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| Draft Direction under the provisions of Regulation 6(6) of the Telecommunications (Interconnection) Regulations 1997 of a dispute between Cable and Wireless ("C&W") and British Telecommunications plc ("BT") over BT’s refusal to allow calls to NTS services to be excluded from its Retail Discounts | |
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Contents Explanatory memorandum Chapter 1 Summary Chapter 2 Background Chapter 3 History of the dispute Chapter 4 The arguments made by the parties Chapter 5 The Director’s decision and reasons Chapter 6 Arrangements for making and viewing representations Draft Direction under the provisions of Regulation 6(6) of the Telecommunications (Interconnection) Regulations 1997 of a dispute between Cable and Wireless ("C&W") and British Telecommunications plc ("BT") over BT’s refusal to allow calls to NTS services to be excluded from its Retail Discounts WHEREAS: (A) The Secretary of State granted to British Telecommunications plc on 22 June 1984 a licence (the "BT licence") under section 7 of the Telecommunications Act 1984 ("the Act") for the running of telecommunications systems specified in that licence; (B) By virtue of section 109 and paragraph 20 of Schedule 5 of the Act the BT licence has effect as if granted to British Telecommunications plc ("BT"); (C) The Secretary of State has granted to Cable and Wireless Communications ("C&W") on 5 December 1991 , a licence under section 7 of the Act for the running of telecommunications systems specified in that licence; (D) C&W entered into a Standard Interconnect Agreement with BT on 1 May 1998; (E) On 30 March 2001 C&W requested that BT remove the impact of its retail discount figures on payments for calls to terminating operators NTS number ranges. BT did not accept C&W’s request and a dispute has arisen. (F) On 25 September 2001, in accordance with the provisions of Regulation 6(6) of the Telecommunications (Interconnection) Regulations 1997 ("the Regulations"), C&W referred the dispute to the Director for determination; (G) Regulation 6(6) of the 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. The direction which the Director makes to resolve the dispute must represent a fair balance between the legitimate interests of the parties, and must be notified to the parties in accordance with Regulation 8(3). The parties are entitled to a full statement of the reasons on which the direction is based; (H) The Director has considered inter alia, the information provided by the parties and the matters set out in Regulation 6(8) of the Telecommunications (Interconnection) Regulations 1997. The principal points are summarised in the explanatory memorandum which accompanies, and is published with, this direction; (I) The Director issued a draft of this direction and the explanatory memorandum which contains the Director’s reasons on ………and responses were invited by …………..; (J) Comments were received from ……….. as detailed and discussed in sections …… of the explanatory memorandum which accompanies and is published with this direction. These comments have been taken into consideration by the Director in making this direction; THEREFORE: 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, the Director makes the following direction to resolve the dispute between BT and C&W: 1. From the date of this direction C&W may choose to exclude some or all calls to its NTS from BT’s retail discounts. 2. Except as otherwise defined in this direction, words or expressions used shall have the same meaning as in the Act, the BT licence or BT’s Standard Interconnect Agreement as appropriate. 3. The parties shall modify their interconnect agreements to give effect to this direction. 4. This direction shall take effect on the day it is published. CHRIS KENNY ………… March 2002
Explanatory Memorandum Summary 1.1 The Director General of Telecommunications ('the Director') has issued a draft direction in accordance with the provisions of Regulation 6(6) of the Telecommunications (Interconnection) Regulations 1997 for the resolution of a dispute between Cable and Wireless (C&W) and BT under the terms of their Interconnect Agreement. The direction sets out the Director’s draft decision in relation to the ability of C&W to choose whether calls to its their Number Translation Services (NTS) number ranges should be subject to BT’s retail discount schemes. The facts 1.2 On 4 September 2001 Oftel published the Direction of BT’s NTS Discounts which established the level of discounts that should apply to calls to 0845 and 0870 NTS services from 1 September 2000. The explanatory memorandum to that direction identified a number of follow-up activities raised during Oftel’s investigations or from the consultation on Oftel’s draft proposals. One of these was the request by operators to be able to selectively opt in or out of BT’s retail discount schemes. 1.3 On 25 September Oftel received a request to resolve a dispute between C&W and BT. BT had refused to allow calls to C&W’s NTS to be excluded from BT’s retail discounts. The considerations 1.3 In reaching his initial view in this dispute, the Director has considered the arguments put forward by C&W in its request for a determination and by BT in its response. He has also considered the submissions made by operators in response to Oftel’s Draft Direction of BT’s NTS Discounts, published, on 23 May 2002 and from earlier representations made to Oftel on this subject. The main arguments can be summarised as follows: C&W’s views
