Contents

Determination

Explanatory Memorandum

Schedule 1

Schedule 2

DETERMINATION

WHEREAS

(1) On 2 December 1999, the Director General of Telecommunications ("the Director") determined that the parties should reach agreement, including agreement on charges, by 10 April 2000 for the provision of indirect access by INMS to BTCellnet’s post-pay subscribers (and to BTCellnet’s pre-pay subscribers by a date to be the subject of a further determination by the Director).

(2) Since by 10 April 2000 the parties had not reached an agreement and, in particular, they had not reached agreement on charges, the Director, as indicated in the Explanatory Memorandum to the 2 December 1999 Determination, set interim charges for the provision of indirect access services by BTCellnet to INMS in his Determination of 18 May 2000, for both post-pay and pre-pay customers.

(3) The 2 December 1999 Determination also provided that, when the Director made a final Determination of the charges, the parties should incorporate these Final Charges in their agreement with effect from the start of the agreement.

(4) Both parties were sent drafts of the Final Charges Determination and Explanatory Memorandum which contained the Director’s reasons and were invited to comment and comments were received from INMS (17 and 19 July 2000) and BTCellnet (13 and 20 July 2000).

(5) The Director has taken account of the comments received from the parties, the key elements of which, in so far as they are within the scope of this Determination, are discussed in the Explanatory Memorandum which accompanies and is published with this Determination.

(6) BTCellnet is able to provide IA services only to those of its pre-pay customers who are served by its IN (Intelligent Network) platform. ("IN pre-pay customers")

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 DETERMINATION:

(i) The Director has determined that the final charges to be paid by INMS to BTCellnet for the provision to INMS of IA services for the benefit of BTCellnet customers on the BTCellnet30 ("BTC30") tariff shall be as set out in the attached Schedule 2 of this Determination and is further explained in the Explanatory Memorandum.

(ii) The Director has also determined that the charges to be paid by INMS to BTCellnet for the provision of IA services to INMS for the benefit of BTCellnet customers on other post-pay tariffs, and for the provision of IA services to INMS for the benefit of BTCellnet IN pre-pay customers (whether BTCellnet’s services are provided via tied service providers (TSPs), via independent service providers (ISPs), or directly by BTCellnet) shall be derived by the same process as has been used in setting the charges for customers on the BTC30 tariff. This process is summarised in the formulae in Schedule 1 of this Determination and is further explained in the Explanatory Memorandum.

(iii) This Determination shall have effect from 21 July 2000.

(date)                                                                                                                         

(signature)

Director General of Telecommunications

Back to Contents

Schedule 1

Application of Oftel calculations of interim charges for indirect access on BTCellnet network (as used for the BTCellnet 30 tariff set out in Schedule 2) to other tariffs.

A. For any given retail consumer post-pay tariff, the corresponding IA charge should be calculated by applying the following formula:

C= ((RRP*0.976)*0.798) – OP

Where

C is the charge to be made to the IA operator

RRP is the recommended retail price (exclusive of VAT)

OP is the outpayment made to the terminating operator (and any transit operator) for that call at that time of day.

B. For any given retail business post-pay tariff, the corresponding IA charge should be calculated by applying the following formula:

C= ((RRP*0.955)*0.798) – OP

Where

C is the charge to be made to the IA operator

RRP is the recommended retail price (exclusive of VAT)

OP is the outpayment made to the terminating operator (and any transit operator) for that call at that time of day.

C. For any given pre-pay tariff, the corresponding IA charge should be calculated by applying the following formula:

C= (RP*0.762) –OP

Where

C is the charge to be made to the IA operator

RP is the retail price (exclusive of VAT)

OP is the outpayment made to the terminating operator (and any transit operator) for that call at that time of day.

Oftel

July 2000

Back to Contents

Schedule 2

* These charges relate to ‘on net’ calls the provision of which is not included in IA services currently offered by BT Cellnet. However, Oftel expect ‘on net’ calls to be included in the provision of IA services as soon as the logistical problems, which have prevented their immediate inclusion, have been overcome.

