(ii) THE RECOVERY OF DONOR OPERATOR TRANSIT CONVEYANCE COSTS ON CALLS TO NUMBERS PORTED TO ANOTHER NETWORK

21 September 2001

Contents

The Directions

(i) Interconnect charges for origination of calls to freephone numbers
(ii) The recovery of donor operator transit conveyance costs on calls to numbers ported to another network

Explanatory memorandum

Chapter 1 – Summary

Chapter 2 – Background

Chapter 3 – The Direction – (i) Mobile Origination of Freephone Calls

Chapter 4 – The Direction – (ii) Donor Transit Charge – Mobile Number Portability

Chapter 5 – Post-direction actions

DIRECTION UNDER THE PROVISIONS OF REGULATION 6(6) OF THE TELECOMMUNICATIONS (INTERCONNECTION) REGULATIONS 1997 OF A DISPUTE BETWEEN ORANGE PERSONAL COMMUNICATIONS SERVICES LIMITED ("ORANGE") AND BRITISH TELECOMMUNICATIONS PLC ("BT") CONCERNING:

INTERCONNECT CHARGES FOR ORIGINATION OF CALLS TO FREEPHONE NUMBERS

WHEREAS:

(A) the Secretary of State for Trade and Industry 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 the BT licence;

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

(C) the Secretary of State for Trade and Industry has granted to Orange Personal Communications Services Limited ("Orange") on 27 July 1995 a licence under Section 7 of the Act for the running of a telecommunications system as specified in that licence;

(D) regulation 6(6) of the Telecommunications (Interconnection) Regulations 1997 (the "Interconnection Regulations"), provides that, where there is a dispute concerning interconnection between organisations, the Director General of Telecommunications (the "Director") shall, at the request of either party, take steps to resolve the dispute within six months of the date of the request;

(E) Orange entered into a Standard Interconnect Agreement with BT on 13 December 1996 (the "1996 Agreement");

(F) Orange has served a Review Notice on BT under the review provision of the 1996 Agreement on 27 June 2000 seeking to review the charging arrangements for calls made by Orange customers to freephone numbers as per schedule 110 of the 1996 Agreement, and request that a similar approach as per the Payphone Access Levy arrangements be adopted for freephone calls originated on the Orange network;

(G) BT formally responded to Orange on 16 January 2001 dismissing Orange’s proposals. Orange and BT are unable to agree on this matter and are therefore in dispute;

(H) on 20 March 2001, Orange referred, in accordance with the provisions of regulation 6(6) of the Interconnection Regulations, this dispute to the Director for his determination;

(I) the Director has considered, inter alia, the information provided by the parties and the matters set out in regulation 6(8) of the Interconnection Regulations. The principal points are summarised in the Explanatory Memorandum that accompanies, and is published with, this Direction. The Explanatory Memorandum also contains a full statement of the Director’s reasons for making this Direction;

(J) a draft of this Direction and the Explanatory Memorandum was issued to interested parties on 2 August 2001. Comments were invited by 30 August 2001 and further comments on comments by 13 September 2001;

(K) Comments were received as summarised in section 3 of the explanatory memorandum published with this Direction. These comments have been taken into consideration by the Director in making this Direction;

NOW, THEREFORE, THE DIRECTOR, PURSUANT TO REGULATION 6(6) OF THE INTERCONNECTION REGULATIONS, AND HAVING CONSIDERED THE VIEWS OF THE PARTIES AND THOSE MATTERS SET OUT IN REGULATION 6(8) OF THOSE REGULATIONS, HEREBY MAKES THE FOLLOWING DETERMINATION TO RESOLVE THE DISPUTE BETWEEN ORANGE AND BT:

1. BT is not required to amend schedule 110 of the 1996 Agreement with Orange in order to review charging arrangements for calls made by Orange customers to freephone numbers;

2. The request for a determination referred by Orange on 20 March 2001 is hereby dismissed.

Keith Long
Director of Compliance

A person duly authorised under paragraph 8 of Schedule 1 of the Telecommunications Act 1984

21 September 2001

DIRECTION UNDER THE PROVISIONS OF REGULATION 6(6) OF THE TELECOMMUNICATIONS (INTERCONNECTION) REGULATIONS 1997 OF A DISPUTE BETWEEN ORANGE PERSONAL COMMUNICATIONS SERVICES LIMITED ("ORANGE") AND BRITISH TELECOMMUNICATIONS PLC ("BT") CONCERNING:

THE RECOVERY OF DONOR OPERATOR TRANSIT CONVEYANCE COSTS ON CALLS TO NUMBERS PORTED TO ANOTHER NETWORK

WHEREAS:

(A) the Secretary of State for Trade and Industry 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 the BT licence;

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

(C) the Secretary of State for Trade and Industry has granted to Orange Personal Communications Services Limited ("Orange") on 27 July 1995 a licence under Section 7 of the Act for the running of a telecommunications system as specified in that licence;

(D) regulation 6(6) of the Telecommunications (Interconnection) Regulations 1997 (the "Interconnection Regulations"), provides that, where there is a dispute concerning interconnection between organisations, the Director General of Telecommunications (the "Director") shall, at the request of either party, take steps to resolve the dispute within six months of the date of the request;

