2000.

NB: LCFA number ranges at that time were 0345, 0645 and 0845 but are now solely 0845, whilst NCFA number ranges were 0541, 0870 and 0990 and are now solely 0870.

1.5 Take up of the new NTS numbers (0844 and 0871) by operators had been extremely limited in the months following the NTS Statement such that, by September 2000 when the 0845/70 discounts took effect, call volumes remained negligible. BT was therefore unable to provide call revenue and discount information to demonstrate how it had set the appropriate level of discounts for these calls. As a consequence, the NTS Discounts Direction (2001) gave that discounts for 0844/71 calls should remain at 11.75 per cent until sufficient data was available.

1.6 Oftel has since sought and obtained information from BT on the calculation of discounts for 0844 and 0871 now that usage of these number ranges has increased. The discount data on which this direction is based is the three months from 1 July to 30 September 2002.

1.7 BT’s data also indicated that, rather than set separate discounts for 0844 and 0871, it is more appropriate to set discounts according to groups of chargebands where the applicability of BT’s various discount schemes is common. In practice this translates to three groups.

1.8 Accordingly, the Director has decided that the average discount BT shall apply to calls it originates to services offered on 0844 and 0871 numbers shall be:

For calls to Internet services: 17.8%
For calls to non-Internet services: 0.1%
For calls to non-discounted services: 0.0%

1.9 These discounts shall apply from 1 October 2002.

Chapter 2

Background

NTS

2.1 In previous NTS determinations 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. One such document can be found at www.oftel.gov.uk/publications/1999/pricing/btfc499.htm.

Changes to the NTS regime from 1 January 2000

2.2 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.

2.3 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 terminating operators’ services.

2.4 In order to enact the NTS Statement Oftel made available two new number ranges to enable operators to offer services at a variety of new price points. This followed enhancements to BT’s retail billing systems, which had previously limited the number of prices that could be offered for all types of call. The new NTS number ranges were 0844 for calls priced at up to 5 pence (per minute (ppm) or per call (ppc)) and 0871 for calls priced up to10 ppm or ppc.

The initial dispute

2.5 On 7 July 2000, BT issued an Operator Charge Change Notice ('OCCN') to operators proposing a further increase to its NTS Discount from 11.75 per cent to 16.8 per cent, with effect from 1 September 2000.

2.6 In July 2000 BT had presented operators with a revised discount figure but did not provide the supporting calculations nor details of the basis of its preparation. The reason given by BT for not providing supporting evidence is that it uses commercially sensitive information from its billing database which it does not wish to make available to its competitors.

2.7 Given the significant level of the increase and the negative effect it would have on NTS terminating payments, operators were reluctant to accept BT’s figures without assurance of their accuracy and relevance. Furthermore, operators argued that BT’s ability to change the level of discounts from time to time undermined one of the key principles of the new NTS arrangements, namely, to give terminating operators greater control over their NTS revenues.

2.8 Accordingly, a number of operators either rejected, or did not respond to, BT’s OCCN. The resulting dispute was referred to Oftel by BT on 1 November 2000. On 5 September 2001 Oftel resolved this dispute by publishing the NTS Discounts Direction (2001). This direction can be found on Oftel’s website at www.oftel.gov.uk/publications/pricing/ntsd0901.htm.

2.9 In conducting its review, Oftel noted the significant difference between the average discounts applied to 0845 Local Call Fee Access ('LCFA') services from those to 0870 National Call Fee Access ('NCFA') services. As a result the direction established separate average discounts of 14.8 per cent for calls to 0845 services and 2.4 per cent for calls to 0870 services.

2.10 Despite operators’ ability, as granted by the NTS Statement, to choose new price points on the 0844 and 0871 number ranges, take-up of these new numbers has remained limited. As a consequence, at the time of Oftel’s review BT was unable to provide call revenue and discount information to demonstrate how it had set the appropriate level of discounts for these calls.

2.11 As a consequence Oftel did not make a direction in relation to the discounts applying to 0844/71 calls. The NTS Discounts Direction (2001) therefore stated that discounts for 0844/71 calls should remain at 11.75 per cent until sufficient data was available. Oftel stated its intention to review the discounts applied to 0844/71 as soon as BT could supply sufficiently representative data.

2.12 In September 2001 Cable & Wireless ('C&W') asked the Director to resolve a dispute between C&W and BT arising from BT’s refusal to remove the effect of all NTS discounts where C&W had requested that BT does not apply its retail discount schemes to C&W’s NTS number ranges. C&W argued that BT’s ability to vary its applicable discounts from time to time undermined the principles of the 1999 ‘NTS Statement’ (see paragraph 2.7).

2.13 Having considered the arguments put by C&W and other respondents to the consultation, on 31 May 2002, the Director published the Direction over C&W's proposal that calls to C&W's NTS number ranges should be excluded from BT's Retail Discounts (May 2002) known here as the ‘NTS Discount Opt-out Direction 2002’ (see www.oftel.gov.uk/publications/pricing/2002/nts0502.htm).

Operators are now able to exempt calls to their NTS services from BT’s discounts thereby achieving greater continuity of future revenues. However, indications are that operators and service providers are reluctant to migrate services onto the new number ranges provided by Oftel in order to benefit from the exemption.

