The Direction

Explanatory Memorandum

Chapter 1 Summary

Chapter 2 Background

Chapter 3 Oftel’s Proposals

Stage 1 – Establishing the baseline on which to build the retail uplift
Stage 2 – volume/revenue adjustment
Stage 3 – adjustment for inflation and efficiency gains
Stage 4 – Freephone adjustment

Chapter 4 Ongoing Reviews of the NTS Retail Uplift

Chapter 5 The Draft Decision

Chapter 6 Arrangements for making and viewing representations

Further copies of the document
Publication of representations made by stakeholders

Annex 1 Calculation of efficiency savings in retail costs

Annex 2 BT’s assessment of Costs to be used in calculating the NTS Retail Uplift

WHEREAS:

A. The Secretary of the State granted to British Telecommunications on 22 June 1984 a licence ("the Licence") under section 7 of the Telecommunications Act 1984 ("the Act") for the running of the telecommunication systems specified in Annex A to the Licence;

B. By virtue of Section 109 of, and paragraph 20 of Schedule 5 to, the Act, the Licence has effect as if granted to British Telecommunications plc ("BT");

C. BT, in accordance with Condition 45 of its licence, has entered into interconnection agreements with a number of Operators. Those interconnection agreements include provisions concerning Number Translation Services ("NTS"). The term "Operators" in this direction shall refer to those operators that have entered into an interconnection agreement with BT;

D. By way of a determination entitled Interim Charges for BT’s Initial Standard Services for the year ending 31 March 1996 the Director General of Telecommunications ("the Director") determined a formula for NTS services where the call originated on one operator’s network and terminated on another. This formula ("the NTS Formula") may be summarised as follows:

Originating Network Operator ("ONO") keeps P – D + C

Terminating Network Operator ("TNO") keeps D – C

Where

"P" is the actual retail price charged by the ONO to the customer

"C" is the pence per minute charge for conveyance over a single tandem segment of BT’s network determined in this determination (multiplied by the number of minutes of the call plus an uplift ("the NTS Retail Uplift") to allow for retail costs incurred by the ONO in handling these calls.

"D" is the deemed retail price for the call.

E. The NTS Formula has been used in subsequent determinations and directions of the Director and continues to apply in accordance with, inter alia, the November 1999 Direction concerning BT’s NTS Conveyance and the December 1999 Statement on the Relationship between Interconnection Charges and Retail Prices for Number Translation Services.

F. BT has continued to review and set the NTS Retail Uplift, in determining its "C", by expressing its retail costs as a percentage of its network costs, for its retail systems business, using figures contained in its audited financial statements. This percentage figure was then applied to BT’s (single tandem) call origination charge to produce a pence per minute surcharge.

G. The Director has previously stated his intention to undertake a review of the NTS Retail Uplift in the NTS Formula and has engaged in a number of discussions with BT and Operators.

H. The Telecommunications (Interconnection) Regulations 1997 ("the Regulations") inter alia implement Directive 97/33/EC on interconnection in telecommunications with regard to ensuring universal service and interoperability through application of the principles of open network provision ("the Directive");

I Regulation 6(1) of the Regulations provides that the Director shall encourage and secure adequate interconnection in the interests of all users and that he exercises his functions in a way that provides maximum economic efficiency and gives maximum benefit to end-users having regard to the matters set out in Regulation 6(1)(a) to (g) of the Regulations.

J. Pursuant to Regulation 6(3) of the Regulations the Director may intervene at any time, in order to make a direction specifying issues which must be covered in an interconnection agreement, or to make a direction that specific conditions be observed by one or more parties to such an agreement. The Director may in exceptional circumstances make a direction that changes be made to interconnection agreements already concluded where it is justified to ensure effective competition or interoperability of services for users or both;

K. A draft of this direction and the explanatory memorandum was published on ……….. and comments invited by ………………………;

L. Comments were received from ………….. and the main points made by those who responded are summarised in …… of the explanatory memorandum.

