Contents

The Direction

Explanatory Memorandum

Chapter 1 Summary

Chapter 2 Background

Chapter 3 History of the Dispute

Chapter 4 The initial arguments made by the parties and the Director’s draft decision

Chapter 5 Comments received to the draft direction and Oftel’s responses

Chapter 6 The Director’s final decision

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;

(C) The Secretary of State has granted to Cable and Wireless Communications (Mercury) Limited ("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 Regulations. The principal points are summarised in the explanatory memorandum which accompanies, and is published with, this direction;

(I) The Director issued a draft of this direction and the explanatory memorandum which contained the Director’s reasons on 15 February 2002 and responses were invited by 15 March 2002.

THEREFORE:

Pursuant to Regulation 6(6) of the Regulations, and having considered the views of the parties, other submissions made to him 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 request that BT excludes some or all calls to its NTS from BT’s retail discounts where those calls are to non-discounted NTS number ranges allocated for this purpose within the 0844 and 0871 number ranges.

2. C&W may not choose to request that BT excludes any calls to its NTS from BT’s retail discounts where those calls are to 0844, 0845, 0870 or 0871 NTS number ranges on which services already exist or which not been allocated for the purpose of terminating non-discounted services

3. 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.

4. The parties shall modify their interconnect agreements to give effect to this direction.

5. This direction shall take effect on the day it is published.

CHRIS KENNY

DIRECTOR OF COMPLIANCE

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

31 May 2002

Explanatory Memorandum

  1 Summary

The facts

1.2 On 4 September 2001 Oftel published the Direction of BT’s NTS Discounts which established the revised level of discounts that should apply to calls to 0845 and 0870 NTS services from 1 September 2000. The discounts applying to 0844 and 0871 numbers were not revised at that time. 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 2001 Oftel received a request to resolve a dispute between C&W and BT. BT had refused to allow C&W’s request that calls to its NTS numbers be excluded from BT’s retail discounts.

The considerations

1.4 In reaching his decision in this dispute the Director has considered the matters in Regulation 6(8) of the Regulations, submissions made by the parties and other respondents to the consultation along with other relevant representations which have been made (for example, submissions made by operators in response to Oftel’s Draft Direction of BT’s NTS Discounts, published, on 23 May 2001 and earlier representations made to Oftel on this subject). The main arguments can be summarised as follows:

C&W’s views (and those of other operators)

• BT’s ability to increase its average NTS discounts, periodically, undermines operators’ revenue forecasts;
• despite the intention behind Oftel’s 1999 NTS Statement operators, still do not have control over their revenues;
• the existing pricing regime is already extremely confusing for consumers and this proposal will not add significantly to that confusion;
• the removal of BT’s discount will enable operators to offer more competitively priced services without risking erosion of revenues through discounts.

BT’s views

• A regime where some services are discounted whilst others are not will create confusion amongst consumers;
• BT will fail to cover its call origination costs unless the full effects of operator opt-out are passed onto retail customers;
• Some consumers may face increases of as much as 85% in the charges for Internet access;
• The proposal would have the potential to damage the market for dial-up Internet access through enforced price increases;
• BT believes its current policy does not dilute terminating operators’ ability to control their NTS revenues.

The draft proposals

1.5 On 15 February 2002 the Director published his draft decision in this dispute which proposed that C&W should be able to choose not to have calls to its NTS number ranges subjected to BT’s retail discounts. In order to implement this, it was proposed that Oftel would allocate new number ranges for non-discounted services.

1.6 A number of operators responded to the draft direction. The non-confidential responses and Oftel’s comments on them, are summarised in Chapter 5 of this document. The detailed, non-confidential responses can be found on Oftel’s website at: http://www.oftel.gov.uk/publications/responses/2002/btref0202/index

The final decision

1.7 The details of the Director’s considerations of this dispute and his final decision are set out in Chapter 6. In summary, the Director considers that enabling operators to exclude calls to their NTS numbers from BT’s retail discount schemes supports the principle set out in Oftel’s NTS Statement published in December 1999. This sought to establish the means whereby terminating operators could control their revenues for calls to services hosted on their numbers by setting the retail price for those calls. The fact that BT can subsequently vary the average discount available to its retail customers undermines this control and may unduly prevent sensible revenue planning. More fundamentally, it is necessary for terminating operators to have pricing freedom in order to secure a vigorous and competitive market for access to services.

1.8 However, the Director is mindful of the potential for consumers to be confused in this new situation where calls to similar services may or may not be eligible for BT’s retail discounts. He therefore believes that, in seeking to remove discounts from calls to existing services, a tangible signal must be given to consumers that the change is occurring. This would be difficult to achieve if those services were to remain on their existing access numbers as there would be no guarantee that service providers would proactively tell their customers that the effective price of accessing their service was about to rise.

1.9 Furthermore, in allowing operators to elect whether calls to the services they host should be discounted, the Director is not sanctioning an automatic increase in the real cost of accessing these services and in particular dial-up Internet access. The Director considers that the use of separate numbers for non-discounted calls affords the opportunity for operators to choose new retail prices for their services which will enable them to compete with services which retain discounted calls. In short this decision is expected to eventually encourage increased price competition in the cost of calling services which remain predominantly at BT’s local rate.

1.10 Accordingly the Director has decided that, with effect from the date of this final direction, C&W should be able to exclude calls to its NTS number ranges from BT’s retail discounts. If it chooses to do so, however, C&W must move its services to new non-discounted number ranges which will be made available by Oftel from within 0844 and 0871. BT’s normal contractual timescales for establishing new retail price points will apply from the date that BT receives requests to open the new numbers. Thereafter, once the new price points have been set up, BT’s normal contractual timescales for opening new number ranges on existing price points will apply. The Director expects that, in implementing this decision (which could apply equally to all operators), BT and operators will give the clearest possible warning signals to consumers that the calls they make to existing services (which are moved to the non-discounted number ranges) may no longer attract discounts.