Chapter 3

Information submitted by BT and calculation of discount levels

3.1 The current NTS regime provides for terminating operators to receive the difference between retail prices (net of discounts) and BT’s conveyance and certain retail costs. Once the level of discount is set, terminating operators have a degree of certainty as to how much revenue they will actually recover from NTS calls. As noted earlier, this is consistent with one of the objectives of the NTS regime, which is to provide terminating operators with the ability to exercise control over their terminating revenues.

Information sought by Oftel and submitted by BT

3.2 On 5 December 2001, Oftel submitted a request to BT for its most up-to-date revenue and discount data in relation to 0844/71 calls.

3.3 On 9 January 2002, BT met with Oftel, to discuss how it could best meet Oftel’s request for revenue and discount data. At that meeting, BT advised Oftel that a special interrogation would need to be written of BT’s 'Swift' database in order to extract an up-to-date record of the customer use of certain types of optional discounts (eg calling circles) on 0844/71 numbers. Prior to Oftel’s request no separate category existed within BT’s call measurement systems for 0844/71 calls. This meant BT was unable to provide historic revenue and discount information for these calls and the new interrogation could only measure results going forward.

3.4 Following Oftel's requests, BT provided the relevant information on 16 and 29 October 2002 and following the draft direction on 5 March 2003. In making this final direction Often has considered data provided by BT for the three months from 1 July to 30 September 2002. Often has also since received data for the following three months, although it continues to use the initial data. Often originally set the level of discounts for 0844 and 0871 in the absence of any available data. Therefore, it is appropriate to revise the level of discounts from a date immediately after data became available. Use of the three months 1 July to 30 September to set a charge from 1st October is consistent with Oftel's standard approach, which is to set future charges based on data for a relevant historical time period.

BT’s calculations

3.5 The basic principle of the calculation of discounts is that it is the difference between gross revenues, calculated on ‘headline’ retail prices, and the amounts due from customers.

3.6 The outline calculation undertaken by BT is as follows:

1. Gross revenues

Less

2. Discounts, including

- Standard real time discounts (eg BT Together)

- Calling circle (eg Friends & Family and Best Friend)

- Inclusive call allowances (eg within the Standard Line Rental and BT Together)

Plus

3. Option fees (eg additional ‘rental’ for BT together)

Equals

4. Net revenues

5. Discount % = (Gross – Net) / Gross

NB: This is an indicative summary based on the option schemes that relate to residential packages. The actual calculation of BT’s discounts includes both business and residential options.

3.7 Oftel is unable to publish details of call revenues and discounts supplied by BT, as these are considered to be ‘commercial-in-confidence’. However, Annex A contains a non-confidential table describing how each of BT’s discount schemes or packages applies to the range of services offered on 0844 and 0871 numbers. Oftel has also included, at Annex B, a narrative provided by BT describing the different types of discounts and attribution methodology used to produce the discounts.

3.8 BT supplied information for each of the call types contained in Annex A. BT supplied the data separated into categories for ‘internet’, ‘non-internet’ and ‘non-discounted’ rather than by number range (the September 2001 direction set separate discounts for calls to 0845 and 0870 numbers). This is because it is more appropriate to set discounts according to groups of chargebands where the applicability of BT’s various discount schemes is common. For example there is a marked differences in the applicability of discounts schemes between internet and non-internet calls which apply equally to both 0844 and 0871 calls in these categories – see Annex A. Taking these factors into account, Oftel considers that BT’s suggested split is more likely to result in BT transferring the correct amount of revenue to terminating operators than if it did not allow such a split.

3.9 BT’s discounts are a combination of ‘billed’ and ‘real time’ discounts. Billed discounts are only calculated during the billing stage, eg, calling circle discounts, such as ‘Best Friend’ and ‘Friends and Family’, give set percentage discounts on particular numbers nominated by the customer and are calculated by BT after calls are made. Real time discounts are calculated as the call is made, eg, BT Together packages provide for set discounts on particular types of calls or at particular times. As can be seen in Annex A, 0844/71 calls are generally not subject to any real time discounts.

3.10 Under BT’s current recording systems, real time discounts are relatively straightforward to measure and allocate to particular call types. However, BT’s systems do not allow it to directly allocate ‘billed’ discounts applicable to 0844/71 calls. BT in effect models how the total of these ‘billed’ discounts (eg Call & Save, Inclusive Call Allowances) should be attributed to each particular call type.

3.11 Option fees are fees paid by consumers over and above the BT Standard charge, and are the price paid to benefit from a particular discount scheme. BT attributed option fees according to a number of methodologies, please see annex B for further information.

3.12 BT could use a range of methodologies and degrees of granularity to attribute discounts and option fees to 0844/71 numbers, and for this final direction Oftel has sought to review whether BT has acted reasonably. Oftel has examined BT's methodology and considers it provides a reasonable basis for calculating actual discounts by call type.

3.13 The average discount directed for each call type is as follows:

Internet calls: 17.8%
Non-Internet calls: 0.1%
Non-discounted calls: 0.0%

3.14 The data used in this direction dates from 1 July to 30 September 2002 and has not, therefore, been reconciled to the relevant revenue figures in BT’s regulatory Financial Statements, which will not be available until some time after 31 March 2003.

