Interconnection and accounting separation : consultative document

20 Pages·1993·1.6 MB·English

by  Office of Telecommunications

officeofTelecommunications
50LudgateHill,LondonEC4M7JJ
Telephone[phone] Facsimile071-6348943
June1993
Consultative Document
IssuedbytheDirectorGeneralof
1 Telecommunications
4
Interconnection and Accounting Separation
2
5
INTRODUCTION
Itisbelievedthatoverthenextpricecontrolperiod(August
3 1993toJuly 1997)acompetitivemarketwillbecomemore
Thisdocumentdiscussesandseekscommentsonanumber fullyestablishedandtheregulatorycontrolsproposedinthis
ofimportantissuesconcerningtheinterconnection documentwillneedtobeadjustedaccordingly.
arrangementsbetweenBTandothernetworkoperatorsand ItisOFTEL’sviewthatfourfundamentalcriterianeedto
serviceproviders. BT’snetworkisthemostcomprehensivein bemetininterconnectionarrangements:
theUKandwillremainsofortheforeseeablefuture. The
termsandconditionsonwhichoperatorscaninterconnectwith arrangementsshouldbetransparentinthesense
BTarethereforeofvitalimportancetothefurtherdevelopment thatchargesshouldbepublishedandoperators
ofacompetitivetelecommunicationsmarketintheUK-andto shouldunderstandhowchargesrelatetocosts
OFTEL’skeypolicyobjectiveofobtainingthebestpossible chargesshouldbeefficientandsustainable
dealfortheenduserintermsofquality,choiceandvaluefor arrangementsshouldnotbeundulydiscriminatory
money.
eitherbetweencompetingoperatorsorbetweenBT
Issuesconcerninginterconnectionhavebeenbrought andotheroperators
sharplyintofocusbytheGovernment’sdecisionin1991toend
sufficientinformationshouldbeavailabletogive
theduopolyinfixedlinksandtoopentheUK
operatorsconfidenceinthearrangementsreached
telecommunicationsmarkettogreatercompetition. These
issuesweresetoutinthethenDirectorGeneral’sstatementof Thisdocumentexplorestheseissues. Itisintwoparts:
9June 1992PolicyonSeparationandInterconnectionandthis Part1:astatementbyOFTELoftheprinciplesitbelieves
documenttakesforwardtheworkanticipatedinthatstatement.
shouldapplytointerconnectionarrangementsinamulti
OFTELconsidersthattheproposalsinthisdocumentwill operatorandmultiserviceprovidermarket,togetherwitha
berelevantforinterconnectionarrangementsintheshortto descriptionoftheactionOFTELproposestotaketoapply
mediumterm. Therearestilldistortionsinthe theseprinciples.Thissectionofthedocumentexplainswhy
telecommunicationsmarketarising,interalia,fromBT’s OFTELisnotproposingstructuralseparationandwhy
dominantmarketshareandtheregulatoryconstraintsonit,for incentiveregulationwillnotbeunderminedbyitsproposals;
example,therateatwhichitispennittedtorebalanceitsprices Parti:proposalsforconsultation. Theissuesonwhich
inlinewithcosts. Competitionis,however,nowdeveloping OFTELisseekingviewsaresetoutatparagraph78ofthe
frombothexistingoperators(egthemobileandcable
document. Theyconcernthedetailedimplementationofthe
companies)andnewentrantsfollowingtheendoftheduopoly.
proposalsoutlinedinthestatement.
•EFEiEiCi mif
mm
iBitm,mm
PrintedimagedigitisedbytheUniversityofSouthamptonLibraryDigitisationUnit
Background (b)regulatoryarrangementsshouldbeinplacetoensure
thatBTdidnotdiscriminateeitherbetweencompeting
6 TheWhitePaperpublishedbytheSecretaryofState operatorsorbetweenitselfandcompetingoperators.
forTradeandIndustryinMarch 1991,Competitionand Particularconcernwasexpressedovertherelationship
Choice:TelecommunicationsPolicyforthe1990s(the betweenBT’sinterconnectionchargesanditsretail
DuopolyReviewWhitePaperCm 1461),concludedthat prices,givenBT’sabilitytooffervolumediscountsto
theduopolypolicyshouldbeendedandthatthe retailcustomersmightmeanitwasnotionallycharging
Governmentwouldconsider,onitsmerits,anyapplication itselflessfortheuseofitsnetworkthancompeting
foralicencetooffertelecommunicationsservicesover operators.
fixedlinkswithintheUK. Sincethenabout60 (c)theinequalityofbargainingpowerbetweenBTand
applicationshavebeenreceivedand20newlicences competingoperatorsmeantthatnegotiationswere
granted. Theseencompassawiderangeofproposed boundtobedifficultandlengthy.
services,forexamplelongdistancetransmission,provision
oflocaltelephonyandawidevarietyofdataandvalue 9 TheseconcernswereaddressedinthethenDirector
addedservices. Thetermsandconditionsonwhichnew General’sJune 1992statementonseparationand
entrantscaninterconnectwithallelementsoftheBT interconnection. Thestatementproposedthatthe
networkareclearlyakeyissueforthem,particularlyas problemsshouldbetackledthroughaccountingseparation
BThasabout97%oflocalterminationsandthemostfully andannouncedaconsultancystudytoadviseOFTELon
developedlongdistancenetworkintheUK. Itisalso thesematters. Thisdocumentisbasedonthatstudyand
importantthatinterconnectionarrangementsareequitable subsequentinvestigativeworkundertakenbyOFTEL.
betweenBTandcompetingoperators.
