Draft Determination under the provisions of Regulation (6) of the Telecommunications (Interconnections) Regulations 1997 of a dispute between British Telecommunications plc ("BT") and the Operators listed in Annex A over BT’S proposal to increase its NTS discounts with effect from 1 September 2000

24 May 2001

Contents

The Direction

Explanatory Memorandum

Chapter 1 Summary
The facts
The considerations
The decision

Chapter 2 Background
Description of the NTS regime before 1 January 2000
Changes to the NTS regime from 1 January 2000
OCCN Process

Chapter 3 History of the dispute
Prior history
The present dispute

Chapter 4 The Director General’s decision and reasons
How discounts are calculated
Residential Line tariff / BT Together
Business and Home Highway
Schools Internet
How Oftel calculated the proposed discounts

Chapter 5 Interest Charge

Chapter 6 Consultation

Chapter 7 Other related issues
Transparency
Possible revisions to the NTS arrangements

Annex A Names of the operators who rejected BT’s proposals

DRAFT DETERMINATION UNDER THE PROVISIONS OF REGULATION 6(6) OF THE TELECOMMUNICATIONS (INTERCONNECTION) REGULATIONS 1997 OF A DISPUTE BETWEEN BRITISH TELECOMMUNICATIONS PLC ("BT") AND THE OPERATORS LISTED IN ANNEX A TO THIS DETERMINATION OVER BT’S PROPOSAL TO INCREASE ITS NTS DISCOUNTS FROM 1 SEPTEMBER 2000

Whereas the Secretary of State granted to British Telecommunications plc on 22 June 1984 a licence (the "BT licence") under section 7 of the Telecommunications Act 1984 ("the Act") for the running of telecommunications systems specified in that Licence;

Whereas by virtue of section 109 and paragraph 20 of Schedule 5 of the Act the BT licence has effect as if granted to British Telecommunications plc ("BT");

Whereas the Secretary of State has granted to each of the operators listed in Annex A, a licence under section 7 of the Act for the running of telecommunications systems specified in that licence.

Whereas the operators listed in Annex A have entered into a Standard Interconnect Agreement with BT on the dates shown.

Whereas the Standard Interconnect Agreement covers charges BT pays other operators for interconnect services and provides for BT to propose a revised charge and the date on which the variation is to become effective by way of issuing an Operator Charge Change Notice ("OCCN").

Whereas BT proposed to each of the operators listed in Annex A, by way of an OCCN, a revised charge for certain Number Translation Services ( "NTS") on 7 July 2000 by varying the value of the discount used in calculating the charge with effect from 1 September 2000.

Whereas the operators in Annex A have rejected BT’s proposal set out in the OCCN dated 7 July 2000 and a dispute has arisen.

Whereas Regulation 6(6) of the Telecommunications (Interconnection) Regulations 1997 ("the Regulations"), provides that where there is a dispute concerning interconnection between organisations, the Director General of Telecommunications ("the Director") shall, at the request of either party, take steps to resolve the dispute within six months of the date of the request. The Determination 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 Determination is based.

Whereas on 1 November 2000, in accordance with the provisions of Regulation 6(6) of the Telecommunications (Interconnection) Regulations 1997, BT referred the dispute to the Director for determination.

Whereas the Director has considered inter alia, the information provided by the parties and the matters set out in Regulation 6(8) of the Telecommunications (Interconnection) Regulations 1997. The principal points are summarised in the Explanatory Memorandum which accompanies, and is published with, this Determination.

Whereas the Director issued a draft of this Determination and the Explanatory Memorandum which contains the Director’s reasons on ……………2001 and responses were invited by …………………2001. A further two weeks was allowed for comments on comments.

Whereas comments were received from ................ on ...................... These comments have been taken into consideration by the Director in making this Determination.