BT’s views
1.4 The details of the Director’s considerations of this dispute are set out in Chapter 5 of this document. In summary, the Director considers that the fact that BT is generally increasing the levels of discounts available to its retail customers can have the effect of undermining operators’ terminating revenues and may unduly prevent sensible revenue planning. Furthermore, given that the retail prices for services are advertised by the service provider whose responsibility it is to ensure their customers are aware if calls will not be discounted, the ability for operators to opt-out of BT’s discounts is unlikely to significantly increase customer confusion. 1.5 Accordingly the Director’s initial view is that, with effect from the date of the final direction, C&W should be able to choose not to have calls to its NTS number ranges subjected to BT’s retail discounts. Alternatively, BT may also choose to continue to apply discounts to retail prices but exclude the effect from its payments to C&W.
Background 2.1 In previous determinations of NTS charges Oftel has given a detailed description of the NTS revenue sharing arrangements and how they were arrived at. Most operators are now familiar with this narrative and it is not, therefore, repeated in this document. Anyone wishing to read the detailed description can refer to Oftel’s earlier NTS directions (also known as determinations) which can be found on Oftel’s website. Two such documents can be found at: www.oftel.gov.uk/publications/1999/pricing/btfc499.htm www.oftel.gov.uk/publications/pricing/ntsd0901.htm Changes to the NTS regime from 1 January 2000 2.2 In December 1999, Oftel published its Statement on the Relationship between Interconnection Charges and Retail Prices for Number Translation Services (now known as 'the NTS Statement'). This followed a lengthy discussion and consultation exercise in response to a general industry view that the NTS formula constrained the ability of terminating operators to exercise sufficient control over their NTS revenues. The new regime was intended to allow terminating operators to establish the price at which they would be remunerated for NTS calls. This price would then be added to BT’s regulated call origination charge plus any transit charges, where appropriate, to establish the retail price for their service. 2.3 In practice operators select a retail price for calls to their services which will, as near as possible, deliver their required revenue after call origination and transit costs have been removed. However, this revenue is also subject to the discounts BT offers to its retail customers. These discounts form part of BT’s means of meeting its retail price control requirements. The combination of headline price reductions and discounts enable BT to achieve its overall ‘RPI-X’ target. 2.4 Discounts take the form of ‘Inclusive Call Allowances’ and price reductions and are also used by BT as an incentive to help retain its customer base in the face of price competition from other operators. Over the years BT has continually extended the range and type of discounts it offers and has increased the proportion of its customer base who benefit from them. As a consequence when it periodically seeks to review the level of discounts it gives for NTS calls the average inevitably increases. This has the effect of reducing the revenues paid to terminating operators for calls to their services. 2.5 Operators have voiced concern over this on a number of occasions since Oftel’s NTS Statement. Many believe that BT’s ability to review its discounts undermines the control over their revenues the NTS Statement sought to give them. Concern over this became clear at NTS Focus Group (NTS FG) meetings later in 2000 when the new 0844 and 0871 number ranges started to be used. As a result Oftel wrote to BT on 1 February 2001 seeking its views on the proposal to allow operators to choose whether calls to their NTS services should be subject to BT’s discounts. 2.6 BT gave its reply in a letter dated 16 February 2001 in which it voiced its opposition to such a proposal on the grounds of the detrimental effects it would have for customers and the fact that operators could use the new NTS rules to ensure they received the payments they required.