Measuresalreadytakentoimprove
7 Inthefirstinstance,interconnectionmattersarefor
transparency
commercialnegotiationbetweenthepartiesconcerned. If
suchnegotiationsfail,theDirectorGeneralcandetermine
10 Measureshavealreadybeentakentoensuregreater
someorallofthetermsofanagreement,andCondition
13ofBT’slicencelaysdownthebasisonwhichhemay transparencyininterconnectionarrangementsandthus
dosoforoperatorswishingtointerconnectwithBT. BT enhancedmarketinformation. Theseare:
isentitledunderCondition 13tochargescoveringthe (a)theJune1992statementindicatedthatwhen
fullyallocatedcostsofprovidingtheservice, including interconnectdeterminationsweremade,theDirector
relevantoverheadsandareasonablerateofreturnon Generalwouldpublishnotonlythetermsofthe
attributableas.sets. Thetennsandconditionsofany determinationbutalsoasfaraspossiblethereasoning
determinationarenormallypublished. Therationale behindthedecisions
behindthisapproachistoensurethattheregulatory (b)inMarch1993,BT’slicencewasmodifiedtorequire
authoritiesdonotinterveneincommercial mattersmore BTtopublisheitherfullinterconnectionagreementsor
thanisnecessary. “anadequatedescriptionoftheinterconnection
8 WhenthethenDirectorGeneralpublisheda arrangementsprovidedforbytheagreementandthe
consultativedocumentinJanuary 1992onBT’sprice precisemethodofcalculationofthecharges suchas
controls,commentatorsexpressedconcern aboutthe to enablethosechargesreadilytobecalculatedbya
interconnection arrangementsonthefollowinggrounds; thirdparty”.
(a)thereshouldbepublishedinfonnationonthetermsand (c)BThasalsoagreedtopublishinformationaboutits
conditionsunderwhich interconnectionwiththeBT costallocationmethodology. Thiswillbepublished
by30Junetohelpinformthedebateonthisdocument
networkwaspossible. Inparticular,itwasstressed
thatmoreinformationwasneededontherelationship (;d)BThasalsoagreedtopublishinformationaboutits
betweenBT’scostsanditsinterconnectioncharges. network.Thedetailsarestillunderdiscussionwith
Ford Collectloir
rintedimagedigitisedbytheUniversityofSouthamptonLibraryDigitisationUnit
1
OFTELbutastatementshouldbepublishedshortly. ofotheroperatorsonthemethodologybywhichthe
Therewillbethreetiersofinformation:first,ageneral chargesareset. OFTELbelievesthattheretentionofthe
descriptionofBT’snetworkwhichwillbeavailabletoall currentdeterminationprocessforinterconnection
thosehavinganinterestininterconnection;second,more agreementsisthebestwayofachievingthis,atleastfor
detailedinformation availabletothoseholdinglicences thetimebeing.
underthe TelecommunicationsAct;andthird,precise
(b)Standardcharges,agreedinadvancewiththeregulator,
informationrevealedtolicensedoperatorsactually
couldleadtounnecessaryrigiditiesandinflexibilitiesin
undertakingnegotiationsoninterconnectionwithBT. thefastmovingUKtelecommunicationsmarket.
BTwillalsogiveoperatorsreasonableadvancenotice OFTELwouldnotwanttoconstrainnoveland
ofitsnetworkplanningprogramme.
innovativeuseofthenetworkbytoorigidasetof
11 Thesemeasureswillhelptoincreasetheamountof standardcharges.
informationavailableinthemarketbutOFTELbelieves 14 OFTELtakestheviewthatstandardchargesshould
thattheproposalssetoutinthisdocumentarealso
evolvefromacombinationofactions,oneofwhichwould
necessarytoachieveadequatetransparencyfor
beBT’spublicationofcharges. Otheractionswould
interconnection purposes.
includethepublicationofinterconnectionagreementsand
OFTELdeterminations,andtheprovisionofadditional
OFTEL’sapproachtostandard informationfromBTaboutwhatBTchargesitselfforthe
publishedcharges useofitsnetwork. Thisdocumentsetsoutanumberof
proposalsrelatingtothislastproposal.
12 InitsfilingforalicenceintheUnitedStates,BThas
i1n3dicatedthatitisproposing,subjecttoOFTELapproval,to p11r56oceItsshacsobuledenleaardguteoditnhtaetrcroentennetcitonchoafrgtehesdbeetienrgmicnoantsitoanntly
publishlocalaccesstariffswithstandardpricesforthe ratcheteddownwardsbyindividualoperators. OFTELdoes
sseerevkiicnegsianntderfcaocnilnietciteisocnoomfmtohneilrysyrseqtueimretdobBTy’so.perBatTorissalso notbelievethiswilloccurbecauseunderitslicenceBTwill
stillbeentitledtorecoverthefullcostsofproviding
proposingthatthelocalaccesstariffsshouldbecostjustified
interconnection,subjecttotheproposalsputforwardin
andapprovedbyOFTEL. BTisunderstoodtorecognisethat
paragraphs34and55below.
achangefromthecurrentregimeofindividuallynegotiated
interconnectionchargestoatariffregimewouldrequire
modificationbytheDirectorGeneralofBT’slicencewhich
STATEMENT
wouldbesubjecttoapublicconsultationprocess. Some
otheroperatorshavealsobeencallingfortheestablishment
OFTEL’spolicyobjective
ofstandardcharges.