(E) Orange entered into a Standard Interconnect Agreement with BT on 13 December 1996 (the "1996 Agreement");

(F) Orange served a Review Notice on BT under the review provision of the 1996 Agreement on 27 June 2000 seeking amendment to its Schedule 501 to allow Orange to recover its costs incurred in transiting calls to ported Orange mobile numbers;

(G) BT formally responded to Orange on 16 January 2001 dismissing Orange’s proposals. Orange and BT are unable to agree on this matter and are therefore in dispute;

(H) on 20 March 2001, Orange referred, in accordance with the provisions of regulation 6(6) of the Interconnection Regulations, this dispute to the Director for his determination;

(I) the Director has considered, inter alia, the information provided by the parties and the matters set out in regulation 6(8) of the Interconnection Regulations. The principal points are summarised in the Explanatory Memorandum that accompanies, and is published with, this Direction. The Explanatory Memorandum also contains a full statement of the Director’s reasons for making this Direction;

(J) a draft of this Direction and the Explanatory Memorandum was issued to interested parties on 2 August 2001. Comments were invited by 30 August 2001 and further comments on comments by 13 September 2001;

(K) Comments were received as summarised in section 4 of the explanatory memorandum published with this Direction. These comments have been taken into consideration by the Director in making this Direction;

NOW, THEREFORE, THE DIRECTOR, PURSUANT TO REGULATION 6(6) OF THE INTERCONNECTION REGULATIONS, AND HAVING CONSIDERED THE VIEWS OF THE PARTIES AND THOSE MATTERS SET OUT IN REGULATION 6(8) OF THOSE REGULATIONS, HEREBY MAKES THE FOLLOWING DETERMINATION TO RESOLVE THE DISPUTE BETWEEN ORANGE AND BT:

1. BT is not required to amend Schedule 501 to the 1996 Agreement to allow Orange to recover its costs incurred in transiting calls to ported Orange mobile numbers;

2. The request for a determination referred by Orange on 20 March 2001 is hereby dismissed.

Keith Long
Director of Compliance

A person duly authorised under paragraph 8 of Schedule 1 of the Telecommunications Act 1984

21 September 2001

  Explanatory Memorandum

Chapter 1 – Summary

1.1 The Director General of Telecommunications (the ‘Director’) has issued two separate Directions in accordance with the provisions of regulation 6(6) of the Telecommunications (Interconnection) Regulations 1997 for the resolution of two disputes between Orange and BT under the terms of their Standard Interconnect Agreement dated 13 December 1996. These Directions set out the Director’s decisions on Orange’s requests for:

(i) higher interconnect charges from BT for origination of calls to freephone numbers; and
(ii) the recovery of donor operator transit conveyance costs from BT for calls to numbers ported to another network.

1.2 Orange referred the two disputes to the Director by letter of 20 March 2001, which he received on 23 March 2001. The Director considered the submissions made by Orange on behalf of itself and by BT and issued a Draft Direction in respect of each dispute on 2 August 2001 to the industry as a whole for consultation. Comments were received as requested and these have been taken into account in making these Directions.

1.3 The details of the Director’s consideration of the submissions made by Orange and BT, the responses to the Draft Directions and the reasons for making his Directions are set out in Chapters 3 and 4. In summary, the Director determines that:

(i) Interconnect charges for calls to Freephone numbers;

The proposal made by Orange represents an inequitable solution to the recovery of its costs in that it requires BT to recover Orange’s costs from other terminating operators. In the absence of evidence that service providers are actively interested in attracting and paying for calls from mobiles, the principles of cost causation, cost minimisation and the distribution of benefits weigh heavily towards current practice. Accordingly, the request made by Orange is rejected and BT is not required to amend schedule 110 of its Interconnect Agreement with Orange; and

(ii) Calls to mobile ported numbers;

The proposal made by Orange would shift cost burdens onto BT which would then be forced to levy charges for costs of mobile number portability (‘MNP’) across all calls, fixed and mobile. Previous determinations by the Director have supported the principle that costs should be borne by mobile operators and their customers. The Director has found no reason to depart from that principle in the absence of evidence of a material change in circumstances. Accordingly, the request made by Orange is rejected and BT is not required to amend Schedule 501 of its Interconnect Agreement with Orange.

1.4 Having considered the facts specific to these two disputes and the matters set out in regulation 6(8) of the Telecommunications (Interconnection) Regulations 1997, these Directions, in the opinion of the Director, represent a fair balance between the interests of the parties in each of these cases, having regard to the Director’s wider duties to the development of the telecommunications industry in the UK and to encourage and secure adequate interconnection in the interests of all users in a way that provides maximum economic efficiency and gives the maximum benefit to end users.

Chapter 2 – Background

Timetable of events

2.1 On 27 June 2000, Orange served a Review Notice on BT under the review provision of its Interconnect Agreement with BT. In the Notice, Orange sought to:

(i) review the charging arrangements for calls made by Orange customers to freephone numbers as per Schedule 110 of the Interconnect Agreement, and request that a similar approach as per the Payphone Access Levy arrangements be adopted for freephone calls originated on the Orange network; and

(ii) amend Schedule 501 of the Interconnect Agreement to allow Orange to recover its costs incurred in transiting calls to ported Orange mobile numbers.

