Contents

Determination under Condition 28.2(a) of BT’s Licence

Determination Schedule 1

Determination Schedule 2

Summary

Explanatory memorandum

How to make representations and objections to the proposed changes

Annex A Non-geographic portability average porting conveyance cost methodology

Annex B Geographic portability average porting conveyance cost methodology

Annex C Proposed modifications to BT’s Licence

TELECOMMUNICATIONS ACT 1984

DETERMINATION UNDER CONDITION 28.2(a) OF BT’s LICENCE

WHEREAS:

(A) On 22 June 1984, the Secretary of State for Trade and Industry granted a Licence (the "Licence") to British Telecommunications under section 7 of the Telecommunications Act 1984 (the "Act") for the running of the telecommunications systems specified in Annex A to the Licence (the "Applicable Systems");

NOW, THEREFORE, THE DIRECTOR, PURSUANT TO CONDITION 28.2(a) OF THE LICENCE HEREBY DETERMINES THAT:

(1) BT shall set its costs and charges for the provision of Portability (other than Mobile Portability or Paging Portability) under Condition 28.2 of the Licence in accordance with the costs and charges set out in Schedule 1 and Schedule 2 to this Determination respectively.

DAVID ALBERT EDMONDS

DIRECTOR GENERAL OF TELECOMMUNICATIONS

31 May 2002

Determination Schedule 1

Part A – Proposed costs incurred in providing Non-Geographic Portability

1. Per line set-up costs for single line portability orders

(i) Freephone

1. Per-line set-up costs

• Standard fax based, ported in real time £8.43

• Standard DDI: Block Portability £15.75

• Complex DDI: Block Portability £26.95

2. Average porting conveyance costs

Determination Schedule 2

Part A – Proposed charges in respect of Non-Geographic Portability

1. Charges with respect to per-line set-up costs

0871 Not available

Part B – Proposed charges in respect of Geographic Portability

1. Charges with respect to per-line set-up costs

Multi-line Portability

• Standard fax based, ported in real time £8.43

• Standard DDI: Block Portability £15.75

• Complex DDI: Block Portability £26.95

2. Charges with respect to the average porting conveyance

Summary

S.1 Oftel’s goal is the best deal for customers of telecommunications services in terms of quality, choice and value for money. It is Oftel’s view that effective competition in terms of quality and price is likely to give customers the best deal. Oftel therefore believes that regulation should be used only as an interim measure to ensure that customers are protected before competition becomes effective. The competitive process is at its most effective when customers’ ability to switch between suppliers is unhindered and does not in itself discourage switching. The decision to switch should be based on the benefits customers believe that they might gain by moving supplier, such as lower prices or higher quality, and not on the difficulties that might be encountered in arranging the switch. The harder it is – or is perceived to be – to switch between suppliers, the less likely that customers are going to do so and thus the competitive process is weaker.

S.2 Portability is a facility that enables customers to retain their telephone number when switching supplier. This can be a very important factor for some customers because the number in itself might have a significant meaning inasmuch as it could be related to their business or might be widely shared with friends and family. It is likely that some customers might decide against switching operator if to do so would require them to change their telephone number. It is therefore important that number Portability is generally available.

S.3 It is also important that any interrelated (inter-operator) charges reflect the Donor Operator’s incurred costs. At the retail level, it is common for the importing operator to absorb any costs that it incurs in setting up the retail relationship. This is because it is in the Recipient Operator’s interest to attract the retail customer. However, the Donor Operator has little incentive to become more efficient in the provision of inter-operator services (for processing the port), as it is the Recipient Operator that pays these charges. To ensure that the Donor Operator cannot compromise competition by setting high charges for Portability, Oftel believes that the Donor Operator should charge the Recipient Operator no more than its efficiently incurred costs in processing the port. In common with other interconnection services, Oftel believes that such charges should be based on the incremental costs in providing the relevant service.

S.4 At present, Recipient Operators are charged BT’s fully allocated costs (FAC) in providing the port. Similarly, BT is charged other operators’ FAC in providing the port when it is the Recipient Operator.

S.5 However, Condition 28.2(a) of BT’s licence requires it to provide its Portability interconnection services to other operators on the same charging basis as it provides other telecommunications services under Condition 69 of its licence, unless the Director General has determined otherwise. The charges for interconnection services provided under Condition 69 of BT’s licence are based on the incremental costs in providing the services. Such costs better reflect the basis on which decisions are made in competitive markets.