OFTELwelcomesBT’sproposaltomovetowards OFTEL’soverallobjective, andthatofUK
standardpublishedinterconnectioncharges. Itconsiders telecommunicationspolicy, istoobtainthebestpossible
thistobeaverypositivestepintheprovisionof dealfortheenduserintermsofquality,choiceandvalue
informationandhopesthatBTwillpublishitsstandard formoney. Thisobjectiveistobepursuedprincipallyby
chargesassoonaspossible. However,OFTELdoesnot promotingefficientcompetition,sothatcustomersare
considerthatagreementofthechargesbytheregulator servedbytheoperatorwhichprovidesservicesmostclosely
shouldbeapreconditiontopublicationforthefollowing matchingtheirneedsatthelowestcost. Keyactionsin
reasons: promotingsuchcompetitionaretheestablishmentofthe
(a)themethodbywhichstandardchargesaresetisnot termsandconditionsonwhichoperatorscaninterconnect
justamatterforBTandtheregulatortoagree T’snetworkandthemakingavailableofinformation
bilaterally. Accountalsoneedstobetakenofthevj chtermsand
REFERENCS cmlt
lAtMlM
tiWwrlif.f* ;3
PrintedimagedigitisedbytheUnivefsttyofSouthamptonLibraryDigitisationUnft
Promotion of efficient competition networkandretailactivities. Thedevelopmentoflocal
competitionintheUKmeanslocal/longdistanceseparation
17 OFTELbelievesthatefficientcompetitionismost wouldnotbeasappropriatefortheUKasitisincountries
likelytobeachievedifinterconnectionarrangementshave whichrestrictlocalcompetition. Ifthenetworkweretobe
thefollowingcharacteristics:
separatedfromretailactivities,therewouldremainregulatory
(a)Thereshouldhetransparencyinthesensethatcharges questionsaboutthetermsandconditionsofaccesstothe
shouldbepublishedalongwithsufficientinfoimation network,sostructuralseparationwouldnotsolveallofthe
aboutthemethodologybywhichtheyhavebeensetto problemsofinterconnectionbyitself. Moreover,theremay
allowanoperatortounderstandhowtheyrelatetothe wellbebenefitstotelecommunicationsusersfromthe
underlyingcosts. exploitationofeconomiesofscopebycompaniesoffering
(b)Chargesshouldheejficientandsustainableinthat integratednetworkandretailservices. OFTELthereforedoes
theyshouldbesetatalevelsuchthatnooverorunder notadvocatestructuralseparation. OFTELbelievesthatthe
recoveryofBT’scostswouldgenerallyresult. Inthis 2k1eyissueiswhetherinterconnectionarrangements meetthe
context,itisnecessarytorecognisetheimpactofthe criteriasetoutinparagraph 17,particularlytransparencyand
currentregulatoryconstraintswhichpreventBTfrom non-discrimination. OFTELconsidersthattheseissuescan
rebalancingitsretailpricesfully. Theseconstraints beaddressedthroughseparateaccountingforanumberof
leadtoBT’saccountsshowingadeficitinitsAccess BT’sactivities.
business,(connectionsandrentals). Interconnection
chargesthereforeneedtoincludeanelementforthe Accountingseparation
recoveryofthedeficitwhereappropriate. Thedetailed
regulatoryarrangementsaresetoutinCondition 13of Ifaccountingseparationistobeusedtoachievethecriteria
BT’slicenceandincludeapowerfortheDirector inparagraph17,transferchargingarrangementswillbeneeded
Generaltowaiveaccessdeficitcontributions(ADCs) fortransactionsbetweenpartsofBT’sbusiness. However,if
incertaincircumstances. thesetransferchargeswerebasedonthecostsincurredbyBT
(c)Chargesandotherinterconnectionarrangements inconveyingcalls,apotentialdifficultywouldarisebecause
shouldnotheundulydiscriminatory. Operatorsshould BT’sownretailtariffsdonotreflectsuchcosts. The
facesimilarchargesandtermsofservicefortheuseof opportunitiesforcompetitiveentrywouldthenbedetermined
thenetworktothoseBTappliestoitselfforequivalent bytariffanomaliesratherthanunderlyingcosts. BT’stariffs
services. aredistortedbythreefactors:
(d)Operatorsshouldhaveconfidencethatthe (a)thereareregulatoryconstraintsontherebalancingof
arrangementsareequitable. OFTELbelievesthat BT’stariffssuchthatexchangelinerentalsdonot
improvingtheavailabilityofinformationhasakey covertheirassociatedcosts,whilecallsarepriced
roletoplayinthis,togetherwithrecoursetoeffective significantlyabovecosts. Thisproblemhas,however,
andtimelyregulatoryaction,whereappropriate. beenaddressedbythearrangementsforpaymentof
18 OFTELhasconsideredthefutureofinterconnection ADCsbycompetingoperators(seeparagraph 17(b)).
Thesepaymentsshouldpreventthedistortionsintariffs
arrangementsagainstthesecriteria.
fromencouraginginefficiententry.
(b)chargesareaveraged. Theydonotvaryacrossthe
structuralseparation
countryalthoughcostsvary.
19 Therewouldclearlybeanumberofdifferentwaysto (c)BT’slocalcallchargesaredeterminedinrelationtoits
meet thecriteriainparagraph17. Ithasbeensuggestedthat localcallchargeareas,whichbearlittlerelationshipto
structuralseparationofBTwouldbethepreferableapproach. theunderlyingcostsofmodemnetworksastheyarea
20 Twooptionshavebeencanvassed:separationbetween legacyofthetimewhenBT’snetworkwas
localandlongdistanceoperationsandseparationbetween predominantlybasedonanaloguetechnology.
