draft determination to resolve a dispute between bt and ... · pdf file2 ofcom’s...

Draft Determination to resolve a dispute between BT and each of

T-Mobile, Vodafone, O2 and Orange about BT’s termination charges for 080

calls

This version is non-confidential.

Confidential redactions are indicated by [�]

Draft Determination

Issue date: 23 December 2009

Contents

Section Page 1� Summary 1�

2� Introduction and background 6�

3� History and scope of the Dispute 19�

4� Ofcom’s analytical framework 29�

5� Ofcom’s analysis of the first question: 080 termination charges 39�

6� Ofcom’s analysis of the second question: 080 origination payments 61�

7� Repayments 80�

8� Ofcom’s provisional conclusions 83�

Annex Page 1� Responding to this consultation 90�

2� Ofcom’s consultation principles 92�

3� Consultation response cover sheet 93�

4� The Draft Determination 94�

5� Charities using THA zero-rating arrangements 98�

Draft determination to resolve a dispute between BT and each of T-Mobile, Vodafone, O2 and Orange about BT’s termination charges for 080 calls

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Section 1

1 Summary 1.1 This draft Determination sets out our proposals for resolving disputes brought by

each of T-Mobile (UK) Limited (“T-Mobile”), Vodafone Limited (“Vodafone”), Telefónica O2 UK Limited (“O2”), and Orange Personal Communications Services Ltd (“Orange”) (together, the “2G/3G MNOs”) against British Telecommunications plc (“BT”). We refer to this dispute as the “Dispute” and we refer to the 2G/3G MNOs and BT collectively as the “Parties”.

1.2 The Dispute concerns the introduction of termination charges by BT for calls to 0800 and 0808 numbers (together, “080 numbers”) hosted on its network. BT’s 080 termination charges vary depending on the retail price of the call (with no charge where the retail price is less than 8.5 pence per minute (“ppm”), ranging up to 13ppm where the retail price is 27.5ppm or above).

1.3 Each of the 2G/3G MNOs is an Originating Communications Provider (“OCP”) and originates calls to 080 numbers that are hosted on BT’s network. Each of the 2G/3G MNOs also applies a retail charge for calls to most 080 numbers, and is therefore subject to BT’s new charges.

1.4 BT notified the industry of these new charges on 3 June 2009 via Network Charge Change Notice 956 (“NCCN 956”)1, and the charges took effect from 1 July 2009.

1.5 On 16 September 2009, we received a submission from T-Mobile asking us to accept for resolution a dispute over whether, in summary,

(i) T-Mobile should receive a payment from BT for originating 080 calls hosted by BT;

(ii) it is fair and reasonable for BT to impose any termination charge for calls to 080 numbers hosted on its network; and

(iii) BT’s charging structure is discriminatory and unfair.

1.6 Our powers and duties to resolve certain disputes are set out at sections 185-191 of the Communications Act 2003 (the “Act”). In accordance with Section 186(4) of the Act, on 6 October 2009 we decided that it was appropriate for us to handle the Dispute, informed T-Mobile and BT of our decision and subsequently published details of the Dispute, including the proposed scope, on the Competition and Consumer Enforcement Bulletin part of our website (the “CCEB entry”).2

1.7 On 9, 26 and 30 October 2009, we received further dispute submissions from Vodafone, O2 and Orange, respectively, all of which related to BT’s termination charges for calls to BT-hosted 080 numbers, as notified in NCCN 956. We considered that it was appropriate for us to handle each of these disputes, and that it was appropriate to join each of these MNOs to the current Dispute between T-Mobile and BT.

1 http://www.btwholesale.com/pages/static/service_and_support/service_support_hub/online_pricing_hub/cpl_hub/notifications/nccn_notifications/April_2009___June_2009.html 2 http://www.ofcom.org.uk/bulletins/comp_bull_index/comp_bull_ocases/open_all/cw_01036/

Draft determination to resolve a dispute between BT and each of T-Mobile, Vodafone O2 and Orange about BT’s termination charges for 080 calls

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1.8 Accordingly, we joined Vodafone, O2 and Orange to the Dispute and published an update to the CCEB (including a revised scope) on 16 November 2009.

The key issues

1.9 From the submissions of the 2G/3G MNOs two common themes emerge:

1.10 First, the 2G/3G MNOs argued that it is unfair, unreasonable and discriminatory for BT to impose any termination charge on OCPs for calls to BT-hosted 080 numbers.

1.11 Second, T-Mobile, O2 and Orange argued that BT should pay them for originating 080 calls and that this payment should be sufficient to cover their efficient costs of origination.3

Scope of the Dispute

1.12 We determined the scope of the Dispute as follows:

i) whether it is fair and reasonable for BT to impose any termination charge for calls to 080 numbers hosted on its network, which originate on the Parties’ networks4; and ii) whether the Parties, as originating mobile network operators, should receive a payment from BT sufficient to cover their costs of originating calls to 080 numbers hosted by BT.

Summary of analysis and provisional conclusions

Overall provisional conclusion

1.13 We consider that, in certain circumstances (which we describe in sections 4 to 6):

(i) it could be fair and reasonable for BT to impose a termination charge for calls to 080 numbers hosted on its network, which originate on the 2G/3G MNOs’ networks; and

(ii) it could be fair and reasonable for the 2G/3G MNOs to receive a payment from BT sufficient to cover their efficient costs of originating calls to 080 numbers hosted by BT.

1.14 However, in light of all the relevant factors and the available evidence, our overall provisional conclusion is that neither the termination charges set out in NCCN 956 nor a payment to cover the costs of origination of any of the 2G/3G MNOs has, in the present circumstances, been demonstrated as being fair and reasonable.

1.15 For this reason we provisionally conclude that the Parties to the Dispute, namely BT and each of T-Mobile, Vodafone, O2 and Orange, should revert to the terms on which they were trading prior to the introduction of NCCN 956.

3 Vodafone remained silent on this issue. 4 By referring to the “Parties” in the scope, we mean the 2G/3G MNOs.


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1.16 We further provisionally conclude that, to the extent that BT has received payments from one or more of the 2G/3G MNOs as a result of NCCN 956, it should repay any payments made by the 2G/3G MNOs and pay interest on those payments.

Analytical framework

1.17 The analytical framework that we have used for reaching our provisional conclusions sets out three principles. We consider that each of these principles is an important consideration in order for a payment in either direction (i.e. to BT in the form of a termination charge or to the 2G/3G MNOs in the form of an origination payment) to be considered fair and reasonable. When applying these principles, we have also considered the consistency of our analysis and provisional conclusions with our previous decisions (and those of the Office of Telecommunications (“Oftel”)),5 as well as relevant benchmarks.

1.18 These principles are:

Principle 1; the 2G/3G MNOs should not be denied the opportunity to recover their efficient costs of originating calls to 080 numbers hosted on BT’s network. In the context of the Dispute, this means either:

(i) it is not fair and reasonable for BT to impose termination charges unless the average retention by each of the 2G/3G MNOs (which is the average retail price minus any termination charge) is greater than the efficient cost of mobile call origination; or

(ii) it is not fair and reasonable for each of the 2G/3G MNOs to receive an origination payment unless their average retention is less than the efficient cost of mobile origination.

Principle 2; the payment in either direction should, taking into consideration our statutory duties:

(i) provide benefits to consumers, taking into account Direct, Indirect and Mobile tariff package effects6; and

(ii) avoid a material distortion of competition either among OCPs or among terminating communications providers (“TCPs”).7

Principle 3; following the submissions of the 2G/3G MNOs, it is also important that the payment in either direction should be reasonably practicable to implement.8

1.19 Applying our analytical framework to consideration of BT’s termination charges in NCCN 956 and the 2G/3G MNOs proposed origination payment, our key provisional conclusions are that:

5 Oftel was the legacy regulator for the UK telecommunications industry. Its duties were inherited by Ofcom in 2003. 6 Direct, Indirect and Mobile tariff package effects are explained in more detail between paragraphs 4.7 and 4.16. 7 More generally, competition among transit operators might also be relevant, but is outside the scope of the Dispute (see paragraph 3.51). 8 We further note our statutory duty that in furthering or securing our functions we do so in a manner which is reasonably practicable (section 3(4)(m) of the Act).


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(i) The 2G/3G MNOs have not been able to confirm to us their average retail prices for 080 calls. Without this information, we are unable to determine the level of the 2G/3G MNOs’ retentions. In turn, although the 2G/3G MNOs’ headline prices are generally above their efficient costs of origination,9 we are unable to determine whether their average retentions are above or below this level. As a consequence we are unable to conclude that Principle 1 is satisfied for a payment in either direction. We note though the implied retention estimates from the headline rates, which suggest that any average call price that was calculated by the MNOs would generally need to be significantly lower than these headline rates to reduce the implied retention below our current provisional view of efficient costs of origination.10

(ii) We have been unable to identify sufficiently clear benefits to consumers that would arise from a payment in either direction. In particular we do not consider that NCCN 956 or an origination payment would necessarily result in lower retail prices for 080 calls. We therefore conclude that Principle 2 part (i) is not satisfied by the termination charge structure in NCCN 956 and that there is insufficient evidence to show that it is satisfied for the 2G/3G MNOs proposals for an origination payment in the present circumstances.

(iii) We consider that, in the current circumstances, the imposition of 080 termination charges by BT risks a distortion of competition among TCPs. In particular we do not consider that other TCPs are currently able to match BT’s termination rate increases,11 and we consider that this may have implications for competition, especially since a significant barrier to matching arises from BT (namely, the limitations of its transit billing system). Principle 2 part (ii) is therefore not satisfied by the termination charge structure in NCCN 956; and

(iv) We consider that the Parties could implement a payment in either direction without further Ofcom involvement. While we note the issues raised by the 2G/3G MNOs about the practicability of NCCN 956, we consider that the Parties could reach a practical solution to these issues should it be agreed that a payment to BT was fair and reasonable. We further consider that it should be relatively straightforward to implement a payment from BT to the 2G/3G MNOs, should it be agreed that an origination payment was fair and reasonable. We conclude that these issues of practicability could and should be resolved between the Parties without further involvement from Ofcom. We therefore provisionally conclude that Principle 3 could be satisfied in each case.

1.20 We provisionally conclude that it could be fair and reasonable for BT to impose a termination charge for 080 calls, and it could also be fair and reasonable for the 2G/3G MNOs to receive an origination payment. This is because, in the right circumstances, either approach could satisfy the three Principles. However, we provisionally conclude that in the present circumstance the three Principles are not satisfied in either case.

1.21 We therefore propose to determine that the Parties revert to the trading conditions that applied before NCCN 956 came into effect (i.e. that there is no payment in either direction).

9 See paragraph 5.49 onwards 10 Further detail on this is set out at paragraph 5.49 11 See Paragraph 5.86 onwards


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1.22 We further propose to conclude that it is appropriate for us to exercise our discretion to require BT to make repayments to the 2G/3G MNOs by way of an adjustment for overpayments made following the introduction of the NCCN 956 until the date of our final Determination (together with interest).

1.23 In reaching these provisional conclusions we have taken particular account of the effects on competition and consumers of the charging arrangements as well as our other statutory obligations and regulatory principles.

1.24 In addition, we consider that it is in the interests of both consumers and citizens to be able to rely on the fact that calls to 080 numbers will be free to the caller, and if they are not free, that they are as close to free as possible. This is set out in more detail in section 2.

1.25 Our analysis and provisional conclusions take as given Ofcom’s current regulatory policies, where they remain relevant, such as regarding the prevailing NTS regime. We also note that these could change in the future. In particular we note that Ofcom is proposing to review the operation of the regulatory regime for 08 and 09 numbers in 2010/11.12

1.26 The introduction and background to the Dispute are set out in section 2; the history and scope of the Dispute are set out in section 3; our analytical framework for resolving the Dispute is set out in section 4; our assessment of the issues is set out in sections 5 and 6; our assessment of repayments is set out in section 7; and our provisional conclusions are set out in section 8. Our Draft Determination for resolving the Dispute is set out at Annex 4.

1.27 We are publishing our proposals for consultation with the Parties and other interested stakeholders, with a deadline for comments of 5pm on 12 January 2010 (see Annex 1 for full details).

12 Draft Annual Plan 2010/11, paragraph A1.46, http://www.ofcom.org.uk/consult/condocs/draftannplan1011/draftannplan1011.pdf


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Section 2

2 Introduction and background Dispute resolution

Ofcom’s duty to handle disputes

2.1 Section 185(1)(a) of the Act provides (in conjunction with section 185(3)) that in the case of a dispute relating to the provision of network access between different communications providers (“CPs”), any of the parties to such a dispute may refer it to us.

2.2 Section 186 of the Act provides that where a dispute is referred to us in accordance with section 185, we must decide whether or not it is appropriate to handle it. Section 186(3) further provides that we must decide that it is appropriate for us to handle a dispute unless there are alternative means available for resolving the dispute, a resolution of the dispute by those means would be consistent with the Community requirements set out in section 4 of the Act, and those alternative means would be likely to result in a prompt and satisfactory resolution of the dispute.

2.3 In summary therefore, where a dispute which falls within section 185(1)(a) of the Act is referred to us, and we cannot identify alternative means which meet the criteria set out above, we have a duty to decide that it is appropriate to handle that dispute.

2.4 Section 188 of the Act provides that where we have decided that it is appropriate for it to handle a dispute, we must make a determination resolving the dispute within four months, except in exceptional circumstances.

Ofcom’s powers when determining a dispute

2.5 Our powers in relation to making a dispute determination are limited to those set out in section 190 of the Act. Except in relation to disputes relating to the management of the radio spectrum, our main power is to do one or more of the following:

(i) Make a declaration setting out the rights and obligations of the parties to the dispute;

(ii) Give a direction fixing the terms or conditions of transactions between the parties to the dispute;

(iii) Give a direction imposing an obligation to enter into a transaction between themselves on the terms and conditions fixed by us; and

(iv) Give a direction requiring the payment of sums by way of adjustment of an underpayment or overpayment, in respect of charges for which amounts have been paid by one party to the dispute, to the other.

2.6 A determination made by us to resolve a dispute binds all the parties to that dispute (section 190(8)) of the Act. While our dispute resolution powers can therefore only bind the parties to a dispute on a bilateral basis, we would expect dispute determinations to be read across and followed in situations where other parties who


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were not a party to the dispute, are facing similar questions vis-à-vis one of the parties to the dispute which has been determined.

Our duties when determining a dispute

2.7 The dispute resolution provisions set out in sections 185-191 of the Act are functions of Ofcom. As a result, when we resolve disputes we must do so in a manner which is consistent with both our general duties in section 3 of the Act, and (pursuant to section 4(1)(c) of the Act) the six Community requirements set out in section 4 of the Act, which give effect, among other things, to the requirements of Article 8 of the Framework Directive.13

Ofcom’s process for determining disputes

2.8 In light of the four month time period within which we must determine how to resolve disputes, our dispute resolution guidelines14 set out the evidence that we require before we will accept a dispute. Those guidelines set out the information that we require when a dispute is submitted, including details of any relevant ex ante conditions, a clear statement of the scope of the matters in dispute, details of the preferred remedy (with reasons), evidence of commercial negotiations and a statement of an officer of the company that best endeavours have been used to resolve the dispute through commercial negotiation, before bringing it to Ofcom.

2.9 In addition to the submissions that we received from each of the 2G/3G MNOs, we requested information both formally using our powers under section 191 of the Act (the “s191 Information Request”), and informally (the “Informal Information Request”). We requested information from the 2G/3G MNOs, BT and other relevant stakeholders. Further detail on this is set out at paragraphs 3.49 to 3.55 below.

2.10 We have also considered the relevance of any previous precedents in this matter. This draft Determination is based on the evidence obtained in the time available, the submissions of the 2G/3G MNOs and BT and relevant Oftel and Ofcom policy precedent.

What the Dispute is about

2.11 The Dispute is about calls to certain number translation services (“NTS”) numbers, namely 080 numbers. NTS is described in more detail below. The Dispute arose following BT’s notification to the industry of termination charges for 080 calls hosted on its network, as set out in NCCN 956. The 2G/3G MNOs (as well as the rest of industry) were notified of these charges on 3 June 2009, and they took effect on 1 July 2009.

2.12 In section 3 we briefly provide the history of the Dispute. In this section we briefly set out a description of the NTS regime (see paragraphs 2.15 to 2.28).

Our conclusions on jurisdiction to resolve the Dispute

2.13 Sections 185 to 191 of the Act set out our dispute resolution powers. They apply to disputes relating to the provision of network access and to other disputes relating to the rights and obligations conferred or imposed by or under Part 2 of the Act. Section 186 of the Act requires us to resolve a dispute referred to us under section

13 Directive 2002/21/EC of 7 March 2002 14 http://www.ofcom.org.uk/consult/condocs/enforcement/

Draft determination to resolve a dispute betweentermination charges for 080 calls

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185 once we have decided in accordance with section 186(2) to handle the dispute. Our remedial powers for resolving disputes are set out in section 190 of the Act.

2.14 In this case, we consider thathe Act15 and pursuant to section 186 of the Act us to handle the Disputeresolution guidelines and in line with theseare appropriate alternative means for resolving the

How NTS works

2.15 As stated above, the Dispute concerns 080 termination rates introduced by BTNumbers that start 080 start with 08 or 09. Theydialled does not relate to a specific geographic location, but instead relates to a particular service. The NTS number dialled by ato a geographic number to deliver the call to its destination.

2.16 For a given NTS call, there (“CPs”) involved in originating and then organisation or individual receiving the callOCP on whose network the call number terminates. The OCP and the TCP may be the same for some calls. There may also be a CP carrying the call between the OCP and the TCP (this is known as a “transit” provider).

Figure 1: providers involved in a typical NTS call

2.17 NTS numbers are used by organisations and individuarange of services includiprogrammes.

2.18 A key feature of many NTS calls is revenue sharing, which provides a micromechanism that enables the NTS service provider, referred being provided via the call.