THEREFORE

Having reviewed the NTS Retail Uplift (as discussed in the explanatory memorandum which accompanies and is published with his direction) and considered the requirements of the Directive, the Regulations and the Licence, the Director, pursuant to Regulations 6(3) of the Regulations makes the following direction:

1. The NTS Retail Uplift applied by BT to assess its NTS conveyance charge, namely "C" in the NTS Formula, from 1 April 2000 shall be as follows:

For Freephone NTS calls (0800/0808), 0.1443 pence per minute; and

For all other NTS calls, 0.2126 pence per minute.

2. BT shall review the NTS Retail Uplift on an annual basis using the following methodology

…………………….

3. Any amount payable by BT to an Operator as a result of this direction should be paid together with interest calculated in accordance with Clause 13.13 of their interconnection agreement.

4. Any amount payable by an Operator to BT as a result of this direction should be paid together with interest calculated in accordance with Clause 13.13 of their interconnection agreement.

5. BT and the Operators shall amend their interconnection agreements to give effect to this direction.

6. The terms defined or described in the recitals to this direction shall have the meaning so defined or described. All other words or expressions used in this direction shall have the same meaning as in the Directive, the Regulations, the Act or the Licence as appropriate.

Keith Long

Director of Compliance

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

…………….. 2001

Draft Direction under the Provisions of Regulation 6(3) of the Telecommunications (Interconnection) Regulations 1997 of BT’S retail Uplift Charge for calls to Operators' Number Translation Services

Explanatory Memorandum

1. Summary

1.1 The Director General of Telecommunications ("the Director") has issued a draft direction, in accordance with the provisions of Regulation 6(3) of the Telecommunications (Interconnection) Regulations 1997 ("the Regulations"), to review the methodology for setting BT’s retail uplift within its regulated NTS call origination charge and to set BT’s NTS Retail Uplift from 1 April 2000. This work has been carried out in accordance with the statement in paragraph 2.1 of ‘Oftel’s Statement on the Relationship between Interconnection Charges and Retail Prices for Number Translation Services’ published in December 1999.

1.2 Oftel first established the principle of a supplemental charge to meet BT’s relevant retail costs in providing access to NTS services, in the first ICAS determination of Interim Charges for BT’s Initial Standard Services for the year ending 31 March 1996 ("the 1996 Determination") published on 30 January 1996. The charging methodology applied was necessarily simplistic given the lack of available data at the time. As with other elements of BT’s NTS retention, Oftel stated that, when these could be properly evaluated, the correct charge should be applied.

1.3 Oftel issued an initial discussion paper to the NTS focus group in February 2000 outlining elements that it believed needed to be considered and invited comments. This paper proposed that the revised charge, when agreed, should have effect from 1 April 2000.

1.4 Oftel next issued a more detailed paper to the focus group in July 2000. This described a proposed basis for calculating the charge and listed the various retail products for which costs should or should not be included. This paper indicated that Oftel intended to issue a draft direction of the revised charge for consultation. For a number of reasons this has not been possible until now.

1.5 Comments were received to both documents and these have been considered in drafting this document. In formulating this draft decision, Oftel has sought BT’s comments on the data and assumptions used. BT has, as a result, provided further supporting data and its own view of the correct charge.

1.6 In considering all of the information made available to it the Director has taken the initial view that costs associated with bad debt for NTS calls should not be allocated towards Freephone (0800/0808) calls. As a consequence, a separate retail uplift charge is proposed for Freephone and chargeable NTS calls.

1.7 The detailed methodology is described in Chapter 3, but the confidential cost and volume details used to calculate the charge have been excluded. Also included is a table giving BT’s view on the application of Cost Volume Relationships (CVRs) to the various retail costs and how this affects the charge. Oftel believes that the operators will have views on the relevance of the various costs. Accordingly, comments are invited on both the Director’s draft decision and BT’s proposal. A number of options for a proposed methodology for reviewing the retail uplift in future is also included for consultation. It is currently intended that, having considered the responses to this document the Director will specify, by direction, the method to be used.