2.2 Both issues were discussed in a number of regular commercial meetings held between BT and Orange. These meetings took place on 19 July, 17 August, 26 September, 1 November and 15 December 2000, although the issues did not form key discussion items at these meetings.

2.3 On 16 January 2001, BT formally responded to Orange. BT dismissed Orange’s proposals for the reasons set out in BT’s responses below. Orange referred both issues to Oftel for determination by letter of 20 March 2001, received in Oftel on 23 March 2001.

2.4 On 2 August 2001, Oftel issued Draft Directions for public consultation and sought comments by 30 August 2001. Comments on comments were invited by 13 September 2001. The responses received have been considered in reaching this final decision.

Chapter 3 – The Direction – (i) Mobile Origination of Freephone Calls

Orange submissions

3.1 In its letter to Oftel of 20 March 2001 Orange stated that, at present, it recovers interconnect revenue for originating calls to freephone numbers determined by the Number Translation Service (‘NTS’) formula. Orange argued that this pricing formula, however, was set mainly with fixed line operators in mind and does not reflect higher network routing costs of mobile operators. As a consequence, Orange said that it did not sufficiently recover its costs for originating this type of call. In seeking to review the interconnect rate it currently receives from BT, Orange pointed to the precedent set of BT recovering the higher origination costs for freephone calls via the Payphone Access Charge (‘PAC’), where terminating operators pay BT a higher pence per minute (‘ppm’) rate for termination of calls to freephone services where the call has originated from a payphone. Orange therefore requested consideration of a similar arrangement for its mobile originated freephone calls.

3.2 In its letter of 19 April 2001, Orange developed its argument further. Orange stated that it considered there to be strong parallels with the PAC in respect of the principle of its request. Orange believed that a charge in alignment with the PAC would be the simplest and most practical solution to the issue and would cause the least amount of disruption for terminating operators. Orange also stated that such a solution would not enable it to fully recover its costs, but would be an acceptable compromise for mobile originating operators.

BT submissions

3.3 In a letter to Orange of 16 January 2001, BT stated it did not consider it appropriate or practicable to apply such a charge without considering a whole range of NTS issues and without involving the rest of the industry. BT noted that the NTS pricing formula applies both to freephone calls terminating on BT’s network and those transited via BT and terminated on another operator’s network. BT considered that the best way forward would be for Orange to pursue the issue within the NTS focus group.

3.4 By letter of 12 April 2001, BT submitted that the proposal by Orange raised significant financial consequences for call termination operators that host freephone numbers. BT said that terminating operators pay the originating operators for originating the call and the proposed mobile origination charges are higher than those of fixed operators. BT argued that terminating operators would have to either categorise calls based on origination network type, or spread the higher cost over all calls. The consequence would be to raise terminating operators’ costs and charges, including charges to charitable organisations. BT stated that it was only one of a number of players in the market for the hosting of freephone numbers. As significant proportions of freephone calls are currently terminated by operators other than BT, it believed it had acted responsibly in advising Orange to address its request to the industry. BT argued that the inability of customers to access freephone numbers from mobile phones was not an issue in this dispute, as two mobile operators already charge for 0800 services to recover costs rather than blocking such calls. In relation to use of the PAC, BT stated that this charge was instigated to cover the regulatory obligation to support non-profit making payphones as required under the Universal Service Obligation.

The draft Direction

3.5 Having duly considered the submissions of Orange and BT in response to the request for determination and the matters in Regulation 6(8) of the Telecommunications (Interconnection) Regulations 1997, the Director was minded to determine in his Draft Direction of 2 August 2001 that the request made by Orange should be dismissed and current contractual arrangements maintained.

Costs of service

3.6 The central issue raised by this determination request by Orange is whether mobile operators are entitled to the full cost of call origination for freephone calls. If so, this raises the further question of whether service providers would want or be willing to pay for such freephone calls originating on mobile networks, given the higher cost of such calls.

3.7 Consumers (in most instances) have access to a fixed line phone (either private residential line or via a public payphone) that offers a satisfactory substitute in this instance to using a mobile. The option is therefore available to the consumer either to make a ‘freephone’ call free from a fixed line phone, or be charged for the extra convenience of using a mobile. Arguably, therefore, the service provider should not be liable to pay for the additional cost if the consumer chooses to make their call by the more expensive mobile route.

3.8 Alternatively, however, it may be that service providers do have an interest in attracting calls to freephone numbers from mobile phone users and would therefore be willing to pay increased call origination costs to capture such calls. For instance, marketing of freephone numbers for services may be directed at consumer groups with little or no access to fixed line phones at the point of exposure, such as commuters and other travelling consumers. Service providers may therefore have legitimate incentive to encourage free mobile freephone calls to capture potential customers. No evidence of this has been provided, however.

Payphone Access Charge and Universal Service Obligation

3.9 The proposal made by Orange is based upon its opinion that a precedent has been set in the application of the PAC to freephone calls originating from payphones. The principal reason for the PAC, however, is to enable BT to recover the costs of its provision of payphone services. More specifically, it is to cover the cost of providing the line and payphone equipment which BT has a responsibility under the Universal Service Obligation to provide. In the case of a standard call from a payphone, BT is able to recover contributions to such costs from the higher call charge. For a freephone call, however, it is unable to do this. The PAC therefore covers the additional cost to BT of supplying and maintaining the payphone equipment and connection. The actual interconnection charge for conveyance of a freephone call from a payphone is the same as from any other fixed line. The costs of conveyance of 0800 are covered in the call origination charge of circa 1ppm payable to all originating operators of freephone calls, including Orange and other mobile networks. The PAC, paid in addition to the conveyance charge, therefore plays no part in covering the costs of call conveyance.