PrintedimagedigitisedbytheUniversityofSouthamptonLibraryDigitisationUnit
22 Withinterconnectionarrangementswhichincludea consideredinmoredetailunderparagraphs49to55
provisionforpaymentofADCs,unbalancedtariffsshould dealingwithchargingarrangements). Itistherefore
notbeabarriertoaccountingseparation. Indeed,the OFTEL’sviewthatpublicationoftheFRBSwouldnot
existenceofADCs,andtheimplicitlevyingofADCsby meetthecriteriainparagraph 17.
BTonitscustomers,makesallthemoreimportantthe
establishmentofamechanismwhichwillenable Accounting byretailactivity
competitorstoestablishwhetherornottheyarebeing
treatedinanon-discriminatorymanner. Theother 25 ThesecondapproachconsideredbyOFTEL-
concernsoutlinedinparagraph21(b)and(c)aboveaffect accountingbyretailactivity-wouldinvolveseparationby
theargumentsabouttheprecisewayinwhich typeofcallseglocal,trunkandinternationalcalls.
interconnectionchargesshouldbesetandthespeedat However,suchadivisionisbecomingincreasingly
whichtariffanomaliesshouldbeeradicated. Theseissues outdatedasnetworkconfigurationschange. Forexample,
aredealtwithmorefullyinparagraphs49to55. theelementsofthenetworkusedbylocalcallsare
23 Havingconcludedthatthecurrentlackofalignment increasinglysimilartothoseusedbytrunkcalls. Sucha
betweenBT’scostsanditschargesisnotabarrierto divisionwouldalsonotdisclosethecoststhatBTcovered
accountingseparationandtransferchargesbetween initslocalcallcharges.
differentBTbusinesses,OFTELhasgivenclose
considerationtothreeapproachestoaccountingseparation. BT-Networkand BT-Retail
Thefirstapproach involvedbuildingonBT’sown
FinancialResultsbyService(FRBS);thesecond 26 ThethirdoptionwhichOFTELhasexaminedis
accountingbyretailactivities,andthethird,anaccounting separateaccountingforBT’sretailandwholesale
separationofBT’sretailandnetworkactivities. activities. Retailactivitiesarethoseinvolvingtheselling
ofservicestotheenduser. ’Wholesaleactivitiesinvolve
Publicationofthe FRBS sellingservicestootheroperatorswhichinturnretail
thoseservicestogetherwiththeirown. Wholesale
24 UnderBT’slicence,theFRBSaccountsarereported activitiesthereforeincludenotonlyuseofBT’snetwork
toOFTELbutnotpublishedonaroutinebasis. TheFRBS butalsootherservicesnecessaryfortherunningofa
showaccountsforBT’sretailactivitiesseparately(eg network,forexampleBT’sNumberingInformation
businessandresidentialaccess,local,nationaland System(andvariousservicesassociatedwiththat)andits
internationalcalls,privatecircuits,publicpayphonesand EmergencyServices. TheaccountsforBT’swholesale
interconnecttransactionswithotheroperators). BThas serviceswouldneedtoincludetheseactivitiesseparately.
suggestedpublishingtheFRBSregularlytogetherwith 27 OFTEL'spreferredapproachisforBTtoaccount
informationonAccessDeficitContributionsrelatingto separatelyforretailandwholesaleactivities,becausethis
eachactivity. Thiswouldexposethevariouscostsand wouldremainarelevantdivisionofactivityasnetwork
revenuesofeachofBT’sretailservicesandofits configurationschange. Itwouldalsohavetheadvantage
interconnectionaccount. However,becausetherewould ofallowingtransferchargestobeestablishedforthe
benoidentificationofuseofnetworkcostswithineach networkelementsusedbyBT’slocalcalls. Local
retailserviceaccount,itwouldnotprovideanyassurance competitorswouldthereforebeabletoseeacomparison
aboutcostapportionmentorthatBTwaschargingitself ofBT’stransferchargeswiththeirinterconnection
thesameascompetitorsforsimilarnetworkservices. The payments. TherestofthisdocumentusesthetemisBT-
FRBSisbasedontypesofserviceratherthannetwork Network(coveringitswholesaleactivities)andBT-Retail
elementsandthisisalsoalimitation,inthatthelatteris andfocusesontheissuesarisingfromsuchanaccounting
clearlymorerelevanttotheneedsofinterconnecting separation.
operators(thevariouselementsofthenetworkare
PrintedimagedigitisedbytheUniversityofSouthamptonLibraryDigitisationUnit
28 InordertoensurethatseparateaccountingforBT- disaggregated,shouldincludetransferchargesandbe
RetailandBT-Networkmeetthecriteriainparagraph 17, publishedannually. OFTELintendstoproposelicence
theseparatedaccountswouldneedto: modificationstogiveeffecttotheseproposals.
(a)bebasedonatransparentcostapportionment
methodologysothatoperatorscouldunderstandmore Non discrimination
fullytherelationshipbetweencostsandcharges. The
principlesonwhichBTmightapportionitscostsare 31 OFTELrecognizesthatitisnecessaryforcompeting
discussedinparagraphs56to65. operatorstohaveconfidencethatBTisnotunduly
(b)besufficientlydisaggregatedparticularlyfortheBT- discriminatingbetweenitselfandcompetingoperatorsor
betweenonecompetitorandanotherwhenproviding
Networkaccount,sothatoperatorscouldidentifythe
similarservices. Condition 17ofBT’slicenceprohibits
elementstheyneededtopurchase. Theappropriate
suchbehaviourandparagraph17.2explicitlyprovidesthat
levelofdisaggregationisdiscussedfurtherin
BT“maybedeemedtohaveshown...unduepreferenceor
paragraphs66to73.
tohaveexercised...unduediscriminationifitunfairly
(c)includetransferchargesbetweenBT-RetailandBT- favourstoamaterialextentabusinesscarriedonbyit....”