1.8 Accordingly the Director proposes that, with effect from 1 April 2000, the uplift for relevant retail costs applied by BT to give its NTS Conveyance charge should be:

Freephone (0800/0808) 0.1443ppm

All other (Local and National) NTS 0.2126ppm

This equates to an overall uplift of 0.2043ppm which is 19.3% lower than the charge currently used by BT of 0.2531ppm.

1.9 The proposed charges may be subject to change in the light of substantive comments received by Oftel as a result of this consultation.

2. Background

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

http://www.oftel.gov.uk/publications/1999/pricing/btfc499.htm
http://www.oftel.gov.uk/publications/pricing/ntsd0901.htm

2.2 Oftel conducted a lengthy consultation in 1995 over the revenue sharing arrangements and charges that should apply to ‘non-geographic’ calls to services hosted by BT and other terminating operators. The industry believed that the arrangements which applied for person to person geographic calls provided little incentive for the development of value added, usually telemarketing, services. These arrangements provide only for a cost based charge to be paid by the originating operator for call termination and for any retail benefit from the calls to be retained by the originating operator.

2.3 Terminating operators held that, as owners of the value added services, they should receive a greater share of the retail price for the calls to cover both their own network costs and to help fund the services. As a result of the consultation Oftel published what has become known as "the NTS Determination" which formed part of the 1996 Determination referred to in paragraph 1.2.

2.4 The NTS Determination set the charges that BT and operators should pay for access to BT’s own services. It also established the basis for the calculation of the payments BT should make to operators for terminating calls destined for their (or their service providers’) services. These payments are the product of the retail price paid by customers less BT’s regulated retention for originating these calls. BT’s retention, in turn, is a product of the element based charge for call origination and conveyance across its network, to the point of handover to the operator’s network, plus an allowance for the costs of relevant retail activities undertaken by BT.

2.5 In the absence, at the time, of any detailed information about the retail activities actually involved, and to the extent, Oftel was unable to determine an auditable methodology for calculating retail costs as a pence per minute supplement to the conveyance charges. Oftel therefore applied, as a proxy, a method which took BT’s published retail costs for its calls (Retail Systems) business expressed as a percentage of the network costs for the same business. This percentage figure was then applied to BT’s (single tandem) call origination charge to produce a pence per minute surcharge.

2.6 The key problems with this ‘simple’ methodology were that BT felt it undervalued the true costs associated with NTS call origination whilst operators believed too many cost elements were included which resulted in BT being able to over-recover for its retail activities.

2.7 Following its establishment in mid 1998 by the Operator Policy Forum (OPF) the NTS focus group highlighted concerns with the retail uplift charge as one of the many issues surrounding NTS at the time. The group initially focussed its efforts on the NTS regime as a whole. This included a detailed consultation exercise which culminated in the publication of ‘Oftel’s Statement on the Relationship between Interconnection Charges and Retail Prices for Number Translation Services’ in December 1999. In paragraph 2.1 of that document Oftel referred to the review of the retail uplift methodology and has subsequently said it would consult on its findings before determining any new charge.

2.8 Operators have stated their belief that owing to the unanticipated growth in the volume of NTS calls the retail uplift as it stands may be too generous to BT and results in an over recovery of retail costs. OFTEL concurs that the increase in NTS call volumes since 1996 coincides with a decrease in BT’s unit retail costs, which have to date not been passed on.

2.9 Additionally Oftel identified the need to consider whether all the elements of retail costs allocated against calls by BT’s wholesale billing systems were actually relevant for NTS calls. Some operators had voiced their view that the inclusion of BT’s marketing and sales activities was not justified. In their view NTS calls to operators’ services were stimulated by the retail activities of their service providers and not by any call stimulation advertising or marketing undertaken by BT. Operators argue that they should not, therefore, be expected to fund BT’s costs for these activities which were designed to grow the overall market for calls and not simply NTS.

