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| A Direction relating to a dispute over BT's Transit Risk Review Supplemental Agreement - 16 January 2003 | |
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Direction
under Regulation 6(6) of the Telecommunications (Interconnection) Regulations
1997 relating to a dispute between British Telecommunications plc ("BT")
and the operators listed in the Schedule over BT's Transit Risk Review
Supplemental Agreement The
final direction Explanatory memorandum
Annex
– Operators that made submissions to the Director DIRECTION
UNDER REGULATION 6(6) OF THE TELECOMMUNICATIONS INTERCONNECTION REGULATIONS
1997 RELATING TO A DISPUTE BETWEEN BRITISH TELECOMMUNICATIONS PLC ("BT")
AND THE OPERATORS LISTED IN THE SCHEDULE OVER BT'S TRANSIT RISK REVIEW
SUPPLEMENTAL AGREEMENT Whereas: (A) The Secretary
of State granted to British Telecommunications on 22 June 1984 a licence
(the "BT licence") under section 7 of the Telecommunications
Act 1984 ("the Act") for the running of telecommunications
systems specified in that licence; (B) By virtue of
section 109 of, and paragraph 20 to, Schedule 5 of the Act the BT licence
has effect as if granted to British Telecommunications plc ("BT"); (C) The Secretary
of State has granted to each of the operators listed in the Schedule
a licence under section 7 of the Act for the running of telecommunications
systems specified in that licence; (D) The operators
listed in the Schedule entered into a Standard Interconnect Agreement
("SIA") with BT on the dates set out in the Schedule; (E) The SIA allows
either party to seek to amend the SIA by serving on the other a review
notice in certain circumstances. On service of a review notice, the
SIA requires that the parties negotiate in good faith the matters to
be resolved with a view to agreeing relevant amendments to the SIA.
Where the parties fail to reach agreement on the subject matter of a
review notice within a period set out in the SIA, either party may,
within a period set out in the SIA, request the Director General of
Telecommunications to determine the matters upon which the parties have
failed to agree; (F) On 18 December
2001, BT served a review notice ("the Review Notice") on the
operators listed in the Schedule. The Review Notice sought amendments
to the SIA to introduce reciprocal provisions covering certain bad debt
risks in a transit situation; (G) For the purposes
of the Review Notice, the SIA allows for a three month period of negotiation,
followed by a three month period within which either party may make
a request to the Director to determine any matters upon which the parties
have failed to agree; (H) On 15 April
2002, and following negotiation between the parties which did not result
in agreement on the Review Notice, BT sent a proposed supplemental agreement
to the SIA signed by BT ("the Supplemental Agreement") to
the operators listed in the Schedule. The Supplemental Agreement incorporated
BT's proposals as set out in the Review Notice. BT sought the return
of a copy of the Supplemental Agreement, signed and dated by the operators
listed in the Schedule, by 7 May 2002; (I) On 13 May 2002, BT wrote to the operators listed in the Schedule seeking the return of a copy of the Supplemental Agreement, signed and dated by those operators, by 20 May 2002. In that letter, BT stated that any operator which had either
(J) As at 20 May
2002, the operators listed in the Schedule had either:
(K) On 24 May 2002,
in accordance with the provisions of Regulation 6(6) of the Telecommunications
(Interconnection) Regulations 1997 ("the Regulations"), BT
referred the dispute to the Director for determination; (L) Regulation 6(6)
of the Regulations provides that where there is a dispute concerning
interconnection between organisations, 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; (M) 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; (N) The Regulations
place upon the Director the general responsibility to encourage and
secure adequate interconnection in the interests of all users; (O) The Director
issued a draft of this direction and the explanatory memorandum which
contained the Director's reasons on 31 October 2002 and responses were
invited by 28 November 2002; (P) Non-confidential
comments were received as detailed and discussed in Chapter 4 of the
explanatory memorandum which accompanies and is published with this
direction. The Director in making this direction has taken these comments
into account; Pursuant to Regulation
6(6) of the Regulations, and having considered, inter alia, the views
of the parties and those matters set out in Regulation 6(8) of the Regulations,
the Director makes the following direction to resolve the dispute between
BT and the operators listed in the Schedule: 2. Except as otherwise
defined in this direction, words or expressions used shall have the
same meaning as in the Act, the BT licence or the SIA as appropriate. 3. This direction
shall take effect on the day it is published. Director of Investigations A person authorised
under Paragraph 8 of Schedule 1 to the Telecommunications Act 1984 ……….
