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MediaWays.uk.Limited and Thus plc complaint concerning BT price changes to virtual path CBR and VBrt classes of service

25 Chwefror 2005

Complainant: THUS and Telefonica UK (formerly mediaWays)
Complaint against: BT
Case opened: 14 August 2003
Case closed: 12 December 2003
Issue: Allegation that BT's increase in the price of two of the three classes of virtual paths, is not objectively justified and therefore is in breach of its licence and the ATM Interconnection Direction
Relevant instrument: The Direction to resolve a dispute between BT, Energis and THUS concerning xDSL interconnection at the ATM switch under Condition 9 of the Public Telecommunications Licence granted to BT and under Regulation 6(6) of the Telecommunications (Interconnection) Regulations 1997 of June 2002 (the "ATM Interconnection Direction") as continued and enforceable under the Communications Act 2003.


Oftel decided against using its concurrent powers under the Competition Act 1998 in light of the desire of the complainants for a speedy resolution of the case. Oftel's policy is to seek to resolve complaints and disputes made under the Telecommunications Act 1984 and Communications Act 2003 in four months, compared with its six month target for resolving complaints made under the Competition Act 1998. Further, the complaint related directly to an obligation imposed on BT under the ATM Interconnection Direction. Oftel, therefore, considered it appropriate to consider the complaint as a possible breach of the ATM Interconnection Direction, rather than as a separate Competition Act complaint.

Issue

THUS and Telefonica complained about the introduction by BT of price increases to two of the DataStream virtual path classes of service (constant bit rate ("CBR") and variable bit rate - real time ("VBR-rt")), which took effect on 13 August. The price of CBR was increased by 40% and the price of VBR-rt was increased by 20%. The price of the third virtual path class of service, variable bit rate non-real time ("VBR-nrt"), remained unchanged.

The complainants alleged that the price increase was unjustified and not due to underlying differences in cost between the three classes of service. It was further alleged that BT discriminated between its own retail business and its wholesale customers as BT's retail business uses VBR-nrt virtual paths (prices for which were unchanged), therefore the price increases would only raise the cost base of BT's competitors.

Virtual paths ("VPs") are an element of the BT wholesale DataStream product, which connects BT's network at the DSLAM through the ATM network to the point of connection with the operator.

Oftel's Findings

Under the ATM Interconnection Direction, BT was required to offer a basic set of ADSL-based interconnection services. BT was further required to provide Additional Functionality, which included alternative virtual path (VP) classes of services (i.e. CBR and VBR-rt). Paragraph 9.4 of the ATM Interconnection Direction allowed BT to levy an additional reasonable charge for the provision of Additional Functionality, where justified.

In light of the complainants' comments, Oftel requested that BT provide justification for the 40% and 20% price increases to the CBR and VBR-rt VP classes of service.

Oftel considers that there are two main potential additional costs associated with the introduction and supply of the additional classes of service, CBR and VBR-rt. These potential costs are:
1. up-front development costs; and
2. ongoing network costs.

1. Development Costs
The introduction of the additional classes of service required BT to modify parts of its support systems, such as: order handling, network management and customer. It is, therefore, appropriate to allow BT to recover the additional costs of these modifications through the virtual path prices.

2. Network Costs
Put simply, the additional classes of service offer a higher quality service than the existing VBR-nrt, with CBR providing the highest quality and VBR-rt somewhere in the middle. It therefore follows that CBR and VBR-rt require more network resources than VBR-nrt and/or will be given priority in the event of any congestion.

However, Oftel recognises the difficulty in determining a precise value for these additional costs, as there are many interplays with factors such as; demand, network utilisation and the mix of the various classes of service in the network. For instance, it could be argued that the introduction of a small number of CBR VPs would have no appreciable effect on the network and thus does not increase network costs. However, as the proportion of CBR VPs in the network increases, so does the effect on the network. If the majority of VPs were to be CBR with only a few 'lower' quality VPs, network costs would increase significantly.