Chapter 4

Comments received to the draft proposals and Oftel’s responses

Summary of the proposals contained in the draft direction published on 23 December 2002

4.1 Oftel proposed using discounts derived from data provided by BT for the period 1 July to 30 September 2002 in the draft proposals. These were namely:

For calls to Internet services: 17.8%
For calls to non-Internet services: 0.1%
For calls to non-discounted services: 0.0%

These discounts were to apply from 1 October 2002.

4.2 Oftel also proposed a change to the method used by BT to implement Oftel directions. In order to prevent operators from delaying implementation by BT of charge changes resulting from Oftel’s resolution of disputes, BT would no longer be required to obtain signed agreement by operators of such changes but should simply amend the Carrier Price List (CPL) to reflect the decision.

Comments received

4.3 Comments were invited on the draft direction and were received from BT, Energis, Easynet, Cable & Wireless (C&W) and a joint submission from Thus on behalf of itself, Easynet, Kingston Communications and Your Communications. These can be found on Oftel’s website at www.oftel.gov.uk/publications/responses/2003/nts1202_5/index.htm.

4.4 The key points raised by each operator are summarised below with Oftel’s response given after each point. Points made by more than one operator have not, in general, been repeated.

BT

Future discount calculations

4.5 BT stated how it was important for a methodology to be developed and agreed which enables the impact of BT NTS discounts rates to be implemented in a more efficient and timely way. To this end BT will supply the necessary financial data to Oftel at the same time as it issues future proposals to review its discounts. It added that by lodging supporting data with Oftel prior to the implementation of any changes that operators should be re-assured that, whilst retaining the ability to contest their resultant charges, that Oftel would have the opportunity to act if any discrepancy were found. BT hoped the industry would welcome such a methodology and stressed that BT was acting in good faith with the objective of reducing the number of future disputes.

Oftel’s response

4.6 Oftel is not able to certify that any of BT’s charge change proposals are correct in order to prevent disputes from arising. To do so may be ultra vires and would fetter the Director’s discretion in the event of any subsequent dispute. Oftel will only use the data to confirm or revise BT’s proposals in the event of a subsequent dispute. This, together with Oftel’s own revised casework procedures, is intended to assist speedy dispute resolution. Operators should not assume that BT’s submission of data to Oftel means that Oftel has approved this data.

Energis

Data timing

4.7 Energis was surprised that BT had been unable to supply its supporting financial data until July 2002 in order to enable Oftel to carry out its calculations. Given the length of time the NTS formula had existed BT should have anticipated the requirement for this data.

Oftel’s response

4.8 BT now has a system in place to supply data on discount rates in a timely manner. Operators should note that Oftel has not calculated BT’s discounts but has sought to review reasonableness of the discounts calculated by BT.

Inclusive Call Allowance (ICA)

4.9 Energis restated its concerns over the way ICAs are allocated and found nothing in Oftel’s draft direction to provide any comfort. Energis believed that ICAs should be applied only to BT owned traffic. This could be achieved by apportioning all ICAs to geographic rather than NTS traffic so that BT and non-BT NTS traffic were treated equally.

Oftel’s response

4.10 Oftel has considered whether to include ICAs as relevant NTS discounts in paragraphs 5.7 to 5.9 of the NTS Discounts Direction (2001).

4.11 This direction deals only with the inclusion of ICAs in BT’s NTS discounts. Any fresh allegation that ICAs are anti-competitive must be submitted through Oftel’s normal complaint procedures. Under BT’s current discount arrangements, ICAs apply both to geographic and certain NTS calls, and in Oftel’s view the extent to which they apply should be included in NTS discounts. On this basis, BT’s apportionment of ICAs to all call types on the basis of the eligible revenue appears reasonable and equitable.

Numbering

4.12 Energis commented that the Discount/Non-Discount column on the 1k number block table within Oftel’s Specified Numbering Scheme (SNS) is being used in an inconsistent fashion. This made it unclear whether or not discounts including ICAs applied to particular number ranges. It also believed that inconsistencies between the various reference documents, such as the SNS and BT’s Retail Price List, would make it difficult for operators to calculate invoices to BT.

Oftel’s response

4.13 Oftel has set aside specific sub-ranges for Internet number blocks opting out of BT’s retail discount schemes, and these are indicated on a dedicated column on the SNS and on the 08 number application forms. Under the current column heading of ‘Discount/Non-Discount’, it could be assumed that a blank column indicated that the block is eligible for BT’s discounts. However, what the column is meant to show is that Oftel has allocated the block as non-discount, and not whether the tariff for the block attracts discounts according to BT’s Retail Price List. Oftel still believes there is a benefit in clearly indicating on the SNS which Internet sub-ranges have been set aside to opt-out of BT’s discounts, but proposes to re-label the column in the SNS to avoid confusion. Oftel and BT are looking at ways to ensure the information shown on the SNS and the BT Price List is consistent, but Oftel stresses that the purpose of the SNS is to give a comprehensive record of the status of all number ranges, codes and blocks and not to indicate BT chargebands.

Review of NTS

4.14 Energis stated its belief that Oftel’s proposals for implementing future directions had not been given sufficiently robust consideration. Energis cited inconsistencies in various BT reference documents such as the SNS and BT’s Retail Price List which make it difficult for operators to calculate their NTS invoices to BT. Energis further stated that such a change should not be pursued when the whole NTS regime may change after July 25 2003 with the implementation of the new EU Directives. Oftel should simply direct discounts for discounted and non-discounted services possibly using the rates for 0845 and 0870 services set by the NTS Discounts Direction (2001) as a proxy.