1.11 Having considered all relevant considerations including those matters set out in Regulation 6(8) of the Regulations (as discussed in Chapters 5 and 6 of this document) the Director considers that this decision represents a fair balance between the interest of the parties. He also considers that his decision gives the correct balance to the matters under Regulation 6(8) and has, in particular, considered the promotion of competition, the relevant market positions of the parties and the public and user interests.

Chapter 2

Background

2.1 In previous NTS determinations Oftel has given a detailed description of the NTS revenue sharing arrangements and how they were arrived at. Most operators are now familiar with this narrative and it is not, therefore, repeated in this document. Anyone wishing to read the detailed description can refer to Oftel’s earlier NTS directions (also known as determinations) which can be found on Oftel’s website. Two such documents can be found at: http://www.oftel.gov.uk/publications/1999/pricing/btfc499.htm http://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 can be found on Oftel’s website at: http://www.oftel.gov.uk/publications/1999/pricing/nts1299.htm

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 can 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 subject to the discounts that BT offers to its retail customers. Over the years BT has continually extended the range and type of discounts it offers and has increased the proportion of its customer base that benefits from them. As a consequence, when it periodically seeks to review the average level of discounts it applies to NTS calls this average discounts inevitably increases in a way that is not capable of being predicted by the terminating operators.

2.4 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 that the NTS Statement sought to give them. Concern over this became clear at NTS Focus Group meetings later in 2000 when the new 0844 and 0871 NTS number ranges started to be used. The background to this actual dispute is contained in Chapter 3 which describes how Oftel’s decision to consult on whether operators should be able to exclude calls to the NTS numbers from BT’s discounts was formalised by C&W’s request for a determination of the issue.

Chapter 3 

  History of the Dispute

Movement in average discounts

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.

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 – now 0845) and National call (0990 – now 0870) services, the retail price charged by the originating operator for local or national calls (exclusive of VAT), as the case may be, minus the originating operator’s average discounts for such calls based on the originating operator's average revenue figures (or, if the originating operator’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 Since the introduction of Network Charge Controls in October 1997, when Oftel ceased to determine BT’s wholesale charges, BT has sought three further increases in the average discounts applied to NTS calls. In all three cases BT’s pricing proposal was disputed by a number of operators leading to Oftel having to determine the levels of discounts that BT should apply.

3.6 The first two disputes were resolved in Oftel’s direction of BT’s NTS Discounts published on 13 September 1999. These set the overall average discount for all NTS at 11.45% with effect from 9 January 1999 and 11.75% with effect from 1 April 1999 respectively. Subsequently on 4 September 2001 Oftel published a further direction of BT’s NTS Discounts which gave that, from 1 September 2000, the average discount for LCFA or Local Call Fee Access (0845 ) calls should be 14.4% and for NCFA or National Call Fee Access (0870) calls, 2.4%. Discounts applying to 0844 and 0871 numbers remained at 11.75% because these ranges were largely unused before September 2000 and consequently no data was available to re-calculate the applicable discounts.

3.7 From information supplied by BT, Oftel estimates that the average discounts applicable to LCFA calls will show further significant increases when these are reviewed again.

Control of Terminating Revenues

3.8 On 6 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 document detailed the ‘new NTS’ regime which sought to give control of terminating revenues to the operators hosting NTS services.

3.9 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.

3.10 In practice, BT has created pricing ladders which allow operators to select retail prices for services which, after BT’s call origination charges have been removed, deliver the outpayments they require. In doing so Oftel also advised terminating operators to take account of BT’s average discounts in setting their retail prices. However, in giving this guidance Oftel had no way of predicting the rate at which discounts, particularly to LCFA calls, would continue to increase.

3.11 In the discussions leading to the draft direction of this dispute, BT argued that the ‘new NTS’ rules enabled operators to re-price their services when BT reviews its discounts. However, this can only be achieved by moving services to new 0844 or 0871 numbers each time BT’s discounts change.

3.12 Rather than change their numbers, a number of operators sought to secure certainty of their revenues by requesting BT not to apply its discounts to these services. BT rejected these requests for reasons that will be discussed in greater detail in Chapter 4 of this document.

The present dispute

3.13 This subject became a focus of concern at NTS Focus Group meetings. As a result Oftel wrote to BT on 1 February 2001 seeking its views on a proposal to allow operators to choose whether calls to their NTS services should be subject to BT’s discounts.

3.14 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 consumers and repeated its view that operators could use the new NTS rules, as described in Paragraph 3.11, to ensure they received the payments they required. On receipt of BT’s comments Oftel concluded that this matter should form the basis for a consultation exercise at the earliest opportunity. However, the existence of a number of other key NTS disputes at the time prevented any immediate progress.

3.15 The matter continued to be discussed at NTS Focus Group meetings where Oftel confirmed its intention to consult on the matter. Oftel restated this intention in paragraph 7.5 of the Explanatory Memorandum to its May 2001 Draft Direction of BT’s NTS Discounts from September 2000 which can be found on Oftel’s website at: http://www.oftel.gov.uk/publications/pricing/ntsd0501.htm and again in paragraphs 7.6 to 7.9 of the Explanatory Memorandum to its September 2001 Direction of BT’s NTS Discounts from September 2000 which can be found at: http://www.oftel.gov.uk/publications/pricing/ntsd0901.htm

3.16 In the meantime, 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 NTS number ranges. BT rejected these SORs 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. Oftel had not given a response because BT’s letter had simply proposed discussing the matter further at the NTS Focus Group and because Oftel had not then formed a view on the merits of the proposal. In the event the subsequent NTS Focus Group discussions led to Oftel’s statement of intent to consult as described in paragraph 3.15.