Oftel

July 2000

Back to Contents

DETERMINATION UNDER PROVISIONS OF REGULATION 6(6) OF THE TELECOMMUNICATIONS (INTERCONNECTION) REGULATIONS 1997 (THE "REGULATIONS") TO DETERMINE FINAL CHARGES FOR THE PROVISION OF INDIRECT ACCESS ("IA") SERVICES BY TELECOM SECURICOR CELLULAR RADIO LIMITED ("BTCELLNET") TO INTELLIGENT NETWORK MANAGEMENT SERVICES ("INMS")

Explanatory Memorandum

Background

1. INMS, an International Simple Voice Resale (ISVR) operator is in dispute with BTCellnet concerning the provision of Indirect Access (IA) services by BTCellnet to INMS. BTCellnet is a holder of licences under Section 7 of the Telecommunications Act 1984 and under the Wireless Telegraphy Act 1949. It has also been notified to the EU Commission as having Significant Market Power (SMP) in the mobile market under the Interconnection Directive (ICD).

2. INMS asked the Director to resolve the dispute under Article 9(5) of the ICD.

3. After public consultation (consultation document: Customer choice: Oftel’s review of indirect access for mobile networks issued in February 1999 in conjunction with Oftel’s parallel consultation document: Competition in the Mobile Market), the Director issued his Statement in July 1999: Oftel’s review of the mobile market announcing his conclusion, having taken account of the views expressed in the consultation, that BTCellnet should be required to provide IA services to INMS.

4. After discussion with the parties, and having taken into account their representations, the Director on 2 December 1999 made his Determination on the manner in which, and the timetables by which, IA should be provided.

5. To cater for the event that the parties were unable to reach agreement on the charges, the 2 December 1999 Determination also provided for the Director to make an Interim Charge Determination which should be followed, after more detailed consideration of the calculations, by a Final Charges Determination.

6. Since the parties did not reach agreement within the timetable set (10 April) by the 2 December 1999 Determination, the Director, in an Interim Charge Determination issued on 18 May 2000, set the IA charges on the basis of the best information then to hand. Following this Interim Charge Determination, Oftel and the parties have held further discussions about the basis on which the IA charges should be established and Oftel and BTCellnet have refined the information to be used in working out the charges.

The Final Charges Determination

7. In this Final Charges Determination, the Director now determines:

a. in Schedule 2, the final IA charges to correspond with BTCellnet’s BTC30 retail tariff for consumers (to act as an illustration of the application of the formula Oftel has designed to derive IA charges from retail prices); and

b. in Schedule 1, the formula that underlies the charges in Schedule 2 as the basis on which BTCellnet will calculate IA charges to correspond with other retail prices. There are three versions of the formula to cover, separately: BTCellnet’s postpay consumer customers; BTCellnet’s post-pay business customers; BTCellnet’s pre-pay customers served by its IN platform.

c. In the case of BTCellnet customers who are served through independent service providers (ISPs), the IA charges will be the same as those calculated for tied service providers (TSPs) customers who have the same wholesale tariffs as BTCellnet uses to bill the ISP. (This is because the ISPs would otherwise, have to tell BTCellnet exactly what their actual retail prices are customer by customer. This would be complex and, potentially, put at risk commercially confidential information.)

8. The three versions of the formula in Schedule 1 are designed to take account of different conditions that apply to different BTCellnet customers: on the one hand, in terms of the way their actual retail prices are derived from recommended retail prices (RRPs); and, on the other hand, in terms of the BTCellnet costs involved in serving them. The formulae distinguish between those BTCellnet post-pay customers who are on consumer tariffs and those that are on business tariffs (because the actual retail prices they pay are different because different discounts are applied to the RRP for business customers compared with other customers). The formulae also distinguish between BTCellnet customers on post-pay (contract) terms and those on pre-pay terms since the BTCellnet costs differ (primarily in that the pre-pay customers costs include the costs of the voucher system), and hence, the total retail costs to be deducted for pre-pay customers’ IA charges are a different proportion of the retail prices.

Basis of the Final Charges – retail price starting point.