3.10 The argument supporting the application of the PAC to cover the higher cost of call origination on mobile networks is therefore flawed. The PAC covers equipment and access network costs, whereas the issue of the cost of call origination via mobile relates to the conveyance cost of the call. Orange and other mobile networks have alternative sources of recovering the higher conveyance cost of originating a freephone call, eg by charging their customers. More crucially, Orange also recovers costs of access through line rental charges. In its determination of August 1998, Oftel considered the following as relevant costs in the calculation of the PAC: maintenance, depreciation, return on capital, redundancy, systems support, directory enquiry and operator services and other operating costs. None of these costs are relevant to those that Orange is seeking to recover in the ability to charge for call origination of freephone numbers. Orange is seeking costs solely relating to the incremental conveyance cost of such calls.

Mobile origination and competition

3.11 Orange and One2One (in the case of contract customers only) do not currently charge customers for dialling freephone numbers. This strategy is distinct from that of Vodafone and Cellnet which do charge. If the proposal made by Orange were accepted and the costs of mobile origination were covered in the charge paid by BT, this may impact on the wider market and how other mobile operators recover the costs of freephone origination. A decision to allow Orange to recover the costs from BT may encourage other mobile network operators to recover charges in the same way, further impacting on the cost ultimately transferred to service providers. Undoubtedly other fixed line operators that terminate freephone calls will also be affected by such a decision.

3.12 It is also necessary to take account of the distinction between telesales/ marketing freephone calls on 0800 numbers and indirect access calls using authorisation access codes. Orange offer free calls to freephone numbers only on telesales/ marketing numbers, not on indirect access numbers. On such numbers Orange is already recovering the costs of mobile origination, as indeed it is in respect of all freephone calls made by its pre-pay customers. In terms of the principle, however, the distinction makes little practical difference as both types of call will be routed via BT as the only fixed line interconnection with Orange. Although the relative costs of the calls may be slightly different, the principle of recovery of cost for the mobile operator from either customer or BT (or other terminating operator (‘TNO’)) remains the same. Orange has not raised any distinction itself in its request for determination.

Practical consequences of recovering call origination from BT

3.13 BT’s share of the total NTS terminating market is approximately 30%. A significant proportion of freephone calls are therefore likely where BT is a transit operator only and passes calls on to another operator to act as TNO. I n such cases where the TNO is not BT, the TNO does not have the capability to distinguish the originating source of the call as all calls are passed to it from the BT network. Therefore, it cannot distinguish between a higher cost mobile origination call or lower cost fixed line call and apply charges to a service provider as appropriate. The result is likely to be higher charges to service providers overall.

3.14 As BT is in effect acting only as transit operator in this scenario, it is also unreasonable to place in its hands the burden of having to recover Orange’s costs from other TNOs for this significant amount of freephone traffic without an industry agreement in place. Under the proposal, Orange would charge BT a higher cost for originating a freephone call. BT would then be placed in the position of having to recover this cost from whichever operator is acting as TNO for that service provider. The alternative is for BT to cover the increased call origination charges itself, even though it is acting only as transit operator. This would not appear to be an equitable solution to enable Orange to recover its costs. Orange may wish to consider whether its objectives would be better achieved in approaching service providers directly and seeking to charge for the increased cost of mobile origination in this way.

Conclusions

3.15 Higher mobile origination costs for freephone calls are currently covered by mobile operators in either policies of charging customers for dialling freephone numbers, recovery of aggregated call use in line rental charges, or by accepting losses on such calls. Lacking evidence that consumers are disadvantaged by charges levied on mobile freephone calls, or that service providers are willing to pay higher charges to cover the cost of mobile originated calls, there is little justification for the Director to make a decision to shift the cost burden onto BT, thereafter to be recovered from other TNOs and ultimately service providers.

3.16 As the issue has arisen, however, it is possible for Oftel to consider the principle of whether mobile operators should recover full costs of call origination from TNOs and ultimately service providers.

3.17 In considering the principle of the way in which the costs of call origination of freephone calls from mobiles should be recovered the Director has applied five of the six principles of cost recovery that the Monopolies and Mergers Commission (‘MMC’) adopted in its 1995 inquiry Telephone number portability: a report on a reference under section 13 of the Telecommunications Act 1984 (ISBN 0-11-515451-5). As the service of mobile origination of calls to freephone numbers is not a reciprocal service, the MMC’s sixth principle does not apply in this case.

Cost causation

3.18 The costs should be recovered from those who cause them to be incurred. This gives the right price signals to encourage economically efficient behaviour. The increased cost of originating a call to a freephone number from a mobile as opposed to a fixed line is caused by the calling party who initiates the call by mobile, rather than choosing to call via a fixed line substitute. The principle of cost causation therefore holds that costs should be borne by mobile customers who choose to call freephone numbers on mobile phones.