3.17 C&W, nonetheless, sought to formalise BT’s refusal to accept its proposals and wrote to Oftel on 25 September 2001 asking the Director to resolve a dispute between C&W and BT arising from BT’s refusal to remove the effect of all NTS discounts where C&W had requested that BT does not apply its retail discount schemes to C&W’s NTS number ranges.

  Chapter 4

The initial arguments made by the parties and the Director’s draft decision

C&W

4.1 In its referral to Oftel, 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. C&W stated that 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 consumers 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. C&W stated that 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-consumers. This is clearly pro-competitive.

BT

4.8 Oftel sent C&W’s referral letter to BT for comment. BT’s response at that time 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 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 proposal 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 consumers 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 0845 internet access number in their ‘Friends & Family Calling Circles’ and some as their ‘Best Friend’

4.14 BT claimed that if operators were allowed to opt out of discounts it could not absorb the effects from its regulated retention. BT said that the removal of retail discounts could, in some cases, mean a price increase of up to 85% for such consumers who would have to be advised personally of such a change. It was submitted that it was surely not the aim of the NTS regime (or, indeed, Oftel) to potentially increase prices for calls to the internet. Those worst affected would be consumers 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 draft decision

4.16 Having considered the arguments for and against the proposal the Director issued a draft direction on 15 February 2002 for consultation. The Director proposed that C&W should be able set its terminating payments without any risk of change through circumstances beyond its control. Accordingly, he proposed that C&W should be able to choose to exempt its NTS services from BT’s retail discounts. He commented that alternatively, BT may consider choosing to continue to apply discounts to retail prices but exclude the effect from its payments to C&W. The Director expected that the BT Price List would make it clear whether discounts apply to specific number ranges.

4.17 The Director gave an initial view on implementation proposals as follows.

4.18 The Director noted that, 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. 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. (NB: Factual errors in this paragraph are addressed in paragraphs 5.28 and 5.29)

4.19 The Director therefore indicated that Oftel would need to allocate separate 10k number blocks for non-discounted price points from within the 0844 and 0871 number ranges. Each new 10k range would correspond to each existing discounted price point including LCFA and NCFA. He suggested that operators could then be allocated new 1k blocks from within each 10k range for their non-discounted services (see paragraph 5.30).

Chapter 5.

Comments received to the draft direction and Oftel’s responses

5.1 Comments were received from BT and four operators one of which was marked ‘Confidential’. The non-confidential comments are available on Oftel’s website at: http://www.oftel.gov.uk/publications/responses/2002/btref0202/index

5.2 It should be noted that whilst this direction has been made in respect of a dispute between BT and C&W, it arises out of inconclusive industry discussions that have taken place over some time. C&W sought only to formalise the matter for Oftel to resolve. BT commented, in its detailed response, that the Director had "taken too narrow a view of the issue in addressing it as a dispute solely between C&W and BT". The jurisdiction for making this direction is under Regulation 6(6) of the Telecommunications (Interconnection) Regulations 1997 ("the Regulations") in order to resolve the dispute referred to him. However, in resolving this dispute he is entitled and required to take into account all relevant considerations including the views of other interested operators. The relevant submissions, including those received prior to the draft direction and in response to it, have been taken into account in reaching this final decision as have the matters listed in Regulation 6(8) of the Regulations. Oftel has included a summary of the comments of each of the non confidential responses from operators. Oftel’s response to the main points raised by each operator is also set out below.

5.3 The Director has decided to confirm his draft decision that CWC should be able to request that BT excludes calls to its NTS number ranges from BT’s retail discounts. However, in order to do so, C&W must move its services to new non discounted number ranges which are to be made available by Oftel within 0844 and 0871. These new number ranges will be additional to and separate from existing 0844 and 0871 numbers which will not be able to be used for non-discounted services. The Director’s considerations in the context of submissions made in response to the consultation are set out in the rest of this Chapter and the Director’s decision is discussed further in Chapter 6.

BT

5.4 BT disagreed with the proposal given in the draft direction to allow C&W to choose to exclude some or all BT originated calls to C&W’s NTS from BT’s discounts. BT firmly believed that the proposed solution underestimated the impact on consumers and instead of promoting the interests of consumers and other users the proposal, instead, promoted the interests of terminating operators.

5.5 BT believed that the draft direction failed to sufficiently consider the public interest and the interests of users as well as the regulatory obligations placed on BT. As a consequence, BT submitted that the Director’s proposed decision failed to be one that that represented a fair balance between the legitimate interests of both parties.

5.6 BT recognised C&W’s desire to further increase its ability to forecast revenues and said it was happy to address the issue. However, BT submitted that customer satisfaction is a top priority for BT and it is not happy to damage its current levels of customer satisfaction in the way that BT anticipated would be an inevitable consequence of the Director’s proposed decision.

5.7 BT strongly believed that an alternative methodology could be found that addresses the real issue of increased certainty of revenue forecasting, but without incurring the level of customer detriment that would accompany the Director’s draft proposals.

5.8 BT offered an alternative solution which was that BT would set the level of average discount for each NTS call type and that these levels would remain fixed for a succeeding period, for example 12 months, after which time they would be reviewed, if required. BT submitted that it would also be prepared to provide Oftel with more frequent figures in order that trends may be determined thereby enabling operators to anticipate what level a future review might present.

5.9 BT was concerned that the draft decision would introduce unwanted and unnecessary problems for consumers and would have detrimental effects on the retail internet market. For this reason, BT hoped that the Director would rethink his draft decision in light of the alternative solution proposed by BT.

5.10 BT also expressed concerns over Oftel’s proposals for implementation of numbering arrangements for the draft proposals pointing out that NTS price points are, in the main, allocated to 100k number blocks with the exception of 0844 numbers used for Internet access which are allocated in 1k number blocks. BT indicated that the draft proposals may require developments to BT’s Customer Service Systems (CSS) which could prove costly and take time to implement.