9. For the Interim Charge Determination, Oftel used the Recommended Retail Prices (RRPs), supplied by BTCellnet, as the basis for the IA charge from which the "minus" elements would be deducted. These RRPs are not necessarily the prices that exist in the market place and against which the IA operators have to compete. Service providers have varying degrees of pricing freedom to adjust to customer demand. In BTCellnet’s case, their tied service providers (TSPs), who sell to the consumer market, on average allow a discount on the RRP of 2.36% (rounded to 2.4%); those who sell to the Business market on average offer a discount of 4.5%.

10. Hence, the single formula for post-pay customers in Schedule 2 to the Interim Charge Determination has been replaced by two formulae: one for customers on consumer tariffs and one for customers on business tariffs. These formulae differ from that of the Interim Charge Determination in that before any deductions are made for "retail minus" elements in the IA charge, the retail price starting point is adjusted to allow for the TSP discounts which produce actual prices in the market place lower than the RRP. The adjustments reflect the average discounts the TSPs apply on the one hand to business customers and on the other hand to other customers, set out in paragraph 9 above.

11. In principle, similar adjustments should be defined and applied to BTCellnet customers who are served by ISPs to reflect the differences between their retail prices and the RRPs. However, information from which reliable average departures from RRPs could be derived for ISP customers is not available. In the absence of such data, the same average adjustments are applied to RRPs to obtain TSP customers’ actual prices that are applied for ISP customers providing proxies for the ISPs’ actual retail prices.

Basis of the Final Charges – IA opportunities where there are bundled charges for calls and subscriptions

12. The RRP (adjusted for any differences between it and actual (TSP) prices, see above) is the standard base for IA charges. However, there is one situation where further measures may be needed to ensure a fair opportunity for IA operators to compete. This situation can arise where the customer subscribes to one of BTCellnet’s Plans by paying a monthly charge which covers a bundle of services (typically subscription and an allowance for calls). There is a view that customers’ perceptions are that the calls made in using up the allowance are "free" since they are already paid for. Oftel has considered what, if anything is needed to ensure IA competition under these conditions.

13. It is not clear how severe a limitation to customers’ opportunities to use IA services the existence of unbundled tariffs may be. Whilst some customers may perceive calls made to use up their allowance as "free", others may fully recognise that these calls are not free but have already been paid for in the bundled tariff. Such customers will be capable of reviewing the attractions of diverting some of their calls to IA operators and adjusting the size of the package of calls they buy in their bundled tariff to take account of this. The key question in this case would be whether a suitable bundled package is available.

14. It is also the case that any limitation perceived from bundled tariffs is itself restricted to only those call services which qualify for the call allowance – these are primarily calls within the UK. International calls, which many believe will be the focus of the initial IA call services do not qualify for the call allowances. Hence the existence of bundled tariffs would not restrict this element of the IA market.

15. Oftel has explored with BTCellnet a number of solutions to the problem posed by bundled tariffs to the development of IA services for UK calls. These involve computing implied retail prices for the services in the bundled tariff. For instance, by comparing Plans to identify the extra calls allowed for extra payments, it is possible to calculate the implied call prices for calls made within the call allowance. This requires complex calculations and does not fully address the problem of the customer perception that calls, whilst the call allowance is not used up, are free. If this solution were adopted, there would be two IA charges for customers using BTCellnet’s bundled tariffs.

16. Oftel prefers the simpler approach that involves computing not the implied retail call prices but the implied retail subscription price. To be applied, however, this approach requires the networks to have at least one unbundled tariff – where there is a defined subscription charge and all calls are charged separately. BTCellnet already has some unbundled tariffs designed for business customers. Oftel has concluded that the Final Charge Determination should not be delayed whilst these possibilities are further explored. Hence, this Final Charge Determination provides for only a single IA charge for BTCellnet customers using their Plan tariffs, based on the RRP (adjusted to actual prices as indicated in paras 9-11 above). Oftel expects BTCellnet to review its existing unbundled tariffs over the next two months from this Determination. Oftel expects this review to lead to BTCellnet’s proposing such further unbundled tariffs as it thinks will be necessary to secure that BTCellnet customers have an effective choice between bundled Plan tariffs and unbundled packages which will allow IA operators to compete for call services on a level basis. At the same time, Oftel will review other possible solutions to this issue, including a range of proposals put forward by INMS in its response to the draft Final Charges Determination.