S.6 Therefore the Director General is now determining that BT’s charges for Portability interconnection services shall be based on BT’s long-run incremental costs (LRIC) incurred in provision of the relevant services. The Director General has set out his view as to what BT’s reasonable costs and charges for the provision of Portability are in Schedules 1 and 2 to this Determination respectively. These costs and charges are based on LRIC. The charges set out in Schedule 2 shall take effect from 1 August 2002.

S.7 In addition, the Director General proposes to set charge controls for the Portability services that are Non-conveyance Standard Services to limit allowable increases in charges for these services. The Director General proposes to include the Portability services that are Non-conveyance Standard Services within a ‘basket’ control with the value of ‘X’ set at 5. At Annex C, the Director General has set out proposed modifications to BT’s licence to give effect to his proposals to charge control Portability services. The Director General has published these modifications for statutory consultation. Comments on the proposed modifications are required by 28 June 2002.

Explanatory memorandum

Introduction

1.1 When the Network Charge Controls – controls limiting increases in charges for BT’s interconnection services – came into effect on 1 October 1997, the cost base and charges for interconnection services moved from fully allocated costs (FAC) to long-run incremental costs (LRIC). This change to costs and charges for interconnection services was introduced to be more reflective of the cost base on which businesses in competitive markets make investment decisions. The Network Charge Controls therefore introduced charges for interconnection services provided for under (then) Condition 13 of BT’s licence based on the incremental costs in providing them. However, for historical reasons, portability interconnection services were provided for under (then) Condition 34C. Thus, the cost base for portability interconnection services remained FAC.

1.2 Condition 28.2(a) of BT’s licence requires it to provide portability services to other operators on the same charging basis as it provides other telecommunications services under Condition 69, unless the Director General has determined otherwise. As explained in paragraph 1.1, the charges for BT’s telecommunications (interconnection) services provided under Condition 69 have been based on their incremental costs since the Network Charge Controls were introduced on 1 October 1997.

1.3 The Director General is therefore addressing this anomaly by determining that BT’s reasonable costs in the provision of portability services shall be based on its incremental costs in providing the relevant services. This has the effect that the charges shall also be based on the incremental costs that BT incurs. The Director General has set out his view on BT’s reasonable costs and charges in providing portability in Schedules 1 and 2 to this Determination respectively. These are based on LRIC.

1.4 The Director General has already consulted on the proposed charges for BT’s portability services in the draft Determinations of July and October 2001 Proposed Fixed Portability Costs and Charges. Respondents to both agreed that inter-operator charges based on LRIC were appropriate for the provision of portability, although BT had concerns with the methodology and calculations used to derive the charges.

1.5 As well as setting charges based on LRIC, the Director General also proposes to place charge controls to limit increases in the charges for the non-conveyance elements of portability. The Director General advised that this was his intention in both the July and October draft Determinations. At Annex C, Oftel has set out proposed modifications to BT’s licence to give effect to charge controls for portability.

Requirement to provide retail portability

2.1 Condition 28 requires operators to provide portability for geographic and non-geographic fixed services – including services with special tariffs such as freephone or premium rate services – at the request of their subscribers. This requirement came into effect from 19 January 2000 under The Telecommunications (Interconnection) (Number Portability, etc) Regulations 1999, S.I. 1999 No. 3449, which modified BT’s licence to insert a new Condition 28 concerning portability. All operators that have an equivalent portability licence condition to Condition 28 in BT’s licence are therefore obliged to provide portability at their subscribers’ requests.

BT’s reasonable costs in providing non-geographic portability services

3.1 Part A of Schedule 1 of this Determination sets out the Director General’s view on the level of reasonable costs incurred by BT in the provision of non-geographic portability services. The second sub-paragraph of Article 12(5) of Directive 97/33/EC (the Interconnection Directive) requires pricing for the provision of portability services to be reasonable to ensure that charges to consumers are ultimately reasonable. This is reflected in Condition 28.2(a) of BT’s licence. The Director General believes that BT’s reasonable costs for the provision of non-geographic portability services are the incremental costs that BT incurs in providing the relevant services because these costs better reflect those that would be likely to prevail in a competitive market. These costs are:

• Per line set-up costs: these are costs incurred in the provision of switching and administration with respect to each ported number.