Network activitiesforservicesBTprovidestoitself
andtodiscloseequivalenttransactionswithcompeting 32 Thereisagrowingconcernabouttheapparenttension
operators. Itwouldnotbesufficientforthesecharges betweenCondition 13ofBT’slicence(whichprovides
tobeinanaggregateform;BTwouldthereforeneedto thatinterconnectionchargesshallincludefullyallocated
publishitsowntransferchargesfortheuseof costsattributabletotheservicestobeprovidedincluding
individualelementsofthenetwork. relevantoverheadsandareasonablerateofreturnon
attributableassets)andCondition 17AunderwhichBT
(d)bepublished. TheJune1992statementproposedthat willultimatelybeabletomoveitsretailchargestohigh
thefirstseparatedbalancesheetsandprofitandloss volumecustomersdowntoincrementalcost. Inaddition,
statementsshouldbeissuedattheendofthefinancial strongconcernshavebeenexpressedthatrecentshortterm
year1993/4. OFTELbelievesthistimetableshould pricereductionsbyBT,notablythe'SundaySpecial'and
stillbepursuedwhilerecognisingthatailthe 'BTLocalSpecial'offers,havenotbeenreflectedinthe
informationcalledformightnotbeavailablebythe ra3te4spaidbyinterconnectingparties. BThas,itis
endof1993/4. claimed,hadaccesstoitsnetworkonmorefavourable
29 Forthereasonsgiveninparagraph22above,OFTEL termsthanthoseavailabletoothers.
alsoconsidersthataseparateaccessaccountwillbe 33 Thepublicationofinterconnectionagreementsandthe
neededtoshowBT’sdeficitinthisactivityandtomake resultsofanydeterminationprocess,togetherwiththe
transparentthecontributionsmadebyBTandother publicationoftheBT-Networkaccount,BT’sinternal
operatorstothefundingofthisdeficit. transferchargesandthedisaggregatedcostsonwhich
30 OFTEL’sviewisthataccountingseparationofBT- thesearebased,willgoalongwaytoprovidingoperators
Retail, BT-NetworkandAccessactivitieswouldbest withconfidencethattheyarenotbeingdiscriminated
providethetransparencynecessaryforBTandits against. Specialoffersanddiscountsinretailpricesare
competitorstoagreesustainable,efficientandnon- clearlybeneficialtocustomersandOFTELbelievesthat
discriminatorychargesforinterconnection. Some theyshouldcontinue. Itis,however,concernedtoensure
initialinformationshouldbeissuedattheendof1993/4 that,indoingso,BTshouldnotbediscriminatingagainst
althoughfullseparateaccountsmaytakelongertoput itscompetitors,evenintheshortterm.
inplace. Theseparateaccountsshouldbebasedona OFTELwillthereforebeproposingalicence
transparentcostapportionmentprocesssuitably modificationtoBTrequiringthatwhereBToffersnew
6
PrintedimagedigitisedbytheUniversityofSouthamptonLibraryDigitisationUnit
.
retailprices,includingspecialoffersandvolume equaltotheinflationrateminusaspecifiedfactor(the
discounts,itpublishestheBT-Networkchargeincluded RPI-Xformula).Pricecontrolofthisformhasbeen
intheretailpriceandmakesthatchargeavailabletoall adoptedbecauseithasgoodincentiveproperties,and
interconnectingoperatorsonasimilarbasis. The itisnottheintentionofOFTELthatthemovetowards
licencemodificationwillalsorequireBTtopublishthe accountingseparationshouldhavetheeffectof
ADCitisbyimplicationchargingitselfandtocharge underminingtheseincentives.
otheroperatorssimilarlywherethoseoperatorsare 39 Ithasbeenarguedthataccountingseparationcould
payingADCs. Tomakethepositionclearinthelicence, leadtotheeffectivereplacementoftheretailpricecapby
OFTELwillalsobeproposingalicencemodificationto acontrolonnetworkchargesbecausethemajorityofBT’s
ensurethatnon-discriminationininterconnection costswouldeffectivelybesubjecttothecontrolsetoutin
arrangementsextendsnotonlytochargingissuesbut Condition 13(iefullyallocatedco.stsincludingrelevant
alsoallothertermsofservice,includingqualityand overheadsandareturnoncapital). This,ithasbeen
deliverytimetables. argued,wouldreducetheincentivepropertiesoftheprice
35 Theapproachoutlinedinparagraph34meansthatBT capandrepresentamovefrompricecontrolregulationto
willbeabletosetinterconnectionandtransferchargesat costplus,orrateofreturnregulation.
whateverlevelitwishes,providedthatsimilarternisare 40 Onewayofavoidingthisdifficultywouldbeto
madeavailabletocompetitors. However,ifBTweretoset introduceapricecappingarrangementfornetwork
transferchargesabovefullyallocatedcosts(theamountits charges. Inthelongtermthismightbeanattractive
licenceentitlesittorecover),competingoperatorscould solution,butontheinformationcurrentlyavailabletoit,
askforadeterminationunderCondition 13ofBT’slicence. OFTELwouldnotintendtoreopentheretailpricecaps
Interconnectionandtransferchargesarethereforelikelyto agreedfor1993to1997.