History of the Dispute Prior history 3.1 On 30 January 1996 Oftel published the determination of Interim Charges for BT’s Initial Standard Services for the year ending 31 March 1996. This determination described the original NTS formula at Annex 6 and is discussed at paragraph 2.2 above. 3.2 Addendum 8 to the determination prescribed that, for NTS, the Deemed Retail Price should be: in the case of Lo-call services (0345) and National call (0990) services, the retail price charged by the ONO for local or national calls (exclusive of VAT), as the case may be, minus the ONO's average discounts for such calls based on the ONO's average revenue figures (or, if the ONO's discounted price was greater than BT’s adjusted retail price for that call minus 6.5%, then BT’s adjusted retail price minus 6.5%). 3.3 On 12 November 1996, Oftel published the determination of Interim Charges for BT’s Standard Services for the year ending 31 March 1997 in which, at Addendum 6, the determined discount for local and national rate NTS calls was increased to 7.5%. 3.4 Although the determinations applied to access to BT’s services, the principles set out were adopted by other operators for their charges to BT for access to their NTS services. 3.5 On 13 September 1999, Oftel published the direction of BT’s NTS Discounts which upheld BT’s proposals for its average NTS discounts to be increased to 11.45% with effect from 9 January 1999 and 11.75% with effect from 1 April 1999 respectively. 3.6 As described in paragraph 2.2, above, Oftel published its Statement on the Relationship between Interconnection Charges and Retail Prices for Number Translation Services, now known as 'the NTS Statement', on 6 December 1999. The process described in that document replaced the original NTS formula and sought to transfer control of terminating revenues to the operators hosting NTS services. 3.7 It achieved this by de-coupling the retail prices of NTS calls from the originating operators, hitherto, fixed local and national rates and creating price ranges from within which terminating operators could choose to position their services. 3.8 A number of operators saw this as an opportunity to guarantee their revenues by choosing price points and requesting BT not to apply its discounts to these services. BT rejected these proposals for reasons that will be discussed in greater detail in Chapter 4 of this document. 3.9 On 4 September 2001 Oftel made a further direction of BT’s NTS Discounts in response to a dispute arising from the rejection, by a number of operators, of BT’s earlier charge change proposals. In making this direction Oftel found that BT was applying its NTS discounts in different ways to LCFA and NCFA calls. As a consequence Oftel directed that, from 1 September 2000, the average discount for LCFA (0345/0845 etc) calls should be 14.4% but that for NCFA (0870/0990 etc) calls it should only be 2.4%. 3.10 In calculating these new discounts Oftel used data supplied by BT from late 1999. At this time the volume of 0844 and 0871 (new NTS) calls was negligible and the discounts that applied could not be measured. Oftel is currently preparing a draft direction for these discounts using the latest available data which BT has been asked to supply. In the meantime BT is continuing to apply an average discount of 11.75% to these calls. The present dispute 3.11 On 30 March 2001 C&W submitted two Statements of Requirements (SORs) to BT requesting that BT remove the impact of its average discount figures on payments for calls to C&W’s number ranges. BT rejected these proposals in a letter dated 12 April 2001 on the grounds that it was waiting for Oftel’s reaction to BT’s earlier response on this subject given in its letter to Oftel dated 16 February 2001 and referred to in paragraph 2.6 above. BT’s comments are summarised in Chapter 4 of this document. 3.12 Following further discussions with BT and at the NTS Focus Group, Cable & Wireless (C&W) wrote to Oftel on 25 September 2001 requesting Oftel to resolve a dispute between C&W and BT arising from BT’s rejection of a request that its retail discount schemes should not be applied to C&W’s NTS number ranges.