• Number block portability set-up costs: these are costs incurred in the provision of switching and administration with respect to blocks of ported numbers.

• Average porting conveyance costs: these are the transit costs incurred by the Donor Operator in conveying calls originating ‘off-net’ to a Recipient Operator. This process is essentially the same as the Donor Operator acting as a transit operator in the conveyance of a non-ported call.

• System set-up costs: these costs are not recoverable under Condition 28.2(b).

Set-up costs

4.1 These costs relate to the provision of switching and administration of each ported number, which include, for example, the costs of changing the number record on the respective platform, and the administrative processes involved.

4.2 The methods of interfacing with the Donor Operator and whether the number is a number originally allocated to BT, or one which is ‘return porting’ to another operator affect the charge for portability services. For the purposes of single and number block portability, it can be assumed that only one type of switch is re-configured to enable porting. Hence, costs will not vary as a result of number records being altered over different switches. The technology used to interface with other operators does, however, have a more significant effect on the overall costs.

4.3 Real time routers, which are used in processing geographic portability orders, are not used in the provision of non-geographic portability, although a similar functionality is provided by means of implementing orders according to both time and date.

4.4 Electronic Data Interchange (EDI), which is used to interface with other operators for geographic portability, is not available for processing non-geographic portability orders.

4.5 The processing and implementation of non-geographic portability orders are relatively labour intensive. Per line and block portability set-up costs are incurred for three basic order types:

• Dated orders: this is where an operator requests portability for a number on a specified date;

• Dated and timed orders (normal working hours): this is where an operator requests portability for a number on a specified date at a specific time within the normal working hours of the Donor Operator; and

• Dated and timed orders (outside normal working hours): this is where an operator requests portability for a number on a specified date at a specific time outside of the normal working hours of the Donor Operator.

4.6 BT does not, at present, charge for return porting.

Average porting conveyance costs for non-geographic portability

5.1 These are the transit costs incurred by the Donor Operator in conveying calls that originate ‘off-net’, ie on another operator’s network, and are destined for the Recipient Operator’s network. This process is essentially the same as the Donor Operator acting as a transit operator in the conveyance of a non-ported call. If the originating operator is also the Donor Operator, the call would pass directly to the Recipient Operator and the APCC transit costs would not be incurred.

5.2 BT and other operators are unable to determine on a call-by-call basis whether a call to a ported number originated ‘on’ or ‘off-net’, nor can existing interconnect and billing systems accurately record all the transit elements involved in the routing of the call. As a result, some form of averaging is necessary to ensure that the Donor Operator is able to recover any transit costs incurred in the routing of a ported call.

5.3 A full account of the methodology used to calculate the average porting conveyance costs and charges for non-geographic portability is given in Annex A.

5.4 In response to concerns put to it by Oftel and made in other operators’ responses to the July 2001 draft Determination, BT re-examined the ‘off-net’ percentages for exported non-geographic portability numbers, ie the proportion of calls to exported non-geographic numbers that did not originate on its network. On re-examining the proportion of calls that were said to have originated ‘off-net’, BT found that it had incorrectly calculated the percentage of calls that had not originated on its network. Oftel reflected the revised percentage of calls that had not originated on BT’s network in the October 2001 draft Determination. However, Oftel did not explain why the percentage of calls that were said to have originated ‘off-net’ had reduced or why, despite this, the charges had not necessarily decreased. This is now explained in paragraph 5.5.

5.5 BT explained that when recalculating the percentage of calls that originated ‘off-net’, it also recalculated the average costs in providing the transit service for those calls that originated ‘off-net’. BT found that the data that it used to calculate the percentage of calls that originated ‘off-net’ were based on calls exiting BT’s network rather than entering it. It also calculated costs based on traffic exiting its network. This has the overall effect of increasing the average costs. On re-calculating both the percentage of calls originating ‘off-net’ and costs incurred for transiting these calls across its network, it found that it had overstated the percentage of calls that it said originated ‘off-net’ but understated the average costs incurred. The sum of the two has resulted in three of the four charges for average porting conveyance decreasing with one (freephone) increasing slightly.