Oftel was also mindful of the importance of encouraging efficient use of the network. It has been recognised above that an argument could be made that there are no additional network costs if only a small proportion of VPs are required to be of higher quality. This may lead to the conclusion that these higher quality VPs should not attract an additional charge for the network cost element. However, if there is not price difference between high and low quality VPs then a rational operator would always choose to purchase the higher quality option, whether they needed that quality or not. This would result in the VP mix in the network being dominated by high quality VPs which would increase network costs. Oftel is therefore of the view that the price of a VP should, in some way, be related to its quality in order to ensure efficient use of network resources.

Following discussions between BT and Oftel, BT concluded that it wished to revise its price changes so that prices of CBR and VBR-rt would, respectively be 10% and 8% above the prices of standard VPs. BT has further proposed that the prices be applied retrospectively to the date of the introduction of the original price increases i.e. 13 August. Oftel considers that at these levels, the prices for CBR and VBR-rt classes of service fall within the range of prices that are reasonable and can be justified.

On this basis of this written undertaking from BT to reduce the prices of CBR and VBR-rt VPs, Oftel considers that the prices for the CBR and VBR-rt classes of service are in line with the requirements of paragraph 9.4 the ATM Interconnection Direction. This deals with the first part of the complaint.

Oftel considers that there is no merit to the second part of the complaint, namely that BT discriminated between its retail business and its wholesale customers as a result of the price changes. The different classes of service are available to all customers (including BT's retail business) on the same terms. Further, Oftel has always ensured that the wholesale charges for VPs are used when assessing BT's downstream businesses against margin squeeze allegations, see for example the investigation into BT's IPStream pricing (case CW/00607/04/03), which was closed on 12 September 2003.

VBR-nrt was the original class of service available whereas CBR and VBR-rt were introduced following requests from other operators. Because of this BT's downstream businesses tend to predominantly use VBR-nrt whereas many newer entrants are using CBR and VBR-rt to a greater extent. As discussed above, CBR and VBR-rt offer a higher quality service than VBR-nrt and can thus be used to support a wider range of services. The fact that the complainants have chosen to use different VP classes of service than BT's downstream businesses can not therefore be described as discriminatory. The issue is whether that price differences are reasonable and can be justified and this has been addressed above.

Oftel has, therefore, closed its investigation into the complaint.


Case Leader : Martin Hill (e-mail: Martin.Hill@ofcom.org.uk)
Case Reference: CW/00678/08/03

Text published when the case was opened

mediaWays.uk.Limited and Thus plc complaint concerning BT price changes to virtual path CBR and VBrt classes of service

Complainants: mediaWays.uk.Limited and Thus
Complaint against: BT
Case opened: 14 August 2003
Issue: Allegation that BT's increase in the price of two of the three classes of virtual paths, is not objectively justified and therefore is in breach of its licence and the ATM Interconnection Direction
Relevant instrument: The Direction to resolve a dispute between BT, Energis and Thus concerning xDSL interconnection at the ATM switch under Condition 9 of the Public Telecommunications Licence granted to BT and under Regulation 6(6) of the Telecommunications (Interconnection) Regulations 1997 of June 2002 (the "ATM Interconnection Direction") as continued and enforceable under the Communications Act 2003

mediaWay and Thus' complaint relates to a price inrease of two (constant bit rate and virtual bit rate real time) of the three classes of virtual paths, which took effect on 13 August. Virtual paths (VPs) are an element of the BT wholesale Datastream product, which connects BT's network at the DSLAM through the ATM network to the point of connection with the OLO.

The complainants allege that the price increase is unjustified, as it is not due to an underlying difference in cost to BT and there is no significant difference between the three classes of VP. Further, that BT has discriminated between its own retail business and its wholesale customers as BT retail uses virtual bit rate non real time (whose price remains unaffected), therefore the price increase will only raise its competitors cost base and not its own.

Oftel is currently investigating the allegations which have been made.


Case Leader: Martin Hill (e-mail: martin.hill@oftel.gov.uk)
Case Reference: CW/00678/08/03