Basis of the Final Charges – two main components of the "minus" in "retail minus"

17. Oftel sets out the basis on which it would determine IA charges for mobile networks in its Consultation Document Customer choice: Oftel’s review of indirect access for mobile networks - February 1999 and Statement Oftel’s Review of the Mobile Market – July 1999. These documents set out the arguments why Oftel considers that the appropriate basis for charges for indirect access on mobile networks should be retail minus. That is: the interconnection indirect access charge to be paid by the indirect access operator to the network operator will be the retail price (which the mobile network/service provider would charge the customer, if the customer had not chosen to use the indirect access operator for the call) but after deduction of the costs of those elements of the service which, on an indirect access call, will not be supplied by the network operator because they will be supplied by the indirect access operator, or not required at all.

18. There are two principle elements of the service that will no longer be supplied by the network operator when a call is handled by an indirect access operator. The first element, and most easily identified and valued, is the conveyance and termination of the call once it has left the mobile network, having been handed over to the indirect access operator, or another (transit) carrier acting on the IA operator’s behalf. These costs are called "outpayments" since in general they are payments made by the host mobile network to other carriers for conveying the calls to their destinations and for paying the terminating operators to deliver the calls.

19. The second element covers all the retail costs of the service. These range from marketing and selling, through customer support (maintenance, service enquiries) to billing (for post-pay calls) or provision of vouchers (for pre-pay services). For IA calls, these costs will be the responsibility of the indirect access operator, or not relevant to an indirect access call. Hence, the IA operator should not be required to make any contribution through the IA charge to costs of this kind incurred by BTCellnet on calls which remain with BTCellnet and are not passed to the IA operator. Otherwise, the IA operator would not only be paying for its own costs but also contributing to the costs of the network operator (or its service providers) when neither the IA operator nor its customers derives any benefit from the expenditure. The costs for this second element are generally referred to as "retail" costs.

Outpayments – component of the "minus"

20. For outpayments, the basic data is comparatively easy to obtain. IA Calls are to specific destinations and charged on well-established bases. In some cases (particularly for international calls) grouping of routes and averaging of outpayments may be necessary to avoid over-proliferation of charges. In these cases, in this Determination, the averages are traffic weighted averages.

Retail costs – component of the "minus"

21. For the retail costs, some of the costs will be directly associated with particular types of call. This is especially true of the costs of the voucher system through which pre-pay customer revenue is collected (whereas for contract customers revenue is collected through a billing system, typically in arrears).

22. Conversely, some costs are shared between several types of call or other services. For these costs some system of allocation is needed to spread the costs across the types of call and services with which they are related. Oftel's approach in the Interim Charge Determination expresses retail costs as a percentage of total revenues (from calls and subscriptions) and then deducts this percentage from the retail price of calls. This approach recognises that retail costs may be caused by retail activity in total but may not be part of the marginal cost of an individual call (ie they are common across outgoing calls and access). The optimal contribution which each call makes to the recovery of these common costs is then likely to differ between calls. Oftel's approach recognises this by assuming that this contribution is proportional to the retail price. Although not the only possible approach, an equal proportionate allowance for retail costs geared to relative revenue is reasonable in these circumstances and is similar to approaches used elsewhere.

23. In the period since the Interim Charge Determination, Oftel has had meetings and discussions with BTCellnet which, amongst other things, have focused on systems of allocation appropriate to this purpose and have addressed BTCellnet’s concerns over the use of relative revenues as the basis of allocation. The costs which have been the focus of these discussions have been the publicity, marketing and selling costs.