5.6 Oftel also asked BT to explain what factors contributed to the higher costs associated with non-geographic portability – the proposed average cost of which was made up from charges up to and including inter-tandem long – as against geographic portability under which the proposed average cost was inter-tandem short. Additionally, BT was asked to explain the differences in average pence per minute costs incurred for non-geographic portability transit services, eg for freephone services its costs are reported to be 0.2445 pence per minute whereas for local rate services they are reported to be 0.2028 pence per minute.

Geographic portability versus non-geographic portability

5.7 BT explained that the differences in the charges for geographic portability and non-geographic portability relate to the geographic limitations applied to geographic portability, ie such numbers can be ported within exchange boundaries only. This is not the case for non-geographic portability. In addition, for non-geographic portability, BT’s intelligent network needs to translate the number before onward routing is possible. Oftel therefore accepts that there are inevitably differences in the usage of interconnection services for geographic portability and non-geographic portability.

Differences in transit charges for different number translation services

5.8 BT established the proposed average transit charge for different non-geographic portability services through use of its element based charging (EBC) matrix. BT makes the EBC Matrix available for the purpose of validating billing information that is calculated on the basis of network elements used. The EBC Matrix is updated quarterly and reflects actual points of interconnection.

BT’s reasonable costs in providing geographic portability services

6.1 Part B of Schedule 1 of this Determination sets out the Director General’s view on the level of reasonable costs incurred by BT in the provision of geographic portability services. The Director General believes that BT’s reasonable costs for the provision of geographic portability services are its incremental costs in providing the relevant services.

• Per line set-up costs: these are costs incurred in the provision of switching and administration with respect to each ported number.

• Multi-line set-up costs: these are costs incurred in the provision of switching and administration with respect to multi-line DDI ports.

• Average porting conveyance costs: these are the transit costs incurred by the Donor Operator in conveying calls originating ‘off-net’ to a Recipient Operator. This process is essentially the same as the Donor Operator acting as a transit operator in the conveyance of a non-ported call.

• System set-up costs: these costs are not recoverable under Condition 28.2(b).

Set-up costs

7.1 Under geographic portability, BT deploys a facility referred to as ‘Real Time Routers’. This facility enables the end-user to be disconnected from the Donor Operator’s network and connected to the Recipient Operator’s network in real time.

7.2 In terms of order processing for geographic portability, operators can interface with BT by fax or Electronic Data Interchange (EDI). The fax-based option is more labour intensive and thus has higher costs and the result of this is a higher charge. Additionally, some EDI orders have to revert to manual processes and this increases the average EDI charge.

Average porting conveyance costs for geographic portability

8.1 BT has not previously recovered its average porting conveyance costs for geographic portability. It had originally deemed that the relevant costs were insignificant and it chose not to recover its costs in the form of an APCC for ported geographic calls. However, it now believes that these costs are material and wishes to recover them. The Director General believes that it is reasonable for BT to recover these costs because these costs are similar to those that BT would incur if acting as a transiting operator for a non-ported call.

Standard portability charges for non-geographic portability services

9.1 Under Condition 28.2(a) of BT’s licence, its charges for Portability services need to be based on their incremental costs. The Director General’s view on the reasonable level of the charges is set out in Schedule 2 of the Determination. These are based on LRIC.

9.2 BT’s per line set-up costs calculated on a LRIC basis are fully recoverable from the Recipient Operator.

9.3 In relation to number block Portability, the Director General considers that these costs are similar in nature to those incurred in per line set-up and that the Recipient Operator should bear these costs. This Determination allows BT to recover its costs in respect of number block Portability.

9.4 When BT originally submitted costing and charging data for Portability services, it did not submit data for block (100 and 10 contiguous numbers) Portability of non-geographic numbers at specific times and on specific dates within and outside of normal working hours. Oftel did not therefore set out proposed charges for these services in the draft Determination published on 18 July 2001. It did though set out charges for these other Portability services in a later draft Determination published on 25 October 2001. The Director General also took that opportunity to consult on all costs and charges for all Portability services having considered responses to the July 2001 draft Determination. The Director General has therefore given two opportunities for those interested to comment on his proposals.