Oftel’s response

4.15 BT applies the standard local rate discounts to 0845 calls but does not apply national rate discounts to 0870 calls In the case of 0844/71 BT applies different discounts according to the type of service. If, for instance, all 0844 calls were to attract the same average discount operators terminating non-internet services would be subsidising those who terminate only internet services. This is clearly inequitable.

4.16 In regard to not making any changes due to the introduction of the new regulatory regime in July 2003, the Director has intervened in this case for the reasons set out in chapter 5, using the powers available to him in Regulation 6(3) of the Regulations. The Regulations set out the general responsibilities of the Director and it is these responsibilities that the Director currently has to satisfy in this case.

Non-discounted number ranges

4.17 Energis concluded by saying that the final direction should explicitly state "that non-discounted services should have been regarded as such for the purposes of the NTS calculations since any ranges were opened up on the BT network".

Oftel’s response

4.18 Oftel can confirm that calls to non-discounted number ranges do not attract BT’s NTS discounts. When operators are allocated non-discounted numbers by Oftel and ask BT to open access, the non-discounted payments are agreed as part of the supplementary agreement to the BT SIA. Only calls to discounted numbers have attracted the average discount of 11.75 per cent prior to 1 October 2002 and will attract the directed discounts thereafter.

Easynet

Data sample

4.19 Easynet expressed concerns over the time period and statistical validity of the information used to determine the disaggregated discounts. Easynet argued it may be possible, if the volume sample was small for distortions to occur through particular ISPs encouraging their retail customers to opt for maximum discounts. This may skew the final discount level for internet calls for all other terminating operators.

Oftel’s response

4.20 Oftel does not consider it likely that the actions of individual ISPs are likely to distort discount levels. Indeed it is unlikely that any ISP would actively encourage their customers to choose to have calls discounted knowing that discounts reduce ISP’s revenues.

Date of direction

4.21 Easynet questioned why Oftel had opted to make the direction effective from 1 October 2002, other than this being the date immediately following the period of BT’s data sample. Easynet also suggested that Oftel seek to set the final charge using six months data to December 2002. Easynet believed a more sensible start date should be 1 April 2003 to coincide with other regular wholesale price changes.

Oftel’s response

4.22 Oftel’s choice of 1 October 2002 as the effective date of this direction is based on the availability of data. In choosing this date Oftel has considered the circumstances leading to this direction (ie the unavailability of data when other discounts were set). It appears reasonable and proportionate to select a date immediately after data became available . In regard to obtaining a further three months of data, Oftel does not believe this would materially enhance the accuracy of the discount calculation. The information supplied by BT included a 100 per cent sample of all 0844/71 calls made over the three month period and is considered sufficiently accurate for the purposes of this direction.

4.23 In addition Oftel has received suggestions from other operators offering alternative effective dates (see below). These vary according to whether the operator terminates significant amounts of internet or non-internet traffic and whether their terminating payments will increase or decrease as a result of this direction.

Audited data

4.24 Easynet believed it would be more appropriate to use historical audited data that could be verified by Easynet and other operators. This would be especially the case when BT itself sets future discounts.

Oftel’s response

4.25 The use of audited data in setting discounts would be an ideal situation. However, given that BT’s regulatory Financial Statements are rarely available until several months after the end of each financial year, this would mean that BT’s discounts could not have effect until long after the end of the measured period. Oftel receives conflicting arguments about whether historic (relating to earlier financial periods), actual or forecast data should be used depending on whether BT’s charges are increasing or decreasing over time. In practice, and for consistency, BT and Oftel have, since October 1997, set charges using historic data for the preceding financial year rather than actual or forecast data for the period of the charge. However, the nature of the information necessary to set charges is not in the same format and is more granular than the information contained in BT’s Financial Statements.

Non-discounted numbers

4.26 Easynet made a number of comments about delays in BT’s processes for opening non-discounted number ranges.

Oftel’s response

4.27 Following publication of the NTS Discount Opt-out Direction 2002, Oftel held discussions with BT over the number ranges to be used for non-discounted internet and non-internet services and how BT’s Retail Price publications could adequately inform consumers of these. This did lead to some delay in Oftel issuing non-discounted numbers and, combined with BT’s lead times for enabling new price points, has meant operators have had to wait for their non-discounted services to become operational. Operators should now be able to readily offer access to non-discounted numbers.

Future review

4.28 Easynet commented that no date for any future review of 0844/71 discounts had been set and believed that it was inappropriate to carry the draft discounts forward for a year based on three months data without a commitment to monitor and revise the figures in the event of changes.

Oftel’s response

4.29 Oftel comments that recent trends in BT’s NTS discounts have shown a significant upward movement. Oftel has no plans to intervene in setting future NTS discounts in the absence of future disputes. It is for BT to monitor its discounts and propose changes when it believes these are necessary or for operators to seek to negotiate changes with BT.

Internet, non-Internet

4.30 Easynet noted the lack of any definition of Internet and non-Internet services and asked who would police this.

Oftel’s response

4.31 Oftel’s numbering unit relies on the operator seeking new number ranges to state their purpose. Oftel believes the difference between internet and non-internet services is fairly fundamental. However, if operators chose to abuse this in order to secure lower discounts, and therefore higher payments, for calls to internet services it would be for BT to take appropriate action. 