2002
Explanatory
memorandum Summary 1.1 The Director
General of Telecommunications (the "Director") has issued
a direction in accordance with the provisions of Regulation 6(6) of
the Telecommunications (Interconnection) Regulations 1997 (the "Regulations")
for the resolution of a dispute between British Telecommunications plc
("BT") and 178 operators as set out in the Schedule to the
direction. 1.2 BT referred
this dispute to the Director on 24 May 2002. The Director considered
the submissions made by BT and the Operators and issued a draft direction
on 31 October 2002 to the industry as a whole for consultation. Comments
were received from five operators and these have been taken into account
in making this final direction. 1.3 The Director
has decided that BT should not be permitted to implement its Transit
Risk Review proposals as set out in its Supplemental Agreement of 15
April 2002. 1.4 BT's proposal's
to implement a claw-back arrangement forms the subject of this dispute
and relates to who should bear the financial consequence of bad debt.
On the basis of the evidence currently presented, the Director is not
convinced that BT's proposals are necessary, represent a fair balance
between BT and other operators or contribute to the maintenance of adequate
interconnection arrangements in the UK. 1.5 The background
to the dispute is described in Chapter 2. Chapter 3 sets out the history
of the dispute, the arguments of the parties and the draft direction
issued on 31 October 2002. Chapter 4 outlines the responses to the draft
direction and Chapter 5 explains the Director's considerations and the
basis of his final decision. Background 2.1 As the UK's
largest operator, BT carries large amounts of both interconnection and
transit traffic. Transit traffic is that which BT neither originates
nor terminates but carries between other operators. Generally, the caller
pays the Originating Number Operator ("ONO") for the cost
of the call, and the ONO then pays BT a transit and termination payment.
BT separately pays the Terminating Number Operator ("TNO")
the termination charge. Currently BT pays the termination payment to
the TNO whether or not it receives payment from the ONO and, in doing
so, is the only party involved in the transaction that is exposed to
the risk of non-payment by the ONO. 2.2 A certain level
of bad debt is to be expected in any industry and is regarded as a normal
cost of doing business. BT has recently sought to introduce two key
measures to address bad debt: Credit Vetting proposal
Transit Risk proposal
2.3 BT has introduced each of these measures in separate proposals for Supplemental Agreements to the Standard Interconnect Agreement ("SIA"). This direction deals only with BT's request for determination on the Transit Risk Review Supplemental Agreement ("the Supplemental Agreement") although, in making the direction, Oftel has considered the extent to which the two proposals interact with each other.
History of the
dispute 3.1 On 18 December
2001 BT issued a contractual Review Notice to Operators. The Review
Notice sought amendments to the SIA to transfer bad debt risks to the
Transit Principals (those responsible for the origination or termination
of the calls) in certain listed situations where BT acts only as the
transit operator. 3.2 Discussions
took place between BT and interested representatives of the industry
during February and March 2002 but no agreement was reached. A number
of operators were sympathetic to BT's position but preferred a solution
based on a pence per minute ("ppm") surcharge, calculated
using forecasts of traffic. 3.3 On 15 April
2002 BT issued the Supplemental Agreement embodying the proposed changes
to 226 operators (including franchisees). Twenty-five operators signed
and accepted the Supplemental Agreement. 45 operators formally rejected
the Supplemental Agreement. The remainder were deemed to have rejected
the Supplemental Agreement by failure to sign within the agreed contractual
timescales. Since BT referred the dispute to the Director, further operators
have signed and returned the Supplemental Agreement to BT leaving, as
of the date of the direction, 178 operators ("the Operators")
in dispute with BT. 3.4 BT referred
this dispute to the Director in a letter of 24 May 2002. In the letter,
BT stated that the dispute concerned BT's proposal that for a number
of transit products, it should have the right to "clawback"
termination payments paid to TNOs in circumstances where it had not
been able to recover those payments from an ONO by reason of the ONO's
insolvency. Under the terms of the Supplemental Agreement, payments
due by BT to another operator would cease to be due, and payments already
made would have to be refunded. 3.5 BT has sought
a determination from the Director on whether or not it should be able
to claw back payments it had made in these circumstances, or to cancel
payments not yet made. Information sought
by the Director 3.6 On 30 May 2002,
the Director wrote to the operators which had not signed the Supplemental
Agreement, advising that he would be making a determination of this
dispute in due course and requested comments. A number of operators
responded, and these are listed in the Annex to the Explanatory Memorandum.