9.5 The Director General considers it appropriate for the Donor Operator to recover its transit costs in providing Portability services through the average porting conveyance charge. The Director General considers that a transit charge would be incurred if operators were to use a transit operator to convey non-ported calls – a transit charge may therefore be made for the call whether it is to a ported or a non-ported number. The Director General considers that BT may recover these costs in the normal manner. However, it is necessary to average this charge in order to overcome the limitations in BT’s interconnect and billing system.

Standard portability charges for geographic portability services

10.1 BT’s per line set-up costs calculated on a LRIC basis are fully recoverable from the Recipient Operator.

10.2 Multi-line costs are higher than the costs involved in per line set-up due to additional switching and administration involved. This is reflected in the higher charges.

10.3 BT put forward a proposal for the recovery of its average porting conveyance costs for geographic portability. The proposed methodology for calculating the average porting conveyance charge for geographic portability is based on the methodology used to calculate the APCC for non-geographic portability. However, for geographic portability, BT has stated that for each call that originates ‘off-net’ its lost revenue is equal to Single Transit. BT’s lost revenue is greater than this for non geographic portability.

Setting the charges for fixed portability services

11.1 In the October and July 2001 draft Determinations, Oftel described the methodology that it proposed to use to set charges for fixed portability services. The proposed charges were based on estimates of the direct labour input required for each service derived from a BT time and motion study and also included allowances for incremental indirect labour costs, other operating costs, depreciation and the cost of capital. The incremental indirect and other costs incurred were calculated from the average mark-ups over direct labour for a group of similar services by applying a cost-volume elasticity (CVE) of 0.45. The proposed charges did not contain a mark-up for common costs on the grounds that it appeared to Oftel that any common costs between services such as portability and the inland network had already been taken into account in setting the Network Charge Control and in setting the charges for services such as local loop unbundling (LLU). However, Oftel stated that it might add a mark-up if BT could show that not all common costs had in fact been included in calculating the mark-ups for the new Network Charge Controls and provided the proposed mark-up was consistent with the LLU determination and Network Charge Control.

11.2 In the October 2001 draft Determination, Oftel also set out the main assumptions underlying the proposed value of ‘X’ of 5. Assumptions about underlying rates of real unit cost reduction (ie before volume effects), cost and asset-volume elasticities, input price changes and the cost of capital were consistent with those set out in Proposals for Network Charge and Retail Price Controls from 2001, February 2001. Further details were given in the October 2001 draft Determination.

11.3 BT took issue with the charges proposed by Oftel on two main points. The two main issues were the mark-up for common costs which, as noted above, had not been included in Oftel’s draft charges, and the estimation of incremental indirect costs for number Portability by the application of a CVE of 0.45 to the average ratio of indirect to direct costs from five "similar products". Oftel accepts the principle that BT should be able to recover the costs incurred in providing number portability from number Portability charges and the charges which it has determined reflect this. The issues concern the appropriate amount of costs to be recovered.

Common costs

11.4 BT argued that the charges should contain a mark-up for common costs and provided a calculation of the amount of common costs implicitly recoverable from number Portability in the LLU determination. Applying this method results in a mark-up of approximately 9.5% over the calculated LRIC values.

11.5 In considering whether it is appropriate to allow a mark-up for common costs, Oftel also considered the views expressed by the Monopolies and Mergers Commission (MMC) on this issue in the report of its 1995 inquiry into Telephone Number Portability. The MMC’s recommendations regarding the appropriate method of cost recovery reflected six principles of cost allocation. On the one hand, a strict application of the six principles, in particular cost causation, would suggest that a mark-up should not be included. On the other hand, the MMC stated that the basis of charges should be the same as that used for interconnection, that is, LRIC plus a contribution to common cost recovery in the form of an equal proportionate mark-up (EPMU).

11.6 The MMC also expressed the view that, in due course, as switching becomes commonplace, BT would cease to be a significant net exporter of customers. Per-line set-up charges would then be a barrier to switching which might disappear in a normal competitive market. It stated that there would therefore be considerable merit in giving the Director General discretion to abolish per line set-up costs (in practice after a review) but did not expect this for three to four years. BT has however said that it is still a net exporter.

11.7 In order to be consistent with the allocation of common costs implicit in the LLU decision and with the Network Charge Controls, and in light of the MMC’s view that the basis for charges should be the same as for other interconnection services, Oftel believes that it is appropriate to allow a mark-up of 9.5% over the calculated LRIC charges. The charges that result are set out in Schedule 2.