2.10 Other operators expressed concerns about whether BT’s retail costs included activities designed to grow BT’s customer base either through increasing the penetration of first and second lines or through ‘winback’ campaigns designed to encourage customers who had migrated to other network operators to return to BT. It was held that it was unreasonable to expect operators to fund BT’s attempts to retain market share thereby reducing effective competition.

2.11 Oftel had also to consider BT’s concerns that the existing charging method had no basis in sound accounting practice. BT felt that this weakness may be leading to a serious under-recovery of retail costs which, along with other expedients that existed within NTS charging such as the single tandem average conveyance charge, meant that terminating operators may be over-rewarded for terminating NTS calls originated by BT. The points made by BT and operators are discussed further in Chapter 3.

2.12 In reaching this stage of issuing a draft direction for consultation Oftel has already sought views from the industry through two discussion papers issued to the NTS focus group in February and July 2000. The first contained Oftel’s initial view on the relevant costs to be included, gave an explanation of how Cost Volume Relationships (CVRs) could be applied and sought views on whether costs should be FAC (Fully Allocated Cost) or LRIC (Long Range Incremental Cost) based. The second paper built upon the first taking the responses received into account and formed the basis of the proposals contained in this document.

2.13 Oftel’s initial papers also proposed that the revised charge should have effect from 1 April 2000. No change is proposed to this date in this review. Since publishing its initial views, Oftel has also sought and obtained further detailed information from BT. Oftel has also discussed various of the assumptions contained these proposals with BT in an attempt to ensure all the relevant factors have been considered.

2.14 The detailed proposals are contained in Chapter 3 of this document. In these it can be seen that Oftel has applied CVRs to all cost categories except bad debt in a way that is consistent with the 1996 Price Control Review (PCR) which used a CVR of 0.25 across all retail products. However, Oftel agrees with BT that, due to the bad debt costs associated with finance and billing, a CVR of 0.25 is not appropriate for this cost category. This is because that bad debt costs are more closely aligned with call volumes and will vary in direct proportion to call revenues. Oftel has therefore applied a cost-revenue ratio of 1 for bad debt.

2.15 BT has stated in its submissions to Oftel that bad debt is a significant contributor to its finance and billing costs but is unable to provide detailed information. Oftel has, therefore, assumed that 50% of BT’s finance and billing costs arise from bad debt.

2.16 BT is also of the view that a much higher average CVR should apply across the range of cost categories and has provided its own analysis to support its view. Oftel believes operators may welcome the opportunity to comment on how the elements of retail costs move with increasing call volumes. Accordingly, non-confidential details of both Oftel’s and BT’s views of the relevant CVRs are included because of the potentially significant effect these two views have on the resultant charge.

3. Oftel’s Proposals

3.1 As discussed in OFTEL’s previous papers, the retail uplift will be set on the basis of the sum of recoverable costs in the base year plus the additional costs incurred as a result of volume growth.

3.2 The following issues need to be resolved in order to determine the retail uplift:

• Which of BT’s retail costs should be recovered in the retail uplift?
• What baseline should the retail uplift be built upon?
• How should the retail uplift be adjusted to take account of the huge growth in NTS call volumes?

NB: All references to call volumes refer to volumes of call minutes.

3.3 The issue of which retail costs should be included in the retail uplift formula has been discussed on previous occasions as stated above. Operators took the view that only those retail costs that are incremental to the provision of NTS calls should be included, ie costs that BT would not bear if NTS services were not available such as direct billing costs. It has also been argued that BT’s marketing and sales costs should not be included since these are not necessarily be related to NTS calls. Indeed it is the operators’ and their service providers’ own marketing activities that drive consumer demand for access to their services.

3.4 BT on the other hand argues that the sole inclusion of costs incremental to the service will result in an under-recovery of costs. BT argues that the cost basis underlying the uplift should be calculated on a fully allocated basis, including other retail costs associated with NTS, such as marketing and sales, and indirect costs associated with it.