5.11 In its detailed response BT also gave the following summary of its concerns over the draft proposals. BT said it believed:

1. The proposed action was in conflict with the Director’s duty within the Telecommunications Act 1984 to protect the interests of consumers;
2. The draft direction failed to make a decision that represented a fair balance of the interests of both parties;
3. The decision did not consider the relative market positions of the two parties;
4. The Director had given inadequate attention to the likely impacts of the decision;
5. The proposal also conflicted with government objectives in telecommunications;
6. The draft decision failed to adequately recognise the full responsibilities of customer relationships;
7. The draft decision failed to consider other regulatory requirements on BT; and,
8. The information upon which the draft direction was based was factually incorrect in respect of BT’s discounts.

Oftel’s response

5.12 The Director notes that BT’s response focussed primarily on the potential for the draft decision to conflict with section 3 of the Telecommunications Act 1984, the criteria in Regulation 6(8) of the Regulations and, primarily, the detrimental effects on consumers. He rejects any suggestion that proper attention has not been paid to these requirements in the making of his final decision.

5.13 The requirements of the Interconnection Directive 97/33 are enacted through the Regulations. Regulation 6(6) embodies the Director’s power to resolve disputes and Regulation 6(8) lists the criteria which the Director must take into account. These include, amongst other things:

• the user interest;
• the desirability of stimulating innovative market offerings and the provision of a wide range of services to users;
• the relative market positions of the parties;
• the public interest (e.g. the protection of the environment);
• the promotion of competition.

5.14 BT has alleged that the Director has failed to take into account or to give adequate consideration to the criteria listed in Regulation 6(8) of the Regulations. In particular, BT referred to the interests of users, the public interest and the relative market positions of the parties. These BT submissions are recorded at paragraph 5.11 (iii), (iv) and (vi) and are responded to below.

5.16 The Director is concerned that, unless consumers are adequately warned of any impending removal of discounts from their calls, BT will be unfairly blamed for actions over which it has no control. Terminating operators and their service providers must take responsibility for their actions and advise their customers accordingly. There would be no incentive for them to do so if discounts could be removed without some other action which signalled to consumers that a change was occurring. Enforcing a change of access number goes some way towards this but the Director also expects operators and service providers to fulfil their obligations to retail customers. This is discussed more fully in paragraphs 6.21 to 6.24 in Chapter 6 below.

5.17 The Director has considered the promotion of competition and the relevant market position of the parties. In particular, he notes BT’s ability as the dominant operator in call origination to influence C&W’s revenues and those of other operators in the NTS terminating market and the difficulties that operators face in seeking to regain control of those revenues This is discussed in greater detail under "Defining the relevant Market" in paragraphs 6.6 to 6.12.

5.18 He believes that BT should be able to apply discounts to calls to its own services (for the benefit of consumers) if it chooses but equally that C&W should be able to elect whether calls to its services should be discounted or not. Furthermore, in accordance with Oftel’s policy statement in the NTS Statement, C&W should be able to control its revenues. The situation as it currently exists has led the majority of operators to keep their services on 0845 LCFA numbers rather than take advantage of new, competitive, pricing options on the, up to 5 pence per minute, 0844 number ranges. This is because of the risk that future changes to BT’s discounts may make lower prices uneconomic leading to subsequent price increases or market exit. This risk is removed by allowing operators to opt out of BT’s discounts and should, Oftel believes, lead to the price competition the NTS Statement sought to encourage.

5.19 BT also alleged that the Director’s decision did not represent a fair balance between the interests of the parties. This is referred to at paragraph 5.11(ii) above.

5.20 The Director has had to consider all of the criteria in Regulation 6(8) of the Regulations along with all of the relevant information available to him. Accordingly, he has had to balance, for example, the promotion of competition with the interests of consumers. Having carefully considered all of these matters he considers that a decision which would represent a fair balance between the interests of the parties is one which does allow C&W to "opt-out" its NTS services from BT’s retail discounts. However, this needs to be balanced with minimising disruption and effects on consumers. The Director considers that implementing this opt-out through the allocation of non discounted number ranges will achieve that balance. This has the advantage of allowing C&W to control its own revenues thus removing its services from the scope of BT’s discounts, but at the same time, signalling to consumers that calls to those particular numbers are not subject to discounts. The Director’s decision in this respect is discussed further at paragraphs 6.18 to 6.30.

5.21 BT also alleged that the Director was failing in his duties under section 3 of the Telecommunications Act 1984. BT referred to the protection of consumers contained in section 3(2)(a). This is referred to at paragraph 5.11(i).

5.22 The Director notes this submission from BT and has already discussed his consideration of in interests and the protection of consumers above. Accordingly, the Director does not consider that he has failed to take the interests of consumers and users into account nor that it is inconsistent with the requirements of EC law. BT submitted that the duty in section 3(2)(a) of the Telecommunications Act 1984 was the Director’s primary duty under that provision. The Director would point out that this is one of a number of duties contained in that Act. Furthermore, as a matter of law, this duty on which BT has made submissions is subject to the primary duties set out in section 3(1) of that Act. Thus, BT are incorrect to focus on this duty as the key and only duty under that Act.

5.23 BT also alleged that the decision the Director proposed in the draft direction was in conflict with government objectives relating to telecommunications. This is referred to at paragraph 5.11(v).

5.24 The Director disagrees. He has no wish to see discounts simply removed from existing prices, thereby increasing the overall costs to consumers. In deciding that a change of access number is the most appropriate way to balance the interests he has discussed above, he is creating an incentive for service providers to reduce retail prices in order to avoid the likelihood of customer migration to cheaper alternative services. This, in turn, he believes will increase the potential for greater price competition in access to services.