Cost-volume elasticity

11.8 In the October and July 2001 draft determinations, Oftel described how the CVE enters into the calculation in two ways. First, it is used to project movements in costs as volumes of "ports" change and is thus a key determinant of the value of ‘X’. Second, a CVE of 0.45 was used to scale down the average mark-ups over direct labour used to allow for indirect costs in order to arrive at an estimate of the incremental indirect costs incurred. For example, if, on average, indirect costs were 50% of the direct labour costs of existing comparable products, Oftel allowed 45% of this, equivalent to a mark-up of 22.5% over direct labour, as its estimate of the additional indirect costs incurred as a result of the provision of portability. This reflects Oftel’s belief that provision of portability services will cause BT to incur some indirect costs in addition to direct labour costs and that it is therefore appropriate for these to be recovered in the charges for portability services. The value of 0.45 reflects Oftel’s view that indirect costs are likely to increase by proportionately significantly less than any increase in output.

11.9 Oftel is not convinced that there is sufficient evidence to support the levels of indirect costs proposed by BT. BT argued that the incremental indirect costs incurred would be proportionately the same as the average mark-up over direct labour for a group of "similar" services. Oftel believes that the method which it has used to estimate indirect costs, which implies that incremental indirect costs are below average indirect costs, remains appropriate for the reasons set out below.

11.10 Oftel believes that it is reasonable to expect there to be economies of scope in indirect costs as it is likely to be efficient for products to share support functions even if they are not otherwise related. In other words, it is reasonable to expect there to be an economy of scale in support functions and that this is likely to create an economy of scope across product lines. For example, if the volume of ports doubles it may be necessary to double the number of employees directly engaged in providing portability, but it is unlikely to be necessary to double the number of managers or support staff. This is reflected in the fact that Oftel’s proposed CVE of 0.45 for indirect costs is significantly less than 1. Indeed, there could have been a case for even lower values, particularly if volume growth can be accommodated without taking on extra staff by, for example, overtime working. In this case, the additional indirect costs incurred might be very low.

11.11 The value of 0.45 is intended to be consistent with assumptions made in Oftel’s review of the Network Charge Controls. As described in the February 2001 statement Proposals for network charge and retail price controls from 2001, Oftel assumed a central case CVE of 0.25 for inland conveyance costs but used a higher value (0.45) for services which did not benefit from growth in minutes per circuit, such as portability.

11.12 BT has argued that "many indirect costs are unlikely to exhibit significant economies of scale" and initially proposed a value for the CVE of 0.87. BT has also argued that LRIC: FAC (fully-allocated cost) ratios are in general a good approximation to CVEs and has offered a calculation which uses, broadly, the Oftel methodology (including a mark-up for common costs) but applies a LRIC:FAC ratio of 0.8933 in place of the CVE of 0.45.

11.13 Oftel does not accept that LRIC:FAC ratios will in general be a good approximation to cost-volume elasticities. They are conceptually different, since the LRIC of a service may include any fixed costs incurred in providing it, while the cost-volume elasticity relates to cost changes at the margin. In addition, it is notable that the LRIC: FAC ratios of some network components are in excess of 0.75, when the average cost-volume elasticity used in setting the Network Charge Control, which BT accepted, was 0.25. Oftel also does not agree with BT that it necessarily follows that a CVE of 1 for direct labour is likely to imply a similar CVE for other cost categories. It is clear in general that different categories of cost can vary with output in different ways.

11.14 Moreover, a value of 0.45 would be more consistent with BT’s own proposed asset volume elasticity (AVE) of 0.43. BT’s estimate of the AVE for portability per line set-up (0.43) is in line with Oftel’s own modelling assumptions (based on the network model after removing the effect of growth in minutes per circuit). As in the Network Charge Control, however, BT’s estimate of the CVE (0.87) appears somewhat high given the AVE. As noted in Proposals for network charge and retail price controls from 2001, in 1997 BT had argued that "the CVE will be around the same as the AVE". Oftel therefore finds it surprising that BT had produced estimates of CVEs that were much higher than the relevant AVEs.

11.15 A further source of evidence regarding CVEs is the recent review of the NTS retail uplift. In that, Oftel has proposed a value of 0.25 across all retail activities, in line with the 1996 retail price control review. BT has proposed different values for individual retail activities (such as accommodation, general support, computing, general management, personnel) typically in the region of 0.5. It is notable that these categories of cost also feature in the list of other overheads for number portability.