Cost minimisation

3.19 The costs should be recovered so as to give operators an incentive to minimise the costs. Current mobile call origination costs are higher than those of fixed line. Passing the full additional cost of mobile origination on freephone numbers to service providers reduces the incentive to decrease the cost of mobile call origination on the part of mobile operators. The principle of cost minimisation therefore holds that the additional costs of mobile origination to freephone numbers should be borne by the mobile operators and their customers.

Distribution of benefits

3.20 Costs should be recovered from those who benefit. The beneficiaries of calling freephone numbers from mobiles as opposed to fixed lines are those mobile customers who enjoy the added convenience of mobiles. Also, mobile operators gain added volume in the use of their services (which they have the option to charge for and so increase their revenue). The principle of distribution of benefits therefore holds that the additional costs should be borne by mobile operators and their customers.

Effective competition

3.21 Costs should be recovered in a way that promotes effective competition. The application of a higher standard mobile origination charge will not promote competition among TNOs providing freephone access to service providers as they will all face the same charge via BT. It is doubtful whether there is much competition among mobile operators on the basis of freephone policies (which are unlikely to be a priority for most mobile customers), but what competition does exist between the different arrangements currently offered will likely be lost if all operators move to pass on the costs to service providers via BT. The principle of effective competition therefore holds that the costs should be borne by mobile operators.

Practicality

3.22 So far as possible, the outcome should be easy to implement. The principle that the costs of higher mobile origination should be paid by the mobile user already applies and is clearly practicable. The alternative, where service providers met the cost, would be more complex but possible to implement following a review of the billing process. This would either have to distinguish between origin of call from either fixed or mobile network, or implement a general rise in the cost of all calls to freephone numbers payable by the service provider.

3.24 A recovery of costs based on the principles of the PAC is not appropriate as the PAC applies to recover costs of equipment and access. Orange does not incur directly equivalent costs in providing its service. The PAC does not cover conveyance costs from payphones, therefore it does not follow that an equivalent levy should cover conveyance costs from mobiles.

3.25 For the reasons outlined above, the Director proposed in his Draft Direction to conclude that the request made by Orange represented an inequitable solution to the recovery of its costs in that it would require BT to recover Orange’s costs from other terminating operators. In the absence of evidence that service providers are actively interested in attracting and paying for calls from mobiles, the principles of cost causation, cost minimisation and the distribution of benefits weigh heavily towards maintaining current practice.

Responses to the draft Direction and the Director’s comments

Orange

3.26 Orange believed that the draft explanatory memorandum centred on Oftel’s conclusion that there was no evidence to suggest that Service Providers were willing to incur the extra cost of terminating mobile originated calls. Orange believed it was key that appropriate research be undertaken in order to accurately establish the position of Service Providers. Orange is willing to undertake such research in order to allow the matter to be progressed by the appropriate Industry groups. Orange accepted that the issue is wider than its Interconnect relationship with BT and welcomes the opportunity to take it forward with Industry as a whole. Orange believed that Oftel’s statement, "consumers have access, in most instances, to a fixed line phone and that this therefore offers a satisfactory substitute in this instance to using a mobile", is inconsistent with the Director’s wider duty to give the maximum benefit to end users. Orange believed that customers should have the choice whether to use fixed or mobile and this freedom of choice should not be artificially restricted by the inability of industry to adopt equitable charging arrangements.

3.27 The Director welcomes the proposal by Orange to undertake the proper research and progress this issue through the appropriate industry forum. The Director considers that the issues raised following the conduct of such research are best solved by industry wide discussion and agreement. The Director rejects Orange’s argument that consumer choice is artificially restricted. In the case of non-freephone calls, consumers have the choice to make calls from fixed or mobile telephones. Calls from mobiles on average cost more than calls via fixed lines and consumers pay higher charges accordingly. In the case of freephone calls, a similar choice exists to the consumer. The cost of a freephone call via a fixed line is lower than it is for a call via a mobile. Consumers have the choice of making the call by the higher or lower cost route. If they choose the higher cost route, and in the absence of agreement by Service Providers to cover the costs of higher mobile origination, then mobile operators must determine how the higher costs are covered in their charging arrangements.

BT

3.28 BT stated in the comments on comments phase that its view had always been that the issues raised by Orange were beyond the control of BT and have a potentially significant impact upon other operators. BT therefore welcomed Orange’s comment that this issue was wider than its interconnect relationship with BT.

3.29 The Director agrees that the issue of mobile origination of freephone calls has a wider impact on operators other than BT. Therefore, the Director’s view is that the issue is best progressed through the appropriate industry groups.

Vodafone

3.30 Vodafone stated that the amount retained by a mobile operator for originating a Number Translation Service (NTS) call, including freephone, was set with reference to BT’s costs and so reflects the costs of a fixed network operator rather than the higher costs of a mobile operator. At the time of the NTS determination, origination from mobiles was considered and the service provider community exhibited no enthusiasm for paying for higher call origination prices for these calls. Mobile operators were thus allowed to charge for calls to 0800 numbers subject to call-by-call notification. Vodafone stated that BT is correct on process issues that Orange should pursue this issue through the NTS focus group. Vodafone commented, however, that it is hypocritical of BT to argue that identifying originating calls from mobile ranges would be unduly difficult given BT’s position on payphones where it supports the Payphone Access Charge.