2.19 Revenue sharing works as follows. The caller pays an OCP for the call. The OCP, having deducted its origination and retailing costs from the retail revenue, passes on the remainder as a terminaticommercial viability and contractual arrangementswith the NTS SP.

15 Each of the Parties to the Dispute is a given that it concerns interconnection between each of the 2G/3G MNOs and BT under the terms of the Standard Interconnect Agreementhttp://www.btwholesale.com/pages/static/Pricing_and_Contracts/Reference_Offers/Telephony.html

dispute between BT and each of T-Mobile, Vodafone O2 and Orange about BT’s


consider that the Dispute falls within the scope of section 185(1) of and pursuant to section 186 of the Act we consider that it

ispute. The Dispute also satisfies the criteria set out in and in line with these guidelines, we do not consider that there

are appropriate alternative means for resolving the Dispute.

As stated above, the Dispute concerns 080 termination rates introduced by BTNumbers that start 080 form part of the NTS number ranges. NTS

They are non-geographic numbers, which means that the number dialled does not relate to a specific geographic location, but instead relates to a

he NTS number dialled by a caller is ‘translated’ by the network to a geographic number to deliver the call to its destination.

For a given NTS call, there may be several different communicationoriginating and then conveying the call from the caller

organisation or individual receiving the call (see Figure 1 below). This includes an whose network the call originates, and a TCP on whose network the NTS

es. The OCP and the TCP may be the same for some calls. There e a CP carrying the call between the OCP and the TCP (this is known as a

: providers involved in a typical NTS call

NTS numbers are used by organisations and individuals to provide access to aincluding financial services, helplines and voting on TV

many NTS calls is revenue sharing, which provides a micromechanism that enables the individual or organisation using an NTS number (NTS service provider, referred to as “NTS SP”) to charge the caller for the service being provided via the call.

Revenue sharing works as follows. The caller pays an OCP for the call. The OCP, having deducted its origination and retailing costs from the retail revenue, passes on

mainder as a termination payment to the TCP, which is then able (subject to and contractual arrangements) to share some of this revenue

Each of the Parties to the Dispute is a CP and the Dispute relates to provision of network access

given that it concerns interconnection between each of the 2G/3G MNOs and BT under the terms of the Standard Interconnect Agreement:

lesale.com/pages/static/Pricing_and_Contracts/Reference_Offers/Telephony.html

Mobile, Vodafone O2 and Orange about BT’s


the Dispute falls within the scope of section 185(1) of it is appropriate for

ispute also satisfies the criteria set out in our Dispute guidelines, we do not consider that there

As stated above, the Dispute concerns 080 termination rates introduced by BT. numbers generally

geographic numbers, which means that the number dialled does not relate to a specific geographic location, but instead relates to a

caller is ‘translated’ by the network

communications providers conveying the call from the caller to the

. This includes an on whose network the NTS

es. The OCP and the TCP may be the same for some calls. There e a CP carrying the call between the OCP and the TCP (this is known as a

ls to provide access to a wide and voting on TV

many NTS calls is revenue sharing, which provides a micro-payment NTS number (the

“NTS SP”) to charge the caller for the service

Revenue sharing works as follows. The caller pays an OCP for the call. The OCP, having deducted its origination and retailing costs from the retail revenue, passes on

payment to the TCP, which is then able (subject to ) to share some of this revenue

and the Dispute relates to provision of network access given that it concerns interconnection between each of the 2G/3G MNOs and BT under the terms of

lesale.com/pages/static/Pricing_and_Contracts/Reference_Offers/Telephony.html

Draft determination to resolve a dispute betweentermination charges for 080 calls

Figure 2: NTS payment flows

2.20 The TCP provides two distinct services in this arrangement. First, it provides call termination to the OCP. Second, it provides services to NTS SPs, which we refer to collectively as “NTS hostingand may also include provision of a range of value added services.

Difference in model of competition between NTS calls and geographic calls

2.21 For any type of call, there are two types of consumersrecipient. In the case of NTS calls, the

2.22 For geographic calls, OCPs(callers). The caller pays aanything. Conceptually the transit services, if relevant. Competitionmarket power (“SMP”)

2.23 For NTS calls the model of competition recipient. Calls are made by callers based on provided by NTS SPs particular service (e.g.building society). The success of this service attractive its content is to a wide range of end users known by the NTS SP or the TCP. Ininnovative services, competition at therequired, so that they in turn can provide

2.24 Conceptually the OCP retails NTS calls on behalf of thepurchases origination and this retailing component from theservices, if relevant), and provides these along with termination andto NTS SPs. For this competition model to work effectively, the paymentNTS calls needs to provide a

16 Our view on the difference in thein our Review of the fixed narrowband services wholesale marketsmarket review”) published on 15 September 2009: http://www.ofcom.org.uk/consult/condocs/wnmr_statement_consultation/main.pdf

dispute between BT and each of T-Mobile, Vodafone, O2 and Orange about BT’s

Figure 2: NTS payment flows

The TCP provides two distinct services in this arrangement. First, it provides call termination to the OCP. Second, it provides services to NTS SPs, which we refer to

NTS hosting”. NTS hosting includes the payment of revenue share also include provision of a range of value added services.

Difference in model of competition between NTS calls and geographic calls

For any type of call, there are two types of consumers: the caller and the call recipient. In the case of NTS calls, the call recipient is the NTS SP.

, OCPs compete to provide retail calls to individual end users. The caller pays a retail price to the OCP and the call recipient does n

Conceptually the OCP also purchases termination from the TCP, as well as transit services, if relevant. Competition among OCPs is promoted

”) remedies in wholesale call origination and in termination

the model of competition is rather different and focused onalls are made by callers based on need to call or the value of the content

who are the call recipient. NTS SPs compete to provide a particular service (e.g. traffic information or access to a company such

). The success of this service may well depend on how valuable or its content is to a wide range of end users who may not necessarily be

SP or the TCP. In order to encourage SPs to offer new and ovative services, competition at the terminating end of the call among TCPs is

required, so that they in turn can provide competitive services to NTS

Conceptually the OCP retails NTS calls on behalf of the TCP and NTS n and this retailing component from the OCP (and transit

services, if relevant), and provides these along with termination andSPs. For this competition model to work effectively, the payment

NTS calls needs to provide a level of revenue certainty to TCPs.

the model of competition between NTS and geographic calls is set out wband services wholesale markets (the “Wholesale narrowband

market review”) published on 15 September 2009: http://www.ofcom.org.uk/consult/condocs/wnmr_statement_consultation/main.pdf

Mobile, Vodafone, O2 and Orange about BT’s

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The TCP provides two distinct services in this arrangement. First, it provides call termination to the OCP. Second, it provides services to NTS SPs, which we refer to

. NTS hosting includes the payment of revenue share also include provision of a range of value added services.

Difference in model of competition between NTS calls and geographic calls16

the caller and the call SP.

individual end users and the call recipient does not pay

ion from the TCP, as well as by significant

wholesale call origination and in termination.

focused on the call the value of the content

SPs compete to provide a or access to a company such as a bank or

depend on how valuable or who may not necessarily be

order to encourage SPs to offer new and terminating end of the call among TCPs is

NTS SPs.

NTS SP. The TCP OCP (and transit

services, if relevant), and provides these along with termination and hosting services SPs. For this competition model to work effectively, the payment regime for

raphic calls is set out (the “Wholesale narrowband

http://www.ofcom.org.uk/consult/condocs/wnmr_statement_consultation/main.pdf


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2.25 Therefore, the regulatory treatment of wholesale call origination and termination reflects the differences in the respective models of competition for different call types. In the case of geographic calls, the OCP, after paying other providers for wholesale services (such as call termination), keeps as profit the rest of the amount billed to the caller (the residual amount is often referred to as the OCP’s “retention”). On the other hand, NTS calls are retailed on behalf of the TCP and NTS SP, and any excess in the amount billed to the caller over and above the costs of originating and retailing the call is generally passed to the TCP (who may share the revenue with the NTS SP, on which basis it competes with other TCPs).

080 payment flow

2.26 We describe here the arrangements that apply where the OCP does not charge the caller for calls to 080 numbers. The NTS charging model for 080 calls (as set out in Figure 2 above) differs from that which applies to chargeable calls.17 With 080 calls, the caller pays nothing and therefore there is no payment for the OCP to pass on to the TCP. The costs of these calls must therefore be recovered at the other end of the NTS value chain i.e. from the 080 SP.18

2.27 Hence 080 SPs wishing to receive 080 calls will enter a contract with their TCP to pay the TCP a sum which covers, at least, the TCPs and OCPs costs associated with routing the call from the retail customer. The TCP will, in turn pay the OCP its costs of call origination.

The National Telephone Numbering Plan

2.28 The National Telephone Numbering Plan (“NTNP”)19 specifies the uses for all number ranges, including NTS number ranges. CPs to whom Ofcom has allocated NTS numbers assume a responsibility to ensure that those numbers are used in accordance with the designations given in the NTNP.

080 numbers

2.29 080 numbers are distinct from other types of NTS numbers in that calls to these numbers have, historically, generally been free – and remain free to call from fixed networks.

2.30 080 numbers are designated in the NTNP as “Special Services - No charge to Customer (except where charges shall be notified to callers at the start of the call).” While OCPs are therefore permitted to charge their customers for calls to 080 numbers, our view remains that 080 calls ought to be free to the caller, and if they are not free, that they are as close to free as possible.

17 The distinction between the general NTS flow of payments and the 080 flow of payments was noted in paragraph 2.3 of the Oftel Consultation paper on the relationship between retail prices and interconnection charges for number translation services in March 1999. 18 We refer to the “080 SP” rather than the NTS SP where we refer solely to 080 calls. 19 The current version of the NTNP was published on 3 August 2009 at: http://www.ofcom.org.uk/telecoms/ioi/numbers/


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2.31 This preferred approach that 080 calls should be free to caller is set out, for example, in our statement Telephone Numbering: Safeguarding the future of numbers (“the 2006 Numbering Statement”).20

2.32 The 2006 Numbering Statement states at paragraph 1.6 that: “We propose to protect the strong existing brand of ‘Freephone’ services on ‘0800’ (and ‘0808’)”, and goes on to state at paragraph 1.31 that:

“Our strategic approach to the 08 range is that services will be described at the ‘two digit’ level. This implies only three categories of 08 numbers: • Numbers starting with 080 will be Freephone - including current 0800 and 0808

ones […]” 2.33 A similar regulatory position has been adopted over many years. For example, the

Oftel Determination and Explanatory Document of the Interim Charges for BT’s Initial Standard Services for year ending 31 March 1996 states that:

“In principle, Oftel believes that 0800 calls should be paid for entirely [by others] and should be completely free to caller. The Director General’s determination does not, however, prevent ONOs [i.e. OCPs] from imposing a charge for 080 calls on their customers.”21

2.34 Our view on the pricing of 080 calls has not changed, despite the fact that MNOs now apply a charge for calling 080 numbers. In this regard we note the comment made by one of the 2G/3G MNOs in information provided to us that:

“0800 is widely understood as being free and there is existing frustration at mobile networks charges.”22

2.35 Our view takes account of the benefits of free calls to 080 numbers in terms of price transparency to consumers. The available evidence suggests that consumers have an expectation that 080 calls will be free, an expectation which we consider is strengthened by the close association between 080 and the concept of ‘Freephone’:23

(i) As part of a broad review of NTS in the UK, we looked at consumers’ perceptions of NTS ranges including 080. Our research found that 83% of the surveyed consumer base was aware of the 080 prefix, with 61% of consumers surveyed identifying 0800 as a ‘free’ service.24

20 Telephone Numbering: Safeguarding the future of numbers, July 2006 http://www.ofcom.org.uk/consult/condocs/numberingreview/statement/statement.pdf, paragraphs 1.6 and 1.31 21 Page 48. We note that a later paragraph of this document recognises that MNOs have higher costs of origination and in the absence of a larger receipt from the TCP may charge originating customers for 080 calls 22 Annex 3B of � internal briefing note 23 We note, for example, that “Freephone” and “FreeCall” are BT branded terms for 080 calls 24 Number Translation Services: a way forward. A report of the key findings of two research studies conducted by HI Europe and MORI on behalf of Ofcom


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(ii) In further market research carried for the 2006 Numbering Statement, 64% of the consumer base recognised 0800 numbers as free to call.25

(iii) On its website, BT cites research that suggests “93% of the UK recognise this number [0800 and 0808] as a free call”26

2.36 In addition, as explained at paragraphs 2.40 and 2.41, it is also the case that 080 numbers are often used for charitable services or for other purposes that confer a social benefit to citizens and consumers. In accordance with our statutory duties, we consider that it is important that such services should remain free to caller from fixed and mobile providers, and that prospective callers are able to rely on continued free provision (see below for a description of zero-rating by MNOs).

2.37 We consider that our view on the pricing of calls to 080 numbers is consistent with both our general duties under section 3 of the Act and the six Community requirements set out in section 4 of the Act. In particular we consider that, in light of the consumer research set out above and the association between the 080 prefix and “Freephone”, it is in the interests of both consumers and citizens to be able to rely on the fact that calls to 080 numbers will be free to the caller, and if they are not free, that they are as close to free as possible.

Zero-rating

2.38 There are in practice some 080 numbers that are free to call from all OCPs, including the 2G/3G MNOs. This relies upon a practice called “zero rating” and is the result of arrangements between MNOs and NTS SPs.

2.39 We understand that most of these arrangements are brokered by The Helplines Association (“THA”).27

2.40 THA is a registered charity that facilitates such arrangements. In 1999, THA started to operate a Special Freephone Tariff (“SFT”) scheme for non-profit confidential helplines run by charities, such as Age Concern and CarersUK.

2.41 THA uses a specific block of numbers for this purpose (numbers with the prefix 0808 80). It makes arrangements on a case-by-case basis with MNOs to ensure calls to numbers with this prefix are free to the caller.28 All of the organisations using this prefix are charities, and a prospective charity has to meet a set of criteria before THA will lobby on its behalf with the MNOs to zero-rate the number(s). The charities that currently benefit from zero-rating as per THA arrangements are set out at Annex 5.

2.42 As well as being free, the fact that THA numbers are zero-rated also means that they will not appear on the caller’s bill (i.e. they are confidential). This is another important aspect of the zero-rating process, as it allows callers to contact the SP in confidence.

25 Numbering Review: Report of Market Research Findings, 23 February 2006 http://www.ofcom.org.uk/consult/condocs/numberingreview/research/marketresearch.pdf page 12. 26 Back to the Future - Full Report; Back to basics to get to the future Key findings for the future of UK Teleservice; The Henley Centre, January 2004. http://business.bt.com/phone-services/08-and-09-numbers/freefone-0800-0808 27 http://helplines.community.officelive.com/default.aspx 28 THA has told us that, as a general rule, H3G, Orange and Virgin Media zero-rate THA 0800 numbers, and H3G, O2, Orange, T-Mobile, Virgin Media and Vodafone zero-rate all 080880 numbers.


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2.43 We understand that the 2G/3G MNOs incur the cost of origination for these calls, and receive no payment either from the caller or the called party.

2.44 Occasionally, THA also works to broker zero-rated agreements on Government-sponsored 080 numbers of particular public interest (such as the Swine Flu helpline). However, we understand that this only happens in exceptional cases.

2.45 [�]

2.46 [�]

2.47 Beyond arrangements with charities and exceptional public services, it appears that the practice of zero-rating is less common. From information provided by the 2G/3G MNOs, it appears that the only other NTS SPs for commercial services that have zero-rate agreements in place with at least one of the 2G/3G MNOs for commercial services are breakdown cover providers (the RAC, AA and Green Flag) and �.29

Relevant policy statements

2.48 In January 1996 Oftel published the “Determination of Interim Charges for BT’s Initial Standard Services for the Year Ending 31 March 1996”30 (“the January 1996 determination”). Annex 6 to this document set out how the newly created NTS regime would operate and the charges that applied to calls to BT terminated services. This established the NTS Formula:31

2.49 Oftel recognised, however, that BT’s billing system at the time could not

accommodate or allow for OCP-specific call origination costs. Oftel thus added that BT must set about making an allowance for such higher costs (such as those incurred by MNOs) in its SP contracts. However, in November 1996 Oftel published the next determination of BT’s charges, the Determination of Interim Charges for

29 We understand that some of these NTS SPs may pay a fee direct to the MNO to cover the costs of origination. 30 This document is published as a ‘related item’ on our CCEB. 31 BT devised the NTS formula to enable NTS TCPs to calculate their termination payments, for the calls BT originates or transits to their network, in order to be able to invoice BT for those payments.


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BT’s Standard Services for the Year Ending 31 March 1997. In this document it recognised that while allowing for OCP-specific costs remained a desirable outcome, in practice it fell down because TCPs could not always distinguish between calls from fixed and mobile OCPs especially if calls transited other networks en route. These practical difficulties remain to the present.

2.50 At the time the January 1996 determination was published BT’s retail prices for calling NTS numbers were the same as its local and national geographic call prices. Over the ensuing years however, BT started to apply discounts to, particularly, “local” NTS calls (now 0845). This meant that the revenues paid to NTS TCPs and their NTS SP customers fell each time BT reviewed its NTS discounts. This created uncertainty about whether NTS revenues would meet the TCPs costs of terminating calls and paying for services.

2.51 Oftel reacted to complaints from TCPs about revenue uncertainty by opening the 0844 and 0871 ranges through the Statement on the Relationship between Interconnection Charges and Retail Prices for Number Translation Services published in December 1999.32 These ranges enable TCPs to select price points that are immune from BT’s retail pricing changes. The intention was that the TCP would decide how much it required from calls e.g. 5ppm and OCPs, including BT, would be required to set their retail prices at a level which included this figure plus their call origination and any transit costs. The December 1999 determination did, however, state quite specifically that this did not affect the existing NTS number ranges:

“0800 (and 0808) will continue to mean ‘free’, 0845 will continue as ‘up to local rate’ and 0870 ‘up to national rate’.”

