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| The Oftel formula returns | |
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Chapter 1 The Oftel formula and the Oftel formula returns Chapter 2 Cross-subsidy in the mobile sector Chapter 3 Conclusions Chapter 4 Consultation Details S1. Since May 1994 Oftel has collected quarterly reports containing certain financial data from Vodafone and BT Cellnet as part of its monitoring of unfair cross-subsidy rules. This financial data (known as the Oftel formula return) is used as input to a statistical test (known as the Oftel formula) designed to assess whether Vodafone and/or BT Cellnet are cross-subsidising their Tied Service Providers ("TSPs"). S2. Oftel is currently consulting on Notices of determinations to remove the determinations that Vodafone and BT Cellnet have Market Influence under Condition 56 of their respective licences, December 2001. If the Director General decides to remove the Market Influence ("MI") determinations, for the reasons set out in the Explanatory Memorandum to the Notices, Oftel considers it appropriate to cease regular monitoring of the Oftel formula. This document sets out the reasons for this proposal. S3. Comments are requested from interested parties by 18 January 2002.
Chapter 1 The Oftel formula and the Oftel formula returns 1.1 Monitoring arrangements, designed to prevent unfair cross-subsidy of TSPs, have been in place since 1994. In April 1997, Oftel published a statement on Fair Trading in the Mobile Telephony Market. This document described the reasons for the Director General’s decision to maintain on Vodafone and BT Cellnet (as operators with market power) the requirement to submit quarterly returns to demonstrate compliance with the Oftel formula. Oftel still requires that Vodafone and BT Cellnet submit quarterly returns for the Oftel formula. The Oftel formula 1.2 The Oftel formula uses a discounting technique to assess whether a TSP is making an adequate return over the life of a subscriber once the cost of acquiring that customer has been taken into consideration. The average life of a subscription is expressed in terms of high, medium or low ‘churn rates’. Results for the Oftel formula are expressed in terms of pounds per subscriber. 1.3 If the Oftel formula results in a positive value, then the TSP is earning a profit for each subscriber. If the results are negative, then the TSP is making a loss for each subscriber, implying a cross-subsidy from elsewhere within the Licensee’s Group. Condition 66 1.4 Condition 66 of Vodafone’s and BT Cellnet’s respective licences allows Oftel to require the provision of financial information, should Oftel consider that there is evidence to suggest that either operator has unfairly cross-subsidised its TSPs. Condition 66 is a standard licence condition and therefore not reliant on a test of market power. It will continue to apply even in the event that the MI designations are removed, so it will remain possible to obtain on an ad-hoc basis such information relevant to determine whether there has been any unfair cross-subsidy. Furthermore, the provisions of Condition 66 cover a broad range of cross-subsidisation, not just the specific network to TSP cross-subsidy that is currently monitored using the Oftel formula.
Cross-subsidy in the mobile sector 2.1 Oftel introduced the monitoring of cross-subsidy in the mobile market at a time when One 2 One and Orange were relatively new entrants in the mobile sector and Vodafone and BT Cellnet were established operators (with market shares of around 40%), who had fully rolled out networks and significant first mover advantages. 2.2 The monitoring arrangements reflected the concern that if a firm has market power at the network level, it may leverage this market power into the downstream service provision level by cross-subsidising its TSPs resulting in the profit margin of Independent Service Providers ("ISPs") being squeezed, and their being unable to compete with the TSPs, because they face the same wholesale charges but must compete with the TSPs’ retail charges. Hence ISPs faced the risk of being excluded from the market. 2.3 As described in the Explanatory Memorandum to the MI Notices, Oftel no longer believes that in the absence of regulation, ISPs face the risk of being excluded from the mobile market. Therefore, the monitoring arrangements for the Oftel formula, along with the MI determinations, may no longer be required. 2.4 If the decision is made to remove the MI determinations because this regime is no longer necessary, the implication is that it is no longer necessary to continue monitoring the Oftel formula and the requirement for Vodafone and BT Cellnet to submit regular returns should cease. 
Conclusions 3.1 Oftel’s goal is to ensure that consumers get a good deal in terms of quality, choice and value for money. In pursuing this goal Oftel will seek to apply the minimum regulation necessary to achieve an appropriate outcome. In line with this strategy and in line with the findings of Effective Competition Review: Mobile, Oftel intends to keep formal regulation of the mobile operators to a minimum. If the MI regime and the monitoring arrangements for the Oftel formula are no longer appropriate then they represent an unnecessary burden of regulation, and should be removed. 3.2 Oftel proposes that if the decision is made to remove the MI determinations currently on Vodafone and BT Cellnet (for the reasons set out in the Explanatory Memorandum to Notices of determinations to remove the determinations that Vodafone and BT Cellnet have Market Influence under Condition 56 of their respective licences, December 2001) then it is appropriate to cease the regular monitoring of the Oftel formula.
Consultation Details 4.1 The Director General would not normally consult upon monitoring processes, however as the Oftel formula has been subject to past statements the Director General considers it appropriate, in this instance, to consult on the proposal to cease the regular monitoring of the Oftel formula. 4.2 Comments are requested by 18 January 2002 to coincide with the close of the first period for representations on Notices of determinations to remove the determinations that Vodafone and BT Cellnet have Market Influence under Condition 56 of their respective licences, December 2001. 4.3 The Director General will publish his decision on the Oftel formula returns at the same time as he publishes his final decision on the removal of the MI determinations. Comments should be sent to: Chris Handley e-mail: chandley@oftel.gov.uk Tel: 020 7634 8863 4.4 Representations made will be available for public inspection in Oftel’s Research and Intelligence Unit and, where possible, on respondents’ websites via hyperlinks from the Oftel site. Respondents should include confidential material in a clearly marked annex. In the interests of transparency, respondents are asked to keep confidentiality markings to a minimum.
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