3.31 The Director accepts that the current interconnection payment that mobile operators receive for originating a freephone call was set in relation to fixed network costs. This is why mobile operators are able to recover additional costs by charging customers. In the absence of an industry agreed and practical alternative, the Director remains of the view that this represents the best solution at present as long as consumers are notified of charging upon making a call. Vodafone’s comment on BT’s ability to identify originating calls from mobiles is noted. From the Director’s point of view, however, it is the ability of other operators terminating freephone calls to identify the originating source of a call that is the principal issue of concern, rather than BT’s ability to do the same.

NIACT

3.32 NIACT declined to comment on the substance, as it believed that the issues were for the industry rather than Oftel to determine.

Individuals

3.33 Without industry wide review and agreement the Director believes that the implementation of a charging mechanism to enable the costs of mobile freephone origination to be recovered is not practical. The costs of freephone calls are paid for by the service provider that uses freephone numbers to encourage calls to its services. For freephone calls from mobiles to be free to the consumer, the higher costs of mobile originated calls would have to be covered ultimately by the service providers themselves and not by BT. BT is unable to secure this payment from service providers as it is only one of a number of operators that terminate freephone calls. If BT were required to cover such costs in the intervening period before industry agreement is reached, such costs would be passed on to all of its customers, including those who never use mobile telephones and who should not be expected to subsidise those who do. The Director therefore welcomes Orange’s indication that it is willing to pursue this issue via an industry wide forum and on the basis of fuller evidence. Consumers are currently warned by recorded message where they will be charged for making a freephone call via mobile. There is little danger therefore that consumers will not be aware that they are paying for the service.

The Direction

3.34 Having duly considered all of the comments made in response to the Draft Direction and the matters in Regulation 6(8) of the Telecommunications (Interconnection) Regulations 1997, the Director sees no reason to change the basis for the Draft Direction concerning the Mobile Origination of Freephone Calls as contained in the consultation document. He concludes that the request made by Orange should be dismissed and current contractual arrangements maintained.

3.35 Nevertheless, the Director encourages the industry to seek agreement on more appropriate charging arrangements for the mobile origination of freephone calls.

Chapter 4 – The Direction – (ii) Donor Transit Charge – Mobile Number Portability

Orange submissions

4.1 In its letter of 20 March 2001, Orange stated that with the advent of mobile number portability, calls to Orange number ranges may now either be terminated on the Orange network if that number is associated with a current Orange network customer, or terminated on another mobile network if the Orange number has been ported from its system. Under current arrangements, when a call to an exported number is received by Orange, it is required to be routed on to the relevant mobile operator which is providing network services to the customer associated with the ported Orange number. In undertaking this onward routing, Orange stated it effectively acts as transit operator on behalf of the originating operator of the call. Orange currently receives a time of day weighted charge for all calls passed from the BT system to the Orange system. This is irrespective, however, of whether the call is destined for an exported Orange number. As such, Orange stated that it is unable to fully recover its costs incurred in transiting calls to ported Orange numbers.

4.2 By way of letter of 19 April 2001, Orange further developed its argument. Orange stated that the relevant charge under consideration is the Donor Conveyance Charge (DCC). Under current arrangements determined by Oftel in November 1999, the charge is split 50:50 between the donor network operator and recipient network operator. Orange has consistently argued, however, that the donor can do little to minimise the cost it is forced to bear and that as such 50% of the DCC should be payable by BT in recognition of the transit function being performed on its behalf by Orange.

BT submissions

4.3 In a letter to Orange of 16 January 2001, BT stated that it understood Orange’s proposal as surcharging the originating operator via BT for additional costs of calls to Orange numbers ported to a third party recipient network. BT’s understanding of the industry porting regime was that there was to be no recovery of excess porting costs from the originating caller or operator, or indeed the (non-porting) transit operator. Additional costs to the donor operator are payable by the recipient operator and a matter for those two mobile operators alone. It would therefore be inappropriate to address these costs at all in the contracts between the originator and BT, or between BT and the donor.

4.4 By letter of 12 April 2001, BT submitted that Orange’s proposal would have the effect of introducing a surcharge for calls to ported numbers. BT stated that Orange are not entitled to apply a surcharge for Additional Conveyance Costs as determined in Oftel’s statement of January 2000 (Numbering Directive: Numbering Portability Requirements). BT assumed therefore that Orange’s proposal related to the Average Porting Conveyance Cost. BT believed that it would be more appropriate for Orange to subsume any costs into its overall network charges for calls. BT stated that the UK has not yet migrated to a dynamic central numbering database and therefore that operators other than those involved in a specific port will not have information regarding whether or not a number has been ported. BT stated that in many cases it may be acting as transit operator between originating operator and Orange and that therefore the issue is for industry and/ or Oftel to resolve, not BT. Originating operators would be required to set differential retail call rates, but as the originating operator would not know whether the number had been ported by Orange, it would not be able to inform the retail customer of call charges until later through interconnect billing. BT stated that Orange’s request would lead to significant confusion and complaints from the retail community and poor publicity for the wider UK mobile industry.