11.16 Oftel believes that BT’s proposed CVE of approximately 0.9 is almost certainly an overestimate and would therefore result in an overstatement of the incremental indirect and total costs of portability. Oftel believes that its own preferred CVE of 0.45 is a reasonable central estimate for indirect costs but accepts that, in the absence of conclusive evidence, it is possible that it is an underestimate and therefore that the incremental indirect costs of portability could be understated. In reaching a decision on how to estimate incremental indirect costs, Oftel has therefore also had to consider the balance of the risks if the determined charges are under- or over-estimated.

11.17 The provision of portability is fundamental to the competitiveness of telecommunications markets as it enables customers to switch networks without the costs of having to change number. However, if charges for portability are themselves excessive, this could deter switching in the same way. This was the thinking behind the MMC’s suggestion that, in time, per-line set-up charges should be abolished. The consequence of setting charges too high, for example by setting such charges on the basis of indirect costs not attributable to the relevant service, might therefore be that competition is diminished. By contrast, the consequences of setting charges below LRIC + EPMU may be simply that BT does not recover a standard contribution to overheads from portability charges in a context in which its overall rates of return are significantly above levels necessary to recover all costs including the cost of capital. In the light of this, Oftel believes that the balance of the arguments favours estimating incremental indirect costs using a CVE of 0.45. This is reflected in the charges set out in Schedule 2.

11.18 These changes do not affect the proposed value of ‘X’.

Portability services and charge controls

12.1 Oftel continues to believe that its assumptions used in calculating the value of ‘X’ are appropriate. Oftel therefore proposes that the value of ‘X’ for services in the ‘Fixed Portability Non-Conveyance Basket’ should be 5 and that the costs and starting charges for these services should be those set out in Schedules 1 and 2 to this final Determination. The portability charges set out in this Determination shall apply from 1 August 2002 and Oftel proposes that the charge controls should also apply from that date. The controls would then apply for four years. Decreases in transit charges should be reflected in the average porting conveyance costs.

12.2 At Annex C, Oftel has set out proposed modifications to give effect to the portability charge controls.

Other operators’ average porting conveyance charges for non-geographic portability

13.1 BT has expressed concern about the accountability of other Donor Operators’ average porting conveyance charges. The formula set out at Annex A, which is used for calculating an operator’s APCC, will arrive at different charges for different operators. There are two factors that will vary between operators. The first is the cost of conveyance, either because of cost differences between networks or differences in the amount of the network used for conveyance. Obviously, the higher the cost of conveyance, the higher the APCC (all else being equal). The second is the proportion of traffic originating ‘off-net’. This is likely to show considerable variation. The larger the share of the access market the Donor Operator’s network possesses, the more likely it would be that a call to a number ported away from its network will have originated on its network. So for BT one would expect a low proportion of ‘off-net’ calls, and consequently a low APCC. For a network operator with no access network, it would be expected that a high proportion (100%) of ported calls originated ‘off-net’.

13.2 If an operator, when applying the formula at Annex A, works on the basis that all calls originate ‘off-net’ and its conveyance costs are high the APCC would then be high. Charges set by operators that do not possess market power are not normally subject to control by Oftel, the reason being that without market power operators do not have the market position that would allow them to price above cost or sustain anti-competitive behaviour. However, there are certain circumstances when even a non-SMP operator is able to sustain a price above cost.

13.3 The APCC charge appears to be one of those circumstances. The impact of the APCC is to reduce the revenue available for the Recipient Operator, which pays this charge for both geographic and non-geographic calls. So if an operator sets a high APCC, it does not affect its own business. It gains the additional revenue, while others lose that revenue. In addition, there is no competitive constraint on the level of the APCC because there is no choice but to use the Donor Operator’s network as a transit operator if the call does not originate on the Recipient Operator’s network. The originating operator has no realistic or effective choice but to pass the call to the Donor Operator because routing is based on numbering and the originating operator knows that the number has been allocated to the Donor Operator. The Recipient Operator has no realistic choice but to receive the call from the Donor Operator. So while most transit services could be subject to competitive pressures, transit for ported calls (and so the APCC) is not currently subject to competitive pressures.