5.26 BT’s concerns about the Director’s suggestion regarding not passing on the effects of discounts to terminating operators are noted. This suggestion was offered as a discussion point in the consultation document and not as a formal proposal. BT does not see why its discount policy should impact on its ability to recover its costs. The Director believes equally that BT’s discounts should not impact on operators’ revenues without those operators having a reasonable ability to control the effects.

5.27 BT alleged that the draft decision failed to consider other regulatory requirements on BT as referred to at paragraph 5.11(vii)above.

BT’s concerns about the Director’s suggestion regarding not passing the effects of discounts to terminating operators are noted. This suggestion was offered as a discussion point for comment and not as a formal proposal. BT does not see why its discount policy should impact on its ability to recover its costs. The Director believes equally that BT’s discounts should not impact operators’ revenues without their having reasonable ability to control the effects.

5.28 BT stated that the information upon which the draft direction was based was factually incorrect in respect of BT’s discounts. This is referred to in paragraph 5.11(vii) above.

5.29 Oftel accepts that its initial description of how NTS numbers are allocated was incorrect. Oftel had indicated that all 0844 price points were allocated in 10k blocks with numbers issued in 1k blocks. In fact, NTS price points are set at the 100k number block level and numbers allocated to operators in 10k blocks with the exception of 0844 and 0871 numbers used for Internet access which are allocated in 1k blocks. BT’s discounts are applied at the 10k level.

5.30 New non-discounted price points will be allocated in the same way. Non-discounted price points will be allocated in 100k number blocks in the 0844 and 0871 ranges and numbers allocated to operators in 10k blocks, with the exception of those for Internet access which will continue to be allocated in 1k blocks but from within 10k blocks set aside for non-discounted price points. The direction will have effect from the date of publication but implementation will be in accordance with BT’s contractual lead times for new price points.

5.31 In its submission BT also indicated that Oftel had failed to address the points made in its letter to Oftel’s Regulatory Policy Directorate dated 20 February 2001. This letter was similar to another addressed to Compliance Directorate dated 16 February 2001 in that both sought to highlight BT’s concerns over the impact on consumers of any decision to exclude services from BT’s discounts. Both letters were considered by Oftel and the issues were discussed at subsequent NTS Focus Group meetings as suggested by BT in the 16 February version. Oftel believes that the issues referred to in BT’s letters were adequately addressed in the draft direction and that reference to the 16 February version was made in paragraph 2.6 of the explanatory memorandum.

5.32 BT re-stated its previous references to the fundamentals of the NTS regime which require operators to take discounts into account when requesting retail prices. Oftel notes that when the NTS regime was established in 1996 BT’s discounts were set at 6.5% for all NTS. The increase in the range of discounts now available to consumers and the number of consumers who have taken these up, increased this figure to 14.4% at September 2000 for LCFA services and it is likely that this figure has now been exceeded. Oftel is currently conducting a further review of BT’s NTS discounts which will be published shortly. Faced with these increases it is hardly surprising that terminating operators have become concerned over the stability of their future revenues.

5.33 Oftel notes BT’s alternative proposal, summarised in paragraph 5.8, aimed at giving operators greater certainty of revenues. Oftel has committed itself to review the method for setting future NTS Discounts in an attempt to forestall future disputes of the type that have inevitably occurred under the existing processes. BT’s proposal of freezing discounts in between future regular reviews and providing trend information in the interim to enable operators to predict future changes does not resolve the basic problem. Operators will continue to have to absorb increases in BT’s average discounts over which they have no control.

5.34 BT’s response also referred to its belief that negative consumer reaction to the removal of discounts would be targeted at BT, other originating operators and Oftel. Oftel acknowledges the possibility that some service providers may omit to publicise the removal of discounts from their services. Insisting on a change of access number should alert consumers to the fact that some change is taking place and may cause them to ask why where no obvious explanation is given. At this point the consumer faces the choice of continuing to use their existing service provider or change to another, whose services appear more competitively priced.

5.35 BT also expressed its concern over the potential for added confusion amongst retail consumers over what they were paying for calls to services which may or may not be discounted. Oftel acknowledges that consumers who are already not entirely familiar with BT’s retail prices and the impact of discounts may not find this additional complexity helpful. However, consumers who consciously seek to have specific calls discounted will be acutely aware when these are removed. Furthermore, services which do not attract any call discounts already exist. Oftel fails to see why this decision would add significantly to BT’s already complex retail pricing structure.

C&W

5.36 C&W welcomed Oftel’s draft decision and considered that it was in accord with "new NTS". However, at the 18 April 2002 NTS Focus Group meeting C&W echoed other operator’s concerns that having to change access numbers would not be welcomed by service providers. C&W asked whether it would be possible for unused number blocks within their existing 100k allocation of 0845 numbers, to be used for its non-discounted services.

Oftel’s response

5.37 Oftel notes C&W’s agreement with the principle of allowing operators to opt out of BT’s NTS discounts. However, for the reasons given at length in paragraphs 6.18 to 6.26 Oftel considers consumers interests are best served if non-discounted services are contained in the new, ‘special’ number ranges to be provided by Oftel in 0844 and 0871.

Energis

5.38 Energis referred to its response to Oftel’s draft determination of BT’s proposals for NTS discounts with effect from 1 September 2000. Energis recommended certain changes to the process for setting of discounts in the NTS formula:

• BT should review discount levels at known, regular intervals, (perhaps annually);
• BT should issue OCCNs for proposed changes to discount levels sufficiently in advance as to allow for agreement of rates by the implementation date, possibly as far as 9 months in advance to allow for Oftel determination; and
• BT should provide at least headline level information as to the reasons behind changes to its proposed discount levels.

5.39 Energis also stated its belief that operators should be able to choose whether their NTS services are included in BT’s discount packages, including ICAs (Inclusive Call Allowances). Energis also requested that operators be able to opt-out of BT’s discounts on a number-by-number basis in order to be able to offer maximum flexibility to our customers.