The draft Direction

4.5 Having duly considered the submissions of Orange and BT in response to the request for determination and the matters in regulation 6(8) of the Telecommunications (Interconnection) Regulations 1997, the Director proposed in his Draft Direction of 2 August 2001 to conclude that the request made by Orange should be dismissed and current contractual arrangements be maintained.

Oftel determination on mobile number portability

4.6 In November 1999, following requests from both Orange and One2One to set the appropriate level of the DCC, the Director considered the principle of cost recovery of MNP. The Director concluded in these determinations that it was appropriate that costs should be recovered from mobile customers, based on the principles of cost causation and the distribution of benefits. This conclusion also supported the principle of cost minimisation in providing an incentive on mobile networks to keep the cost of porting as low as possible. Furthermore, the Director concluded that the costs of the DCC should be split equally between Donor and Recipient to ensure effective competition between mobile operators, also to provide equal incentive upon both networks to keep costs as low as possible. The determinations were effective until 31 March 2000 after which the mobile operators were required to negotiate a commercial settlement between themselves.

Draft conclusions

4.7 The Director stated his view that the costs of MNP should be borne by mobile customers in his previous determination on the issue with reference to the MMC’s six principles of cost recovery (see paragraph 3.17 above). Although this determination was effective only until 31 March 2000, the Director considers that the principles established therein remain current and valid. The Director’s conclusions in his previous determination in respect of MNP are outlined below.

Cost causation

4.8 The costs of MNP should be recovered from those that cause them to be incurred. This gives the right price signals to encourage economically efficient behaviour. In the case of MNP, two parties could be considered to cause costs to be incurred. First, the call recipient, by porting to another network, makes it necessary for calls to be ported when other operators’ customers wish to contact them. Secondly, the calling party, by initiating the call, causes the relevant parts of the network to be used. However, the calling party is unable to engage in any behaviour, other than not making the call, which would enable costs to be avoided, while the recipient has the choice of whether or not to port his number, and hence whether or not the cost of porting should be incurred. The principle of cost causation therefore implies that costs should be borne by mobile customers who port their numbers to a greater extent than call originators.

Cost minimisation

4.9 The costs of MNP should be recovered so as to give operators an incentive to minimise the costs of providing MNP. This suggests that it would be appropriate to limit the costs which the donor network operator, which has a degree of control over the level of the costs, can recover from the recipient network operator.

Distribution of benefits

4.10 Costs of MNP should be recovered from those who benefit from it. Benefits from MNP accrue both to customers porting their numbers and also to mobile customers in general through increased competition in the mobile market. Customers calling from a fixed line would benefit only indirectly from MNP, if the mobile operator would compete more fiercely on call charges to mobiles. This suggests that, on the Distribution of Benefits principle, costs should be recovered from mobile customers generally, with possibly some costs being recovered from mobile customers who port their numbers.

Effective competition

4.11 The costs of MNP should be recovered in a way that promotes effective competition. This means that the charging structure should not distort competition, or deter operators from introducing mobile number portability.

Reciprocity

4.12 Reciprocal charging implies that the charges relating to a customer porting from one operator to another should apply to a customer porting in the opposite direction.

Practicality

4.13 So far as possible, the outcome should be easy to implement.

4.14 In the context of these principles it was the Director’s initial view that Orange had provided no evidence of a material change in circumstances that might lead him to believe a departure from the established principles was justified in making a Draft Direction.

4.15 For the reasons outlined above, the Director considered that the request made by Orange would shift cost burdens onto BT which would then be forced to levy charges for costs of MNP across all calls, fixed and mobile. Previous determinations by the Director have supported the principle that costs should be borne by mobile operators and their customers. The Director found no reason to depart from that principle in this case in the absence of evidence of a material change in circumstances.

Responses to the consultation and the Director’s comments

Orange

4.16 Orange questioned the logic of Oftel’s conclusion in paragraph 4.8 above and its consistency in the application of charging principles. Orange argued that neither the mobile customer nor originating caller have any control over how a call is routed to a ported number. This decision rests with the networks involved, primarily the originating network. A ported mobile customer cannot influence an inefficiency in an originating network’s routing practice. Orange therefore questioned why mobile customers should be expected to bear the costs of inefficiency in fixed networks that are beyond their control. Orange stated that Oftel’s interpretation of the charging principles also appeared to be at odds with recent decisions in respect of cost recovery of additional capacity required by BT to provide Single Tandem Flat Rate Internet Access Call Origination (‘ST FRIACO’). In that decision, Oftel argued that all operators and their customers, whether beneficiaries of ST FRIACO or not, must bear the additional costs arising from the introduction of services using ST FRIACO. Orange sought clarification of what it argued to be a major inconsistency in the application of charging principles. Orange stated that although the UK was among the first to implement MNP it is now lagging behind Europe where direct routing is the most widely adopted network implementation for MNP. Orange sought confirmation from Oftel that it agreed that indirect routing is inefficient. Orange also requested, on the supposition that charging principles are not being used to promote routing efficiency, what other initiatives Oftel intended to undertake or support to ensure that UK technical implementation meets levels of efficiency achieved by other European countries.