3.5 Oftel believes that consistency with the PCR in 1996 is important in terms of cost recovery. The price control review was set on the basis that a certain amount of retail costs, including some indirect costs and sales and marketing costs, would be recoverable from NTS call minutes. A separate allocation of retail costs was therefore made for NTS calls. Accordingly the Director believes that it is appropriate to include the following costs in the retail uplift:

• Finance and billing costs (50% = bad debt
• Customer service
• Marketing – aimed at getting more people connected to BT in the UK
• Marketing – aimed at non-UK customers
• Billing enquiries
• Fault report
• Complaints
• Indirect retail costs

3.6 The retail uplift calculation therefore consists of the baseline figure, which comprises direct costs, their associated indirect costs, other indirect costs (such as sales and marketing) and allowance for a Return on Capital Employed (ROCE). All cost categories except bad debt are inflated by a CVR over the relevant period, and the bad debt proportion of the baseline is inflated by a cost-revenue relationship over the relevant period.

Stage 1 – Establishing the baseline on which to build the retail uplift

3.7 The first stage is to establish the base year from which the data used in the calculations is drawn. Initially, OFTEL decided to use data from the start of the last retail price control period, ie August 1997. However following discussions with BT, it was agreed that for the purposes of the recovery of NTS costs, it was appropriate to use the data used in calculating the retail price controls, which was for the financial year 1994/95. At this point in time, some of BT’s retail costs were intended to be recoverable from NTS call minutes, and some were intended to be recoverable from price controlled services. Since accounts are not separated to such a degree, it is not possible gain direct evidence of the actual allocation of retail costs to NTS. However it is possible to gain an estimate of this by first calculating BT’s unit retail costs for its Local Call and National Call category ("L&N"), and multiplying this by BT NTS call volumes for those call categories. This is calculated using the following formula:

Call volumes for L&N (including NTS BT – OLO) 94/95

3.8 This method of using total retail costs divided by total call volumes is consistent with the method used in the 1996 PCR.

3.9 During its review of the price cap on calls to mobiles in 1998, the Monopolies and Mergers Commission (MMC) revised the distribution of the retail costs of calls. In doing so it reduced the costs that were attributed to calls to mobiles, for the year 1997/98, by £53.9m. These costs were then re-allocated across local and national calls (including BT to OLO NTS calls), giving an increase in total costs of 9.7%. Given that the price cap in calls to mobiles was calculated using these lower costs, it is appropriate that the reallocation of £53.9m of retail costs to local and national calls should be taken into account in these NTS calls. Hence the baseline of the NTS retail uplift calculated above has been inflated by 9.7%.

Stage 2 – volume/revenue adjustment

3.10 In the initial discussion paper of February 2000, OFTEL set out a proposal for adjusting the retail uplift to take account of greater call volumes. This proposal involved adjusting the initial allocation of retail costs through the use of CVRs.

3.12 As indicated in paragraph 2.14, for all cost categories except bad debt, OFTEL proposes to use the same CVR used in the 1996 PCR. The CVR associated with network costs alone, is estimated as 0.25 in the PCR. The end to end CVR, which is a weighted average of the retail network CVRs) is also estimated at 0.25. Therefore the CVR applicable to retail costs should also be 0.25.

3.13 However, for the bad debt cost category, Oftel proposes to use a cost-revenue ratio of 1, i.e. Oftel believes that costs of bad debt vary directly with revenues of calls, rather than volumes and that this also adjusts for the relative decline in call prices over time. As stated in paragraph 2.15, in the absence of definitive information, Oftel has assumed that 50% of finance and billing costs consist of bad debt. From information supplied by BT, for the year 1995/96, finance and billing costs made up of 21% of total retail costs. Oftel has therefore assumed that finance and billing costs accounted for 21% of the total baseline costs of which 11.5% arise from bad debt. The CVR of 0.25 is therefore applied to the remaining 88.5% of retail costs.

3.14 Call minute volume data indicates that volumes of NTS calls in 1999/00 were 2558%% higher than those in 1994/5. A CVR of 0.25 indicates that if volumes had grown by 2558% then retail costs will have grown by 640% over the same period. To make the volume adjustment, the 88.5% of the baseline cost figure is multiplied by (1+640%) to allow for the recovery of all retail costs except the bad debt category.