2.52 In practice however, the new charging arrangement was never adopted and take-up of 0844 and 0871 was very slow for some years. BT later proposed a ladder of retail prices that TCPs could choose from and then applied the NTS formula as originally created to derive the outpayments from each price point. This is the arrangement that still applies.

Relevant precedents

2.53 BT is not subject to any SMP designation in any market that includes termination of 080 calls (although as set out below BT is subject to SMP designations in other markets that may be relevant to our considerations in the Dispute – see paragraph 5.97). Likewise there are no SMP obligations on any of the 2G/3G MNOs that are relevant to our considerations in the Dispute.

2.54 The only other regulatory obligation that is relevant to the Dispute is the designation set out in the NTNP for 080 calls, as set out above.

The Orange Direction

2.55 On 21 September 2001 Oftel issued a direction to resolve a dispute between Orange and BT regarding “interconnect charges for origination of calls to freephone numbers (the “Orange Direction”).33 Specifically, Orange considered that it should recover from BT its costs of originating “freephone” (i.e. 0800) calls. A key issue considered by

32 http://www.ofcom.org.uk/static/archive/oftel/publications/1999/consumer/nts1299.htm 33 http://www.ofcom.org.uk/static/archive/oftel/publications/mobile/oran0901.pdf. In this context the term “freephone” is used to refer to 0800 numbers.


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Oftel in resolving this dispute was whether MNOs are entitled to recover the full cost of call origination for freephone calls.

2.56 This raised the question of whether NTS SPs would want to or would be willing to pay for freephone calls originating on mobile networks, given the higher costs of such calls (noting that consumers, in most instances, had access to a fixed line phone). Alternatively, it was noted that NTS SPs might have an interest in attracting calls to freephone numbers from mobile users and might be willing to pay increased call origination costs (although there was no evidence that this was the case)34.

2.57 Oftel concluded that there was “little justification” in making a decision to shift the cost burden of mobile freephone call origination onto BT which would thereafter be recovered from other TCPs and ultimately service providers. The higher mobile origination costs were covered by MNOs in either policies of charging customers for calling freephone numbers, recovery through line rental charges or by accepting losses on such calls. Given the lack of evidence that consumers were being disadvantaged by charges levied on mobile freephone calls or that service providers were willing to pay higher charges to cover mobile call origination costs, there was no reason to depart from these practices.

2.58 Oftel further considered the issue of whether MNOs should recover the full costs of call origination from terminating network operators and ultimately SPs. In doing so it applied five of the six cost recovery principles (excluding the sixth principle of reciprocity)35 and determined that in the absence of evidence that service providers were actively interested in attracting and paying for calls from mobiles, the principles of cost causation, cost minimisation and the distribution of benefits weighed heavily towards maintaining the status quo36 (and against Orange’s request for higher origination payments).

2.59 Therefore, the Orange Direction dismissed a claim for the recovery of higher mobile call origination costs based on a lack of evidence of a willingness to pay on the part of NTS SPs, access to fixed lines against the added convenience of mobiles, the need to encourage mobile operators to minimise costs, a desire to promote competition between mobile providers (in terms of retail pricing of 080 calls) and on the basis that the increased cost of originating a call to a freephone number from a mobile (as opposed to a fixed line) is caused by the calling party who initiates the call by mobile, rather than choosing to make the call via a fixed line.

The NTS call termination market review

2.60 On 22 October 2004, Ofcom published the consultation document NTS call termination market review (“the NTS call termination market review consultation”).37

2.61 In the NTS call termination market review consultation, Ofcom proposed to identify a market for NTS call termination in the UK and set out its view that BT has SMP in that market. Ofcom considered a number of options for action, and indicated that its preferred option was to impose two new SMP conditions on BT in the NTS call

34 Orange Direction, paragraph 3.8. 35 See paragraph 4.53 below. 36 The level of outpayment made by BT reflected the cost of fixed call origination and mobile operators were able to recover the additional costs of origination by charging their customers. 37 NTS call termination market review, 22 October 2004, published at: http://www.ofcom.org.uk/consult/condocs/ntsctmr/.


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termination market, requiring it to provide network access, and not to exercise undue discrimination in relation to the provision of network access.38

2.62 The NTS call termination market review consultation closed on 7 January 2005. Non-confidential responses to the consultation were published on Ofcom’s website.39

2.63 As discussed in the following paragraphs, on 7 April 2005 Ofcom opened an investigation into a complaint from Cable and Wireless plc (“C&W”) about BT’s charges for NTS call termination. In order to avoid duplication of analysis, Ofcom decided not to proceed separately with the NTS call termination market review.

NCCN 500

2.64 On 1 April 2004, via Network Charge Change Notice 500 (“NCCN 500”), BT notified increases to its termination charges for 0845 and 0870 calls with effect from 1 May 2004. These increases were in effect withdrawn from 1 January 2006 via NCCN 908.

2.65 On 8 April 2005, Ofcom opened an investigation using its concurrent powers under the Competition Act 1998 (“the Competition Act”) to investigate a complaint about NCCN 500 (the “NCCN 500 decision”) submitted by C&W.

2.66 C&W alleged that BT was dominant in a number of relevant markets including the market for NTS call termination, and that BT had abused its dominant position in relation to the price increases for NTS call termination on certain number ranges, in breach of the Chapter II prohibition of the Competition Act and/or Article 82 EC (“Article 82”).40

2.67 The NCCN 500 decision concluded that the available evidence did not support the view that BT’s conduct over the relevant period infringed the Chapter II prohibition of the Competition Act and/or Article 82 and that there were therefore no grounds for action. Ofcom published the NCCN 500 decision on 1 August 2008.41

Market definition and dominance

2.68 Ofcom concluded that the relevant market in relation to the NCCN 500 decision was the market for the termination/hosting of NTS calls on all number ranges, by all TCPs in the UK.

2.69 BT’s share of the NTS call termination/hosting market, based on total volumes, was below a level that would typically be associated with a position of dominance in the relevant market. However, Ofcom found that BT was able to act independently of other TCPs, its competitors, its customers and ultimately of consumers due to the particular structure and features of the market.

2.70 Ofcom found that BT was able to introduce price increases for NTS call termination without its TCP competitors, or its OCP and NTS SP customers being able to constrain its pricing behaviour.

2.71 BT’s competitors and customers were unable to constrain BT’s pricing behaviour because of: �

38 NTS call termination market review consultation, section 5. 39 http://www.ofcom.org.uk/consult/condocs/ntsctmr/resntcctr/. 40 Following the Lisbon Treaty, Article 82 has been renumbered Article 102. 41 http://www.ofcom.org.uk/bulletins/comp_bull_index/comp_bull_ccases/closed_all/cw_823/


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�� BT’s position in retail markets, which meant that OCPs were reluctant to pass on the price increase to their retail customers (which would not in any case have undermined BT’s ability to increase its NTS call termination charges); �

�� BT’s SMP in the market for call origination which, combined with the NTNP requirements on retail prices, prevented other TCPs from raising their gross termination charges on BT-originated calls to NTS numbers;�

(iii) BT’s SMP in the market for single transit, which prevented other TCPs from raising their gross termination charges on non BT-originated calls to NTS numbers; and

(iv) the fact that BT would have been able to match or better any outpayment to an NTS SP that a competing TCP could have made.

2.72 Ofcom noted that close to 100% of NTS traffic, which is both originated and terminated by CPs other than BT, is transited via BT. For such transit traffic, BT bills other TCPs at the same rate irrespective of the identity of the OCP (and OCPs at the same rate irrespective of the TCP). Ofcom considered that the existence of this arrangement, together with low levels of direct interconnection, made it difficult for competing network providers to broker bilateral agreements.

2.73 Ofcom therefore found that BT was dominant in the market for NTS call termination/hosting in the UK during the time that NCCN 500 was in force.

BT’s conduct

2.74 C&W alleged that the price increases notified in NCCN 500:

(i) imposed a margin squeeze on C&W;

(ii) discriminated in favour of BT and against C&W on price;

(iii) were excessive;

(iv) increased C&W’s costs of providing a competing service or forced it to provide an inferior service to that of BT;

(v) increased BT's market power in the NTS call origination and NTS call termination markets; and

(vi) formed part of a concerted strategy to dilute competition.

2.75 Ofcom concluded that BT’s conduct did not constitute an abuse of its dominant position and there were no grounds for action in that case.

NTS policy review

2.76 As stated in the draft Annual Plan for 2009/201042, we will review the operation of the regulatory regime for calls to 08 and 09 numbers. In particular, following the conclusion of the EU Regulatory Framework review, we note the need to take into consideration the new requirements of the Authorisation Directive 2002/20/EC with

42 Draft Annual Plan 2010/11, paragraph A1.46, http://www.ofcom.org.uk/consult/condocs/draftannplan1011/draftannplan1011.pdf


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reference to our ability to set tariff principles and maximum prices to specific number ranges.43

43 See Article 3(11) of Directive 2009/140/EC of the European Parliament and of the Council of 25 November 2009 amending Direective 2002/21/EC on a common regulatory framework for electronic communications networks and services, 2002/19/EC on access to, and interconnection of, electronic communications networks and associated facilities, and 2002/20/EC on the authorisation of electronic communications networks and services. http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2009:337:0037:0069:EN:PDF


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Section 3

3 History and scope of the Dispute History of the Dispute

3.1 The Dispute is about BT’s notification to the industry of termination charges for 080 calls hosted on its network, as set out in NCCN 956. The 2G/3G MNOs (as well as the rest of industry) were notified of these charges on 3 June 2009, and they took effect on 1 July 2009.

3.2 Below we briefly set out the history of payment arrangements between OCPs and BT for carrying 080 calls prior to NCCN 956, the impact of NCCN 956 and the arguments made by the 2G/3G MNOs and the response of BT in the Dispute.

Pre-November 2008

3.3 Prior to 1 November 2008 BT paid a call origination charge to all OCPs (including the 2G/3G MNOs) for 080 calls hosted on its network. This charge was based on the fixed cost of origination, approximately 0.5ppm.

NCCN 911

3.4 On 2 October 2008 BT issued Network Charge Change Notice (“NCCN 911”).44 NCCN 911 notified the industry that from 1 November 2008 BT would no longer make a call origination payment to MNOs for calls to 080 numbers hosted on BT’s network. Payments to fixed networks were unaffected.

NCCN 956

3.5 On 3 June 2009 BT issued NCCN 956. NCCN 956 notified the industry of new termination charges for 080 calls hosted on BT’s network. The termination charges are applicable where the OCP charges a retail price of 8.5ppm or more. The charges notified in NCCN 956 are set out in Figure 2 below:

Figure 3: Extract of the charging table and explanatory notes in NCCN 956

“Freefone™ 0800 & 0808 Calls

Description Effective Date

Until Daytime (ppm)

Evening (ppm)

Weekend (ppm

Note

All Operators 01/07/2009 -0.6481 -0.2967 -0.2336 1

All Operators 01/07/2009 0.0000 0.0000 0.0000 2

All Operators 01/07/2009 2.0000 2.0000 2.0000 3

All Operators 01/07/2009 4.5000 4.5000 4.5000 4

44 http://www.btwholesale.com/pages/static/service_and_support/service_support_hub/online_pricing_hub/cpl_hub/notifications/historic_notifications/NCCN_Archive_2008/October_2008_December_2008_Archive.html


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All Operators 01/07/2009 7.0000 7.0000 7.0000 5

All Operators 01/07/2009 10.0000 10.0000 10.0000 6

All Operators 01/07/2009 13.0000 13.0000 13.0000 7

A negative value denotes a payment from BT to the Operator.

The BT charges to the originating Operator shall be ascertained as follows:

Note 1 – if no retail charge is payable by the originating Operator’s retail customers, the charge set out opposite note 1;

Note 2 – if the retail charge payable by the originating Operator’s retail customers is greater than zero and less than 8.5ppm (inc VAT), the charge set out opposite note 2;

Note 3 – if the retail charge payable by the originating Operator’s retail customers is 8.5ppm or greater, and less than 12.5ppm (inc VAT), the charge will be calculated as set out opposite note 3;




Note 7 – if the retail charge payable by the originating Operator’s retail customers is 27.5ppm (inc VAT) or greater, the charge will be calculated as set out opposite note 7;

in the above table shall apply for all, or for the relevant portions of a Billing Period.”

T-Mobile dispute referral to Ofcom

3.6 On 16 September 2009 we received a dispute submission from T-Mobile concerning BT’s termination charges for calls to 080 numbers. In its submission T-Mobile described how it had expressed its opposition to BT’s proposed charges and how it had met with BT on several occasions in an attempt to resolve their differences by negotiation. Despite negotiation T-Mobile and BT were unable to reach an agreement.

3.7 Having considered T-Mobile’s submission and comments made by BT, we were satisfied that the Dispute is a dispute between CPs relating to network access. This is because the Dispute concerns the terms on which BT is prepared to interconnect with the 2G/3G MNOs for the termination of 080 calls hosted on its network, in other words the terms on which BT will grant access to its network.

3.8 On 6 October we informed T-Mobile and BT of our decision that it was appropriate for us to handle the Dispute for resolution on the basis of section 186(3) of the Act. We


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did not consider that there were alternative means available for resolving the Dispute which could provide a prompt and satisfactory resolution.

Vodafone submission

3.9 On 9 October 2009 we received a dispute submission from Vodafone, which also concerned BT’s termination charges for calls to 080 numbers.

O2 submission

3.10 On 26 October 2009 we received a dispute submission from O2, which also concerned BT’s termination charges for calls to 080 numbers.

Orange submission

3.11 On 30 October 2009 we received a dispute submission from Orange, which also concerned BT’s termination charges for calls to 080 numbers.

Decision to join Vodafone, O2 and Orange

3.12 Having considered the dispute submissions received from Vodafone, O2 and Orange, we concluded that there was a dispute between BT and each of these MNOs that commercial negotiations had failed to resolve. We therefore considered that it was appropriate for us to handle each of these disputes.

3.13 We further considered that the principal issues raised by Vodafone, O2 and Orange were essentially the same as the issues raised by T-Mobile. Accordingly, we considered that it was appropriate to join Vodafone, O2 and Orange to the existing Dispute.

3.14 We informed the 2G/3G MNOs of this decision on 13 November 2009. On 16 November 2009 we updated the CCEB to reflect the joining of Vodafone, O2 and Orange, and we also set out the finalised scope of the Dispute.

The arguments of the 2G/3G MNOs

Introduction

3.15 The 2G/3G MNOs appear to be in broad agreement that:

(i) BT occupies a position of strength in the market for the provision of termination of calls to 080 numbers, and that this position equates to dominance and/or SMP;45

(ii) due to its position in the market BT has engaged in unfair, unreasonable and discriminatory charging through the imposition of NCCN 956; and

(iii) given BT’s position in the market they are unable to avoid the new charges.

3.16 Although the 2G/3G MNOs made their submissions separately and at different times, we consider that the core arguments that they make are substantively the same. We

45 In this context the 2G/3G MNOs refer to the NCCN 500 decision and also the NTS call termination market review consultation.


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also consider that the arguments made as to why BT’s behaviour is unfair, unreasonable and discriminatory are common to all the 2G/3G MNOs.

3.17 We briefly summarise the key arguments of each, and their suggested approach to resolution below:

T-Mobile

3.18 T-Mobile submitted that:

(i) BT “is dominant and/or has SMP” in the “affected relevant market”;

(ii) The tiered charges are discriminatory and unfair as different OCPs are charged different amounts for an equivalent service;

(iii) BT should pay OCPs a fee at least sufficient to cover the costs of an efficient mobile operator; and

(iv) It is unclear which of BT’s charges apply to T-Mobile tariffs, and the arrangements are unworkable as well as being unfair, unreasonable and discriminatory.

3.19 T-Mobile suggested that Ofcom should determine:

(i) that BT should pay an origination payment to T-Mobile (as set out in paragraph 3.28); or if not

(ii) that the payment arrangements between BT and T-Mobile should revert to those that were in effect pre-NCCN 911, i.e. that BT make a cost-based call origination payment to all fixed and mobile OCPs for 080 calls terminating on its network; or if not

(iii) that no wholesale payment should pass between BT and T-Mobile in respect of 080 calls and that each party should seek to recover their costs from their respective retail customers.

Vodafone

3.20 Vodafone submitted that:

(i) BT is in a dominant position “on the market for the termination of calls to NTS numbers”;

(ii) BT is discriminating between customers by linking its wholesale charge for terminating calls to the retail pricing of 080 calls, which is likely to distort competition in the retail mobile market;

(iii) BT is exploiting its dominant position to impose unfair prices terms and conditions; and

(iv) The charging structure is flawed and will leave BT’s customers (i.e. OCPs including the MNOs) facing significant additional burdens.

3.21 Vodafone suggested that the appropriate remedy is one that restores the parties to trading on the terms that were in effect prior to NCCN 956.


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3.22 Vodafone also asked that, to the extent that it has made any payments to BT under NCCN 956, BT is required to reimburse Vodafone fully.

O2

3.23 O2 submitted that:

(i) BT is seeking to charge twice (i.e. to charge both OCPs and 080 SPs) for the provision of interconnection to 080 numbers;

(ii) It objects to the imposition of interconnection charges without appropriate cost justification; and

(iii) It should receive a payment from BT for originating calls to 080 numbers.

3.24 O2 suggested that the appropriate resolution of this dispute involves:

(i) the withdrawal of NCCN 956;

(ii) the repayment of money from BT to O2, including interest, as if NCCN 956 had not been issued; and

(iii) the payment by BT to O2 of a charge in respect of the origination of calls to 080 numbers on the O2 network, hosted by BT, as set out in the following table with payments effective as of 1 August 2009 (in ppm):

Daytime Evening Weekend 0.6481 0.2967 0.2336

Orange

3.25 Orange submitted that:

(i) BT has failed to justify why it should be entitled to levy any termination charge on OCPs for calls to 080 numbers;

(ii) The cost of the calls is intended to be met by the called party (the 080 SP) not the OCP;

(iii) BT is dominant and/or has SMP in the relevant market, and the charges are discriminatory and unfair; and

(iv) BT should pay Orange for the call origination service that Orange provides to BT and its customers.