NOW THEREFORE THE DIRECTOR, PURSUANT TO REGULATION 6(6) OF THE REGULATIONS, AND HAVING CONSIDERED THE ARGUMENTS OF THE PARTIES, AND THOSE MATTERS SET OUT IN REGULATION 6(8) HEREBY MAKES THE FOLLOWING DETERMINATION:

1 For the purposes of calculating the charge BT pays the operators listed in Annex A for NTS services the Deemed Retail Price, which in the case of local and national call fee services, is the net retail price after discounts charged by BT for local and national calls, shall be:

i) in the case of calls to national (0870/0990/) and 0871 NTS services, the retail price charged by BT for such calls (exclusive of VAT) minus BT’s average discounts for such calls of 2.4% based on BT’s relevant revenue figures;

ii) in the case of calls to local (0345/0645/0845) and 0844 NTS services, the average retail price charged by BT for such calls (exclusive of VAT) minus BT’s average discounts for such calls of 14.6% based on BT’s relevant revenue figures.

2 The charge in this determination shall have effect from 1 September 2000.

3 If the net amount payable by BT is lower than that previously payable, the Operator shall pay to BT the amount of the difference together with interest calculated in accordance with Clause 13.13 of BT’s Standard Interconnect Agreement.

4 If the net amount payable by BT is greater than that previously payable, BT shall pay to the Operator the amount of the difference together with interest calculated in accordance with Clause 13.13 of BT’s Standard Interconnect Agreement.

5 BT shall modify the OCCN to give effect to this determination.

6 The parties shall modify their interconnect agreements to give effect to this determination.

KEITH LONG

DIRECTOR OF COMPLIANCE

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

……………….. 2001

Explanatory memorandum

Summary

1.1 The Director General of Telecommunications ("the Director") has issued a draft determination in accordance with the provisions of Regulation 6(6) of the Telecommunications (Interconnection) Regulations 1997 for the resolution of a dispute between BT and each of the operators listed in Annex A attached to the draft determination under the terms of their Interconnect Agreements. The draft determination sets out the level of discounts to be applied to each operator’s interconnect charges for Number Translation Services (NTS). It is proposed that the revised discounts take effect from 1 September 2000.

The facts

1.2 BT issued an Operator Charge Change Notice (OCCN) to other operators on 7 July 2000, proposing an increase in NTS discounts from 11.75% to 16.8% to take effect from 1 September 2000. The proposal was rejected by the operators listed in Annex A to the draft determination and BT referred the dispute to Oftel on 1 November 2000. Oftel notified the operators concerned of BT’s referral of the dispute and sought comments.

The considerations

1.3 In reaching his draft decision in this dispute, the Director General has considered all of the arguments put forward by the operators . The main arguments may be summarised as follows:

• that BT’s proposal to increase the level of NTS discounts was not supported by any factual evidence to justify the increase;
• that even if the proposal were objectively justified, the size of the proposed increase would have a disproportionate effect on NTS terminating payments; and
• that BT’s ability to change the level of discounts at will restricts terminating operators’ control over NTS revenues granted by the ‘new NTS’ regime introduced by Oftel from 1 January 2000.

1.4 The details of the Director’s consideration of this dispute are set out in Section 4 of this document. In summary, the Director is minded to determine that the fact that BT has introduced new discount packages, inclusive call allowances and has updated existing packages, is sufficient to support the proposition that the rates of discount applicable to NTS calls should be recalculated. However, the methodology currently used to calculate NTS discounts reflects assumptions which, though appropriate at the time when the old NTS system was introduced, are no longer sustainable. In particular, there is no longer, under the new NTS scheme, any close linkage between the published prices for geographic and non-geographic calls. In addition, there are now sufficient differences between local and national NTS calls to warrant the calculation of separate discount rates for each (see paragraph 4.12 below).

The decision

1.5 Having considered all of the matters discussed in Section 4 of this document, the Director proposes that, with effect from 1 September 2000, the discounts applied to local NTS calls (0345/0645/0845 and the new 0844 ranges) made by BT customers should be 14.6% and to national NTS calls (0870/0990 and the new 0871 ranges) should be 2.4%. Any over or under payments resulting from these changes will be subject to interest at the ‘Oftel Rate’.

Background

Description of the NTS regime before 1 January 2000

2.1 The term Number Translation Services ("NTS") describes a range of specially tariffed services, primarily used for telemarketing, which operate within the number ranges 080X/0500 (Freefone), 0345/0645/0845 (local call fee access), 0870/0990 (national call fee access) and 08xx/09xx (Premium Rate Services). These services are offered at specific price points in order that customers calling from any fixed network will be able to associate the number range with a particular pricing arrangement. For example, 080X/0500 calls are free to the caller.