List of chargebands

4.32 Easynet commented on the absence of any link between the two categories of calls and the BT charge bands which prevented service providers from knowing which discounts applied to the various calls. Oftel should provide a list of relevant BT charge bands showing discounts and service category.

Oftel’s response

4.33 The SNS shows each 10k (or 1k for Internet) block, the price point and for 0844/0871 Internet numbers, whether it is discounted or not.

Cable & Wireless

Discounts for Internet services

4.34 C&W said it was not clear, without access to BT’s methodology, why the discount applying to internet services was so high compared to the discounts applying to non-internet and other NTS number ranges.

Oftel’s response

4.35 Oftel refers operators to the table at Annex A to this direction. From this it can be seen that calls to internet services qualify for ICAs and BT’s Friends & Family/Best Friend and Key Numbers discount schemes whereas calls to other 0844/71 services do not. It is common for internet users to include their dial up number as their ‘best friend’ in order to reduce their costs of internet access.

4.36 The principal reason why the discount rates will differ from those applying to other NTS numbers is because there is variation in the applicability of BT's various option schemes to different number types. It is for this reason that Oftel asked BT to provide it with a discounts applicability schedule (reproduced at annex A) so that this variation can be scrutinised without consulting BT's Price List in detail. For 0845 calls, discounts are currently set at 14.8 per cent which is three percentage points lower than that determined in this document for internet 0844/71 calls, [but note that the 0845/70 discounts were set from 1 September 2000 using data for the three month period 1 October to 31 December 1999

Internet, non-Internet

4.37 C&W echoed Easynet’s concerns over the definitions applying to internet and non-internet services and the potential for service providers to ‘game play’ in order to maximise their revenues. C&W added that it is not always clear to terminating operators whether a service is an internet service or not. C&W also questioned how discounts could be applied according to service type back to October 2002 and that it was not sufficient to rely on BT’s interpretation of service type.

Oftel’s response

4.38 Oftel points out that BT’s interpretation of service type is not based on its own discretion but on the use of number ranges allocated by Oftel for internet and non-internet services. When operators apply to Oftel for numbers in the 0844/0871 ranges, Oftel’s Numbering Unit checks whether the service is voice or data and that the application is for blocks in the appropriate range. As specific 1k blocks have been set aside for internet only use, the allocated number block would then denote whether the service was voice or internet. The Numbering Unit now asks operators for what any new number ranges being applied for are to be used. It does not use any particular definition of internet service and generally accepts the operator's description. It is therefore the operator’s responsibility to understand what services their service provider customers are offering.

Numbers for non-discounted services

4.39 C&W asked Oftel to confirm that operators are able to exempt internet services from BT’s discounts and added that it may be helpful for Oftel to identify specific 10k number blocks for non-discounted services. This is so that these services are clearly identifiable and can not be inadvertently included in discount schemes.

Oftel’s response

4.40 Oftel confirms that specific number ranges have been set-aside for non-discounted internet services and that the SNS, 08 number block application forms and the notification of number allocation clearly identify the non-discounted status. Also, the non-discounted status for 10k non-Internet blocks is marked on the notification of number allocation.

Date of direction

4.41 C&W strongly questioned the choice of 1 October 2002 as the effective date for 0844/71 discounts. C&W referred to Oftel’s September 2001 Direction of BT’s NTS Discounts and, in particular, Oftel’s statement that "the Director currently intends to consider whether it is appropriate to backdate any subsequent change in the level of discounts for these number ranges". C&W held that operators have a legitimate expectation that the matter will be properly considered, and a fully reasoned position made available where a decision is taken not to backdate. It added that the only justification given in the draft direction was that there were no compelling reasons to apply retrospection in this case.

4.42 C&W added that the level of discounts that Oftel is proposing to impose as a result of this Direction are sufficiently different from those applying to other NTS numbers to indicate that these numbers are treated quite differently from other number ranges. In this situation, retrospection may have a significant impact for various OLOs, and Oftel has a duty to consider this. It is not clear from the discussion in the draft Direction that Oftel has even taken this factor into account. If this is the case Oftel would clearly be dereliction of its duties.

4.43 C&W further argued that there were other compelling reasons for applying retrospection. These surrounded the dispute over BT’s refusal to remove operators’ number ranges from its discounts which culminated in the ‘NTS Discount Opt-out Direction (2002)’. C&W expressed its concerns over the requirements of that direction and the significant costs to operators in having to change number ranges in order to opt out of discounts for existing services. This has led to a limited take up of these services by operators. As a result the benefits of opting out are only available to new services. Given that these new services were opened on ranges specifically to benefit from opting out of BT’s discounts it is reasonable to expect retrospection.

4.44 C&W also noted that without retrospection there was no incentive on BT to undertake work in a timely manner. Where operators must rely on information from BT before a final decision can be reached, retrospection incentivises BT to respond quickly. Without retrospection BT, like all incumbents, has an incentive to delay in order to retain the incremental value that accrues over the period of the delay.

Oftel’s response

4.45 Oftel confirms that retrospection of this direction was fully considered. In most cases, a retrospective decision represents a transfer of revenue between operators without a direct feed through to consumer benefits. The Director considers that decisions should only be made retrospective when there are clear and compelling reasons for doing so. As explained in paragraph 3.4, Oftel considers that the revision of the discounts should be from a date immediately after relevant data became available.