5.40 Energis welcomed the Director’s proposed decision, in principle, that C&W should be able to opt-out of BT’s retail discounts but was disappointed with the proposed mechanism for achieving this. Energis believed that the use of separate 10k number blocks for non-discounted services meant that customers with existing services could not easily be moved. It said that it seemed unlikely that a customer would move from a discounted to a non-discounted service. Energis alleged that this did not take into account other non-price factors such as service levels which can influence such a move. It submitted that changes to the dial-up number can prove a significant barrier to end-user migration.

5.41 Energis further welcomed Oftel’s initial view that BT should be free to retain a service within its retail discounts against an Operator’s wishes as long as payments to the Operator are as if the discount had not been applied. It submitted that this gives BT the freedom to compete in the call origination market without using other Operators’ money to do so. It also gives operators and service providers certainty in their business planning namely, knowing that their revenues will not be varied by factors outside their control.

5.42 Energis was disappointed that, even though the issue was acknowledged in paragraph 7.4 of Oftel’s draft determination of BT’s NTS Discounts issued on 23 May 2001, no progress appears to have been made towards an open consultation on the timing of reviews of BT’s retail discounts within the NTS formula. Such a review should also include consideration of the level of information given to Operators by way of explanation of proposed changes.

5.43 Energis strongly challenged the following comments made by BT. These are taken from Chapter 4 of the Explanatory Memorandum to this direction:

• In paragraph 4.11, BT states that "...it is a simple matter for terminating operators to set competitive retail prices..." on the basis that BT’s discount policy is published and uniform. Energis said that this ignored the fact that only BT has the information as to the level of take-up of discount packages and the trends in take-up.
• In paragraph 4.13, there is a reference to a letter from BT to Oftel in February 2001, describing "how its discounts schemes included volume and call pattern options designed to recognise its customers level of spend and /or fit their calling patterns". Energis said this seemed to describe discount schemes for larger business customers but the very next sentence refers to "Friends and Family Calling Circles" and "Best Friend" which are for consumers. Energis also said there was no visibility of the relative impact of BT’s business and residential discount schemes on the final retail discount figure included in the NTS formula.

Oftel’s response

5.44 Oftel notes Energis’ comments about the need to review the process for agreeing revisions to BT’s NTS Discounts. This need was indeed highlighted by Oftel in May 2001 but Oftel has had to prioritise the various NTS related disputes and issues that have arisen with formal disputes being given priority over ‘own initiative’ consultations. When Oftel issues its forthcoming draft direction of BT’s NTS Discounts for calls to 0844 and 0871 numbers (for which data is currently being gathered) Energis’ suggestions in that respect will be considered in formulating the draft proposals.

5.45 Oftel recognises Energis’ and other operators’ preference to be able to remove discounts from calls to their services without having to change the called number. According to comments made at the NTS Focus Group on 18 April 2002, Service Providers would evidently echo this preference and would resist any requirement by their host operator to change numbers However, the Director believes that the interests of consumers equal the inconvenience to operators and service providers of having to change access numbers. Internet service providers can easily change their customers’ access numbers by on-line menu driven instructions. Only frequently used voice services may require proactive notification of number changes.

5.46 Energis also believed that operators should be able to have discounts applied or not on a number by number basis. As stated in paragraphs 5.29 and 5.30 BT’s billing systems are capable only of applying discounts at the 10k level. The likely costs involved and time required to enable pricing and application of discounts at the single number level are likely to be considerable. Furthermore, other operators systems are unlikely to be able to work in this way. Oftel is not, therefore, looking for BT to enhance its billing capabilities to meet this request. However, BT and operators are free to investigate the costs and likely benefits of such an enhancement if desired. However, Oftel notes the consumer disbenefits that may arise from the lack of a tariff signal in the number.

5.47 The reasons behind Oftel’s decision to use new specific numbers for non-discounted calls are discussed in more detail in Chapter 6. However, the Director has concluded that his final decision represents a fair balance between the interests of the parties. He has discussed this above at paragraph 5.20 and below in Chapter 6 at paragraphs 6.18 to 6.30.

5.48 Finally in paragraph 5.41 Energis referred to Oftel’s other suggestion in the draft direction that BT could continue to discount calls but to pay the full, non-discounted, outpayment to operators. Oftel has responded to this at paragraph 5.26 above.

WorldCom

5.49 WorldCom considered that service providers, in agreement with terminating operators, should be able to choose whether their NTS services are included in BT’s discount schemes. This is because, as stated by Oftel in its December 1999 Statement on the Relationship between Interconnect Charges and Retail Prices for Number Translation Services, service providers in conjunction with terminating operators should be free to set the payments for access to their service. WorldCom submitted that there also needs to be certainty around the interconnect revenue received by service providers/terminating operators to enable them to make efficient investment and business decisions.

5.50 WorldCom agreed with OFTEL’s analysis in the draft direction that removing BT’s discounts from some NTS calls would be unlikely to increase customer confusion about BT’s already complex prices. WorldCom submitted that the average consumer is unlikely to understand individual call costs and the impact of discounts in any event.

Control over retail pricing and stability of interconnect revenues

5.51 In order to encourage effective competition and innovation, WorldCom considered that service providers, in agreement with terminating operators, should have "the opportunity to decide how to pitch their prices in the retail market and to compete aggressively on both price and service content" (quote from Oftel’s December 1999 NTS Statement). WorldCom said that enabling BT to control discounts on retail prices, puts both the ultimate retail price borne by consumers and the interconnect revenues received out of the control of the terminating operator. WorldCom was concerned that there appears to be no provision to explicitly state that the direction could apply to NTS services currently provided by operators as well as new number ranges.

5.52 WorldCom further agreed with OFTEL that BT’s discount as applied to NTS calls will continue to increase over time and as such have an increasingly negative effect on terminating operator revenue.