2.2 In January 1996, following a detailed consultation, Oftel published the determination of Interim Charges for BT’s Initial Standard Services for the year ending 31 March 1996. This determination established a formula for the financial arrangements which should apply to Number Translation Services where the call originated on one operator’s network and terminated on another. This formula prescribed that:

the originating operator (ONO) should retain: P - D + C and

the terminating operator (TNO) should receive: D – C

where:

P was the actual retail price charged by the originating operator to the customer;

C was the pence per minute charge for conveyance over a single tandem segment of BT's network (as determined in the 1996 determination) multiplied by the number of minutes of the call, plus an uplift to allow for retail costs incurred by the originating operator in handling these calls;

D was the Deemed Retail Price for the call and was:

• in the case of Freefone services, zero;
• in the case of national call fee services, the net retail price after discounts charged by the originating operator for national calls
• in the case of local call fee access services, the net retail price after discounts charged by the originating operator for local calls, disaggregated into two rates (one for short and one for long duration calls) to allow for the effects of the originating operator’s minimum call charge.
• in the case of Premium Rate Services, BT's retail price minus 7.9%, comprising a deduction of 3.5% (to allow for average discounts) and a further 4.4% (to compensate for bad debts).

NB: Please note that this determination relates only to local and national NTS calls. Any references to Freefone and PRS are for illustration only.

2.3 The principle underpinning the NTS formula was that originating operators should be able to cover their costs if they set prices at the deemed level. The effect is that terminating operators receive what is left from the retail price after the originating operator’s costs have been deducted. (In the case of Freefone calls the retail price is zero, so that there is a net payment from the terminating operator to the originating operator. The balance of the terminating operator’s revenue derives from the charges made to its own customers (ie the service providers to whom calls are passed) for terminating calls.

Changes to the NTS regime from 1 January 2000

2.4 In December 1999, Oftel published its "Statement on the Relationship between Interconnection Charges and Retail Prices for Number Translation Services". This followed a lengthy discussion and consultation exercise in response to a general industry view that the NTS formula constrained the ability of terminating operators to exercise sufficient control over their NTS revenues. The new regime was intended to allow terminating operators to establish the price at which they would be remunerated for NTS calls. This price would then be added to BT’s regulated call origination charge plus any transit charges to establish the retail price for their service. However, although operators select a retail price for calls to their services, their outpayments are subject to BT’s NTS discounts.

2.5 This new regime applies to all NTS calls including those where the retail prices is the same as BT’s local and national retail call prices. Services priced at up to five pence per minute use numbers in the 0844 range and services priced at up to ten pence per minute use 0871 numbers. Traditional services on 0345/0645/0845 and 0870/0990 are still priced at local and national rates respectively.

OCCN Process

2.6 Clause 13 of BT’s Network Charge Control (NCC) Standard Interconnect Agreement, (or "Standard Contract"), describes the process used by operators, including BT, for offering and amending charges in payment for access to another operator’s services, including NTS. Where BT (as an originating operator) proposes to change either its retail price or its interconnect charge for call origination (in a way which results in a change to the price paid to the terminating operator for terminating calls) it issues an Operator Charge Change Notice (OCCN).

2.7 Similarly where a terminating operator proposes a change to its terminating payment it issues an OCCN to BT seeking the new payment.

2.8 The operator receiving the OCCN has 14 days to decide whether to accept or reject the new charge and to notify the originator of the OCCN. Failure to notify within 14 days signals a rejection of the proposal. Where the proposal is rejected, both operators have a further 14 days to settle the resultant dispute. If after this second period the dispute remains unsettled, either operator may refer the dispute to Oftel. On referral of a dispute, the Director is under an obligation to carry out a full investigation and take steps to determine the outcome within six months.

History of the dispute

Prior history

3.1 On 30 January 1996 Oftel published the determination of Interim Charges for BT’s Initial Standard Services for the year ending 31 March 1996. This determination described the original NTS formula at Annex 6 and is discussed at paragraph 2.2 above.