4.46 Retrospection, in this case, may benefit operators who terminate predominately non-internet services but would penalise those operators who host mainly internet services. Oftel has taken a balanced view of all the factors in this case, including the reasons why the current revisions were delayed, in reaching its decision to apply these discounts from 1 October 2002, the date immediately following the period of the information sample.

4.47 Oftel does not agree, that BT’s initial refusal to remove C&W’s services from its NTS discounts and Oftel’s NTS Discount Opt-out Direction (2002) which did not allow operators to opt out of discounts without moving to new number ranges, meant that the new discount levels should apply retrospectively as a form of compensation. Here again, if retrospection were to apply, any benefit would only be felt by operators terminating predominantly non-internet services to the possible disbenefit of other operators.

Audited data

4.49 C&W’s final point on this issue noted that the information on which this direction has been based has not been reconciled to BT’s regulatory financial statements. C&W asked if, for any reason, the audited figures differ from the directed discounts, will Oftel reconsider the directed figures.

Oftel’s response

4.50 This direction has been made using the best data available to enable Oftel to review BT’s proposals. Oftel is working with BT to ensure information supplied in conjunction with future discount change proposals contains as much supporting evidence as possible to enable Oftel to review the figures in the event of any subsequent dispute. There are no plans to re-establish any process of re-examining directions when audited data is available.

ICAs

4.51 C&W asked for further clarification of how the ICA had been applied to the different call categories and for further clarification on option fees, stating that the information in annex B is insufficient.

Oftel’s response

4.52 Oftel confirms that (in line with annex A) the ICA has been apportioned to Internet calls only, and not to non-internet and non-discounted services. In relation to option fees, annex B has been augmented to give an illustrative example of how option fees are calculated.

Thus on behalf of itself, Easynet, Kingston and Your Communications

Retrospection

4.53 The operators held that it was inappropriate for Oftel to apply the internet discount retrospectively to October 2002 when operators have not had the opportunity to have their internet services exempted from BT’s discounts until now.

Oftel’s response

4.54 Oftel believes the variation in operators’ views reinforces its decision to apply the direction from a date following the period of the information sample and not for reasons driven by differing operator aspirations.

4.55 The NTS Discount Opt-out Direction (2002) has now been fully implemented by BT after some initial delays. These delays occurred in meeting operators requests and were in part due to the need to identify appropriate number ranges for non-discounted services and for BT’s Price List to be able to clearly detail these. In any event the scope of this direction does not extend to compliance by BT with earlier directions.

Implementation

4.56 BT confirmed it would apply the implementation methodology proposed by Oftel in the draft direction and repeated in the draft direction of BT’s NTS retail uplift.

4.57 Some operators, however, expressed concerns over the proposals which would have allowed BT to implement changes required by this direction without having to obtain operators’ agreement through signed pricing letters. The operators considered that BT should copy new CPL entries to operators prior to formal publication to give an opportunity for any errors to be identified and queried.

4.58 As a result Oftel’s proposals have been modified to reflect as near as possible the OCCN process and timescales currently in place. Details of the revised implementation process can be found at paragraphs 5.11 to 5.18 of this document.

4.59 It should also be noted that the implementation process set out in chapter 5 applies only where stipulated in an Oftel direction. This direction is not seeking to impose a change to the implementation process generally and where no such implementation requirement is made in an Oftel direction BT’s published price change notification procedures will apply.

Chapter 5

The Director’s Final Decision

5.1 The Director has considered the requirements of the Interconnection Directive as implemented in the Telecommunications (Interconnection) Regulations 1997 ('the Regulations'). In this instance the final direction is issued under the provisions of Regulation 6(3).

Exceptional circumstances

5.2 In making a final direction under Regulation 6(3) the Director is required to demonstrate that exceptional circumstances require him to intervene in the matter concerned. BT’s previous attempts at reviewing its NTS Discounts have resulted in its proposals being rejected by significant numbers of operators. The reasons given by operators centre around BT’s refusal to include details of the calculations used in setting its discounts owing to the commercial sensitivity of the data used.

5.3 In the absence of sufficient data, operators have no means of validating whether discounts have been applied correctly to their calls. In addition, the combination of new discount schemes and the increasing take up of these schemes has meant that average discounts increased with each review. These factors have led operators to dispute BT’s proposals and subsequently to seek to have calls to their services excluded from BT’s discounts.

5.4 BT’s regulated retention for originating NTS calls entitles it to retain its relevant network and retail costs. These are subtracted from the net retail price for calls, after discounts, to give the outpayment paid to terminating operators. It is important therefore that the average discounts given by BT to its retail customers are calculated using the most accurate available data to ensure terminating operators receive appropriate payments for their calls. Failure to do so may distort the NTS market and lead terminating operators to set higher than justified retail prices for calls to their services creating a disbenefit to consumers.

5.5 Oftel is currently in discussion with BT about ways in which BT could review its charges to offer a greater degree of transparency without compromising commercially confidential information. In the meantime it must be recalled that Oftel undertook in the NTS Discount Direction (2001) to review 0844/71 discounts when data became available. Oftel also considers that, until BT can satisfy operators of the validity of its discounts, any attempt by BT to set actual discounts for 0844/71 may result in yet another dispute. This, and the potential impact on the NTS terminating market of the determined discount rate different from the actual underlying discount rate, creates the exceptional circumstances which justifies Oftel’s intervention in this matter. 