24. BTCellnet has proposed that the costs at issue should be considered as primarily incurred in order to acquire and retain customers. Costs of acquisition are specifically the sorts of costs which Oftel would not expect to be deductible as part of the "minus" in "retail minus". This is on the basis that without such costs, the customer would not be on the network, and hence IA operators would have no opportunity to sell their services to them. Since IA operators therefore benefit from acquisition expenditure it should not be deducted from the retail price in setting IA charges. BTCellnet have made some analysis of the expenditures to identify their purpose and effect. They have concluded that a very large percentage of the expenditures is for acquisition/retention – only a small proportion is classed by BTCellnet as designed for call stimulation (and hence deductible since the IA operator should not have to contribute to the support of the services he is trying to displace). However, BTCellnet has not been able to supply sufficiently detailed information for Oftel to be confident that the proportions proposed by BTCellnet are just. In the event therefore, Oftel has concluded that it should continue to apportion these costs in the same ratio as the services’ revenues. It is open to BTCellnet to bring to Oftel further information if they wish to return to the matter. Oftel will review the new information and make a further determination if necessary.

25. As for the Interim Charge Determination, so in the Final Charge Determination, the total of deductible retail costs has been expressed as a percentage of the total revenues and this percentage is then applied to each recommended retail price (RRP) after adjustment to convert the RRP to "actual" prices, this establishes the deduction for retail costs for each service.

Application of the approach

26. For this Final Charge Determination, as with the Interim Charge Determination, in order to establish a methodology for compiling IA charges under different tariffs, Oftel has taken the BTCellnet 30 tariff as an example in Schedule 2. For each of the main types of call that might be made under this tariff, Oftel has first made an adjustment for the difference between RRP and actual prices (see paras 9-11 above) – in this Schedule 2 example, using the average discount appropriate for a consumer customer. Oftel has deducted from the result the percentage for retail costs established above (paragraphs 21-25). The relevant outpayment is then deducted from this further result to set the indirect access charge, service by service. The process described above can be boiled down into a general formula – or set of formulae. These are set out in summary form in Schedule 1 to this Determination. Oftel’s intention is that BTCellnet should apply the same process, by applying the appropriate formula, to each of its retail tariffs to arrive at the corresponding IA charge: using the same outpayments for each service or type of call as set out in Schedule 2 for the BTCellnet 30 tariff. For post-pay (contract) customers, there are two formulae – differing in the adjustment for actual prices according to the customer’s type of tariff (Consumer or Business) and hence the discount that is applicable. The third formula in Schedule 1 is for pre-pay customers’ tariffs, using the retail price (RP) as the starting point and applying the separately calculated percentage deduction for pre-pay retail costs (see paragraph 21).

Future changes to IA Charges.

27. In keeping with its long term strategy announced in February 2000 , Oftel believes that it should not be necessary for the regulator to intervene in future revisions of IA charges to keep them up-to-date with changes in retail prices, outpayments and retail costs. It should be possible for the parties to agree on the timing and direction of changes within the framework now set by Oftel through the use of the formulae in Schedule 1, adapted appropriately to take account of changes.

28. Oftel does not therefore intend to set out as part of the Final Charge Determination under what conditions IA charges should be changed. However, for clarity, Oftel is taking the opportunity in this Explanatory Memorandum to repeat and develop the outline Oftel provided in Annex 4 of the July 1999 Statement Oftel’s review of the mobile market (paragraphs 22-25) of its conclusions as to the timing of changes to IA charges.

29. Since reductions in retail prices, if unaccompanied by parallel changes in IA charges, would squeeze the margins available to IA operators, Oftel would expect changes to retail prices to be matched by parallel changes to IA charges, with notification of the changes made to IA operators and service providers simultaneously. Indirect Access operators can then review their own retail prices and inform their customers of any consequential changes.

30. Other than in exceptional circumstances, Oftel would not expect changes in retail costs (in whichever direction) to be reflected into IA charges more often than once a year – timed when the outturn audited financial results for BTCellnet’s Statutory Accounts are available. Consistent with the last sentence in paragraph 24, Oftel expects BT Cellnet to propose changes within the year 2000/2001, as an exception, given that it is the first year of IA costing.