3.2 Addendum 8 to the determination prescribed that, for Number Translation Services, the Deemed Retail Price should be: in the case of Lo-call services (0345) and National Call (0990) services, the retail price charged by the ONO for local or national calls (exclusive of VAT), as the case may be, minus the ONO's average discounts for such calls based on the ONO's average revenue figures (or, if the ONO's discounted price was greater than BT’s adjusted retail price for that call minus 6.5%, then BT’s adjusted retail price minus 6.5%).

3.3 On 12 November 1996, Oftel published the determination of Interim Charges for BT’s Standard Services for the year ending 31 March 1997 in which, at Addendum 6, the determined discount for local and national rate NTS calls was increased to 7.5%.

3.4 Although the determinations applied to access to BT’s services, the principles set out were adopted by other operators for their charges to BT for access to their NTS services.

3.5 On 13 November 1998 and 3 February 1999 BT issued OCCNs proposing changes in payments to terminating operators for local and national NTS calls resulting from a re-calculation of the contemporaneous average NTS discounts of 11.45% with effect from 9 January 1999 and 11.75% with effect from 1 April 1999 respectively. A number of operators rejected BT’s proposals and both disputes were referred to Oftel for determination. Oftel concluded, in determinations issued on 13 September 1999,that BT’s NTS discounts should be increased by the amounts and on the dates proposed by BT

The present dispute

3.8 On 7 July 2000, BT issued an OCCN to operators proposing a further increase to its NTS Discount from 11.75% to 16.8%, with effect from 1 September 2000. (This was the first proposed increase in the discount since the introduction of the ’new NTS’ arrangements earlier that year.) This increase was to take account of discounts applied during the third quarter of the financial year 1999/2000.

3.9 In common with its earlier OCCNs, BT had simply presented operators with a revised discount figure without any supporting calculations. The reason given by BT for not providing such supporting data is that it uses information from its billing database. BT regards such information from its billing database as commercially sensitive and does not wish to make it available to its competitors.

3.10 Given the significant level of the increase and the negative effect it has on NTS terminating payments, operators were reluctant to accept BT’s figures without assurance of their accuracy and relevance. Furthermore, operators argued that BT’s ability to change the level of discounts from time to time undermined one of the main objectives of the new arrangements, viz, to give terminating operators greater control over their NTS revenues.

3.11 Accordingly, a number of operators either rejected, or did not respond to, BT’s OCCN. The resulting dispute was referred to Oftel by BT on 1 November 2000. Oftel notified the relevant operators of the reference and sought any comments. Those that were received have been considered in making this draft determination.

The Director General’s decision and reasons

4.1 Oftel has approached this decision on the basis of the ‘new NTS’ scheme as it is currently constituted. Although one of the objectives of the scheme is to give terminating operators greater control of their revenues, it is not open to Oftel to prevent BT from periodically reviewing its discounts solely on the grounds that such a review impacts adversely on the revenues of terminating operators. The scheme allows for discounts. The Director has been asked to determine the dispute that has been referred to him by BT, which in this case is to decide whether the discounts proposed are reasonable. Nevertheless, this case does suggest that there may be some aspects of the NTS scheme where further improvements may be possible: Consideration of these is outside the remit of this determination but two such proposals are discussed in Section 7 below.

How Discounts are calculated

4.2 The current method used by BT to calculate the level of discounts for any telephony package entails measuring the total retail revenue, net of discounts, collected by BT for all local and national (geographic and NTS) calls made in the period concerned. This is compared with the gross revenue that would be associated with the ‘headline’ retail price of the calls. This determination takes account of discounts applied during the period 1 October 1999 to 31 December 1999. The data to support BT’s proposal was the most up-to-date information available to BT at the time.

4.3 For NTS discounts, BT identifies gross revenues, gross discounts and option fees, on an accruals basis, in order to pass on the appropriate revenue to NTS terminating operators after deduction of its conveyance and retail costs. This is consistent with NTS principles which require that the originating operators (in this case BT) must recover its costs associated with originating NTS calls, from call revenues. Once these have been deducted the remaining revenue is passed to the terminating operator as an outpayment.