3.26 Orange asked Ofcom to determine:

(i) that BT should pay an origination payment to Orange (as set out in paragraph 3.28); or if not

(ii) that the payment arrangements between BT and Orange should revert to those that were in effect pre-NCCN 911, i.e. that BT make a cost-based call origination payment to all fixed and mobile OCPs for 080 calls terminating on its network; or if not


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(iii) that the payment arrangements should revert to those that were in effect pre-NCCN 956, i.e. BT should cease charging for termination of 080 calls originated by Orange that terminate on BT’s network.

3.27 Orange also suggested that BT should be required to repay any amounts already paid by Orange pursuant to the changes introduced in NCCN 956.

Payment by BT to the 2G/3G MNOs

3.28 As set out above, T-Mobile, Orange and O2 argued that BT should make a payment to them for the call origination service which they provide to BT and BT’s customers (Vodafone has not commented on this issue). They argued that such a payment should be at least sufficient to cover the costs of an efficient MNO in originating and conveying such calls to BT’s network.

3.29 The rationale for this payment appears to be that the origination service benefits both BT and BT’s 080 SP customers. Further, the presumption in the case of 080 calls is that the NTS SP should pay, via BT, for the costs of originating an 080 call.

3.30 Prior to the introduction of NCCN 911, BT made a payment to MNOs for originating 080 calls, although the 2G/3G MNOs suggested that this payment did not cover their origination costs.

BT’s response

3.31 BT responded to the dispute submission of T-Mobile on 29 October 2009. We consider that, as the core arguments made by the other MNOs are substantively the same, BT’s response to T-Mobile’s arguments applies equally to the submissions made by the other 2G/3G MNOs. In summary, BT argued that:

(i) The NTS termination market is not regulated by Ofcom, and 080 termination charges are therefore set subject to commercial negotiation and contract (in BT’s case via the Standard Interconnect Agreement);46

(ii) T-Mobile’s retail charges are set at a level that should enable recovery of appropriate call origination and retailing costs and further allow a significant margin;

(iii) T-Mobile is able to set high retail charges for calls to BT’s 080 numbers which are not subject to competitor constraint;

(iv) A “revenue generating Freefone call” more closely resembles other revenue generating NTS calls such as 0845, and the “only course of action available to BT” was to raise its termination charges “in order to ensure a fair share of the revenue generated across the NTS platform”;

(v) By setting “excessively high” retail prices, T-Mobile and others are discouraging consumers from using services on the 080 platform; and

(vi) BT’s charges are fair and proportionate to the retail charge made by the call originator, and will mean that more revenue is available at the termination end “which should result in more revenue available for [080 SPs]”.

46 http://www.btwholesale.com/pages/static/Pricing_and_Contracts/Reference_Offers/Telephony.html


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Scope of the Dispute

3.32 After considering T-Mobile’s original submission and the comments made by BT, we concluded that our proposed scope of the Dispute would be to determine:

i) whether it is fair and reasonable for BT to impose any termination charge for calls to 080 numbers hosted on its network, which originate on T-Mobiles network; and ii) whether T-Mobile, as an originating mobile network operator, should receive a payment from BT sufficient to cover its costs of originating calls to 080 numbers hosted by BT.

3.33 In line with our standard procedures, we published the proposed scope on the CCEB

and invited comments from BT, T-Mobile and any other interested parties.

Initial representations on proposed scope

3.34 On 13 October 2009, T-Mobile asked us to extend the scope of this Dispute to include a consideration of BT’s new charges for termination of calls to 0845 and 0870 numbers.47 T-Mobile told us that these two price changes concern the same fundamental issue that we are considering in the Dispute, i.e. that the charges are unfair, unreasonable and discriminatory.

3.35 However, we did not consider that (i) these issues were sufficiently related such that they ought to be brought within the scope of the current Dispute or (ii) the requirements of a dispute had been met, in particular that the parties had exhausted commercial negotiations in relation to these further changes in BT’s charges for NTS call termination.

3.36 T-Mobile also stated that it considered the scope of the Dispute ought to be broadened to not only consider whether BT is entitled to impose any charge, but also whether the specific charges notified in NCCN 956 are fair and reasonable (taking into account the possibility that different amounts may be charged to different OCPs for the same call termination service).

3.37 We did not consider it appropriate to amend the scope of the Dispute to include consideration of whether the specific charges introduced by BT are fair and reasonable. We considered that the main issue in dispute is BTs imposition of termination charges for 080 calls. Our immediate task, and the focus of the Dispute, was therefore to consider whether it is fair and reasonable for BT to impose any termination charge for calls to BT-hosted 080 numbers.

3.38 We therefore considered that the request for us to consider the specific charges notified in NCCN 956 was premature. Should we determine that it is fair and reasonable for any payments to be made by any party, we would expect the Parties to enter into commercial negotiations following determination of this Dispute to consider, what, if any, charges may be justifiable and only bring the matter back to us should these discussions fail.

47 BT has also introduced new arrangements for termination charges for calls to 0845 and 0870 numbers that adopt a “ladder” where the termination charge depends on the retail price of the call. The details of these charges are contained in NCCN 985 and NCCN 986 respectively.


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Revision to scope

3.39 On 16 November 2009, after we had joined Vodafone, O2 and Orange to the Dispute, we published an update note on the CCEB which amended and finalised the scope to determine:

i) whether it is fair and reasonable for BT to impose any termination charge for calls to 080 numbers hosted on its network, which originate on the parties’48 networks; and ii) whether the parties, as originating mobile network operators, should receive a payment from BT sufficient to cover their costs of originating calls to 080 numbers hosted by BT.

Stakeholders interested in the outcome of the Dispute

3.40 On 13 October we received representations from C&W about the impact of BT’s termination charges notified in NCCN 956.

3.41 C&W stated that its interest in the Dispute flowed from the impact it may have on C&W as an MNO (C&W offers a product based on FMC technology) in transit markets.

3.42 C&W’s concerns centred on the issues of transit and porting. In particular C&W argued that:

(i) NCCN 956 forecloses the transit market to C&W. C&W suggests that it does not know what termination charge BT will levy on a particular call, because BT has not provided sufficient information to allow C&W “to determine in advance the price [C&W] will be charged for any given call to a BT 080 number”. For this reason it is unable to charge the correct amount to the OCP that hands the call over to C&W for transit. C&W has therefore been forced to increase its transit charges to mitigate the risk of arbitrage by other OCPs in light of NCCN 956. This, it argues, “forecloses the transit market” to C&W.

(ii) Even if C&W were able to find out what BT charges are for each OCP, because numbers are ported between OCPs, this will not give an accurate picture of where each call originated. BT bills for these services by caller line identification (“CLI”)49 but it is unclear how BT can accurately bill when the CLI of a mobile call may not reflect the network of the caller. For example an O2 number ported to T-Mobile would be billed at the rates set by O2 rather than T-Mobile because of the CLI. So where calls are not received directly from the OCP it becomes difficult to verify BT’s bills. [�]

3.43 We are of the view that these transit and porting issues are outside the scope of the Dispute. As such we have not considered the validity or otherwise of the C&W’s specific concerns in any detail in our assessment below.

3.44 On 15 October we received representations from Hutchison 3G UK Limited (“H3G”) about BT’s termination charges notified in NCCN 956.

48 As set out in footnote 3, by referring to the ‘parties’ in the scope, we mean the 2G/3G MNOs 49 The telephone number of the caller


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3.45 H3G stated that its interest in the Dispute flowed from the fact that the outcome would have a direct bearing on H3G’s commercial negotiations with BT and therefore on H3G’s business.

3.46 H3G asked that Ofcom consider the following issues in determining the Dispute:

(i) should Ofcom find that BT’s charges are fair and reasonable, what the level of the charge should be; and

(ii) should Ofcom find that MNOs should receive an origination payment from BT, what the level of that payment should be.

3.47 H3G’s arguments are similar to representations made by the 2G/3G MNOs as discussed at paragraphs 3.15 to 3.30 above.

3.48 TelXL Limited, Virgin Media Limited (“Virgin Media”) and the Number (“118 118”) also asked to be considered as interested parties.

Information sought by Ofcom

3.49 We invited BT to comment on the scope of T-Mobile’s dispute submission and they did so on 22 September 2009.

3.50 We held separate meetings with BT and T-Mobile on 14 October 2009 to discuss their response to the Dispute and dispute submission, respectively.

3.51 BT submitted further comments on T-Mobile’s dispute submission on 29 October 2009.

3.52 We invited BT to comment on the scope of Vodafone’s dispute submission and they did so on 16 October 2009. We invited BT to separately comment on the scope of O2’s and Orange’s dispute submissions and they did so on 11 November 2009.

3.53 On 13 November 2009 we wrote to BT, T-Mobile, Vodafone, O2, Orange and H3G asking them for their views on a number of the analytical issues raised by the Dispute (the “Informal Information Requests”). They all responded providing the information we had asked for.

3.54 On 17 November 2009, we sent BT, T-Mobile, Vodafone, O2, Orange and H3G formal notices under section 191 (the “s191 Information Requests”) of the Act requiring them to provide documents, call data and other information in connection with the Dispute (these requests were sent in draft on 11 November 2009), and we received this information from each of them.

3.55 We also requested:

(i) Information from C&W on an informal basis, in order to better understand their concerns around transit and porting as summarised at paragraph 3.42;

(ii) Information from the THA on an informal basis, in order to better understand the zero-rating of 080 numbers.

3.56 We also contacted a number of 080 SPs, namely: [�], the Central Office of Information (“COI”), HSBC Bank, Lloyds TSB, Produban, Centrica, and the Royal


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Bank of Scotland to obtain their views on mobile retail charges for calls to their 080 contact numbers.

3.57 At the time of writing we have only received information from [�] and the COI, and we have taken their views into account in our assessment.


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Section 4

4 Ofcom’s analytical framework Introduction

4.1 This section sets out our analytical framework for resolving the Dispute. We have set up our analytical framework to answer each of the two elements in the scope of the Dispute in turn. As a reminder, the scope of the Dispute is as follows:

(i) whether it is fair and reasonable for BT to impose any termination charge for calls to 080 numbers hosted on its network, which originate on the Parties’50 networks; and

(ii) whether the Parties, as originating mobile network operators, should receive a payment from BT sufficient to cover their costs of originating calls to 080 numbers hosted by BT.

4.2 Section 5 sets out our analysis of BT’s termination charges for 080 calls, and section 6 analyses the proposed alternative considered in the second point of the scope, origination payments to the 2G/3G MNOs.

4.3 In light of our statutory duties, we assess both elements of the Dispute by considering the potential impacts on consumers and competition. In doing so, we have taken into account all relevant factors, including previous Ofcom statements and those of Oftel on issues relevant to the Dispute, as well as relevant benchmarks.

Overview of effects on consumers and competition

Consumers

4.4 In assessing whether it is fair and reasonable for BT to impose any termination charge for calls to 080 numbers hosted on its network, which originate on the 2G/3G MNOs’ networks, we need to consider the impact on consumers, especially in light of our principal duty to further the interests of consumers where appropriate by promoting competition.

4.5 As discussed in section 2, there are two types of consumer: the caller and the call recipient (the 080 SP). The caller is the customer of the OCP. The 080 SP is the customer of the TCP.

4.6 The balance between the prices paid by these two sets of customers is important to our assessment of the issues in the Dispute. This is because both prices have an effect on the benefits that may be realised by consumers. These effects may be “Direct” effects or “Indirect” effects.

Direct and Indirect effects.

4.7 The prices paid by callers for 080 calls may be affected by both the level and the structure of termination charges or origination payments. Any such effects are referred to in the following discussion as “Direct” effects.

50 By referring to the ‘Parties’ in the scope, we mean the 2G/3G MNOs.


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4.8 The factors that influence the attractiveness to an SP of offering an 080 service are referred to in the following discussion as “Indirect” effects. This is because they may affect the volume of 080 calls made and the quality of services provided by 080 SPs, ultimately increasing or reducing the benefits to consumers from 080 numbers.

4.9 In our assessment we weigh up any Direct effects of termination charges or origination payments for 080 calls on retail prices against any Indirect effects.

4.10 For example, a termination charge payable to BT could be passed on to 080 SPs, which might increase the attractiveness or quality of 080 services offered by SPs. However, the termination charge would ultimately be funded by OCPs, which could result in higher retail charges for consumers (although as we note below, the structure of the termination charges is relevant as well as the level).

4.11 In contrast, an origination payment to the 2G/3G MNOs might lead to lower retail prices for 080 calls. However, if the origination payment is ultimately paid by 080 SPs, this may diminish the attractiveness of offering a 080 service and potentially reduce the number and/or quality of 080 services to the longer term detriment of consumers.

4.12 There are two distinct roles of the retail 080 call price:

(i) To provide a price signal to callers; we explain our view in section 2 that 080 calls ought to be free to the caller and if they are not free, that they are as close to free as possible. We consider that this is likely to be why the 080 SP has chosen an 080 number rather than a different NTS or geographic number. When the OCP charges customers for 080 calls, this could therefore adversely affect the 080 SP. However, the OCP does not have any incentive to take this negative effect into account, because the 080 SP is the customer of the TCP rather than the OCP.51

(ii) To enable the OCP to recover its costs; all MNOs sell a bundle of services to mobile subscribers, not just 080 calls. MNOs need to recover the cost of originating 080 calls. They can do so either through the retail 080 call price or prices for other services (or from the TCP where there is an origination payment from the TCP to the OCP).

4.13 Given the two distinct roles of the retail 080 call price, one factor that is relevant in assessing whether it is fair and reasonable for BT to charge OCPs for termination of 080 calls hosted on its network is the 2G/3G MNO’s retention on 080 calls. By this we mean the revenue that the MNO retains from an 080 call, less any termination charge.

4.14 MNOs retaining more than the efficient cost of originating 080 calls might be undesirable. This is because without raising the retail 080 call price (i.e. avoiding a negative Direct effect) there is additional revenue that could potentially be passed to the TCP and ultimately to the 080 SP (leading to a positive Indirect effect on consumers).

51 In other words, there is an externality effect between the OCP and SP. In some circumstances, this externality could be internalised through bilateral arrangement between NTS SPs and MNOs which are designed to deliver zero-rated calls.


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Mobile tariff package effect

4.15 There is also the potential for an impact on mobile tariffs overall. A reduction in the retention on 080 calls might lead MNOs to increase other prices in their packages, such as retail prices for other number ranges, handset subsidies etc. This is the “Mobile tariff package” effect, which could have a detrimental effect on consumers.

4.16 Similarly if the MNO is not recovering its efficient costs of originating 080 calls, then making an additional payment to the TCP could be undesirable, because it might seek to recover this cost from its wider customer base.

Competition

4.17 As explained in paragraph 4.4, our principal duty is to further the interests of consumers where appropriate by promoting competition. Therefore in assessing 080 termination charges, the impact on competition is important to our analysis.

4.18 The effects of any termination charge or origination payment may influence, or be influenced by, competitive conditions. In the context of the Dispute, we have considered competition among TCPs and competition among OCPs:

(i) Competition among TCPs; i.e. whether other TCPs can charge comparable termination rates to those set by BT, enabling them to compete for 080 SPs. This is relevant for two reasons. First, to see whether it is likely that BT will face competitive pressure to pass on 080 termination charges in better deals for 080 SPs, thereby influencing the Indirect effect on consumers. Second, to consider any impact on competition among TCPs themselves.

(ii) Competition among OCPs; i.e. whether termination charges for 080 calls hosted on BT’s network could lead to a distortion of competition between OCPs in the retail mobile market (which includes BT as a mobile service provider).

The model of competition

4.19 As described in Section 2, for NTS calls the model of competition revolves around the call recipient’s end (i.e. the NTS SP). In order to encourage NTS SPs to offer new and innovative services, competition at the terminating end of the call among TCPs is required, so that they in turn can provide competitive services to NTS SPs. It should be noted though that, in general, NTS calls involving revenue share are retailed on behalf of the TCP and NTS SP by the OCP and any excess in the amount billed to the caller over and above the costs of originating and retailing the call is passed to the TCP (who may share the revenue with the NTS SP, reflecting competition with other TCPs).

4.20 In contrast to this, 080 calls are often provided free to the caller. For this reason the arrangements for payments between the different providers involved in a 080 call have not traditionally followed the ‘revenue sharing’ model. Instead, the called party (the 080 SP) will make a payment to the TCP, which is intended to cover some or all of the cost of the call (including origination). However, calls to 080 numbers from mobiles may be different from free 080 calls, as the MNOs often charge the caller.

4.21 This is significant for the Dispute because the flow of payments for mobile-originated calls to 080 numbers could more resemble the general ‘revenue-sharing’ NTS model rather than the traditional 080 model. The direction of the flow of payments for 080 calls originated on mobile networks is the central question to be addressed in the


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Dispute. This has implications for the structure of charges for 080 calls – the balance of charges between NTS call termination, NTS hosting and NTS retail call prices. This balance is crucial to the way NTS markets operate, since a TCP’s ability to attract NTS SPs (and generate calls from OCPs’ retail customers) will depend on the level of the hosting charge that it can offer NTS SPs. There are different considerations that influence the correct balance of charges, such as the Direct, Indirect and Mobile tariff package effects discussed above. But what is clear is that consumers/080 SPs at both ends of the call will be concerned about the retail 080 call price.

Our analytical framework

The three Principles

4.22 Given the factors set out at paragraphs 4.4 to 4.21 above, the arguments of the Parties and consideration of our statutory duties, we consider that there are three key principles that are relevant in considering whether a payment in either direction is fair and reasonable:

Principle 1; the 2G/3G MNOs should not be denied the opportunity to recover their efficient costs of originating calls to 080 numbers hosted on BT’s network. In the context of the Dispute, this means either:

(i) It is not fair and reasonable for BT to impose termination charges unless the average retention by each of the 2G/3G MNOs (which is the average retail price minus any termination charge) is greater than the efficient cost of mobile origination; or

(ii) It is not fair and reasonable for each of the 2G/3G MNOs to receive an origination payment unless their average retention is less than the efficient cost of mobile origination.