Practicality of Implementation

5.53 WorldCom sought clarification regarding how the implementation proposals would apply to existing NTS number ranges. WorldCom said it is costly for NTS service providers to change numbers due to the impact on consumer awareness. It said that, ideally, service providers should be able to choose whether their existing numbers are subject to discounts or not. WorldCom also sought further information on the BT billing issues alluded to. This is because our understanding is that, certainly in the case of 0844 numbers, 1k ranges within the same 10k block can attract different retail charging.

5.54 In conclusion WorldCom said it agreed with and would support OFTEL’s draft proposals in relation to this dispute subject to clarification on the extent to which existing number ranges are affected and on the date from which this new regime would take effect.

Oftel’s response

5.55 Oftel’s detailed reasons for requiring the use of specific numbers for non-discounted services are given in Chapter 6 in paragraphs 6.18 to 6.30. Oftel has also described the numbering levels at which routing and pricing take place in paragraphs 5.29 and 5.30 above. In response to WorldCom’s request for clarification on how the decision applies to existing NTS number ranges, Oftel confirms that operators can elect to exempt any of their existing services from BT’s discounts. This means, however, that LCFA services operating on 0845 numbers will have to move to new 0844 numbers to become discount exempt.

General

5.56 Having considered all the relevant submissions and given his responses as detailed above, the Director has made his final decision which is discussed in the next Chapter.

Chapter 6

The Director General’s final decision

The considerations

6.1 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."

6.3 C&W and other operators argued vigorously in favour of being able to elect whether BT’s discounts should apply to their services and BT has argued equally vigorously against such a proposal. The Director has made his decision based on the following considerations.

6.4 The Director’s decision has been based on legal advice and an analysis of the facts and relevant submissions which have been made to him. He has given careful consideration to the criteria set out in Regulation 6(8) of Regulations. In particular, as discussed at paragraph 5.17 and in further paragraphs below he has given careful consideration to the relevant market position of the parties, the promotion of competition and the interests of users and the public interest. In the view of the Director his final decision, having taken into account all of these matters, represents a fair balance between the interests of the parties.

6.5 The Director has, therefore, concluded that CWC should be able to request that BT excludes calls to its NTS number ranges from BT’s retail discounts. However, in order to do so, C&W must move its services to new non-discounted number ranges which are to be made available by Oftel for this purpose within 0844 and 0871. NB: These new number ranges will be additional to and separate from existing 0844 and 0871 numbers which will not be able to be used for non-discounted services. As a result of this decision, C&W will be able to make a request to BT to this effect from the date of publication of the direction. Oftel also anticipates that BT will respond to similar requests from other operators in the same way. Such requests should be dealt with in accordance with normal commercial arrangements. The Director expects that, in implementing this decision, BT and operators will give the clearest possible warning signals to consumers that the calls they make to existing services (which are moved to the non-discounted number ranges) may no longer attract discounts as they currently do.

Defining the relevant market

6.6 In the draft direction, one of the justifications for the proposal was given as BT’s market power in Internet call origination, and that BT may be able to lever market power from call origination into wholesale Internet call termination. This indicates that the latter market is not effectively competitive. BT, in its detailed response, commented on this. It stated that a lack of effective competition in markets for call termination and call origination for internet access did not justify the proposed decision to allow operators to opt out of discounts which apply to all NTS calls. BT also state that "even if one accepts the Director’s finding of effective competition BT does not believe that mere reliance on this fact is sufficient to justify allowing terminating operators to opt out of NTS discounts."

6.7 It is not relevant to just consider the Internet related markets. The relevant market in this dispute is wholesale call origination, which encompasses voice and data, and all types of calls at the wholesale level. In the Surf Together investigation (Investigation by the Director General of Telecommunications into the BT Surf Together and BT Talk and Surf Together pricing packages - May 2001): http://www.oftel.gov.uk/publications/internet/surf0501.htm

Oftel defined wholesale call origination on fixed telecommunications in the UK as a distinct market, using the hypothetical monopolist test. Call origination on mobile networks were not considered to be an effective substitute, due to a lack of demand and supply side substitutability.

6.8 The relevant market definition encompasses both voice and data for the origination of all call types, due to the ease of supply side substitutability between them. In addition, the residential and business sectors are considered, for present purposes, as part of the same market. The geographic scope of the market is UK wide, given BT’s uniform (and regulated) wholesale call origination charges.

6.9 Recent data indicates that BT has a market share by volume of 69.2% of all calls in the combined residential and business markets in Quarter 3 of the year 20001/2.

6.10 In terms of this current dispute, it is relevant that BT holds market power in wholesale call origination. If BT did not hold market power, then operators would simply switch to other operators for call origination to avoid the discounts (and there would be no interconnection regulation).

6.11 The downstream retail market for NTS services is considered to be effectively competitive. Therefore it can be expected that the effect of operators opting out of BT’s discounts will not be to raise net prices to consumers. The immediate, short term price rises will not be sustainable, and it can be expected that they will be competed away.

Addressing the issues

6.12 Oftel’s responses to BT’s arguments against the draft proposals are given in paragraphs 5.12 to 5.35. Oftel considers that operators and service providers should be able to choose whether calls to their services should be discounted. This reinforces the principle, set out in the December 1999 NTS Statement, that operators should have control over their revenues from services they host. It is not sufficient simply to be able to estimate how much revenues are likely to be eroded in the future as the average discount applied by BT changes. In addition, giving terminating operators greater control of the net retail prices paid by consumers goes hand in hand with effective competition in the downstream NTS retail market.

6.13 BT has argued that its average discounts have increased over the years primarily because of the take up of its discount schemes by consumers rather than any fundamental change in the discounts given. This take up has probably reached or neared its peak such that the average discounts applied to NTS calls are unlikely to increase significantly in future. However, the Director believes this is irrelevant to the basic policy principle that operators should have maximum possible control of their revenues.