Only four operators other than BT responded formally to the draft direction
issued on 31 October 2002. These operators' comments are summarised
in Chapter 4. 3.7 A meeting with
BT was held at Oftel on 17 July 2002, to discuss the relationship between
this dispute and the dispute over credit vetting, the background to
the proposals, and possible solutions. 3.8 A meeting with
interested operators was held at Oftel on 19 July 2002 to discuss operators'
concerns about the both the Transit Risk and Credit Vetting proposals,
and this included discussion of alternative solutions to address BT's
concerns. 3.9 On 9 August
2002 the Director wrote to BT requesting further information on the
extent of transit risk to BT, BT's reasons for not choosing alternative
solutions and any supporting information for BT's proposals. BT made
an initial response to this letter on 28 August 2002, providing some,
but not all, of the information requested. BT provided further information
on 13 and 19 September 2002, and fulfilled the remainder of the information
request on 4 October 2002. BT requested that these responses be kept
confidential to Oftel. Submissions of
the parties BT 3.10 BT argued that
it carried a unique burden of transit risk. It said that it was obliged
to provide interconnection, and act as a middle man in transiting calls
and collecting termination charges from ONOs on behalf of TNOs. BT said
that, as the financial state of the telecomms sector had deteriorated,
the burden placed upon it had become increasingly unreasonable. In BT's
financial year 2000/01 three operators went into some form of insolvency
resulting in losses to BT of around £200,000; in 2001/02, however,
this number rose to 22, resulting in the loss of several tens of millions
of pounds. 3.11 BT does make
some provision for bad debt in its Product Management, Policy and Planning
("PPP") charge, which aims to recover the administration costs
of providing an interconnection service. BT claimed, however, that these
provisions were negligible, because when the PPP charge was calculated
they were based on lower expectations of bad debt than those currently
experienced. 3.12 BT claimed
that its conveyance charges have a profit margin of only 3 per cent,
and that this was insufficient for it to cover the increasing costs
of bad debt. BT argued that the increasing exposure meant that it must
take protective measures, and it considered that it should have the
right to 'clawback' termination payments made to TNOs where it had not
been able to recover the money from ONOs by reason of the ONOs' insolvency.
The bad debt would therefore, in BT's view, justifiably be the TNOs'
risk and cost. 3.13 BT did not
believe that a ppm surcharge on charges for transit services payable
by ONOs to BT (the solution preferred by other operators) would be workable
or equitable since it would rely on predictions of how much transit
bad debt BT would suffer in a particular year, along with the volume
of transit calls to be carried during that year. Furthermore, operators
not terminating calls would have to pay the same charges as those which
did. 3.14 BT had considered
whether it could insure against transit risk but its enquiries showed
that too much information was required from potential insurers. Although
BT had not obtained any formal quotes, it believed that insurance would
be very costly and cover only a proportion of the bad debt. 3.15 BT acknowledged
the view (see paragraph 3.19 below) that an inadequate credit vetting
provision could exacerbate the level of transit risk, and said that
its proposals for changes to its credit vetting procedures should have
a significant impact on the level of transit risk to which it was exposed. The Operators 3.16 The Director
received comments on this proposal from a number of operators listed
in Annex to this Explanatory Memorandum. The following arguments were
raised by a number of these operators. 3.17 BT has contracts
with each of the ONOs and hence is the only operator in a position to
control transit risk. Most operators said that it would be unreasonable
for BT to pass on bad debts to operators who had no way to control or
predict these costs. They considered that if BT could simply pass on
losses to TNOs, BT would lose a considerable amount of the incentive
it currently had to attempt to control transit and credit risk. Some
operators found it conceivable that BT would continue passing on calls
knowing that the ONO was in financial difficulty. The TNO would be unaware
of the problem until BT attempted to recover monies paid, leaving TNOs
unable to estimate how much of the payments already received from BT,
acting as the transit operator, they would actually be able to retain.