4.4 BT has provided Oftel with gross revenue, gross discount and option fee data for quarter 3 1999/2000 to support its 16.8% discount calculation but not the detailed basis of its preparation. Oftel has reviewed and discussed this data with BT and proposes to consult on how this can be overcome as discussed in paragraph 7.3 below. The data provided indicates that substantial increases in discounts have largely resulted from the introduction of an inclusive call allowance in both BT Together and the Residential Line tariff.

4.5 Discounts have the effect of reducing the outpayment a terminating operator receives from BT. It is therefore important that only discounts relevant to NTS calls are included in the calculations. BT’s own calculations included the effect of discounts associated with packages such as Option 15, Friends & Family and Premierline and the equivalent business discount packages. They also included discounts associated with the Residential Line Tariff and BT Together package (both launched on 1 October 1999) and the Schools Internet scheme. However, BT excluded the Inclusive Call Allowance (ICA) associated with its Business and Home Highway ISDN schemes on the grounds that their effects are insignificant. OFTEL has examined the effect of each of these and its conclusions are given below.

Residential Line tariff / BT Together

4.6 Both of these packages include an ICA, and BT Together also provides lower call prices for local and national calls including calls to local NTS services. In order to reflect ICAs within the discount calculation it is necessary to enhance gross revenues by the full retail value of the ICA used and gross discounts by an amount of the same value, such discounts being abated by option fees where they exist. For the Residential Line tariff this treatment equates to a 100% discount on the full retail value. ICAs have no impact on the discount rate for national rate NTS calls as they are specifically excluded.

4.7 The effect of the ICA at 1 October 1999 was that customers received free calls to the value of 60 pence per month but with a rental increase of 33 pence (both inc VAT). Since then the ICA has increased to £1.80 per month and the rental has increased by £1.07 per month over the September 1999 figure. The ICA applies to both local and national geographic calls but only to local rate NTS calls. The effects have therefore been incorporated in this determination on an averaged basis. Other NTS and Premium Rate calls are expressly excluded.

Business and Home Highway

4.8 The Business and Home Highway schemes provide ISDN services with an unbundled and bundled rental option. The bundled option offers a substantial ICA for a smaller increase in the rental price. BT has not provided figures relating to the Business and Home Highway products for this review of its NTS discounts on the grounds that they had no significant effect.. However, if the discount information for Business and Home Highway were significant, the Director would have included them with the effect of increasing the level of BT’s discounts.

Schools Internet

4.9 BT had included the ‘discounts’ associated with the Schools Internet service in its calculations. Oftel has removed these figures from its calculations on the grounds that Schools Internet is not an NTS service and should not impact on operators’ NTS outpayments.

How Oftel calculated the proposed Discounts

4.10 The proposed discount rates have been derived from a period prior to the introduction of the ‘new NTS’ regime. However the principles applied to the calculation of NTS discounts are consistent between the old and new regimes. It is therefore entirely appropriate that these rates apply with effect from September 2000 onwards and therefore span the old and new regimes..

4.11 Under the old system, NTS calls were charged at local and national call rates. Consumers expected to pay the price of a normal geographic call. Consequently the appropriate revenue to be passed on to terminating operators was that related to the net prices of geographic local and national calls (less BT’s conveyance costs), and the appropriate discount rate reflected discounts on all local and national calls. However the new NTS charging regime has led to a change in emphasis. The ability of operators to select price points for their NTS services has broken the link between published geographic and NTS prices . Consequently the appropriate revenue to be passed on to terminating operators should take into account the price of their NTS calls less any discounts which apply specifically to NTS calls (and less BT’s conveyance costs).

4.12 Oftel has noted that, in particular, national rate NTS calls attract a significantly lower level of discount than their geographic equivalent, largely as a result of these calls being specifically excluded by BT from most discount schemes. As a consequence there is a significant difference in the level of discounts attracted by ‘local’ and ‘national’ NTS calls. Oftel believes a separate discount figure is, therefore, appropriate for each type of call. This new approach has been adopted by Oftel in calculating the discounts proposed in this determination.