6.14 At the NTS Focus Group meeting on 18 April 2002 (which Oftel attended), comments from various operators including the parties to this dispute were made. As they are relevant to this decision they have been taken into account and have pointed to a consensus among operators in favour of being able to opt out of BT’s discounts. However, there are clearly differing views on how this should be achieved. There was also a strong belief on the part of operators that BT’s concerns over consumer awareness and the potential for price confusion were exaggerated.

6.15 The Director has considered, amongst other things, consumer interests (earlier discussion on this is contained at paragraphs 5.12 to 5.24 in Chapter 5). He considers that consumers who have specifically nominated NTS numbers for discounts will be acutely aware and concerned if discounts are, or are about to be, removed. Furthermore, unless the reason for the change is made obvious by the service provider then BT will undoubtedly be blamed as the originating operator. Other, less price conscious, consumers may inevitably become more confused by the inconsistent availability, or otherwise, of discounts on numbers they dial unless it is abundantly clear whether or not their calls will be discounted.

6.16 Oftel recognises that BT should be able to give consistent pricing messages to consumers and that, currently, discounts are applied (or not) by service type and price point. Allowing operators to opt out of discounts introduces an additional level of complexity by virtue of the fact that calls to popular services which are currently discounted may or may not be in future. In the interests of consumers it is, therefore, vital that price messages are as clear as possible so that they can make informed choices over services and not receive unwelcome surprises when the bills arrive.

6.17 Some operators have also informed Oftel that service providers will not welcome a requirement to change dialled number ranges to opt out of discounts. Indeed, it was submitted that some have indicated that such a requirement would not be acceptable under any circumstances. The Director has taken this into account with all other submissions.

6.18 Under existing arrangements, operators wishing to maintain the level of the terminating payments have to change price points, and hence access number ranges, each time BT’s average discounts move. This direction means that only one number change will be required to exempt services from discounts indefinitely. The Director recognises that this may not be welcomed by service providers. However, he believes in light of the considerations he has made in this matter that, in particular, it is a necessary safeguard to both meet C&W’s request and to protect the interests of consumers.

6.19 According to BT, many consumers deliberately nominate their dial-up Internet access number for the maximum available discount. However, it is probable that many consumers do not understand the difference between geographic and non-geographic calls. They may believe that all local calls are the same and are equally eligible for discounts. It is particularly important, therefore, that terminating operators should not be able to remove discounts without making it obvious to consumers that calls to their services no longer attract the same discounts as other local calls. In effect their services will become ‘specially priced’ and should be accessed by numbers that signal this.

6.20 Oftel is also concerned that some customers would be unclear that discounts were being removed from calls if the dialled number were to remain unchanged. Indeed, there is a risk that some operators and service providers may avoid publicising the fact as they have an incentive to discourage consumer migration to other, more competitively priced, services.

6.21 It would, therefore, fall to BT to have to notify each customer, individually, that calls to one or more of their nominated numbers will, in the future, be charged at the non-discounted retail price. Furthermore, this would have to be done as and when BT is advised by the operator or service provider and not as a one-off standard exercise. Oftel believes this would be an unreasonable requirement and cost to impose on BT where it is not responsible for the removal of discounts.

6.22 The requirement to move services to new non-discounted numbers provides the opportunity for service providers to explain, to those accessing its services, why the change is being made. Even if they fail to do so, because the number of any existing service would have to change, consumers may then seek to nominate their new access numbers for discounts and will, at that time, be advised by BT whether or not discounts apply.

Effect on the future pricing of services

6.23 In its submission following the draft direction BT expressed concern that this decision may have an adverse effect on the prices that consumers pay, in particular for dial-up Internet access. BT alleged that removal of discounts would increase net retail prices which it submitted would not be consistent with government policy for Internet access.

6.24 Oftel considers that, following this direction, some service providers may prove unwilling to move their services from traditional price points or existing number ranges. As a consequence, calls to their services will continue to be discounted and there will be no change. Others may decide to opt out of BT’s discount schemes but may, at the same time, choose lower headline retail prices for their calls in order to remain price competitive whilst achieving increased certainty of revenue (see paragraph 6.12).

6.25 It is equally possible that some operators may simply seek to remove discounts whilst maintaining the existing headline retail price. The higher resultant payments they would receive from BT will enable them to offer more attractive revenue sharing arrangements in order to gain service provider business. As stated in paragraph 6.12, Oftel believes that any resultant price increases will be short term as competitive pressures will take effect ultimately resulting in any such price increases being competed away. In this way greater price competition could emerge in a market that still relies heavily on traditional LCFA (0845) access

The Director’s decision

6.26 Having considered the arguments for and against the proposal as discussed in this explanatory memorandum and the practicalities involved the Director has decided that C&W should be able set its terminating payments without risk of these being changed through circumstances beyond their control. Accordingly C&W should be able to choose to exempt its NTS services from BT’s retail discounts provided that its services are moved to new, specifically allocated, number ranges.

Implementation

6.27 As stated in paragraph 5.28, NTS price points are generally contained within 100k number blocks and numbers allocated to operators in 10k blocks. Exceptions are 0844 and 0871 numbers used for Internet access which are allocated in 1k blocks. BT’s discounts are, however, applied at the 10k level.

6.28 New non-discounted price points will be allocated in the same way. For non-Internet services, 100k number blocks in the 0844 and 0871 ranges will be set at non-discounted price points and numbers allocated to operators in 10k blocks. Numbers used for Internet access will continue to be allocated in 1k blocks but taken from 10k blocks set to accommodate non-discounted price points. The direction will have effect from the date of publication (namely, C&W will be able to make a request to BT to exempt any of its services operating on the new non-discounted ranges at any time after the date of publication of the Direction). However, following such a request, implementation will be in accordance with the normal contractual lead times between the parties for the implementation of new price points.