The arguments made by the parties C&W 4.1 C&W argued that terminating operators, in requesting terminating payments from BT, should be able to calculate the resultant retail prices for calls to specific number ranges. This, C&W asserted, was the intention of the new NTS regime established by Oftel from January 2000. However, BT has retained control of discounts which BT retail customers receive on calls to non-BT NTS numbers. 4.2 C&W agreed that BT has a legitimate interest to recover its costs of originating NTS traffic and nothing in C&W’s proposal prevents BT from doing so. 4.3 C&W commented on how BT had suggested that customer confusion will be created if some NTS number ranges receive discounts and others do not. In directing the ‘new NTS’ regime Oftel opened up the new 0844 and 0871 number ranges for calls priced up to 5ppm and up to 10ppm respectively. C&W argued that retail customers have little idea of which NTS number ranges are eligible for which discount schemes. As such excluding some numbers from discounts altogether is unlikely to have a significant impact on customer confusion. 4.4 C&W asserted that BT should be regulated in call origination in a manner consistent with Oftel’s December 1999 NTS Statement. Terminating operators have made investments on assumptions that the regime set out in that statement would be enforced. 4.5 C&W pointed out that BT had argued that the existence of a range of retail price points enables terminating operators to offer services at different price points if they are unhappy with the termination payments received. In practice this would mean terminating operators would have to change number ranges or port their customers onto new ranges each time BT reviewed its NTS discounts. C&W argued that this is not a viable proposition and means that advertised retail prices would have to be increased to accommodate the change. 4.6 C&W said that BT is dominant in call origination and competes with C&W (and other operators) in the provision of NTS services. This market is potentially competitive, but BT’s ability to restrict the commercial offerings of other terminating operators means that it is not effectively competitive. 4.7 C&W’s proposals will enable terminating operators to better meet the needs of service providers who want to provide a range of services to end-customers. This is clearly pro-competitive. BT 4.8 Oftel referred C&W’s letter, requesting the resolution of this dispute, to BT for comment. BT’s response is summarised below. 4.9 BT agreed that C&W had indeed submitted Statements of Requirements (SORs) requesting BT to cease to apply retail discounts to calls made by BT’s retail customers to C&W’s NTS number ranges. However, this issue was not specific to C&W as other operators had expressed similar requirements and specifically in response to Oftel’s recent consultation on the Direction of BT’s NTS Discounts. BT’s view was then and remains that the removal of certain number ranges from BT’s retail discount schemes would be undesirable, particularly from a consumer viewpoint, and was, in any case, being debated at industry level. 4.10 BT added that, ever since publication by Oftel of the 1999 NTS Statement, it has maintained that its average levels of retail discounts must be reflected in its NTS retention if it is to fully recover its costs of originating calls to other operators NTS services. BT added that Oftel has also always supported the principle that originating operators must always cover their costs in these circumstances, quoting from a letter received from Oftel on 4 February 2000. This said: "BT must ensure terminating operators are aware that calls to their services will be subject to discounts. As such terminating POLOs will be net of BT’s average discount, in force at that time, and will change with any subsequent change in average discounts. Terminating operators may then choose to adjust their POLOs to allow for BT’s discounts." (NB: The Payment to Other Licensed Operator (POLO) is the NTS termination payment made by BT) 4.11 BT referred to C&W’s proposal as representing a change to this position which was not justified. C&W’s concern centred around the key purpose of the ‘new NTS’ regime that terminating operators should be able to set "competitive" prices for access to their services. BT believed its discount policy does not dilute that philosophy. Its discounts are applied uniformly, by category of service, to calls to all terminating operators offering those services. The discount packages are well known and described in great detail in the BT Price List. It is, therefore, a simple matter for terminating operators to set competitive retail prices for calls to similar services offered by other operators. 4.12 BT also pointed out the potential for customer confusion that would be brought about by having to effectively double the number of retail charge bands to accommodate number strings which are, or are not, eligible for discounts. 4.13 BT also referred to a letter sent to Oftel in February 2001 in which it sought to warn of the potential for very serious customer issues which would arise from this proposals and of which it was not convinced Oftel was aware of or had taken into account. In this letter BT described how its discounts schemes included volume and call pattern options designed to recognise its customers level of spend and/or fit their calling patterns. BT’s customers, it alleged, are very well aware of the discounts for which they, and the calls they make, are eligible. Many have included their 0X45 internet access number in their ‘Friends & Family Calling Circles’ and some as their ‘Best Friend’ 4.14 If operators were allowed to opt out of discounts BT claimed it could not make up for the loss to the customer from its share of the income. The removal of retail discounts could, in some cases, mean a price increase of up to 85% for such customers who would have to be advised personally of such a change. It was surely not the aim of the NTS regime (or, indeed, Oftel) potentially to increase prices for calls to the internet. Those worst affected would be customers using pay-as-you-go services as opposed to those able to pay monthly fees. 4.15 Concern was also expressed by BT over how billing for discounted and non-discounted calls would work if numbers were issued like-for-like in 1k blocks. It was unable to give any commitment that it would undertake any work to enable its billing system to discriminate in terms of discounts down to the 1k level. It suggested Oftel should set aside 10k blocks for each service type and price point from which operators could choose 1k blocks for their service.