3.15 In order to address the finance and billing cost category, it is necessary to convert the volume increase into revenue increase. To do this, Oftel has applied an estimated average annual price change factor for NTS calls, inclusive of discounts of –4.81% over the period. Applying this price change to the 2558% volume increase results in a revenue increase of 1978% from 1994/5 to 1999/00. With a cost-revenue ratio of 1 it is assumed that the bad debt component of BT’s finance and billing costs have also increased by 1978% over the relevant time period. As a result 11.5% of baseline costs are multiplied by (1+1978%) to give a volume adjusted cost figure for bad debt.

Stage 3 – adjustment for inflation and efficiency gains

3.16 The volume adjusted cost figure does not reflect the effects of underlying efficiency gains accruing to BT Retail Systems Business or inflation in retail prices over the years.

3.17 The Director proposes an efficiency savings adjustment through a calculation which estimates the underlying annual gain in efficiency in retail activities. By using a CVR, it is possible to strip out volume effects that are responsible for cost reductions.

3.18 The relevant data used for the calculation is:

• Retail costs for Local and National, BT-OLO and BT-BT NTS calls incurred in 1999/00;
• Retail costs for Local, National, BT-OLO and BT-BT NTS calls incurred in 1994/95;
• Retail costs for Local, National, BT-OLO and BT-BT NTS calls incurred in 1994/95 and adjusted for inflation;
• BT call volumes for Local, National, BT-OLO and BT-BT NTS calls in 1994/95 and;
• BT call volumes for Local, National, BT-OLO and BT-BT NTS calls in 1999/00;

Annex 1 explains this calculation, which results in an efficiency saving of 0.050, ie costs (adjusting for the effects of inflation and volume effects) fall by 5% per annum over the 5 years. Oftel has assumed that bad debt costs do not undergo any efficiency savings as these result from customer behaviour which is outside BT’s control. Therefore, the efficiency saving is only applied to the volume adjusted baseline for all costs except bad debt.

3.19 To make an inflation adjustment, an average annual inflation rate is calculated from the RPI, featured at the end of the spreadsheet, which gives an average inflation rate of 2.69%.

3.20 The inflation and efficiency coefficients are applied using the following formula:

where: e = efficiency savings

i = inflation

3.21 The result is a retail uplift figure for all NTS calls of 0.2046ppm.

NB: BT’s current retail uplift charge is 0.2531ppm.

Stage 4 – Freephone adjustment

3.22 This stage makes an adjustment in recognition of the fact that bad debt costs do not apply in the case of Freephone calls Oftel has excluded bad debt from the retail contribution made by Freephone calls. This results in the uplift charges being more cost reflective.

3.23 In 1999/00 Freephone calls accounted for 9% of NTS call volumes. As a consequence Oftel has assumed that chargeable NTS calls attract all of the bad debt costs and 91% of the remainder. Freephone calls account for the residue.

3.24 When applied to the respective call volumes, this adjustment gives significantly different uplift charges:

1. Freephone (0800/0808) 0.1443ppm

2. All other NTS 0.2126ppm

3.25 In line with its recent separation of BT’s NTS Discounts for NTS Local and National calls Oftel believes the difference between these two charges justifies applying a separate charge for Freephone and all other NTS calls. This will ensure operators meet BT’s retail costs in accordance with the type of NTS services they terminate.

4. Ongoing Reviews of the NTS Retail Uplift

4.1 As described in paragraph 2.5 Oftel originally determined the ‘simple’ uplift methodology which took BT’s published retail costs for its calls (Retail Systems) business expressed as a percentage of the network costs for the same business and applied this to BT’s (single tandem) call origination charge to produce the charge.

4.2 Since that time, BT has periodically reviewed the charge by updating the percentage factor from its published data and applying this to its contemporaneous single tandem charge. Additionally, in 1998, following the introduction of the NCC regime on 1 October 1997, BT reset the cost base from FAC to LRIC and adjusted the percentage factor to accommodate this.