13.4 An operator with a high APCC could discourage other operators from attracting its customers. The Recipient Operator’s revenues would be low or, perhaps, non-existent. A high APCC could create a barrier to portability.

13.5 Condition 28.2(a) of licences – or its equivalent in other licences – states that charges for portability services are always subject to the requirement of reasonableness. If there is doubt about the reasonableness of any charge, the matter may be brought to the Director General’s attention for determination. If in receipt of a determination request, the Director General would need to consider the reasonableness of the relevant charges, and the possibility that the charges could present a barrier to portability. In principle, the Director General believes that other operators’ charges for the conveyance elements of portability should be based on BT’s costs.

Other operators’ average porting conveyance charges for geographic portability

14.1 The Director General believes that other operators could use the same methodology used to calculate BT’s average porting conveyance charge for transit costs that they similarly incur for geographic portability.

Charges for other operators’ portability services and reciprocity

15.1 The Number portability licence condition requires operators’ charges to be based on their incremental costs if the charges made by BT under Condition 69 of its licence are set on an incremental cost basis, unless the Director General should determine otherwise. Charges for services provided under Condition 69 of BT’s licence are based on their incremental costs, and the Director General is proposing to determine that charges for BT’s portability services should be based on their incremental costs. There is a requirement, therefore, for other operators to base their charges for their portability services on their incurred incremental cost in providing those services.

Publication requirements and financial reporting

16.1 portability services will be subject to the same requirements as other non-competitive interconnection services, eg the requirement to publish charge change notices ninety days before they are to become effective. Additionally, BT will also be obliged to prepare and publish financial information for portability services.

Next steps

17.1 It is Oftel’s intention that the charges set out in Schedule 2 and the licence modifications to give effect to the charge controls should apply from 1 August 2002.

How to make representations and objections to the proposed changes

1. Parties likely to be affected by the proposed changes to BT’s licence have until 28 June 2002 to make representations or objections to the proposed changes. Any representations or objections must be made in writing and, where possible, sent by e-mail to mike.galvin@oftel.gov.uk. However, copies may also be posted or faxed to the address below. If any affected parties are unable to respond in one of these ways, they should discuss alternatives with the Oftel manager named below:

Mike Galvin
Oftel
50 Ludgate Hill
London
EC4M7JJ

Tel: 020 7634 8869
Fax: 020 7634 8847

2. In accordance with Section 12(6D) of the Telecommunications Act 1984, representations made against the proposed modifications shall be taken to constitute an objection only if a written statement that they are to be so taken accompanies them. The Director is required by Section 12(2) of the Act to consider any representations or objections on the proposed modifications duly made and not withdrawn. Subject to such consideration, and to the consent of BT for the respective modifications, the Director proposes to make the modifications as soon as practicable after the statutory consultation is completed.

Further copies of this document

Publication of representations and objections

4. Representations and objections 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. However, in the interests of transparency, respondents should avoid applying confidential markings wherever possible.

5. Non confidential representations and objections can be viewed in the Publications section of Oftel’s website under classification Responses to Oftel consultations. They may also be viewed in Oftel’s Research and Information Unit. Appointments must be made in advance (see contact details in paragraph three).

Annex A

Non-geographic portability average porting conveyance cost methodology

A.1 These are the transit costs of conveying calls received from an originating operator that are destined for a ported number on a Recipient Operator’s network. The average porting conveyance charge is applied to non-geographic and geographic ported calls. The charging formula is based on existing transit rates and the proportions of non-geographic and geographic traffic (calls) that originate ‘off-net’. An illustrative example of how the average porting conveyance charge is calculated is set out below.

Example of calls to freephone

A.2 This average is then applied to the tariff gradient to yield the appropriate day, evening and weekend rates for calls to ported numbers:

Annex B

Geographic portability average conveyance cost methodology

A.1 These are the transit costs of conveying calls received from an originating operator that are destined for a ported number on a Recipient Operator’s network. The average porting conveyance charge is applied to non-geographic and geographic ported calls. The charging formula is based on existing transit rates and the proportions of non-geographic and geographic traffic (calls) that originate ‘off-net’. An illustrative example of how the average porting conveyance charge is calculated is set out below.

For the recovery of the average porting conveyance charge for geographic portability all calls are assumed to be Single Tandem Transit only.