The requirements of the Regulations

5.6 The Director’s final direction is based on an analysis of the facts and relevant information which has been supplied to him. He has given careful consideration to the criteria set out in Regulation 6(1) of the Regulations. In particular, he has considered the need to stimulate a competitive market, the aims of maximum economic efficiency and the maximum benefit to end-users.

The Final Decision

5.7 Having sought information from BT and reviewed its methodology and the supporting figures used for calculating the discounts, as described in chapter 3, the Director has reached his final decision in this matter. Accordingly he directs that, with effect from 1 October 2002, BT’s average discounts for calls to operators services operating on 0844 and 0871 numbers shall be:

For calls to Internet services: 17.8%
For calls to non-Internet services: 0.1%
For calls to non-discounted services: 0.0%

5.8 Oftel considers that it is appropriate for the change to have effect from a date immediately following the period over which the supporting data was obtained.

Effective date

5.9 The Director has decided that this direction shall have effect from 1 October 2002. Oftel does not propose to require BT to apply the level of discounts resulting from this review retrospectively, beyond 1 October 2002.

5.10 In September 2000, insufficient information was available to allow discounts for 0844 and 0871 discounts to be set and the Director took a decision to set the discounts at 11.75 per cent. In the interests of certainty and stability, there must be compelling reasons to retrospectively adjust a charge particularly where the charge has been set based on the best information available at a point in time. It is the Director’s opinion that no such reasons exist in this case and 1 October 2002 is an appropriate date.

Implementation of the Direction

5.11 In the draft direction, Oftel proposed changes to the process used by BT to implement Oftel directions through publication of pricing letters and OCCNs.

5.12 A number of operators expressed concerns about how, under the proposed new process, perceived errors in BT’s implementation of the Director’s decision would be addressed. Oftel has considered these concerns and concludes that the implementation process in this direction should offer similar opportunities in terms of time for highlighting genuine errors in BT’s change proposals and subsequent negotiation and dispute, as the process already in operation for OCCNs.

5.13 The main difference compared to the current OCCN procedure, for the purposes of implementing this direction, is that the Operators will not have to notify their approval of BT’s proposed changes within 14 days of receipt of the proposed changes. Instead, such approval will be deemed after 14 days in the absence of the Operator notifying BT otherwise as set out below.

5.14 The Director wishes to note that the implementation method set out below is aimed at recognising and addressing operator concerns that genuine errors may occur in the process of implementing this direction. The method set out below is not a means of challenging the decisions made by the Director in this direction.

5.15 Accordingly, and only in relation to the changes resulting from this direction, as soon as possible following publication of this final direction, BT will notify operators of the changes it proposes to make to the CPL in order to implement this direction. Operators will then have 14 days from receipt of the proposed changes to notify BT in writing of any concerns with BT’s proposed changes to the CPL stating why that Operator believes that the proposed changes do not correctly implement this direction. If an Operator is satisfied that the proposed changes do correctly implement this direction, there will be no requirement to notify BT of its approval of the changes.

5.16 If, after the 14 days, no formal concerns are notified to BT, the proposed changes to the CPL will be deemed to have been approved and BT shall include the changes in the CPL.

5.17 Where an operator does raise concerns that BT’s proposed changes do not correctly implement this direction BT and the Operator shall have a further 14 days to seek to reach agreement as to the proposed changes so that they do correctly implement this direction. If the parties fail to reach agreement within the further 14 days either party may, not later than 1 month after the expiry of the second 14 day period, refer the matters in dispute to the Director.

5.18 Until agreement of the proposed changes is reached by the parties, or the proposed changes are determined by the Director as a result of a dispute, the charges currently contained in the CPL shall continue to apply. The new changes, once agreed, shall then be included in the CPL.

Annex A

Applicability of BT Option Schemes by call type

Highway

Additional charges for Highway are allocated to Highway rentals.

Option Fees

Fees are allocated to call type with the total value of discount each call type receives

Surftime within BT Together

The fee allocated to Surftime for the BT Surf Together and BT Surf & Talk Together Options is the same fee for the stand alone Surftime Evening & Weekend option.

ICAs

ICAs are allocated to eligible call types in line with the call revenues of the call types. The call revenues are at Option prices (eg Together/Commitment prices), excluding the discounts applied at the billing stage (eg excludes F&F/Op15/Choices discounts).

Details of BT's charge bands and the number ranges to which they apply can be found in the BT Price List at:

http://www.serviceview.bt.com/list/current/docs/Call_Charges/00161.htm; and
http://www.serviceview.bt.com/list/current/docs/Call_Charges/00161.htm.

Annex B

Introduction

BT has introduced a range of customer packages which offers discounts to certain call types, normally for the additional payment of a quarterly fee. Some discounts are calculated during the billing process whereas others are priced directly when the call is made. This document aims to provide an overview of the overall impact on call revenues, relating in particular to the production of the discounts presented to Oftel in the NTS discount submissions.

Summary of discounts/packages

The following table lists the options relevant to the NTS discount submissions for the period 2001/02 – 2002/03. Each category is labelled as:

• Billed – calculated within billing process, or
• Real time – calculated as call is made

Table cont

Note: Business Complete Savings Plans are split out to the individual packages of Choices and Key products. Highway versions of the Together options are included.