To exacerbate this problem, many TNOs would already have passed on the
payments to their customers (i.e. Service Providers) and would not be
able to recover the payments themselves. Operators also felt that BT
might make less effort to recover monies from ONOs if it knew that it
could pass on any losses to the TNOs. 3.18 Condition 45
of BT's licence sets out BT's obligations to interconnect on reasonable
terms, including that BT will be paid for the services it provides.
Some operators considered that where an originating operator had a poor
credit or payment history this would allow BT to terminate interconnection
with that operator for failing to make payments and that this provided
it with ample protection. Since the OLOs do not, for the most part,
interconnect directly with each other they do not have this protection
available to them. The view of the operators was that there are too
many operators for each of them to contract directly with all of the
others. 3.19 Some operators
felt that the transit risk problem was caused partly by the inadequacy
of BT's credit vetting procedures. Many operators felt that BT's credit
vetting proposals (see paragraph 2.2) could resolve the issue of transit
risk. 3.20 Several operators
felt that BT had already made adequate provision for bad debt within
the PPP charges. While it was accepted that bad debt had been higher
in the last year than it had in previous years, the operators said that
as BT had been collecting PPP charges since 1995-96, when bad debt was
negligible, and should have accumulated sufficient sums to cover the
current levels of bad debt. 3.21 Some operators
said that if they knew that they were liable for the bad debt of ONOs,
they would ask BT not to pass on calls to them from any company in financial
difficulty. 3.22 Operators felt
that, if there was a need for BT to pass on costs within the industry
(and not all operators accepted that this was reasonable) there were
other, more preferable solutions. It was suggested by several operators
that BT could insure itself against transit risk. Cable & Wireless
considered that the solution of passing transit risk to TNOs by requiring
them to interconnect directly with each of the ONOs merited further
examination. Generally, however, the industry indicated that if the
principle that transit risk could be spread across the industry were
accepted, they would prefer a ppm surcharge on payments made by ONOs,
though approval of this solution would be dependent on BT providing
estimates of the level of the surcharge. 3.23 On 31 October 2002 the Director issued a draft direction setting out his proposed decision in resolving the dispute. In summary, Oftel was provisionally of the view that BT's proposal to transfer the burden of bad debt directly to the TNOs was unacceptable for the following reasons: (i) it transferred the bad debt risk to TNOs which had no contractual relationship with ONOs and thus had no way of minimising the risks of ONOs' bad debt. To transfer all the risk to the TNOs would artificially increase this risk (as the TNOs had no means to reduce it) and move the burden into the termination markets, thereby increasing the riskiness of these markets. This risk would be artificial in the sense that in the normal course of business it would be unreasonable to expect a company in a supply chain to accept terms and conditions where it bears, but does not control, the risk of bad debt; and (ii) it reduced, but did not remove, BT's incentive to minimise the costs of bad debt from ONOs by implementing credit vetting policies and appropriate credit management policies. BT still bore, and could be expected to take steps to minimise, bad debt on transit charges and where it terminated calls itself. BT was in the best position to minimise transit risk, however, as it knew which operators it was dealing with, had the contractual means to screen them and the technical means to withdraw or suspend services where there was a sufficiently high risk of insolvency. 3.24 Accordingly, the Director was minded to direct that the operators listed in the schedule to the draft direction should not be required to sign the supplemental agreement. BT's accounting for bad debt 3.25 Oftel has carried out a partial review of how BT accounts for bad debts, including those that arise out of the provision of transit services. Oftel is of the view however that this review is not vital in resolving the dispute at hand. Oftel notes that going forward, BT is seeking to introduce credit vetting provisions into the SIA. As previously stated, Oftel is considering a dispute in respect of this matter and will be issuing a direction shortly. However, given that Oftel's draft direction stated that it is reasonable in principle for BT to have a credit vetting policy, any policy adopted by BT should enable it to control its exposure to bad debt better and this in time should impact on the level of its bad debt costs.
Responses to the draft direction BT 4.1 BT repeated
that it is obliged to provide a transit service and that in the current
economic climate this posed a significant risk to BT. It noted Oftel's
view that TNOs would be disadvantaged by its proposal as they do not
have a direct relationship with ONOs, but maintained that since BT transited
calls to TNOs which enjoyed economic benefits from such calls, it was
reasonable to expect TNOs to share a proportion of the risk. It also
repeated that its profit margin on providing transit services was very
small and was quickly eliminated by the failure of even a few ONOs to
pay.
Chapter
5 Annex
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