4.3 The new charge proposed in this document will also need to be reviewed from time by BT to time in line with NCC requirements. Oftel has identified three possible options for carrying out these reviews and welcomes comments on a preferred option.

4.4 A regular review of call volumes – a mechanical process in which the revised calculation method described in Chapter 3 of this document is periodically updated by applying latest volume data. This option has the advantage of being quick and simple but takes no account of changes to the cost base over time.

4.5 A regular review of cost and volume data – here BT would re-calculate the uplift, by identifying which, if any, costs have changed and applying its latest volume figures using the CVRs contained in Oftel’s final direction. This is a much more involved process, but has the advantage of ensuring that the cost base is appropriate and the latest growth factors have been applied.

4.6 Price cap - given that volumes of NTS calls are relatively large, the recovery of retail costs from NTS calls is significant, implying that a price cap could be appropriate. The price cap would have a starting value of the uplift as directed by Oftel and would involve forecasting volumes of NTS calls over the 4 year period that it covers, and would be set using Oftel’s CVR and efficiency factors.

4.7 A price cap has the advantage of introducing cost reduction incentives, and an element of certainty. However, it relies on reasonably accurate volume forecasts which, given the history of NTS, may be difficult to achieve. The price cap would also have to be consistent with any future general retail price cap Oftel may be likely to set.

4.8 If, as a result of the consultation, options one or two are judged to be the most acceptable by the majority of respondents the final direction will direct how the charge will be reviewed on an ongoing basis. However, if Oftel believes a Price Cap is the most appropriate option then a further separate consultation exercise will be required to set the level of the cap.

5. The Draft Decision

5.1 This draft decision is made in accordance with the provisions of Regulation 6(3) of the Telecommunications (Interconnection) Regulations 1997 ("the Regulations"). This regulation states inter alia that "The Director may intervene at any time and that he may in exceptional circumstances make a direction that changes be made to interconnection agreements already concluded where it is justified to ensure effective competition or interoperability of services for users or both."

5.2 This work has been carried out in accordance with the statement made in paragraph 2.1 of ‘Oftel’s Statement on the Relationship between Interconnection Charges and Retail Prices for Number Translation Services’ published in December 1999. The need to review BT’s NTS Retail Uplift was initially recognised by the NTS Focus Group in 1998 and confirmed by Oftel in the 1999 Statement. In other words, the industry has sought that the existing ‘proxy’ charging methodology be replaced by one which accurately reflects BT’s relevant retail costs. The Director considers that these circumstances are sufficiently exceptional to justify his intervention under the terms of Regulation 6(3) of "the Regulations".

5.3 In reaching this draft decision the Director has considered Regulation 6(1) of the Regulations and the matters listed in (a) to (g) and, in particular (b) "the need to stimulate a competitive market". Whilst ensuring that BT recovers its relevant retail costs for originating NTS calls it is essential that the charge is fair and reasonable and does not impede the continued development of a vigorous and competitive market for NTS services.

5.4 Accordingly the Director’s draft decision is that, with effect from 1 April 2000, the methodology for calculating BT’s NTS Retail Uplift shall be as described in Chapter 3 of this Explanatory Memorandum and the revised charges shall be:

For calls to Freephone numbers (0500/0800/0808) 0.1443ppm

For calls to all other NTS numbers 0.2126ppm

5.5 Thereafter, it is proposed that BT will review the charge annually using the methodology to be determined by the Director following this consultation.

6. Arrangements for making and viewing representations

6.1 The Director General’s proposed draft decision is being made available to interested parties, together with the Director General’s reasons, so that they may have a reasonable opportunity to make representations. Having considered any such representations, the Director General will, if appropriate, make the direction and will notify BT and interested parties of that direction and his reasons for making it. The closing date for submitting representations on both the charging methodology and the charges proposed in this determination is 14 November 2001.