4.13 Having recalculated the figures supplied by BT as outlined in this chapter, the Director is of the view that with effect from 1 September 2000 calls from BT customers to operators’ NTS services operating at local rate ie 0345, 0645 and 0845 and additionally at the recently introduced 0844 number ranges should be subject to a discount of 14.6%. Calls to services operating at national rate ie 0870 and 0990 and additionally at the 0871 number ranges should be subject to a discount of 2.4%.

4.14 The Director’s decision has been based on legal advice, an analysis of the facts and the balance of the interests of the parties. It has also been based on consideration of the criteria set out in Article 9(5) of the Interconnection Directive 97/33/EC (as implemented in Regulation 6(8) of the Telecommunications (Interconnection) Regulations 1997), in particular the relevant market position of the parties and the promotion of competition. In the view of the Director the decision in this determination represents the best balance between the interests of the parties.

Interest Charge

5.1 In accordance with Clause 13.13 of BT’s Standard Contract, this determination provides that the operators who, since 1 September 2000, have been receiving payments based on BT’s preceding average discounts of 11.75%, will repay to BT the amount of the difference plus interest from that date. Similarly the operators who, since 1 September 2000, have been receiving payments based on BT’s proposed average discounts of 16.8%, will receive refunds from BT of the amount of the difference plus interest from that date. The applicable annual rate set in Clause 13.13 is the London Inter Bank Offered Rate (LIBOR) plus 3/8 per cent

Consultation

6.1 Oftel seeks comments from all interested parties on the proposed decision detailed in this draft determination. Comments should be sent in writing and / or by e-mail to:

Geoff Brighton
Oftel
50 Ludgate Hill
London
EC4M 7JJ

telephone: 020 7634 8925
e-mail: gbrighton@oftel.gov.uk

6.2 Comments should be sent to Oftel by 22 June 2001.Comments will be placed in Oftel’s Research and Intelligence Unit Library on 25 June 2001 and comments on comments, if any, should be sent to Oftel by 9 July 2001. Where comments are submitted as "Confidential to Oftel" these should be clearly marked. A separate non-confidential version should also be supplied for other parties to be able to comment on.

6.3 The final determination will be made as soon as possible after the end of the consultation period.

Other related issues

Transparency

7.2 As noted above, operators remain concerned that the methodology used to calculate discounts relies on information which BT claim cannot be published because of its commercial sensitivity. This means that operators are in no position to assess for themselves whether BT’s proposals are reasonable. The almost inevitable result is that a dispute arises each time BT reviews its discount figures, since operators must necessarily rely on Oftel to carry out this assessment for them.

7.3 OFTEL is considering how operators can check BT’s future proposals using data that is available in the public domain possibly using BT’s published results. The Director has commented in his Statement published with the 1999/2000 CCA Financial Statements that his preliminary view was that the information contained in the Financial Statements and supporting documentation may be deficient in a number of respects including the calculation and attribution of price discounts. This issue of transparency will be handled in Oftel’s forthcoming Consultation Document on future regulatory financial information. Nevertheless, any initial comments operators wish to make on this aspect may be included with their response to this draft determination.

Possible revisions to the NTS arrangements

7.4 It is clear that the level of discounts can have a significant impact on the terminating payments received, particularly for services priced at or below local call rate. Additionally BT’s ability to review discounts means that operators’ control over their NTS revenues is limited. While, under the existing arrangements, it is not possible to eliminate these effects it may be that operators would find the consequences more manageable if BT were to propose future changes to NTS Discounts at regular, pre-publicised, intervals.

7.5 A more radical change would be to amend the system so as to give operators the right to choose whether they wish to have discounts applied to calls to their services. Oftel and BT have already had informal exchanges on this proposal. BT considers that operators retain control of their revenues through their ability to nominate and change the retail price points for their services. Oftel considers it unrealistic to expect operators to change price points, with the necessity of a change of number range, each time BT changes its discounts. The subject will be pursued by the recently re-convened NTS Focus Group chaired by Oftel. If, as a result, Oftel believes it needs to determine that a discount opt-out option should be offered by BT, a full industry consultation will be proposed.

Names of the operators who have not accepted the proposed change