besetatfullyallocatedcostsoraloweramountwhereBT
choosestochargeitselfaloweramount. Itfollowsfrom 41 Theincentivepropertiesofthecurrentpricecontrol
thisthatthecostallocationmethodologyemployedis aiTangementsshouldcontinuetooperate,asBT’smain
crucialinensuringthatinterconnectionchargesaresetatan meansofmeetingthecontrolwouldbetoreducenetwork
appropriatelevel. Paragraphs56to65dealwiththisissue. costsandhencetransfercharges. However,thereare,in
principle,twowaysinwhichtheincentivearrangements
36 Thequestionhasalsoarisenastowhensimilarnon- mightceasetowork.First,amovetoeffectivecontrolof
discriminationrequirementsmightapplytooperatorsother networkchargesmightleadtoBTnotattemptingto
thanBT. Thisshouldnotbeaproblembecausethelicences reduceitscostsinawaythatallowedittomeettheretail
fornewoperatorsincludeanobligationtointerconnecton pricecap.Relativelyhighcostsatthenetworklevelwould
termswhichdonotshowunduepreferenceor betransferredtotheretailpartofthebusiness,withthe
discrimination. resultthattheretailpartofthebusinesswouldbeloss
37 SinceBTisalreadyintroducingaseriesofspecial makingafterretailpriceshadmovedtomeettheoverall
offers,OFTELintendsintheverynearfutureto pricecontrol. OFTELdoesnotconsiderthisislikelyto
proposethelicenceamendments,outlinedinparagraph happen. Ifitdid,OFTELwouldproposealicence
34,toBT modificationtoenableittotakeappropriateregulatory
actionifBT’sreturnsattheretaillevelwereshowntobe
Appropriate Form ofPriceControi inadequate.
42 Secondly,andperhapsmoreimportantly,underprice
38 Concernhasbeenexpressedthattheintroductionof controlregulationthecompanyhasanincentivetotryto
accountingseparationmighthaveadverseeffectsonthe reduceitscostsmorequicklythanisimpliedbytheprice
incentivesforBTtoimproveitsefficiency.Themain controlformula,sinceunderthisformofregulationitis
controlonBT’spricesatpresentisthepricecaponretail abletokeepforaperiodanysupernormalprofitsso
prices,bywhichpricesarepermittedtorisebyanamount earned. Thefearisthatamovementtowardscontrolof
^‘inteclimagedigitisedbyTheUniversityofSouthamptonLibraryDigitisationUnit
therateofreturnearnedonnetworkservicesmightreduce Accordingly,ontheinformationcurrentlyavailabletoit,
theincentiveforBTtoreduceitscosts.Asnetworkcosts OFTELhasnoreasontoreopenissuesaboutthelevelofthe
werereduced,thisformofcontrolwouldleadtoan retailpricecapspriortotheexpiryofthenextpricecontrol
immediatereductioninnetworkchargesandany periodinJuly1997.
supernormalprofitswouldnotberetainedatthenetwork
level.
PROPOSALS FOR CONSULTATION
43 However,theeffectofcompetitionontheincentives
facingBTshouldalsobeconsidered. Ifcompetitionwere 48 Thispartofthedocumentdealsindetailwithanumber
wellestablishedattheretaillevel,therewouldbelittle ofissueswhichhavealreadybeenraisedinthefirsthalfof
incentiveforBTtoreducenetworkchargesandgenerate thedocumentandonwhichOFTELwouldwelcomeviews.
supernormalprofitsattheretaillevel,becausetheywould Theissuesinclude:
quicklybeeroded. ButifBT-Networkfacedthesame
degreeofcompetition,themainincentiveonBTtoreduce • howOFTELshouldcalculatenetworkchargesin
costswouldcomefromcompetitionratherthanprice thedeterminationprocessgivenBT’sretailtariffs
control. arenotcurrentlyalignedwithcosts
44 Thelevelofinvestmentproposedbynewentrants • theextenttowhichOFTELshouldgetinvolvedwith
suggeststhat,inthedevelopmentoftheUK BT’scostapportionmentprocess
telecommunicationsmarket,BTappearslikelytoface • thedetailedinformationrequirementsforaccounting
competitionfromanumberofoperators,whowill separation
cleoamstpestoemfeorofthtehebiursoinwenssinoffraBsTt’rusctcuursetionmecrosmpaentditpiroonviwdiethat • whenotheroperatorsshouldberequiredtopublish
BT-Networkinduecourse.Thedevelopmentofretailand informationsimilartothatbeingcalledforfromBT
networkcompetitionisthereforelikelytobebroadly
Calculating network charges
simultaneous.Thisimpliesthat,ifretailcompetition
becamefierceenoughtoremoveretailsupernormalprofits
thepressurefromcompetitiononBTtominimisenetwork 49 ThissectionisconcernedwithhowOFTELshould
costswouldbesufficientthatincentiveregulationwould calculatenetworkchargeswhenitmakesadeterminationin
nolongerbeamajorconcern. ordertoensuretheyarenondiscriminatorywithrespectto
BT’sretailprices. Discriminationarisesifacompetitor
45 Untilcompetitionreachesthisstageofdevelopment, facesanetworkchargewhichisdifferenttothecharge
ateithertheretailorthenetworklevel,itseemslikelythat whichBT-NetworkchargesBT-Retailforthesameservice.