Principle 2; the payment in either direction should, taking into consideration our statutory duties:

(i) provide benefits to consumers, taking into account Direct, Indirect and Mobile tariff package effects; and

(ii) avoid a material distortion of competition either among OCPs or among TCPs.

Principle 3; following the submissions of the 2G/3G MNOs, it is also important that the payment in either direction should be reasonably practicable to implement.52

4.23 We consider that the application of these principles is consistent with our obligations, in particular the Community requirements under section 4 of the Act, the duties set out in Article 8 of the Framework Directive (Directive 2002/21/EC) and our general statutory obligations.

4.24 In sections 5 and 6, we apply each of the three Principles to our assessment of 080 termination charges and origination payments respectively.

52 We further note our statutory duty that in furthering or securing our functions we do so in a manner which is reasonably practicable (section 3(4)(m) of the Act).


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Consistency with previous decisions

4.25 One of the key issues in our analysis is the balance between the retail price of an 080 call, and the price paid by the 080 SP for the 080 service. As explained in paragraph 2.30, our view is that 080 calls ought to be free to the caller, and if they are not free, that they are as close to free as possible. As our determination of this Dispute could therefore impact on retail pricing incentives, we have therefore had regard to this policy in conducting our analysis.

4.26 We have also had regard to the various Ofcom and Oftel decisions discussed in section 2 as appropriate.

4.27 The Parties have made reference to market definition and market power. It is beyond the scope of this dispute to define the relevant market and make a finding of either dominance or SMP.

4.28 However, BT’s likely market position is relevant to our considerations, such as the potential for BT’s behaviour to affect competition. As such, we take as a starting point the analysis of market definition and market power in the NCCN 500 decision and then consider whether there have been material changes since then. While NCCN 500 specifically dealt with 0845 and 0870 calls, we consider that given that MNOs often charge the caller for 080 numbers, the current flow of payments for mobile-originated calls to 080 numbers means that it more resembles the general ‘revenue-sharing’ NTS model rather than the traditional 080 model. This means that NCCN 500 is relevant.

4.29 The market was defined in the NCCN 500 decision as “the market for the termination/hosting of NTS calls on all number ranges, by all terminating communications providers (“TCPs”) in the UK.” We found that BT was able to introduce price increases for NTS call termination without its TCP competitors, or its originating communications provider (“OCP”) and NTS service provider customers being able to constrain its pricing behaviour. As such we concluded in the NCCN 500 decision that BT held a position of dominance. The key sources of BT’s dominance in NCCN 500 were that BT’s competitors and customers were unable to constrain BT’s pricing behaviour because of:

(i) BT’s position in retail markets, which meant that OCPs were reluctant to pass on the price increase to their retail customers (which would not in any case have undermined BT’s ability to increase its NTS call termination charges);

(ii) BT’s significant market power (“SMP”) in the market for call origination which, combined with the National Telephone Numbering Plan (“NTNP”) requirements on retail prices, prevents other TCPs from raising their gross termination charges on BT-originated calls to NTS numbers;

(iii) BT’s SMP in the market for single transit, which prevents other TCPs from raising their gross termination charges on non BT-originated calls to NTS numbers; and

(iv) the fact that BT would have been able to match or better any outpayment to an NTS service provider that a competing TCP could have made.


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4.30 We considered whether there have been material changes since the NCCN 500 decision to the sources of BT’s dominant position in NTS termination/hosting in the UK as identified in that decision, or differences in the circumstances applicable to the Dispute. We have reached the following provisional conclusions:

(i) Paragraphs 5.106 to 5.110 consider (for the purposes of the Dispute) the issue outlined in paragraph 2.71 (i). As set out in those paragraphs, our view is that BT’s position in the retail mobile market is insubstantial;

(ii) In relation to paragraph 2.71(ii), we do not consider that this is directly relevant for this dispute as we are dealing with non-BT originated calls (and reciprocity is not relevant – see paragraph 4.59 below);

(iii) Paragraphs 5.80 to 5.87 consider (for the purposes of the Dispute) the issues outlined in paragraphs 2.71(iii) and (iv). As set out in those paragraphs, it appears to us that non-BT TCPs cannot currently increase or match BT’s termination rates and so this means that currently BT would be able to match or better any payment to an 080 SP that a competing TCP could make.

Benchmarking

4.31 In order to consider whether it is fair and reasonable for BT to impose an 080 termination charge or, in the alternative, make an origination payment to the 2G/3G MNOs, in accordance with the analytical framework described above, we need to consider the 2G/3G MNOs level of retention. As part of this, it is necessary to consider the efficient cost of call origination. To assist with this analysis we consider whether there are any appropriate benchmarks that may be relevant. At paragraph 186 of the TRD core issues judgment the CAT states that:53

“Benchmarking is a useful tool and OFCOM should consider the value of comparisons put forward by the parties and what they show about the reasonableness of the charges or other terms and conditions being proposed.”

4.32 We therefore asked the Parties to identify any benchmarks for the efficient cost of origination of 080 calls on a mobile network. In response the Parties commented on the nature of benchmarks that may be relevant to the consideration of origination costs. In addition, some MNOs have also referred to relevant benchmarks to support a higher origination payment from the TCP. We consider the relevance of these benchmarks in our analysis.

4.33 We considered two types of benchmarks that were suggested by the 2G/3G MNOs:

(i) benchmarks for the efficient cost of call origination on mobile networks; and

(ii) international benchmarks for origination payments to MNOs for calls to 080 numbers.

53 The Competition Appeal Tribunal (“CAT”) judgment in T-Mobile (UK) Limited and Others v Ofcom [2008] CAT 12 dated 20 May 2008 in relation to Ofcom’s Determination of Disputes between T-Mobile and BT, O2 and BT, H3G and BT, and BT and each of H3G, Orange, and Vodafone relating to fixed to mobile and mobile to mobile termination (the “TRD core issues judgment”) http://www.catribunal.org.uk/files/Judgment_TRDs_200508.pdf


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Benchmarks for the efficient cost of mobile call origination

4.34 The efficient cost of origination has a network cost and a retail cost component.

Network cost

4.35 We received a number of submissions suggesting that the network cost of origination on a mobile network can be estimated using the regulated charges for mobile call termination.

4.36 BT states that:

“Since the same components are used in both cases we would expect that the cost of origination would be similar to termination.”54

4.37 T-Mobile, Vodafone and Orange all submit that the cost of originating any call is approximately the same as the cost of terminating the same call.55

4.38 The MNOs’ termination charges are currently regulated under charge caps that were set by reference to (a forecast of) MNOs’ efficient costs, using a glide path to this level in 2010/11.

Retail cost

4.39 As to the retail cost of origination, BT argues that:

“Retailing of calls whether for a fixed telecommunications provider or a mobile one, requires the same functionalities e.g. billing, customer service etc…..Therefore it is BT’s view that the proxy for efficient retail costs should be those selected by Ofcom in the current BT NTS Retail Uplift Charge Control assessment. The costs….have already been fully analysed by Ofcom and form the basis for the recovery of BT’s retail NTS costs”.56

4.40 BT is required to originate and to retail NTS calls on behalf of other TCPs. BT is allowed, when it originates NTS calls, to retain an amount to cover its costs including an element of its own retailing costs (the “NTS Retail Uplift”).57 This amount is currently 0.1848ppm for 080 calls.

4.41 As set out in the previous Retail Uplift price control58, TCPs do not have a direct commercial relationship with the caller. Therefore the TCP needs the OCP (which has the direct relationship with the caller) to undertake the retailing of the calls on its behalf.

4.42 Given this, we concluded in our assessment of allowable costs that BT should be able to recover an element of costs relating to the activity that BT undertakes to acquire and retain customers. This means sales and marketing activity related to

54 Response to question 1 of Informal Information Request 55 Responses to question 1 of Informal Information Request 56 Response to question 2 of Informal Information Request 57 This requirement is SMP Condition AAAIII in the Wholesale Narrowband Market review. 58 Charges between Communications Providers: Number Translation Services Retail Uplift charge control and Premium Rate Services bad debt surcharge, (2005) http://www.ofcom.org.uk/consult/condocs/NTSfin/ccp/ntsruprs.pdf


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customer acquisition and retention is considered to be part of the retailing service provided by BT to NTS TCPs.

4.43 However, we did not support the inclusion of sales and marketing costs related to ‘call stimulation’ being part of the NTS retailing service. The argument is that it is not necessary for customers to be encouraged to make calls by BT in order for BT to retail NTS calls on behalf of the TCP. NTS SPs can (and do) promote their service and the numbers they use. Any benefit that they get from BT stimulating use of the phone or Internet more generally is a side effect and is likely to be small in comparison to the benefits of direct marketing of the NTS service itself.59

4.44 T-Mobile also argued that there are other costs as well as billing and customer service that need to be recovered from call origination (beyond those reflected in the NTS Retail Uplift), such as network externality surcharge, 3G spectrum costs etc. We discuss the efficient cost of origination, taking account of benchmarks, in greater detail from paragraph 5.10 onwards.60

4.45 In light of the above submissions, relevant benchmarks that have been considered are the regulated mobile termination rate and BT’s NTS Retail uplift.

International benchmarks for origination charges

4.46 T-Mobile has submitted evidence of origination payments made in other countries. Specifically, it states that in other European countries MNOs are paid a fee for originating calls to freephone numbers which is at least sufficient to cover their costs of origination. This allows them to offer those calls to retail customers for free without the risk of making a loss on those calls.61

4.47 Specifically, T-Mobile suggested that:

“In other countries, it is commonplace for differentiated payments to be made for calls originating on mobiles compared with calls originating on fixed lines, recognising the different costs of call origination on mobile networks as opposed to fixed networks. For example, T-Mobile understands that mobile network operators in Germany are currently paid 6.59 �c/min for originating calls to free-phone numbers, in Slovakia the payment is 9.87 �c/min, in the Czech Republic 10.7 �c/min and in Austria it is 12.4 �c/min.”62

4.48 According to T-Mobile, in Germany and Slovakia this origination fee is equivalent to the regulated call termination rate. In Austria and the Czech Republic the origination fee is higher than the regulated call termination rate. In the Netherlands, MNOs receive an origination fee of, on average, approximately �0.25 per minute.63

4.49 We consider that these international benchmarks are of interest and point to one way (i.e higher origination payments) in which the Dispute could be resolved. However we

59 We are currently consulting on whether to take a similar approach in setting the new NTS Retail Uplift charge control, as set out in our consultation ‘Wholesale charges for Number Translation Services and Premium Rate Services published on 28 July 2009: http://www.ofcom.org.uk/consult/condocs/nts/ 60 Repsonse to question 1 of Informal Information Request 61 Response to question 5 of Informal Information Request 62 Paragraph 2.9 of T-Mobile’s submission 63 Response to question 2 of Informal Information Request


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do not consider that they should be determinative of the arrangements in the UK. A range of considerations are relevant to the situation in the UK, such as the Direct, Indirect and Mobile tariff package effects, the implications for competition at both ends of the call, and previous relevant statements by UK regulators (Oftel and Ofcom). To place greater weight on these international benchmarks, we would need to have more detailed information on the underlying reasons for putting these arrangements in place in other countries, and whether there are similar circumstances in the UK, and a more complete picture of the arrangements in other EU countries. We have not obtained such information in the limited time available for the Dispute.64

Discrimination

4.50 One of the core arguments made by the 2G/3G MNOs is that the terms of NCCN 956 are discriminatory, and that it is inherently wrong for BT to price discriminate i.e. set different termination rates to different MNOs (see paragraphs 3.15 onwards).

4.51 Our thoughts on this issue of discrimination are as follows:

4.52 As discussed above, the general model of competition for NTS calls is that such calls are retailed on behalf of the TCP and NTS SP by the OCP, and any excess in the amount billed to the caller over and above the costs of originating and retailing the call is passed to the TCP (who may share the revenue with the NTS SP, reflecting competition with other TCPs).

4.53 In other words, differing termination charges apply according to the retail price. The model of originating calls to 080 numbers adopted by the MNOs through the introduction of retail pricing could therefore be viewed as being similar to the general NTS model.

4.54 In light of this, it appears to us that setting different termination rates to different MNOs is not in principle per se discriminatory. This is because where MNO A charges a higher retail price than MNO B then the former is in a position to pass a greater amount of revenue onto TCPs or NTS SPs.

Relationship between our analytical framework and the six principles of pricing and cost recovery

4.55 In previous disputes, we have often used the six principles of pricing and cost recovery as a basis for an analytical framework.65

4.56 These principles are:

(i) Cost causation: costs should be recovered from those whose actions cause the costs to be incurred;

64 We also rely on the use of international benchmarks with caution, noting the CAT’s comments in Hutchison 3G UK ltd v Ofcom [2008] CAT 11 at paragraph 261 -“We do not find the evidence of H3G’s experience in other jurisdictions, where the mobile number portability arrangements in place are different, at all convincing. First, it is very difficult to draw any conclusions derived from two disparate facts plucked out of the information about a wide range of international markets.” See also paragraph 127 of Vodafone Limited v Ofcom [2008] CAT 22. 65 For example, this was used in the Orange Direction and the recent dispute between C&W, THUS plc, Gamma Telecom Ltd and Opal Telecom Ltd. and BT: http://www.ofcom.org.uk/bulletins/comp_bull_index/comp_bull_ocases/open_all/cw_01040/


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(ii) Cost minimisation: the mechanism for cost recovery should ensure that there are strong incentives to minimise costs;

(iii) Effective competition: the mechanism for cost recovery should not undermine or weaken the pressures for effective competition;

(iv) Reciprocity: where services are provided reciprocally, charges should also be reciprocal;

(v) Distribution of benefits: costs should be recovered from the beneficiaries especially where there are externalities; and

(vi) Practicability: the mechanism for cost recovery needs to be practicable and relatively easy to implement.

4.57 The application of any one of these principles to the relevant circumstances can sometimes point in a different direction to the other principles. But the set of principles provides a framework to identify such trade-offs and to facilitate the use of judgement to strike an appropriate balance in reaching conclusions.

4.58 The six principles of pricing and cost recovery cover the same substantive issues as the analytical framework of Principles 1 to 3 set out above, as follows:

(i) Principle 1 relates to the principles of cost causation and distribution of benefits between callers and 080 SPs (reflecting the externality between the OCP and the 080 SP) and cost minimisation may also be relevant;

(ii) Principle 2 relates to the principles of distribution of benefits and effective competition; and

(iii) Principle 3 relates to the principle of practicability.

4.59 The one principle that is not listed above and is not be relevant to these disputes is reciprocity.66

66 We are not aware that any of the 2G/3G MNOs provide NTS hosting services for 080 SPs, and on that basis we do not consider the principle of reciprocity to be relevant to the Dispute.


39

Section 5

5 Ofcom’s analysis of the first question: 080 termination charges

Introduction

5.1 Using the analytical framework set out in the previous section, we set out below our analysis of whether it is fair and reasonable for BT to impose any termination charge for calls to 080 numbers hosted on its network, which originate on an MNO’s network.

5.2 This assessment does not address the issue of discrimination raised by the 2G/3G MNOs, as we have already considered this in paragraphs 4.50 to 4.54.

Principle 1: the MNO must be able to recover its efficient costs of originating 080 calls

5.3 Principle 1 is that: the 2G/3G MNOs should not be denied the opportunity to recover their efficient costs of originating calls to 080 numbers hosted on BT’s network. In the context of the first question this means:

• It is not fair and reasonable for BT to impose termination charges unless the average retention by each of the 2G/3G MNOs (which is the average retail price minus any termination charge) is greater than the efficient cost of mobile origination.

5.4 If the OCP’s retention is greater than the efficient cost of origination then such a scenario would be more analogous with other NTS number ranges involving revenue share, in which revenue in excess of the costs of origination is passed on to the NTS SP via the TCP. This scenario is therefore a requirement for a termination payment to BT by the 2G/3G MNOs.

5.5 We discuss below at paragraphs 5.78 to 5.93 whether in the circumstances of the Dispute we expect there to be a significant Indirect effect , i.e. whether BT as the TCP is likely to pass on the revenue it gains from termination charges by offering more favourable terms and conditions to 080 SPs. If it did so, there would likely be a positive Indirect effect on consumers, because the more attractive terms available to 080 SPs using 080 numbers might stimulate more widespread use of 080 numbers or enhance the quality of services available on calls to such numbers.

5.6 Moreover if the MNO’s retention is greater than its efficient cost of origination, then the positive Indirect effect could in principle be achieved without a negative Direct effect of higher retail prices for calls to 080 numbers. There might be no need for the MNO to raise its retail call prices for the purpose of cost recovery depending on the level of the termination charge. We discuss below at paragraphs 5.66 to 5.74 the related issue of the MNO’s incentives to raise or lower retail 080 call prices given the structure of termination charges.

5.7 However, to the extent that MNOs are currently recovering more than the minimum costs reasonably apportioned to 080 call origination, a reduction in their retention on 080 calls could potentially lead them to raise the prices of other elements of their


40

prices to mobile consumers. This is the Mobile tariff package effect. We discuss this effect at paragraphs 4.15 and 4.16.

5.8 In order to assess whether Principle 1 is satisfied we need to know the MNO’s retention for 080 calls and its efficient costs of origination.

5.9 In the following paragraphs we first set out the evidence the 2G/3G MNOs and H3G have submitted to us on their efficient costs of 080 call origination, and second our views on their submissions, before going on to explain how we have approached MNOs’ retention in the context of this Dispute.