The Director General’s decision and reasons 5.1 Oftel has approached this dispute on the basis of the ‘new NTS’ scheme as it is currently constituted. In the Explanatory Memorandum to the September 2001 direction of BT’s NTS Discounts Oftel made the following comment: "Although one of the objectives of the scheme is to give terminating operators greater control of their revenues, it is not open to Oftel to prevent BT from periodically reviewing its discounts solely on the grounds that such a review impacts adversely on the revenues of terminating operators." 5.2 That direction also identified three areas where further work needed to be done in support of the NTS regime. One of these was to decide whether the key objective of ‘new NTS’, ie to give terminating operators greater control of their revenues, was being achieved if calls to operators services were compulsorily subjected to BT’s discounts. 5.3 C&W and other operators have argued vigorously in favour of being able to elect whether to have discounts applied and BT has argued equally vigorously against such a proposal. The Director has made his draft decision based on the following considerations. 5.4 The Director’s draft decision has firstly been based on legal advice and an analysis of the facts. It has also been based on consideration of the criteria set out in Article 9(5) of the Interconnection Directive 97/33/EC (as implemented in Regulation 6(8) of the Telecommunications (Interconnection) Regulations 1997), in particular the relevant market position of the parties, the promotion of competition and the interests of users. In the view of the Director this draft direction represents a fair balance between the interests of the parties. 5.5 The Director considered whether BT’s discount policy, applied at a retail level, had the effect of distorting competition in wholesale NTS call termination. This includes whether BT is targeting discounts in order to unfairly disadvantage operators’ service. In the event discounts apply uniformly across NTS number ranges according to the types of services being offered. They, therefore, apply equally to BT’s and operators similar retail services. 5.6 The Director has also considered the significance of Oftel’s recent conclusions regarding BT’s market position given in its Effective Competition Review: dial-up Internet access published on 29 January 2002. This review concluded that BT’s dominance in call origination means that this market is not effectively competitive. Furthermore, changes to the call termination market and recent growth in BT’s market share together with the risk that BT may be able to lever market power from call origination into wholesale Internet call termination, lead Oftel to conclude that this market is also not yet effectively competitive. The Director considers that these findings are important in deciding whether BT should continue to be able to impose its discounts on other operators’ NTS services a large proportion of which offer dial-up Internet access in competition with BT. 5.6 Oftel has considered, first, the question of benefits and disadvantages to consumers of upholding C&W’s proposal. Customers who have used their BT discounts to specifically offset the costs of NTS calls will find that calls to their chosen services increase in price. However, those customers will be notified of the increases by BT and will have the option to change either or both their originating network operator and NTS service provider to obtain a better deal. 5.7 There are, equally, numbers of customers who have not signed up for BT’s retail discounts to any great extent. The retail prices of their calls may only increase marginally if at all. 5.8 In regard to BT’s concerns over the potential for customer confusion about what a call or category of call will cost, Oftel considers that this proposal is unlikely to have a significant impact upon an already confused pricing regime. BT’s customers, in all probability, have little idea what calls actually cost when discounts are applied. The existence of 0845 and 0844 number ranges with different prices and tariff gradients adds to this. Oftel created the ‘new NTS’ regime, in part, to encourage price as well as service competition but this has inevitably contributed to a lack of clarity in retail pricing. Removal of discounts is unlikely to add significantly to this effect. 5.9 Oftel does not share BT’s concerns over the potential for damage, by the proposal, to the market for dial-up Internet access. Operators seeking to opt out of discounts risk losing market share in favour of services which continue to attract discounts. However, the ‘new NTS’ regime offers operators the opportunity to adjust retail prices. Terminating operators may, therefore, reduce the headline retail prices for their NTS services to compensate in the knowledge that their revenues will not subsequently be undermined by future reviews of its NTS Discounts by BT. This can only be good for competition in this market. 