BTcouldretain,atleastforsometime,supernonnal Apurelycostbasedapproachtocalculatingnetwork
profitsearnedthroughincreasedefficiency. chargescouldleadtothisproblembecauseBT’sretail
46 OFTELbelievesthataccountingseparationwillnot tariffsareaveragedacrossthecountry,whereasthecostsof
haveadverseeffectsontheincentivepropertiesofthe itsnetworkvarydependingontheelementsofthenetwork
pricecontrolarrangements,atleastduringtheperiodin usedandthevolumeoftraffic. Thisproblemcouldalso
whichthepricecontrolprovidesthemainincentiveforBT arisewhereBT-Retailoffersadiscountonitstariffor
toimproveitsefficiency. Thepositionwill,ofcourse, changesitstariffstructurebutBT-Networkdoesnotoffer
needreassessmentin 1997whenthepricecontrolsare anappropriatediscountontherelatednetworkcharge
reviewedanditmaythenbethatapricecapfornetwork (discussedatparas31-34).
serviceswouldbeappropriate. 50 Asexplainedinparagraph21,BT’sretailtariffsarenot
47 OFTELviewstheretentionoftheincentiveproperties atpresentaligneddirectlywithitscosts,evenaftertaking
ofpricecontrolasveryimportant.However,itdoesnot accountoftheimplicitcontributionstothefundingofthe
regardtheincentivesasbeingfundamentallyatriskthrough accessdeficit. Inthesecircumstancesthebasisfor
theadoptionofitsproposalsforaccountingseparation. calculatingnetworkchargeshassomeimportant
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implicationsforthewayinwhichcompetitionmightbe componentcosts. Functioncostswouldreflectthecostsof
encouragedtodevelop.TherearetwofeaturesofBT’stariff conveyancebetweenspecifiedpartsofthenetwork(egthe
structurethatareparticularlyrelevantinthisrespect.First, pointofinterconnectionwiththeBTnetworktoaBT
BTchargesonanaveragebasis,sothatitstariffsinany customer)irrespectiveofthenumberofnetwork
particulargeographicalareaarenotrelatedtothecostsof componentsused. Thismeanstherewouldbeanaverage
providingserviceinthatarea. Secondly,BTdetermines localnetworkchargenomatterthelocalareainthecountry
whichcallsarelocalandwhichnationalonthebasisofits wheretheinterconnectionoccurred. Therewouldbearisk
localcallchargingareaswhichhavelittlerelevancetothe inthisapproachofreducingtheincentivesforefficient
structureofthemodernnetwork. interconnection,asanoperatormightnotwishto
51 Thereareseveralbasesonwhichnetworkchargescould interconnectwithBTattheclosestpointtothecustomerif
becalculated. Oneapproachcouldbeforeachoperator itfacedasimilarchargeforconnectingatacentraland
interconnectingwithanothertopayexactlythecosts remotepoint. ThiswouldmeanthatifthecompetitortoBT
(howeverdefined)whichitsuseoftheother’snetwork wereabletoconstructamoreefficientnetwork,someof
imposed. Whenoneinterconnectingoperatorprovided theseefficiencieswouldbelost. Thisproblemcouldarise
particulartransmissionandswitchingservicestoanother, forbothlocalandlongdistanceoperators.
thepaymentwouldrepresentanestimateofthecostofthe 54 Whiletariffstructuresmightbeexpectedtobecome
networkcomponents. Exampleofcomponentsmightbethe alignedwithcostsovertime,forsuchachangetooccur
minutesofusageofthelocal,junctionortrunkswitchorof immediatelyisnotregardedbyOFTELasbeingdesirable.
thelongdistance,junctionorlocaltransmissionsystem. OFTELbelievesthat,initsdeterminations,itshouldcalculate
Thecostsofthesecomponentswouldbelikelytodepend networkchargesinsuchawaythatthecombinationof
notonlyontheparticulartechnologyandnetworktopology componentspurchasedfromBTbyacompetitorwouldnot
employedbutalsoontheamountoftrafficintheareaoron leadtounduedistortionsbetweennetworkchargesandretail
theparticularroutebeingused,sinceeconomiesofscale tariffs.OFTELwouldwelcomeviewsonthisproposed
wouldleadtolowerunitcostsasmoretrafficwasconveyed approachandonthelevelofdisaggregationwhichshouldbe
orswitched. appliedincostingBT’snetwork.
52 Themaindifficultywiththisapproachisthatthe 55 Ifinterconnectionchargesweretobesetonsucha
resultingnetworkchargescouldbearlittlerelationshipto basis,itwouldbenecessarytomakefurther
BT’sretailtariffs.Thiswouldcreateanomaliesbetween adjustmentstothechargesinorderthatinaggregate
retailtariffsandnetworkcharges,andputpressureonretail nooverorunderrecoveryofcostsbyBTwouldbe
tariffstobedeaveraged. If,asanalternative,component expected. Sincereductionsinchargeswouldbe
chargeswereaveraged,sothat,forexample,theuseofa appropriateinsomecircumstancestoreflecttheeffects
BTtrunkswitchwouldcostthesamenomatterwhereinthe ofBT’sretailchargingstructure,increasesmightbe
countryitwasbeingused,theremightbeacloser necessaryineitherspecificchargesortheaveragelevel
relationshipbetweennetworkcostsandretailtariffs. ofchargestoallowcostrecovery. OFTELwould
However,thiswouldnotsolvetheproblemifthecostofthe welcomeviewsonnetworkcharges.