Combinations allowed

• Only one Standard option (billed or real time).
• A Calling Circle is allowed with any standard combination.
  
• One Call Allowance (all non LUS residential customers qualify for a standard allowance).
• Supplementary Real Time options allowed in combination with any Standard Billed option.

Call types

For the complete allocation of discounts, the call revenues (for PSTN, ISDN and Highway) were split into the following main categories:

Local geographic and non geographic
National geographic and non geographic
IDD
Fixed to Mobile
Directory Enquiries
Premium Rate Calls
Surftime Calls
Other

The call types presented to Oftel for the NTS discount submissions are local non geographic, national non geographic and Premium rate calls.

Data systems used

To cover both billed and real time discounts, a number of data systems need to be used:

CSCS (Call Statistics Centralisation System)

• Main financial system for the measurement of call revenues.
  
• Daily feed produces call revenues by call type by time of day in total and by OSC package, revenues are post OSC.
  
• Revenues are as earned within a time period.
  
• Daily feed produces call revenues at standard prices by call type by time of day by OSC package.
  
• CSCS is call based and cannot measure bill based discounts

Swift

• Database primarily sourced from billed data (revenues are all post OSC prices)
• Two specific reports are used in the analysis of call discounts:
  
  
• Accounts, billed call revenue by call type by customer package and billed discount by standard option, threshold options and calling circle by customer package combinations.
• Calling Circle discounts by call type

Real time (OSC) discounts

Discounts from all OSC products are directly measured by CSCS on an accrued basis. The discounts include the effects of minimum fee and time of day.

Note: Calls priced at 0 pence per minute are only local geographic and national geographic for the BTT Local and UK options. NTS calls on these options retain the standard BTT prices. All Surftime calls priced at 0 pence per minute are in the Surftime call type, not in local NTS.

Billed discounts

All bill related discounts are applied to revenues post OSC prices. Billed discounts come from standard packages, call allowances and/or calling circles. Further, these discounts are additive i.e. each discount is applied to the billed call spend.

The total billed discount is measured in the financial systems but is not directly available by call type or by option.. To provide the level of detail required for the NTS submissions (discounts by each option, by call type), the discounts are attributed based on the reports from SWIFT. In Swift, the billed discounts are reported separately for standard packages, threshold options (eg call allowances and Call & Save) and calling circles.

The billed discounts by each type of option are attributed to call type in four steps as follows:

Standard options

Discounts from standard packages can be allocated directly from the billed data by package by call type, as the discounts are a set percentage for each call type (eg 11 per cent on local, national and IDD and 0 per cent on other calls for Option 15).

For Call & Save, the total Call & Save and call allowance discount is calculated based on the average bill of eligible revenues and aligned to the Swift reported threshold discount for Call & Save, which covers both. The Call & Save element is then apportioned to the eligible call types in line with the total billed revenues of those call types.

Call allowances

The total call allowance is based on the reported Swift threshold discount. The allowance discount is allocated to call type in proportion to the eligible billed revenue by option.

Calling circles

Calling circle options give set discounts on particular numbers nominated by the customer (within defined restrictions on call types etc). The amount of calling circle discount is dependent on the choice of numbers.

The total amount of calling circle discount is reported by Swift.

The apportionment of calling circle discounts to call type is applied using the directly measured Calling Circle report.

Adjustment to earned revenues

All the above apportionment is based on billed data. The billed results are aligned to the earned revenues by call type and to total earned discount for each quarter before use.

Option fee attribution

For products where there is a fixed fee (eg BT Together), the option fee element is the amount in excess of the standard rental. 

Apportionment for business

Total business option fees are apportioned to call type in line with total business billed discounts.

Apportionment for residential

For residential option fees the following call allocation rules are applied:

Apportioned to call type in line with total residential billed discounts:
Option 15, F&F overseas, BT Together, BT Working Together, BT Working Together Talk

Apportioned directly:

BT Surf Together: all to Surftime
BT Together Local Option: all to local geographic
BT Together Local & Surf Option: half to local geographic, half to Surftime
BT Together UK Option: all to national geographic
BT Together UK & Surf Option: a third to local geographic, a third to national geographic, a third to Surftime
Surftime EveningWeekend and Anytime: all to Surftime

0844/0871 calls

The requirement to report on discounts to 0844/0871 calls has led to the development to identify additionally the following call types due to the eligibility to specific discounts:

0844/0871 – Internet calls
0844/0971 – non Internet calls
0844/0871 – no discounts

0844 Internet calls benefit from the additional BT Together ICA but not from any BT Together call discounts. Fees were allocated as follows:

Total BTT OSC call discounts = OSC
Total BTT ICA = ICA(tot)
Total BTT additional ICA = ICA(add)
Total BTT fees = F
Fees allocated to ICA(add) = F(add)
BTT ICA allocated to 0844 = ICA(0844)

Add ICA benefit % = ICA(add)/(ICA(add)+OSC)
F(add) = Benefit % * F
Fees allocated to 0844 = ICA(0844) * ICA(add)/ICA(tot) * F(add)

Worked examples using illustrative figures and details of spreadsheet formulae follow on the next two pages.

Table 1 – Worked example of attribution of option fees