6.2 Where possible, comments should be made in writing and sent by e-mail to:

However, copies may also be posted or faxed to the address below. If any stakeholders are unable to respond in one of these ways, they should discuss alternatives with the Oftel manager named below:

Geoff Brighton
Oftel
50 Ludgate Hill
London
EC4M 7JJ

Tel: 020 7634 8925
Fax: 020 7634 8943

Oftel also proposes that the NTS Focus Group should have an opportunity to discuss this document before the deadlines for submission of comments. A meeting will be called to allow operators to seek clarification of the proposals during the consultation period.

Further copies of this document

6.3 This document can be viewed in the Publications section of Oftel’s website (www.oftel.gov.uk), under classification Pricing and price control. Paper copies and more accessible formats such as large print, Braille, disc and audio cassette can be made available on request. Please contact Oftel’s Research and Information Unit by phoning 020 7634 8761 or by sending an e-mail to infocent@oftel.gov.uk.

Publication of representations made by stakeholders

6.4 On this occasion, Oftel is not programming a formal period during which interested parties may comment on the representations made by others. However, in the interests of transparency, all representations will be published, except where respondents indicate that a response, or part of it, is confidential. Respondents are therefore asked to separate out any confidential material into a confidential annex which is clearly identified as containing confidential material. Oftel will take steps to protect the confidentiality of all such material from the moment that it is received at Oftel’s offices.(repetition).

6.5 Non confidential representations can be viewed on Oftel’s website in the Publications section under classification Responses to Oftel consultations. They can also be viewed at Oftel’s Research and Information Unit. Appointments must be made in advance by phoning 020 7634 8761 or sending an e-mail to infocent@oftel.gov.uk.

Annex 1

Calculation of efficiency savings in retail costs

In order to determine the adjustment, the following formula extracted from the recent Price Control Review (OFTEL February 2001) is applied:

where x = efficiency savings, i.e. year on year gain in underlying efficiency net of volume effects.

Annex 2

BT’s assessment of Costs to be used in calculating the NTS Retail Uplift

Key 2

A2.1 As detailed in paragraphs 2.14 and 3.12 of the Explanatory Memorandum Oftel has used a single CVR of 0.25 for all Sectors, with the exception of the bad debt component of finance and billing. This is consistent with the assumptions used in the 1996 PCR with the exception that the Director now believes the costs attributable to bad debts vary in line with call revenues. BT has carried out its own analysis and believes that higher CVRs are appropriate in the majority of Sectors. BT also defines the CVR as LRIC/FAC whereas Oftel has defined it as MC(marginal cost)/FAC.

A2.2 Annex 2 to this document gives BT’s own assessment of the CVRs that should be applied to the various billing sectors used in compiling the relevant retail costs. The Table above lists the key sectors that have a significant contribution to costs. There are also a number of minor items that have been aggregated into "Other" as their net contribution totals less than 2.5% of the resultant cost figure.

A2.3 The Table lists the key Billing Sectors having aggregated minor items into "All other items". The second column shows the CVR BT has used for each sector and the third column shows how each billing sector contributes to the overall cost figure used in compiling the charge. Precise percentage figures have not been quoted for reasons of commercial confidentiality but it can be seen that the key contributors are Marketing & Sales and Finance & Billing, as would probably be expected with, to a lesser extent, Customer Service.

A2.4 Column four shows how each CVR has been sourced with definitions in ‘Key 2’ below the Table. From Key 2 Category 1 is used for mostly minor items and is where BT has used the Oftel figure of 0.25. Category 2 gives CVRs that BT has assessed as being appropriate for that billing sector in relation to calls. Sectors using category 2 account for over 50% of the total costs. Category 3 is an estimated figure of 0.5. Category 4 represents CVRs that are consistent with those used across operating cost sectors other than calls. The contribution each category makes to the total costs is also shown.

A2.5 Oftel’s proposed charge and the CVRs used have been formulated to align with 1996 PCR principles. BT’s more specific approach leads to a much higher average CVR and a significant increase in the resultant charge. Oftel believes operators may have views on the assumptions used by both Oftel and BT, from their own experience, and welcomes any comments on relevant CVRs and how these should be applied.