4.17 Call routing is determined by the originating network and the mobile network(s) concerned. Ultimately, however, the network’s customers pay the cost of routing the call. Mobile customers who port their number set up the routing inefficiency and receive the benefit of a ported number. The originating caller is neither the cause of the routing inefficiency nor the direct beneficiary of the ported number. It is therefore unreasonable for the originating network and consequently its customers to have to bear the costs of MNP. In the case of ST FRIACO, the provision of the additional capacity required in tandem switches to provide ST FRIACO services benefits not only customers taking up FRIACO services but all users of tandem switch capacity. It is therefore appropriate that all users should bear a fair share of the costs. The Director does not therefore see any inconsistency in the principles applied to ST FRIACO and MNP as suggested by Orange. The charging principles applied by the Director for MNP are fully analogous with the promotion of efficiency and direct routing. Under present arrangements, both Donor and Recipient network have a combined incentive to invest in a more efficient routing process. The Director’s view is that any lead in seeking a technical solution to the efficient routing of MNP should properly come from the industry.

BT

4.18 BT stated in the comments on comments phase that Mobile Licence Condition 68.1 (d) Mobile Number Portability states that "the Donor Operator shall make no specific charge based on additional Conveyance Costs". BT stated that Operators should continue to recover portability conveyance costs indirectly in standard charges. Where calls transit networks as a result of portability, but neither originate nor terminate on-net, BT stated Orange could seek to recover these costs through an Average Porting Conveyance Charge. BT argued that this system operates already for fixed number portability and would enable Orange to recover its costs without forcing an unworkable scheme where either individual calls may be charged at different rates depending on where a number was ported, or where individual calls needed to be identified as originating on or off-net. BT argued that an approach as suggested by Orange would also seem to contravene Article 1 clause 3 of the Number Portability Directive (Directive 98/61/EC of 24 September 1998 amending 97/33/EC) which states; "National Regulatory authorities shall ensure that pricing for interconnection related to the provision of this facility is cost-orientated and that direct charges to consumers, if any, do not act as a disincentive for use of this facility."

4.19 BT also stated that in its view the inference by Orange that the UK should now move to direct routing for number portability has far reaching implications on operators in terms of cost and infrastructure development. BT stated its view was that the cost of setting up and administering a new system outweighs the current cost of routing practices. BT understands that this is a view shared by the industry at present and stated that Orange should take its arguments forward in the appropriate industry groups as it is not a matter that can be addressed in BT’s interconnect contract with Orange.

4.20 The Director’s view is that the cost of conveyance to the Donor operator, as represented in its half of the DCC, should be subsumed into general network costs, spreading the cost over all calls on the network. Such an approach follows the principle of cost minimisation, encouraging operators to minimise additional conveyance and thus adopt the most efficient routing method of providing portability. It also reflects the distribution of benefits principle as additional conveyance costs are recovered from all customers of the network, in the same way that the benefits of number portability accrue to all customers through enhanced competition. The Director also considers that any move to direct routing practices in the industry will properly result from the correct economic incentives on operators. The Director’s view is that current charging arrangements for MNP provide such incentives at present.

Vodafone

4.21 Vodafone stated that the current method used to accomplish mobile number portability in the UK is ‘tromboning’, where calls are routed first to the donor operator’s network and then on to the recipient network. Vodafone stated that this has little impact on network performance at low levels of porting, but its effects increase as more customers choose to change network but retain their number. For this reason, if porting is to be continued and expanded, the technical and commercial approach chosen should be one that effectively supports the demands placed upon it. In the event of there being a desire to migrate to such a new approach it would be necessary for there to be incentives on all operators, both originating and terminating, to migrate. Vodafone stated that this issue is fundamentally bound up with the technology that might be used to accomplish MNP and indeed whether MNP is desirable and pro-competitive at all. Vodafone stated it is not clear that efficiency incentives exist on originating operators who are not mobile players to migrate to a new approach. Vodafone considers this likely to constrain possible new technical solutions for number portability.

4.22 The Director agrees with Vodafone’s analysis that the costs of inefficient routing increase with the number of customers porting their numbers to another network. While the porting of numbers and therefore the cost remains low, there is little incentive for operators to invest in a more efficient routing system. As the number of porting customers and therefore the costs of inefficient routing grow, so do the incentives upon operators to invest in a more efficient solution. As stated in response to the comments from Orange above, the charging principles applied by the Director for MNP are fully aligned with the promotion of efficiency and direct routing. The Director’s view is that any lead in seeking a technical solution to the efficient routing of MNP should properly come from mobile operators, however.

NIACT

4.23 NIACT declined to comment on the substance, as it believed the issues were for the industry rather than Oftel to determine.

The Direction

4.24 Having duly considered all of the comments made in response to the Draft Direction and the matters in Regulation 6(8) of the Telecommunications (Interconnection) Regulations 1997, the Director sees no reason to change the basis for the Draft Direction concerning Mobile Number Portability as contained in the consultation document. He concludes that the request made by Orange should be dismissed and current contractual arrangements maintained.

Chapter 5 – Post Direction Actions

5.1 This Direction has been made in response to the submissions made by Orange and BT and applies only to these operators.

5.2 On the issue of mobile origination of freephone calls, the Director invites the industry, as it sees appropriate, to seek agreement on new charging arrangements following the completion and submission of any appropriate research on the attitude of service providers to attracting such calls.