componentsneededtoconveyaparticularcallwithinthe
BTsystemsummedtoanamountgreaterthanBT’s Costapportionmentmethodology
averagedretailtariff. Thiscouldoccur,forexample,in
denselypopulatedmajorconurbations,wheremoreswitches 56 Oneoftheconsistentconcernsraisedabout
areusedonaverageforalocalcallthaninotherpartsofthe interconnectionchargesinthepasthasbeenthelackof
country. Thisislikelytobeaparticularconcernforalocal transparencyinthewayBTapportionscoststodifferent
competitor,suchasacabletelevisioncompany. activities. Thisisofparticularconcerngiventhatonly
53 Asolutiontothisproblemmightbetopricethenetwork 20%ofBT’scostsaredirectlyallocatedtoservices.
onthebasisoftheaveragefunctioncostsratherthan OFTEL’sviewisthatifthefullbenefitsofgreater
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transparencyandaccountingseparationaretobeachieved, downthebasesthemselves-ratherthanjustthetypesof
itwillbenecessarytomakemoreinformationpublicly bases-orevenactuallyundertakethecostapportionment.
availableonBT’scostapportionmentmethodology.
62Settingthebasesofcostapportionmentwouldrequirea
57 ThepaperthatBTwillbepublishinginJunewill substantiallyhigherlevelofinputbyOFTEL.Itisquestionable
describethemethodologyitusestoapportioncostsand whetherthiswouldresultinabenefitintermsofimprovedcost
shouldmaketheprocessmoretransparent. apportionmentsufficienttooutweighthecostsinvolvedandit
58 Aquestionwhichrequiresconsiderationiswhether wouldheraldverydetailedregulatoryinvolvement. OFTEL’s
OFTELshouldbemorecloselyinvolvedinBT’scost viewisthatitsobjectives,ofensuringanappropriatecost
apportionment.AtpresentBT’sauditorsstatewhetherin apportionmentprocessandgivingoperatorsconfidenceinthe
theiropinionthemethodsofallocationofcosts,assetsand process,wouldbemetifitwereinvolvedinlayingdownthe
liabilitiesarereasonableandwhethertheFRBShasbeen principlesonwhichthemethodologywasbasedandthetypes
properlyprepared. OFTELhasnoroleinthesettingof ofco.stapportionmentbaseswhichBTshouldfollow. OFTEL
principlesorbasisonwhichtheallocationprocessis wouldexpecttheseprinciplestobeappliedconsistentlyandin
based. OFTELdoeshavearoleinassessingtherelevance linewithgenerallyacceptedcostapportionmentpractice. It
ofitemsofcostforinclusionininterconnectioncharges, proposestoseeklicencemodificationstothiseffect. A
butthebasedatausedforthispurposearederivedfrom suggestedsetofprinciplesandtypesofcostapportionment
theFRBS. basesisatAnnexA.
59 OFTELcouldbecomefurtherinvolvedifitwereto 63 OFTELconsidersthatthecostapportionment
laydowntheprincipleswhichBTshouldfollowin principlesandtypesofcostbasesshouldbepublished
apportioningitscosts. OFTELexpectsthatmanyofthe andBT’sauditorsshouldconfirmthattheyhadbeen
principleswouldprobablybethosealreadyfollowedby followed. OFTELwouldreservetherighttohavethe
BTitself. Forexample,BT’sexistingcostapportionment apportionmentmethodologyandtheresultingcosts
methodologyadoptstheprinciplethatcausallinksshould investigatedbyitsownappointedaccountants.
formthebasisofcostapportionment. Thismeans,for 64 OFTELwouldproposetoseekappropriate
example,thattheallocationofplantcoststotheaccess modificationstoBT’slicencespecifyingOFTEL’srolein
serviceisbasedonthenumberofexchangelineswhich layingdownprinciplesandtypesofcostbases,theroleof
giverisetothecosts. Theprincipleofcausalityis BT’sauditorsanditsowninvestigativerole.
importantbecauseitshouldreducetoaminimumthe 65 OFTELwouldwelcomeviewsonthesuggestedset
overheadsthatarelefttobeallocatedonanonspecific ofprinciplesandtypesofcostapportionmentbasesat
basis.
AnnexA.
60 Theremayhoweverbeimportantadditionalprinciples
thatsuchanapproachwouldobligeBTtofollow. For Accounting requirements
instance,aprincipletowhichOFTELattachesimportance
isthatcomparisonscanbemadeovertimeinthefinancial 66 Thissectiondiscussesthedetailedaccounting
perfonnanceofBT’sservices. Forsuchcomparisonstobe requirementsfortheseparateaccountsofBT-Network,
meaningfulthecostapportionmentmethodologymustbe BT-RetailandAccessbusinesses.
consistent,butif,exceptionally,changesaremade(for
exampletoimprovetheaccuracyoftheapportionment) 67 TheFRBSdisclosesaccountsforbusinessand
theeffectonprioryears’resultsshouldbeshown. residentialaccess,local,nationalandinternationalcalls,
publicpayphones,privatecircuits,apparatussupply
61 AfurtherdegreeofinvolvementbyOFTELcould business,andothernonregulatedUKandinternational
includesettingdownthetypesofbasesusedtoestablish activities. TheFRBSisnotpublishedonaroutinebasis
causallinks-forexamplecalldurationsforallocating andwhenthesystemsbusinesselementswerepublishedin
somelocalexchangecosts. Indeed,OFTELcouldset thecontextofthe1992consultativedocumentonBT’s
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