Efficient cost of origination

Views of the Parties and H3G on the efficient cost of origination of 080 calls

5.10 Vodafone submits that broadly speaking origination costs are similar to those for termination. However, it considers that there are retail costs that need to be recovered in addition to the network cost.67

5.11 Vodafone states that its “wholesale rates” for originating calls to the 080 number ranges (which we would expect to be at least as high as its costs) are typically below [�]ppm. In an internal presentation, O2 stated that its costs for connecting calls to 080 numbers are approximately [�].68

5.12 T-Mobile expresses the view that the network costs of origination are similar to those for termination. However it considers that there are various other elements of cost that are relevant and that overall:

“the costs of originating 080 calls are at least [�] per minute”.

5.13 In substantiating its estimate, T-Mobile lists the following as being relevant:

(i) Current call termination regulated charge – 4.85ppm

(ii) Network externality surcharge – [�]

(iii) Full costs of the 3G licence fee – [�]

(iv) CARS (Customer acquisition, retention and services costs) – [�]

(v) Billing and customer service costs – no quantification

(vi) Interconnection costs – the outpayment to the TCP.69

5.14 However, internal documentation obtained from T-Mobile indicates that at a retail price of 40ppm and a termination rate of [�], a margin of [�] would be generated. Although not explicitly stated in the document, it seems to imply that T-Mobile used a figure for costs of [�] to derive the margin of [�] (since 40ppm minus [�] equals [�]), not a cost of [�].

67 Response to question 1 of Informal Information Request 68 Response to question 1 of Informal Information Request 69 Response to question 1 of Informal Information Request


41

5.15 H3G states that it has not undertaken any specific work to calculate the network cost of originating 080 calls, or the cost of retailing 080 calls. However it considers that the payments that it is prepared to accept from certain 080 SPs in exchange for zero rating calls to 080 numbers is instructive of its broad view of its own combined network and retail costs of origination.

5.16 H3G states that it currently receives [�] for zero-rating calls to one 080 number. [�] H3G considers this to be lower than its combined network and retail costs of origination.

5.17 Orange states that the cost of originating calls on a mobile network including network, admin, licence and non-network costs is approximately [�]. In order to derive this proxy for the originating rate, it has:

(i) taken the network element based on the existing mobile termination rate (subtracting the cost of location updates - which are associated with terminating services - but otherwise ignoring other traffic routing variations);

(ii) added the spectrum allowance associated with the above;

(iii) added the administration allowance associated with the above;

(iv) added a non-network element based on P&L costs to EBITDA (excluding handset, interconnect costs and administration costs (using for the latter item the MTR figure) within OPCS spread over non-terminating traffic.

5.18 The figure provided by Orange includes the retailing element i.e. covering billing, marketing and sales together with an appropriate share of central overhead costs, which it states is approximately [�].70

5.19 BT’s views on the efficient cost of originating 080 calls are set out in section 4. We also BT asked to clarify how it calculated whether the threshold level of 8.49ppm is sufficient to enable an efficient (mobile) call originator to continue to recover its costs of retailing and originating the call (if any) and obtain a margin. BT responded that:

“[t]here was no formal calculation of the threshold, BT assessed that 8.5p allows for some margin for call origination given what BT understands to be the end-user charge and a view of the cost of origination using the Target Average Charge “TAC” as a proxy for origination costs”.71

70 Response to question 1 of the Informal Information Request 71 Response to s191 Information Request


42

Our view on the efficient cost of origination of 080 calls

5.20 From the responses received from the 2G/3G MNOs, there appears to be some evidence for the cost of origination being around 5ppm – see paragraph 5.11.

5.21 We note H3G’s comments but we do not accept we should infer their efficient costs of originating 080 calls from the payments they receive. For example, H3G may have significant bargaining power relative to these SPs. As such we do not rely on its submissions for this aspect of the Dispute.

5.22 Our views on the six elements that T-Mobile considers to be relevant are given below:

5.23 Current call termination regulated charge at 4.85ppm: this is not quite the same as the efficient cost of termination. Since glide paths were used to set the mobile termination charge caps,72 the regulated charges (or Target Average Charges, TACs) in the earlier years of the caps are above the efficient level of termination costs and only equal to (forecast) efficient costs in the final year of the price cap, i.e. 2010/11. The forecast nominal TAC for 2010/11 is 4.3ppm.73 Given that we are expecting to resolve this Dispute in February 2010, and this is sufficiently close to 2010/11 (which starts less than two months later on 1 April 2010), we intend to use 4.3ppm as the relevant figure for the efficient level of termination costs in the Dispute. We agree that the efficient cost of termination provides a suitable estimate of the efficient network costs of origination.

5.24 Network externality surcharge at [��]: we consider that this is irrelevant to origination and was removed by the Competition Commission in calculating the termination rate in its determination of Mobile phone wholesale voice termination charges on 16 January 2009 (the “Competition Commission’s Determination”).74 It should not therefore be included in the efficient cost of origination.

5.25 Full costs of the 3G licence fee at [��]; the efficient cost of termination already includes an appropriate amount for the cost of 3G spectrum, as per the Competition Commission’s Determination.75 As such we consider that any further allowance is irrelevant and so should not be included in the efficient cost of origination.

5.26 CARS at [��] – as noted at paragraph 4.40 the regulated NTS Retail Uplift of 0.1848ppm includes a level of CARS for BT. The basis for its inclusion is because, to retail the calls, it is reasonable for BT to undertake activity to acquire and retain customers. We note, however, the apparent large difference in CARS costs between

72 Charge caps come from the charge control and cap the price an MNO can charge for termination. 73 The nominal TAC for 2009/2010 is specified in the Amendment to SMP Service Conditions (http://www.ofcom.org.uk/consult/condocs/mobile_call_term/statement/CTMAmendement2009final.pdf) and the method for calculating the nominal TAC for 2010/2011 is set out in paragraphs 1.24 – 1.26. The calculation is TAC2010/2011 = TAC2009/2010 * (1+RPI-X), where X is the controlling percentage in nominal terms (specified in the document), and RPI is the actual RPI inflation rate in the year ending December 2009 (for the remainder of the year for which RPI index figures are not yet available we used the Treasury’s consensus inflation forecast, http://www.hm-treasury.gov.uk/d/200910forcomp.pdf). 74 http://www.competition-commission.org.uk/appeals/communications_act/mobile_phones_determination.pdf at paragraph 141 75 Ibid


43

BT and the MNOs. The allowance for CARS costs in BT’s NTS Retail Uplift is included in the 0.1848ppm, whereas T-Mobile claims CARS costs of [�].76

5.27 MNOs choose the level of CARS costs to incur and the pattern of their recovery in the effectively competitive retail mobile market. One approach, therefore, would be to regard all CARS costs as in principle relevant to 080 calls. However, given the apparently very large disparity between MNOs’ and BT’s CARS costs, before accepting such an approach, we consider that a full explanation and detailed justification for the efficient level of MNOs’ CARS costs would be required.

5.28 Another approach would be to limit CARS costs for 080 calls from mobile to the same ppm allowance as for BT’s NTS Retail Uplift. Under this approach, MNOs’ CARS costs in excess of the ppm allowance for such costs in BT’s retail uplift would not fall within the minimum costs that need to be recovered from 080 calls prices, but might be recovered by MNOs from other mobile services. The following arguments might support this latter approach:

(i) special considerations apply to 080 calls because of the interests of 080 SPs and our policy view of 080 numbers – see paragraphs 2.29 to 2.37;

(ii) such a large excess of mobile origination costs over those on fixed networks

might indicate that inclusion of all of the MNOs’ CARS costs would not represent an efficient cost;

(iii) the amount of CARS costs that MNOs seek to recover from 080 calls may be

higher than 080 SPs are willing to pay. Paragraph 6.80 sets out a discussion about 080 SPs willingness to pay for zero-rated 080 calls. As set out,there is limited evidence that SPs are willing to contribute to the additional costs for originating 080 calls on mobile networks; and

(iv) Ofcom’s position, as set out in our March 2007 Statement on Mobile Call

Termination, is that it is efficient to recover CARS costs from subscriber charges.77

5.29 In light of the considerations set out above, we are minded to favour deriving the minimum efficient costs of mobile origination for the purpose of the Dispute using the second approach (in paragraph 5.28, perhaps with a further adjustment for the lower volume of call minutes per subscriber on mobile networks. Since the ppm allowance for CARS costs in NTS Retail Uplift is a proportion of the 0.1848ppm and the efficient network costs are 4.3ppm, we consider it unlikely that the total, even including this

76 We recognise that MNOs’ call volumes per subscriber are likely to be lower than BT’s. This may suggest that BT experiences greater economies of scope enabling it to recover costs from a wider set of services compared to the MNOs. This may therefore imply that the MNOs’ cost of origination of 080 calls should attract a higher share of the retail costs than BT’s 080 NTS Retail Uplift. However, we consider it unlikely that the difference in call volumes between MNOs and BT is sufficient to explain the difference between 0.1848ppm and [�]. 77 “Ofcom disagrees with H3G’s view that there is no logical definition of a subscription service... CARS are driven by the number of subscribers and can be efficiently recovered by charging at the point of use for the service that causes them to be incurred. Therefore, since MNOs are able to charge customers for subscription it is efficient for MNOs to seek to recover subscriber costs through a specific charge. MNOs may choose to adopt a different pricing approach, e.g. recovering some of the CARS through charges for calls, however, this does not mean that there is no subscription service.

�

(Paragraph A15.41 of Mobile Call Termination, Statement, March 2007) http://www.ofcom.org.uk/consult/condocs/mobile_call_term/statement/statement.pdf


44

adjustment, exceeds 5ppm. However, we would welcome further comments on this issue.

5.30 Billing and customer service costs; no quantification. We consider that these costs are relevant given their inclusion in the NTS Retail Uplift. BT has suggested that the current NTS Retail Uplift of about 0.1848ppm is a relevant benchmark for the retail cost component in the efficient cost of mobile origination. This 0.1848ppm figure includes an allowance for billing and customer service costs.

5.31 Interconnection costs; the outpayment to the TCP. This is taken into account by examining the MNO’s retention i.e. the retail call price less the outpayment to the TCP.

5.32 This appears to be consistent with other evidence provided by the Parties, as set out in particular at paragraph 5.11 above.

5.33 We understand that Orange’s steps i) to iii) involve starting from its TAC in 2009/10 and subtracting the (small) cost of location updates to yield a figure for the network cost of 4.8ppm. We agree that “location updates” are a cost related to termination but not to origination78. We further note that this estimate of the network costs is broadly consistent with other evidence provided by the Parties, as set out above. However, as for T-Mobile, we consider that it would be more accurate to start from the TAC in 2010/11 of 4.3ppm.

5.34 As regards Orange’s estimate of retail costs, we consider that the same points apply as set out above in relation to T-Mobile’s estimate of CARS cost.

5.35 Therefore in light of the evidence available to us, including the regulated average mobile termination charge of 2G/3G MNOs in 2010/11, the NTS Retail Uplift benchmark discussed above, and the information received from the Parties and H3G, we are minded to consider that the efficient cost of originating 080 calls is unlikely to exceed 5ppm.

Derivation of MNOs average retail 080 call prices

5.36 To establish whether or not Principle 1 is met in relation to the first question in scope, we need to compare MNOs’ efficient costs of 080 call origination with their retention for 080 calls, which is their average retail call price minus any termination charge.

5.37 The Dispute was prompted by the termination charges notified in NCCN 956 which, as set out in paragraph 1.2, depend on the OCP’s 080 retail call price.

5.38 BT suggested to us when we met them that payments from MNOs under NCCN 956 may be based on the MNOs average 080 retail call price. We asked the MNOs to provide information on their average retail call prices.

Views of Parties and H3G on the derivation of MNOs average retail 080 call prices

5.39 Vodafone, in its response to our informal information request, argues that at no point has BT proposed to Vodafone that its termination charge might be based on a blended average of Vodafone’s retail prices offered across its customer base for calls to 080 number ranges. Rather, BT’s approach has been to use the published

78 See footnote 253 from Mobile Call Termination Statement, March 2007 http://www.ofcom.org.uk/consult/condocs/mobile_call_term/statement/statement.pdf


45

Vodafone retail price for one particular consumer tariff as the deemed retail price for all 080 calls, thus failing to take into account the substantial variations in actual prices on different call plans offered to different customers, and zero rating in special cases.

5.40 According to Vodafone, to arrive at any sort of weighted average reflecting what customers actually pay, it is not appropriate simply to aggregate the sum of individual price points and divide by the number of price points, since this makes no allowance for the proportion of customers facing each price and the volume of call minutes actually made. Calling patterns and volumes may vary considerably between different customer groups.

5.41 For this reason, Vodafone believes that the only way to be able to establish the validity of BT’s wholesale charges would be for it to undertake work internally to extract the necessary actual 080 data to determine the correct level of the BT wholesale charge. However, it states that its billing systems have not been previously set up to differentiate traffic destined for BT’s 080 number ranges and the 080 number ranges of other operators. Moreover, even if it were possible to extract actual usage data, it argues that this is commercially sensitive information. It further adds that it believes that the same considerations that apply to Vodafone would be equally relevant to the MVNOs using Vodafone’s network.

5.42 While Vodafone’s response to the Informal Information Request highlights the difficulties of estimating a blended average retail charge for calls to 080 numbers, we note that in its response to the s191 Information Request Vodafone states that it charges a [�] will apply to all calls to number ranges with the prefixes 080 for its small and medium sized enterprises. According to Vodafone, pricing for larger corporate customers is determined on a more individual and bespoke basis so depending on the outcome of the contractual negotiation and the preference of the corporate customer, tariffs for calls to 080 number ranges can vary from a [�] (peak) rate.

5.43 T-Mobile in its response to Ofcom argues that estimating a blended average actual retail charge for calls to 080 numbers would be a difficult and complicated task and would need to be based on a number of assumptions, which it believes make it an impracticable solution. It states that it expects that some of its wholesale partners would be unable accurately to calculate or estimate their own ‘average retail rate’ with a sufficient degree of precision. If this is the case, it reasons that as the numbers they provide would need to be factored into an overall average network calculation, any material errors could skew the final average rate and result in everyone paying the wrong rate. It further adds that a concern with having to calculate a blended rate is that it is highly likely to lead to a situation in which its wholesale partners would inadvertently be providing it with information about their own retail charges in advance of announcing price changes, which could be contrary to competition law.

5.44 O2 in its response also highlights the difficulties and states that the problem it has in deriving an average retail charge for calls to 080 numbers, is that it has [�] and each one has to be interrogated to determine the volume of calls, minutes and revenues. It says though that it is currently in the process of gathering the information and seeking to verify it, though it added that it expected that Mobile Virtual Network Operators (“MVNOs”) would face similar problems to O2.

5.45 H3G similarly argues that it is not possible to establish an accurate retail price for the following reasons:

(i) [�]


46

(ii) [�]

(iii) [�]

(iv) H3G is not privy to information about the retail revenues generated from calls made by the customers of their MVNO partners.

(v) H3G is not privy to information about the retail revenues generated from calls made by the customers of their international roaming partners calling Freefone services whilst roaming on H3G’s network.

5.46 It further adds that in relation to categories (4) and (5) it follows a strict policy against entering into any discussions with its MVNOs regarding their retail charges.

5.47 Finally, Orange states in its response to the s191 Information Request that it is:

“in the process of arriving at an agreement with BT as to how it will determine the charge applicable to its BT 080 terminated calls. That proposed methodology is a simple average of retail revenues divided by minutes after excluding zero rated calls”.

5.48 As has been noted in the submissions of the 2G/3G MNOs and the responses received summarised above – most of the 2G/3G MNOs and H3G have argued that calculating an average 080 retail call price is complex and as such have declined to provide BT or us with an average retail call price figure.

5.49 To estimate the average 080 retail call price, BT said that it has accessed relevant consumer pricing information from published price lists on MNO’s websites. Based on the retail charge for calls to BT’s 080 numbers, BT placed the OCP on the relevant termination charge price point on the BT 080 termination charging ladder. BT’s estimates of the 080 call price of the 2G/3G MNOs are as follows (including VAT):

(i) O2: 20ppm

(ii) Orange: 15ppm

(iii) T-Mobile: 27.5ppm – 40ppm79

(iv) Vodafone: 25ppm

5.50 BT noted though that:

“[r]ealising that CPs may apply some discount or rationale to their call charges BT was willing to accept a signed affirmation from a Chief Finance Officer confirming the CP’s retail charge for 080 calls. This option currently has not been taken up”.

5.51 An internal presentation by O2 (dating from November 2009) sets out a table of how much it costs to call 0800 from MNOs. This table (Table 1) is reproduced below.

Table 1: 080 retail call prices of MNOs

79 BT increased T-Mobile’s termination rate to 13ppm because in its own words “T-Mobile’s own web site states that its retail charges for calls to freefone number ranges are up to 40ppm”. Given that prices may well be below 40ppm, we have used a range of 27.5ppm as per the highest tier on NCCN 956 and 40ppm.


47

O2 Vodafone Orange T-Mobile H3G

Pay Monthly 20p min 20p min 15p min 10p – 40p min 15p min Pay & Go 15p min 25p min 25p min 10p – 40p min 15p min Source: Internal O2 presentation

Our view on MNOs average retail 080 call prices

5.52 In light of the submissions received from the parties – see above – we do not have the necessary evidence to confirm the 2G/3G MNOs’ average call retail prices. Our understanding is that the prices derived by BT (and the internal presentation by O2) relate to the 2G/3G MNOs’ headline prices on a specific tariff package or a range of packages. This does not take account of the full range of tariff packages, nor the potential for discounts below the headline rates, as BT itself recognises.

Our view on the roles of the Parties in establishing average retail 080 call prices 5.53 We have considered the roles of the Parties in deriving the average 080 retail call

prices of each 2G/3G MNO. The Parties would then be in a position to consider whether or not Principle 1 set out above is satisfied, i.e. whether the average retention is greater than the efficient cost of mobile origination.