5.10 Given BT’s recent pricing strategy it is likely that BT’s discounts as applied to NTS calls, in particular to 0844 and 0X45, will continue to increase over time. This has an increasingly negative effect on terminating operators’ revenue. Oftel considers that while, under ‘new NTS’, operators are able to adjust their POLO to achieve continuity in terminating revenues, given the lack of control and visibility over when and how frequently changes can occur, it unreasonable to expect them to change the retail price of calls each time discounts are reviewed by BT. This would involve changing the number range on which the service operates and would have an unreasonable impact on consumers. 5.11 Operators should be able to forecast their likely income from NTS calls with a degree of certainty and not risk unexpected reductions arising from action by BT over which they have no control. The proposed decision 5.12 Having considered the arguments for and against the proposal and the practicalities involved the Director has decided that C&W should be able set its terminating payments without any risk of change through circumstances beyond their control. Accordingly C&W should be to choose to exempt its NTS services from BT’s retail discounts. Alternatively, BT may also choose to continue to apply discounts to retail prices but exclude the effect from its payments to C&W. The BT Price List will, as now, also make it clear whether discounts apply to specific number ranges. Implementation 5.13 At present, with the exception of LCFA and NCFA services, NTS price points are allocated against 10k number blocks from within which individual operators are given 1k blocks. Even LCFA and NCFA are now allocated at the 1k level but from within the entire ranges. BT’s billing system is set up to recognise each 10k block as meaning a particular retail price point and to apply the appropriate discount. This means that operators would not be able to use numbers from within their existing allocations for both discounted and non-discounted services. 5.14 Oftel would need to allocate separate 10k number blocks for non-discounted services across the entirety of NTS numbers and price points including LCFA and NCFA. Operators can then be allocated new 1k blocks from within each 10k block for their services.
Arrangements for making and viewing representations 6.1 The Director General’s proposed draft decision is being made available to interested parties, together with the Director General’s reasons, so that they may have a reasonable opportunity to make representations. Having considered any such representations, the Director General will, if appropriate, make the direction and will notify BT and interested parties of that direction and his reasons for making it. The closing date for submitting representations on both the charging methodology and the charges proposed in this determination is 15 March 2002. 6.2 Where possible, comments should be made in writing and sent by e-mail to: gbrighton@oftel.gov.uk However, copies may also be posted or faxed to the address below. If any stakeholders are unable to respond in one of these ways, they should discuss alternatives with the Oftel manager named below: Geoff Brighton Oftel also proposes that the NTS Focus Group should have an opportunity to discuss this document before the deadlines for submission of comments. A meeting will be called to allow operators to seek clarification of the proposals during the consultation period. Further copies of this document 6.3 Paper copies of this document and more accessible formats such as large print, Braille, disc and audio cassette can be made available on request. Please contact Oftel’s Research and Information Unit by phoning 020 7634 8761 or by sending an e-mail to infocent@oftel.gov.uk. Publication of representations made by stakeholders 6.4 On this occasion, Oftel is not programming a formal period during which interested parties may comment on the representations made by others. However, in the interests of transparency, all representations will be published, except where respondents indicate that a response, or part of it, is confidential. Respondents are therefore asked to separate out any confidential material into a confidential annex which is clearly identified as containing confidential material. Oftel will take steps to protect the confidentiality of all such material from the moment that it is received at Oftel’s offices.(repetition). 6.5 Non confidential representations can be viewed on Oftel’s website in the Publications section under classification Responses to Oftel consultations. They can also be viewed at Oftel’s Research and Information Unit. Appointments must be made in advance by phoning 020 7634 8761 or sending an e-mail to infocent@oftel.gov.uk.
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