31. For changes to outpayments (again in either direction), Oftel is concerned that IA operators should not be exposed to constant fluctuations in IA charges which could be the result of immediate reflection of changes in individual outpayments (especially where IA outpayments are an average of several individual outpayments, as is the case for many international IA charges). Oftel believes that it would be reasonable for changes in outpayments to be introduced no more often than at three monthly intervals. However, if IA charges are being changed as a result of changes to retail prices, it would be reasonable to review outpayments at the same time – if changes to outpayments were then combined with changes to retail prices, the three monthly cycle of review of outpayments could be re-set for the services concerned.

32. As stated above, Oftel would not expect to have to intervene to make any further Determinations of IA charges. Nevertheless, if INMS considers that BTCellnet is abusing its capacity to take (or withhold) initiatives in setting IA charges, or in proposing new levels of IA charges, INMS will be able to bring its complaint to Oftel for consideration under the disputes resolution processes set out in the Interconnection Directive.

On-net calls

33. In common with calls on other networks, calls by BTCellnet customers to other customers on their network ("on-net calls") enjoy special retail tariffs. In some cases it is possible that the application of the Schedule 1 formula will result in a negative IA charge (typically because the outpayment (which includes the charge for call termination back on the BTCellnet network) is large enough to exceed the retail price (if not on its own, in conjunction with the retail costs deduction)). There are some logistical problems therefore in adapting networks’ systems to cater for IA versions of on-net calls. Oftel believes that in the future IA operators will wish to cater for all of a customer’s calls and hence that the on-net calls should not be permanently excluded from the range of IA services. On the other hand, Oftel considers that these on-net calls –by virtue of the fact that, by definition, they present very little scope for IA operators to compete with the network operators for calls originating and terminating on their own networks – are unlikely to be a priority for IA operators. Oftel therefore believes that the networks should have reasonable time to incorporate ways around the difficulties of providing for on-net calls which will minimise the costs. Meantime, Oftel has set the IA charge to include a deduction for the outpayment in the expectation that solutions to the difficulties will have been reached before significant traffic develops.

Completion of the agreement between INMS and BTCellnet on IA services

34. In the 2 December 1999 Determination, Oftel anticipated that there might be unresolved issues between the parties over charges that might prevent signature of the agreement. Hence, the provisions for Interim and Final Charge Determinations. However, Oftel understands that there are some other aspects of the draft agreement for provision of IA services that are still not agreed between the parties. Oftel has considered these difficulties and, where appropriate, has indicated to the parties how the Director may be minded to decide if such issues were brought to him for resolution.

Effects on the timetable for implementation

35. The 2 December 1999 Determination provides for the implementation of IA services (ie when live IA traffic is to be carried) within one month of the signing of the agreement following a Determination of Interim Charges by the Director. Oftel is aware that there may be logistical difficulties in setting up the physical arrangements for conveying INMS’s indirect access calls from the BTCellnet network to INMS’s facilities The 2 December 1999 Determination makes provision for the Director (after appropriate consideration of representations) to consent to some later date.

Parallel dispute – INMS/Vodafone

36. At the same time as his 2 December 1999 INMS/BTCellnet Determination, the Director also issued a Determination on the parallel dispute between INMS and Vodafone. The consultation on indirect access for mobile networks covered both disputes – as did the Director’s July 1999 Statement. The principles of the two Determinations are the same.

37. INMS and Vodafone did not reach agreement by the date set in their Determination.

38. In a parallel Determination to the INMS/BTCellnet Interim Charges Determination, the Director determined the interim IA charges to be paid by INMS to Vodafone for IA calls made by subscribers to the Vodafone 30 tariff and set out the basis on which IA charges, for IA calls made by Vodafone customers using other Vodafone retail tariffs, should be established. This is same basis as set out in Schedule 1 of this Final Charge Determination for the INMS/BTCellnet dispute, although the values in the formulae may differ.

39. In the 2 December 1999 Determination on the dispute between INMS and Vodafone, there are the same provisions as in the BT Cellnet Determination of the same day for the adoption of Final Charges, after a further Determination.

40. Implementation of IA by Vodafone (when live IA traffic is to be carried) was set in the 2 December 1999 Determination in the same terms as for the INMS/BT Cellnet dispute (see above, para 35).

41. The Director has today made a parallel Final Charges Determination in the INMS/Vodafone dispute.

Oftel

July 2000