5.54 The MNOs identify various complications in estimating an average retail 080 call price. But we are minded to consider that each MNO should be in a position to estimate its own average 080 retail call price to an acceptable degree of accuracy and subject to a reasonable verification procedure. We recognise that there may be a number of practical issues for the MNOs in doing so, as reflected in the responses from the 2G/3G MNOs and H3G. But, at root, we consider that this approach is reasonable as it involves each MNO estimating the average of the prices that it chooses to charge to its own customers. We can see that in some circumstances a precise calculation of the average 080 call price might be difficult, but we do not consider that to be the requirement, because an estimate using reasonable assumptions is likely to be fit for purpose. We consider that the degree of accuracy required and the nature of any verification procedure are matters for negotiation between the Parties.

5.55 In the event that the MNO is unable to provide or reasonably verify its average 080 retail call price, then we are minded to take the view that BT is entitled to estimate the MNOs’ average 080 retail call price based on information available to it, such as the retail tariffs displayed on that MNOs’ website. But, in doing so, BT should take into account reasonable and verified comments from the MNO about such a calculation (such as the relative weights to be attached to different tariffs). Since the MNO may change its retail prices over time, the Parties should also put in place a process to allow for changes in the average 080 retail call price over time.

5.56 As regards MVNOs or resellers, we are minded to consider that the MNO should liaise with the MVNO or reseller with which it has a contractual relationship, to allow that MVNO or reseller to provide an estimate of its average 080 retail call price, along with suitable verification. We are minded to consider that the MVNO should be in a position to estimate its own average 080 retail call price to an acceptable degree of accuracy and subject to a reasonable verification procedure, as for the MNOs as set out above (and ensuring compliance with competition law). In the event that the MVNO is unable to provide or reasonably verify this figure, then we are minded to take the view that the MNO is entitled to estimate the applicable average 080 retail


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call price as per the analysis that BT is entitled to undertake described in paragraph 5.55.

5.57 We note Vodafone’s submission that BT’s approach has been to use Vodafone’s published retail price for one particular consumer tariff as the deemed retail price for all 080 calls. We are unclear from BT’s submission whether this is correct. But if it is accurate, then this approach is likely to be inadequate (even where the MNO has failed to provide a verified average price). However, we acknowledge there may be limits on BT’s ability to compute an average, reflecting the limited information that is available to it (such as the proportion of calls made on each of the MNO’s tariffs). We also note Vodafone’s submission that BT has never suggested that the termination rate might be based on a blended average of Vodafone’s retail 080 call prices across its customer base. BT’s response to the s191 Information Request suggests that it is willing to accept such an average subject to suitable verification. There seems to be a contradiction between the submissions of Vodafone and BT, and we would expect commercial negotiation to take place on this issue before termination charges would be considered fair and reasonable.

5.58 The discussion above has assumed that the appropriate approach is to derive a single average retail 080 call price for each 2G/3G MNO. But, since each 2G/3G MNO may set a range of different prices for calls to 080 numbers, another approach in theory would be for the termination rate to vary depending on the specific retail price applicable to each call. We are aware that there is a trade-off between, on the one hand, the potential benefits of termination charges varying if retail prices vary and, on the other hand, questions of practicability which may involve a degree of averaging. As a result, we are minded not to be prescriptive in the approach that should be adopted and consider that the Parties should be able to find a suitable set of arrangements (noting the requirements of competition law). We comment further below on the arrangements for zero-rated calls.

Consideration of headline rates

5.59 Although we have been unable to determine the 2G/3G MNOs average retail prices, their published retail prices are relevant. Table 2 shows BT’s view of the average 080 call prices of the Parties, its proposed termination charge for each MNO given that estimated average price and the resulting retention.

Table 2: BT’s estimates of the average 080 call prices of the Parties, its proposed termination charge under NCCN956 and MNOs’ retention

Pence per minute BT’s estimate of MNO’s average 080 call price (excluding

VAT)

BT’s termination charge under

NCCN956

Implied retention

O2 17.0 7.0 10.0

Orange 12.8 4.5 8.3

H3G 12.8 4.5 8.3

T-Mobile 23.480 – 34.0 13.0 10.4 – 21.0

80 See footnote 79


49

Vodafone 21.3 10.0 11.3

Source: BT submissions and Ofcom analysis

5.60 As set out above, internal documentation from O2 sets out a table of how much it costs to call 0800 from each of the MNOs (which are similar to BT’s figures). It is worth noting that BT’s view of the average 080 calls prices of the Parties does not differ substantially from the figures cited by O2. We recognise though that these are likely to just be representative headline rates81 for the MNOs and not the average retail prices. Nonetheless, it is useful to consider based on these numbers and BT’s proposed termination charge for each MNO (set out above) the implied MNO retention.

Table 3: O2’s estimates of the average 080 call prices of the Parties, its proposed termination charge under NCCN956 and MNOs’ retention Pence per minute

O2 Report of MNO's 080

call price - Pay Monthly

(excluding VAT)

O2 Report of MNO's 080

call price - Pay & Go

(excluding VAT)

BT’s termination

charge under NCCN956

Implied retention (Pay

Monthly)

Implied retention (Pay

& Go)

O2 17.0 12.8 7.0 10.0 5.8

Orange 12.8 21.3 4.5 8.3 16.8

H3G 12.8 12.8 4.5 8.3 8.3

T-Mobile 8.5 - 34.0 8.5 - 34.0 13.0 -4.5 - 21.0 -4.5 - 21.0

Vodafone 17.0 21.3 10.0 7.00 11.3

Source: O2 submissions and Ofcom analysis 5.61 We set out above that we are minded to consider that the efficient cost of mobile

origination for the purpose of the Dispute is unlikely to be above 5ppm. As can be observed from the tables above, the headline rates seem to imply a retention that is above this level (except for some of T-Mobile’s tariffs). We recognise that these implied retention estimates are not based on the average 080 call price. Nevertheless, this comparison implies that the MNOs’ average call prices would generally need to be significantly lower than these headline rates to reduce the implied retention below our provisional view of the efficient costs of origination.

Our view on Principle 1

5.62 In light of the submissions received from the Parties, we do not have the necessary data to form a clear view on the MNOs’ average retail prices. We are therefore unable to conclude whether Principle 1 is currently met by any termination charges, such as BT’s NCCN 956, in the context of the Dispute. We note though the implied retention estimates from the headline rates, which suggests that any average call price that was calculated by the MNOs would need to be significantly lower than these headline rates to reduce the implied retention below our current provisional

81 By ‘headline rates’ we mean the 080 tariff that is publicly available for the MNO in question.


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view of efficient costs of origination.

5.63 However, we have set out above our provisional conclusions on some of the key parameters to assess whether Principle 1 is satisfied:

(i) we are minded to consider that the efficient cost of origination of 080 calls on a mobile network for the purpose of the Dispute is unlikely to be above 5ppm.

(ii) as regards the roles of the Parties in deriving the average retail 080 call prices of the 2G/3G MNOs, in the first instance it is for the MNO to:

a) provide an estimate of its own average retail 080 call price, subject to a reasonable verification procedure; and

b) liaise with the MVNOs and resellers with which it has a contractual relationship to do likewise, subject to the requirement to comply with competition law.

(iii) if it is unable to, we are minded to consider that BT is entitled to estimate the applicable average retail call prices using publicly available information, but taking account of reasonable and verified comments made by the MNO and/or MVNOs.

(iv) details of the arrangements, such as the degree of accuracy of any estimates, verification procedures or involvement of neutral third parties, should be the subject of negotiation between the Parties.

Application of Principle 2

5.64 Principle 2 is: The termination charge should:

(i) provide benefits to consumers; and

(ii) avoid a material distortion of competition either among OCPs or among TCPs.

Effect on consumers 5.65 Consumer benefits may be Direct (via lower prices for 080 calls) or Indirect (via lower

hosting charges for 080 SPs, which could expand the provision of 080 services by making them more financially attractive).

Direct consumer benefits

Views of Parties and Interested Parties on the Direct consumer benefits

5.66 In its response to our s191 Information Request, T-Mobile noted that:

“under the wholesale charging structure in NCCN 956, a call which is charged at 22ppm at the retail level would incur a wholesale charge of 7ppm from BT (a difference of 15ppm) whereas a call which is charged at 23ppm at the retail level would incur a wholesale charge of 10ppm (a difference of only 13ppm). It would be more profitable therefore, for the originating network operator to ensure that its retail


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charges were aligned to the top end of each BT’s wholesale charging bands rather than the bottom of the next charging band.”

5.67 In response to our Informal Information Request, Vodafone also raised this point and said that the price bands in BT’s charging structure have the potential to act as a focal point, encouraging OCPs to converge on particular retail pricing points e.g. at the top of a particular price band, which will likely dampen retail price competition.

Our view on direct consumer benefits

5.68 The impact on 080 retail call prices depends on the structure of the termination charge (and not just the level of the charge). The OCP is likely to be influenced by two main considerations in deciding whether to change its retail call price: (i) the retention it would receive at different call prices, and (ii) the effect of the call price on the volume of calls made by its customers.

5.69 As regards the first consideration, we note that the termination charges in NCCN 956 increase with higher retail call prices by MNOs, but they increase less quickly than the MNO’s retail call prices. Therefore, the MNO’s retention increases as its retail call price rises. This is likely to provide the MNO with an incentive to increase its 080 retail call price, in order to obtain a larger retention.

5.70 Figure 7 below shows the OCP’s retention from a 080 call in ppm terms (i.e. the retail price minus the termination rate) under NCCN 956 and the OCP’s retail price (in ppm terms). The horizontal axis shows the OCP’s retail price of 080 calls and the vertical axis shows the ppm amount left over for the OCP once it has paid the TCP.

5.71 As can be observed from Figure 7, if an OCP’s price of call origination increases from 17.45ppm to 17.50ppm then the termination rate jumps from 4.5ppm to 7ppm. The amount remaining for the OCP thus falls from 12.95ppm to 10.50ppm. However as the retail price increases, the MNO retains the full amount of that additional revenue (i.e. the whole of a further 1ppm price rise is retained by the OCP once the top of BT’s tiered band is reached). So, while there are exceptions in the region of the thresholds between different levels of BT’s termination charge, there is a general tendency for the OCP’s retention to be larger, the higher its retail price. This is consistent with T-Mobile’s view.


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Figure 4: OCP retention under NCCN 956

5.72 The second consideration is that a higher call price might deter some calls from being made. The size of this effect depends on the sensitivity of mobile customers to the level of the call price. We have not received direct evidence on this point, but, in explaining the rationale for their choice of 080 call prices, the 2G/3G MNOs and H3G have generally suggested that other factors are more important to their customers. Paragraphs 6.24 to 6.31 provide a discussion of how the 2G/3G MNOs and H3G currently structure their prices. As set out in those paragraphs, T-Mobile states that its retail charges for 080 numbers form part of its overall customer proposition and so it places the most value on those aspects of the package that matter most to its customers i.e. low monthly recurring charges and increasing volumes of monthly inclusive call minutes. This view is echoed by O2 and Vodafone while H3G states that since its launch in 2003, it has not revised the tariffs for calling 080 numbers. This might suggest that the disincentive to raise 080 call prices from this second consideration is relatively weak.

5.73 In essence therefore, we consider that the current NCCN 956 structure of termination charges is likely to provide an incentive for MNOs to increase the 080 call price, because the incentive to increase retention is likely to outweigh the disincentive of reducing the volume of calls. Our provisional conclusion is that there is likely to be a negative Direct effect on consumers arising from NCCN 956.

5.74 We note though that a structure of termination charges different from NCCN 956 might have a positive Direct effect on consumers. For example, if the termination charge increased at the same rate as the retail price, the first consideration would not create an incentive for the MNO to increase retail prices, because that retail price increase would not increase the MNO’s retention. In such circumstances, any

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material sensitivity of mobile customers to the 080 call price would imply an overall incentive on the MNO to reduce the retail call price. Such a positive Direct effect might however need to be weighed against the potential for other prices for mobile services to increase via the Mobile tariff package effect.

Incentives to zero-rate calls to 080 numbers

5.75 We set out in Section 2 that zero-rated calls are important, especially for calls to charities and valued public services. Therefore, we give special consideration to the effect of NCCN 956 or any termination charge on the MNOs’ incentives whether or not to zero-rate calls. Presently it is unclear:

(i) whether BT will levy a termination charge on all 080 calls including zero rated calls; or

(ii) whether zero rated calls are excluded from the calculation of the average retail price.

5.76 As noted in paragraph 5.57, there are a number of approaches that could be used to set termination charges and to estimate the average retail 080 call price and we are not minded to be prescriptive in the approach that should be adopted. We consider that Parties should be able to find a suitable set of arrangements.

5.77 However, it is our view that, to be fair and reasonable, the approach should avoid a disincentive effect on MNOs to zero-rate calls.

Indirect effect

5.78 The impact on 080 SPs and the provision of 080 services depends on the incentives on BT to pass on higher termination charges to 080 SPs in the form of lower hosting charges and/or higher quality hosting services.

5.79 As noted in section 2, we believe that the NCCN 500 decision is relevant in the Dispute. It found that for NTS, other TCPs were not able to match BT’s higher termination charge in practice and so they could not fund a strategy of offering higher outpayments in a competitive market. This may suggest therefore that there is unlikely to be competitive pressure for significant pass-on of termination revenues to 080 SPs by BT.

Views of Parties and Interested Parties on Indirect consumer benefits

5.80 When asked to explain how its termination charges could create greater consumer benefits, BT responded that:

“One of BT’s concerns is that by charging excessively for 0800 calls, these CPs are discouraging consumers from using these services, to the detriment of Service Providers. BT would welcome a move from the CPs to lower their prices so that consumers would benefit and NCCN 956 termination charges would not apply. If the CPs continue to make high charges then one effect of BT’s pricing proposal would be to gain a fairer share of the overall revenue, which could be used to offer more favourable terms to the SPs.”82

82 Response to question 3 of Informal Information Request


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5.81 However, when questioned as to whether BT had amended its contracts with 080 SPs for the provision of 080 hosting since the introduction of NCCN 956, it responded that it has not amended any existing contracts with 080 SPs since the introduction of NCCN 95683.

5.82 We also invited submissions from BT, C&W (a competing TCP), 2G/3G MNOs and H3G on the ability of other TCPs to match BT’s charges to see if there had been any material changes since the NCCN 500 decision.

5.83 BT responded that CPs who wish to follow BT’s pricing for this type of traffic have “had issues with” billing and identification of traffic. It is currently working through a formal Statement of Requirements (“SOR”) from one TCP, [�].

5.84 In relation to a question on the SOR, it said in its response to the s191 Information Request that:

[�]

5.85 BT additionally stated that another TCP, [�], had contacted it and indicated that they would be submitting a similar SOR but as yet this has not been received.

5.86 C&W said that one reason for not being able to match BT’s termination charge structure was that no agreement exists with BT for BT to implement the desired structure on its transit price list. It noted though that one IVR is progressing a SOR to this effect and the matter has been discussed at the NTS Focus Group.84 [�].

5.87 When questioned as to whether the 2G/3G MNOs or H3G had been informed by any TCPs other than BT that they would start charging for termination of 080 calls, all the 2G/3G MNOs and H3G responded that they had not paid termination charges to any other TCP and they also said that no TCP has as yet informed them that they would adopt this policy. T-Mobile however noted that it is aware that [�] has asked BT to carry out some billing development work so that they can introduce equivalent charges for calls that are transited via BT. Based on this, T-Mobile said that if BT is allowed to set termination charges, it expects other TCPs will introduce similar charging structures in the future.

Our view on Indirect consumer benefits

5.88 Given the findings in the NCCN 500 decision and the submissions received on this issue, our understanding is that the barriers to matching NCCN 956 by other TCPs are: the lack of direct interconnection, BT’s current transit billing system (i.e. its current inability to identify the originating operator) and, in some cases, the TCP’s billing system, which may need to be upgraded for it to be able to match NCCN 956.

5.89 Most TCPs do not have direct interconnection with the MNOs, because the routes are generally not commercially viable. BT’s transit billing system plays a material role, because the OCP (as well as the TCP) could always choose to transit traffic via BT, in which case the TCP would currently be unable to distinguish the OCP. The

83 H3G stated that BT has increased it charges to SPs from 4ppm to 4.98ppm since NCCN 956. However, BT has said that it has not changed its terms with SPs for 080 - 4.98ppm is the BT base rate so it may be that an out of contract customer has been re-priced to base rate but this would have nothing to do with NCCN956. 84 An-industry-led forum to discuss and attempt to resolve issues that arise in relation to NTS matters


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OCP has an incentive to do this whenever it could achieve lower termination charges (net of any transit charges)85.

5.90 In light of the above we consider that, to the extent that BT’s termination charge increases are not matched by other TCPs, BT may not pass on higher termination charges to 080 SPs in the form of lower termination/hosting charges and/or higher quality hosting services. BT has suggested that its higher termination charges under NCCN 956 “could be used to offer more favourable terms to the SPs” (emphasis added). However, we have not received any evidence that the higher termination charges either are or will be used in this way.

5.91 From the responses received, it appears that, although there may be future developments, currently BT’s termination charges cannot be matched by other TCPs. This may suggest therefore that there is unlikely to be competitive pressure for significant pass-on of termination revenues to 080 SPs by BT. Based on the evidence currently available, we provisionally conclude that NCCN 956 may not have a significant positive Indirect effect on consumer benefits.

5.92 We note that in different circumstances termination charges might have a positive Indirect effect. For example, if other TCPs were able to set comparable termination charges to BT, there is likely to be competitive pressure to pass on at least a proportion of such charges to 080 SPs in the form of more favourable terms and conditions. This could be to the ultimate benefit of consumers, if it stimulated greater availability of 080 numbers and/or a higher quality of services offered on such calls.

Our view on consumer benefits

5.93 Taking into account our views on the Direct and Indirect consumer effects above, we consider that NCCN 956 is unlikely to benefit consumers. This is because NCCN 956 is likely to have a negative Direct effect in providing incentives for MNOs to raise their 080 call prices and is unlikely to provide an offsetting positive Indirect effect, as there seems to be no competitive pressure for BT to pass on the higher termination charges into more favourable terms and conditions for 080 SPs. However, considering termination charges in general, if they had a different structure that provided an incentive for OCPs to set lower retail call prices, and if other TCPs were able to match BT’s termination charges, there would be different circumstances and so it could potentially justify a departure from this position.

Effect on competition

5.94 The Parties have made submissions on market definition and market power. We do not consider that it is appropriate for us to conduct a detailed market analysis to resolve this Dispute. However we have considered the NNCN 500 decision and whether there have been material changes since.

85 See paragraphs 5.60 to 5.64 of the NCCN 500 Decision


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Competition among TCPs

Views of Parties and Interested Parties on competition among TCPs

5.95 Paragraphs 5.80 to 5.87 set out the views of BT, the 2G/3G MNOs and H3G on whether other TCPs can match BT’s termination charges.

Our view on competition among TCPs

5.96 In a normal competitive market among TCPs, if BT profitably increased its gross (and net) termination charge86, this would attract entry (or expansion) by other TCPs who could match the increase and accept a lower hosting payment from 080 SPs. If this were to occur, 080 SPs could then switch to the new entrant in response. This mechanism would thus provide competitive pressure for TCPs to share higher gross termination charges with 080 SPs, and to return the net termination charge to the competitive level.

5.97 However, competing TCPs currently appear unable to match BT’s higher gross termination charge in practice, and so they may be unable to fund a strategy of offering higher discounts to 080 SPs as would arise in a competitive market. Therefore competing TCPs may not be able to attract 080 SPs/customers away from BT without incurring losses.

5.98 In light of the above, although it is not clear why BT would pass on higher termination charges to 080 SPs, if it did so in whole or in part, in circumstances in which other TCPs were unable to match BT’s termination charge increases, there would be a risk that competition would be distorted among TCPs.

5.99 In the NCCN 500 decision we considered whether BT had abused its dominant position by imposing a margin squeeze, such that equally efficient TCPs were unable profitably to match BT’s prices (and other terms and conditions) offered to SPs. We did not find an infringement of the Competition rules in that case. In the context of this Dispute BT has not yet amended its contracts with 080 SPs and our current understanding is that there has so far been no pass-on by BT of higher termination charges into more favourable terms and conditions for 080 SPs. If this is the case, we have no reason to suspect,therefore, that currently NCCN 956 may lead to a margin squeeze against other TCPs.

5.100 But if BT were to pass on a proportion of its higher termination charges under NCCN 956, there is a risk that a margin squeeze could arise. In the context of this dispute, we have not identified the extent of pass-through at which a margin squeeze might arise, because this would require a detailed analysis of revenues and costs that has not been appropriate in the context of the Dispute.

5.101 Insofar as significant pass-on of higher termination charges by BT occurs when supplying hosting services to 080 SPs (i.e. in the alternative to paragraph 5.90 above), there is a risk that competition between TCPs could be distorted.

86 The gross termination rate is the per-minute revenue paid by the TCP to the SP. The TCP then retains the net termination charge which is the gross termination charge less any revenue share paid to the service provider (or plus any payment received from the SP, in which case the net charge would exceed the gross charge).


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5.102 As above though, if there were a change in circumstances, e.g. such that other TCPs were able to match BT’s higher termination charges, then the potential distortive effect may no longer arise.

Competition among OCPs

Views of Parties and Interested Parties on competition among OCPs

5.103 Vodafone argues that BT’s termination charges in NCCN 956 would lead to a distortion of competition between OCPs in the retail mobile market, given BT’s vertical integration into that market.

5.104 T-Mobile also argues the following (and Vodafone makes a similar argument):

“By imposing variable charges for call termination which cannot be justified by reference to the underlying costs of providing the service, BT is abusing its dominant position by discriminating between customers (i.e. different customers are charged different amounts for an equivalent service)…..Insofar as competition between mobile operators is concerned, the competitive distortion and disadvantage arises directly out of the fact that different operators would be being charged different amounts for an identical service.”87

5.105 Vodafone additionally points out that it may face greater financial exposure to BT than its competitors because of the mix of its customer base, the tariffs that they have been offered and their usage patterns. It also raises the possibility that BT’s tiered structure of price bands could “act as a focal point for OCPs to converge on the same retail price and so dampen retail competition.”

Our view on competition among OCPs

5.106 As regards Vodafone’s argument about BT’s vertical integration, we note that 080 calls represent a relatively small proportion of mobile services. Furthermore, BT’s share in the retail mobile market (subscriptions as a proportion of all mobile subscriptions) is approximately 0.5%88 compared to a share of 23% for Vodafone89, for example. This suggests that BT’s position in 080 termination and as a mobile service provider is not sufficiently large to have the ability to distort competition materially in the manner alleged by Vodafone.

5.107 As regards T-Mobile’s argument about discrimination, we explain in section 4 above that it appears to us that setting different termination rates to different MNOs for 080 calls is not, in principle, per se discriminatory.

5.108 Vodafone argued that a differential financial impact on it (or even the potential for such a differential impact) compared to other MNOs would constitute a distortion of competition. However, given that all MNOs face the same pricing schedule, we consider that any differential financial impact is a normal result of competition and the firm’s own commercial decisions, and not a distortion of competition itself.

5.109 We note the possibility that BT’s tiered structure of price bands in NCCN 956 could, in Vodafone’s words, “act as a focal point for OCPs to converge on the same retail

87 Response to question 6 of Informal Information Request 88 Internal Ofcom research 89 Ofcom Communications Market Report 2009. http://www.ofcom.org.uk/research/cm/cmr09/CMRMain_4.pdf


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price.” However, we do not have evidence to suggest that this has been the effect of NCCN 956. As regards termination charges in general, the potential for the effect is very dependent on the number and exact structure of bands. The nature or materiality of the effect on competition among OCPs is thus unclear especially given the discussion in paragraphs 5.68 to 5.74.

5.110 In these circumstances, taking into account the available evidence, we do not consider it is likely that NCCN 956 or termination charges in general would lead to a material distortion of competition among OCPs in mobile services.


5.111 Considering termination charges in general, if there were changes in the structure of termination charges compared to NCCN 956, and if other TCPs were able to match BT’s termination charges, then there would likely be different circumstances which could impact our analysis.

5.112 However given the structure of the NCCN 956 and our understanding that other TCPs are unable to match BT’s termination rates, in accordance with our statutory duties we provisionally conclude that NCCN 956 is not in the interests of consumers and competition. This is because there is likely to be a negative Direct effect of an incentive on MNOs to raise 080 call prices, without competitive pressure for an offsetting positive Indirect effect of pass on of higher termination charges to more favourable terms and conditions for 080 SPs. In the alternative, i.e. if there is pass on to 080 SPs by BT, there is a risk of a distortion of competition among TCPs.


5.113 Principle 3 is: The implementation of BT’s charging structure should be reasonably practicable to implement.

The views of the Parties and H3G on practicability issues – deriving average retail call prices

5.114 As has been outlined in paragraphs 5.39 to 5.51, the 2G/3G MNOs and H3G have expressed a view that it is very complex to calculate an average 080 call price and some MNOs have raised the issue that the process of deriving an average 080 call price, including MVNOs as well as itself, could lead to an inadvertent breach of competition law.

Our view on practicability issues - deriving average retail call prices

5.115 We set out our analysis and provisional conclusions on these issues of practicability in paragraphs 5.52 to 5.63 above.

Practicability issues – MNO pass-on to MVNO

5.116 In assessing the practicality of implementing NCCN 956, we asked 2G/3G MNOs and H3G to provide us with details of the impact of BT’s charging on their commercial relationships with wholesale customers/MVNOs. In particular, we asked whether changes in the termination rate charged for 080 calls would affect the payments that MVNOs make to them.

5.117 [�]

5.118 [�]


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5.119 [�]

Our view on practicability issues - MNO pass-on to MVNO

5.120 In light of the submissions provided to us, it appears that the ability to pass on termination rate increases differs amongst MNOs. While we recognise that this could be an issue for implementation, this falls to negotiation of commercial contracts, rather than regulatory requirements. If we were to conclude that NCCN 956 was otherwise fair and reasonable, then we are minded to consider that these contractual differences would be unlikely to be sufficient to depart from this view. It is likely that, should any future arrangements involving termination charges for 080 calls be proposed by BT, there would be a time lag in any implementation. This may provide scope for MNOs to renegotiate or revise their arrangements with wholesale customers.


5.121 In light of the submissions provided, we expect that the Parties could reach a practical solution within the parameters that we have set out (in particular, see paragraph 5.62 above), and so Principle 3 should not be a barrier to NCCN 956 being considered fair and reasonable. We recognise that there are practical issues that need to be resolved, but we consider that this can occur through commercial negotiations.

Proposed conclusion : whether it is fair and reasonable for BT to impose any termination charge for calls to 080 numbers hosted on its network, which originate on the 2G/3G MNOs’ networks

5.122 We consider that there could be circumstances in which it would be fair and reasonable for BT to impose a termination charge for calls to 080 numbers hosted on its network, which originate on the 2G/3G MNOs’ networks.

5.123 In light of the current circumstances, the evidence available to us and especially given the structure of NCCN956 and our understanding that other TCPs are unable to match BT’s termination charges, we provisionally conclude that it is unlikely to be fair and reasonable for BT to impose a termination charge for calls to 080 numbers via NCCN 956. Having considered our statutory duties, in particular, we do not consider that NCCN 956 is likely to further the interests of consumers and competition (Principle 2).

5.124 Further, we are currently unable to reach a definitive view on whether MNOs’ retention on 080 call prices under NCCN 956 exceed the efficient cost of mobile origination of about 4.5ppm to 5.0ppm (Principle 1). We note though the implied retention estimates from the headline rates, which suggests that any average call price that was calculated by the MNOs would generally need to be significantly lower than these headline rates to reduce the implied retention below our current provisional view of efficient costs of origination.

5.125 However, we do not consider that issues of practicability should be a barrier to termination being considered fair and reasonable (Principle 3).

5.126 As regards termination charges in general, if there were changes in the structure of termination charges, and if other TCPs were able to match BT’s termination charges,


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then there would be different circumstances and so this view would not necessarily apply.


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Section 6

6 Ofcom’s analysis of the second question: 080 origination payments

Introduction

6.1 Using the analytical framework set out in section 4, we set out below our analysis of whether the 2G/3G MNOs should receive an origination payment from BT sufficient to cover their costs of originating calls to 080 numbers hosted by BT.

6.2 As explained in section 3, T-Mobile, O2 and Orange have argued that BT should pay OCPs an origination charge for calls made from their customers to 080 numbers hosted by BT. They argue that the payment should be sufficient to cover the efficient costs of mobile origination.

6.3 We consider each of the principles in turn.


6.4 Principle 1 is: the 2G/3G MNOs should not be denied the opportunity to recover their efficient costs of originating calls to 080 numbers hosted on BT’s network. In the context of the second question, this means:

• It is not fair and reasonable for each of the 2G/3G MNOs to receive an origination payment unless their average retention on 080 calls is less than the efficient cost of mobile origination.

6.5 In determining whether Principle 1 is satisfied, we follow the same approach set out in section 5 in relation to the corresponding application of Principle 1 to the first element of the scope (namely whether it is fair and reasonable for BT to impose a termination charge). Therefore the relevant factors which need to be considered are the efficient cost of originating/retailing 080 calls and the calculation of the MNO’s average retail call price.

6.6 The submissions received from the Parties and H3G on what is an efficient cost of originating 080 calls and the average 080 retail call price are summarised in paragraphs 5.10 to 5.19 and 5.39 to 5.49.


6.7 Our provisional view on Principle 1 is set out in detail in section 5 and is also applicable here.


6.8 Principle 2 is: the origination payment should:


(ii) avoid a material distortion of competition either among OCPs or TCPs.


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Benefits to consumers

6.9 As outlined in section 4 there are three possible ways that an origination payment could impact on the interests of consumers:

(i) The Direct effect through a lower retail price of 080 calls;

(ii) The Mobile tariff package effect from lower prices for other elements of the retail mobile bundle; and

(iii) The adverse Indirect effect through the impact any origination payment could have on the attractiveness for SPs of offering an 080 service.

6.10 In the case of the Direct effect, there may be Direct benefits for consumers if the origination payment is passed through to consumers in lower retail prices for 080 calls90. In this case, the origination payment reduces the costs of origination that would need to be recovered from 080 callers.

6.11 However, the origination payment may not be passed-through to lower 080 retail call prices, but to other prices paid by the caller, such as their mobile subscription or related services (for example, lower bundle prices) – the Mobile tariff package effect. Therefore, although the origination payment may not pass through into lower 080 retails call prices, it may still indirectly benefit consumers rather than simply be retained by the MNO.

6.12 We consider that, for the purpose of assessing Principle 2, the pass-through to the retail price of 080 calls should be given greater weight than the pass-through (if any) to other retail prices. As explained in section 2 our view is that 080 calls ought to be free to the caller, and if they are not free, that they are as close to free as possible.

6.13 Additionally, we consider that 080 SPs choose 080 numbers in order to signal that the call will be free (or low cost) to the caller, while MNOs do not have an incentive to take into account the impact on the 080 SP from setting a higher retail call price. The interests of 080 SPs relate, in part, to the retail price for 080 calls as this will affect the volume of calls they will receive. In this sense, their interests are directly related to the long term interests of consumers, both through any Direct benefits (a pass-through to lower retail call prices) and Indirect effects (affecting the attractiveness of SPs to offer 080 services) which are discussed further below.

6.14 In general, we do not have a stated preference on the balance of MNOs’ retail prices between the different services that they offer. This is a matter to be determined through competition between MNOs and other players in the retail mobile market, such as MVNOs. However, the focus of this dispute is 080 calls to which special considerations apply as noted above. Our view on the retail pricing of 080 calls and the interests of 080 SPs mean that, to the extent that such a trade-off is necessary, we have a clear preference for a balance of prices involving lower 080 call prices. For example, as between a choice of (i) lower 080 call prices and higher prices for other mobile services, and (ii) higher 080 call prices and lower prices for other mobile services (which both yield the same profit for MNOs), we have a preference for the former balance of prices.

90For ease of exposition, we refer to as “pass-on” the extent to which charges, which are paid by the SP to the TCP at the termination/hosting end, reflect changes in termination charges (or origination payments); and as “pass-through” the extent to which the OCP’s retail 080 call prices at the origination end reflect changes in termination charges (or origination payments).


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6.15 An origination payment may also have an adverse Indirect effect on consumers if it is ultimately funded by 080 SPs, as this may make operating an 080 service less attractive. Therefore, consumers may ultimately be disadvantaged as the quantity and/or quality of 080 services available could reduce. However, 080 SPs are likely to care about the retail call price paid by the caller, as reflected in their choice to use an 080 number as opposed to another NTS number range or geographic number. This may support some 080 SPs being willing to pay an origination charge if it would reduce the retail 080 call price set by MNOs.

6.16 We now consider these effects in turn.

Direct effects and Mobile tariff package effects

6.17 We asked the Parties and H3G for submissions relating to the pass-through of any origination payment into lower 080 call prices for consumers.

Views of the Parties and H3G on pass-through

6.18 We asked for views on why OCPs should receive an origination payment if they fully recover their costs for originating 080 calls.

6.19 T-Mobile has stated that the fee it received from BT (until November 2008) was never sufficient to cover its costs, and so it therefore charges callers to avoid making a loss. As a result, it argued that if it received a fee sufficient to cover the costs of origination, it would no longer be necessary to levy a retail charge to recover the costs directly from callers and it could reconsider their retail charging policy for 080 calls. It said that it is unable to do this unless its costs of origination are recovered from call recipient via the TCP as it would be financially unacceptable to make a loss given the large volume of calls.

6.20 Orange referred to the distribution of benefits of an 080 call in justifying an origination payment. It stated that:

“the service benefits BT and BT’s NTS Service Provider customers hosted on 080 number ranges, and therefore there should be the presumption that the NTS SP should pay – via BT – for origination costs. This is the underlying flow of payments for fixed calls to 080 numbers.”

6.21 O2 further supported this view and said that:

“it should receive a payment from BT for originating calls to such numbers where BT charges the receiving party for deliver and interconnection of the call.”

6.22 H3G said that:

“H3G considers that BT should make a payment sufficient to cover H3G’s network and retail costs of origination. BT should do this on the basis that H3G would then drive more traffic to the 080 number ranges (as H3G could charge a lower retail rate, or zero-rate calls), thereby generating further revenue for BT from its service providers.”

Our view on pass-through

6.23 This suggests that the retail charge would be less important for cost recovery if the MNOs received an origination payment from the TCP, and implies that there may be


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a pass-through into lower 080 retail prices if a payment was made. However, in order to assess the likelihood of such a pass-through and the resulting Direct benefits for consumers, we have considered the following evidence to inform our view:

(i) How are current mobile retail prices determined, and what does this mean for the Mobile tariff package effect?

(ii) Were any changes made to the retail 080 price following NCCN 911 and the removal of the origination payment from BT?

(iii) Are there any external pressures for lower retail 080 prices?

(iv) Could wholesale MVNO customers benefit from an origination charge, meaning their customers can also benefit?

Views of the Parties and H3G on current mobile prices

6.24 In order to understand the likelihood of any origination payment being passed-through into lower 080 retail call prices as opposed to lower prices for other mobile services (i.e. the Mobile tariff package effect), it is important to understand how the MNOs currently structure their prices.

6.25 T-Mobile stated that:

“…our retail charges for 080 numbers form part of our overall customer proposition which comprises a number of elements and involved striking a balance between giving excellent value to the customer measure against the costs we incur as a business. As part of this overall balancing exercise, we place the most value … on those aspects of the package that matter most to our customers, in particular this means having monthly recurring charges that are as low as possible and increasing the volume of monthly inclusive call minutes.”91

6.26 This importance of inclusive airtime and low monthly charges is a view echoed by O2 who have stated that:

“O2 competes aggressively on prices and, in particular, on the volume of calls in retail call bundles. In our experience, customers expect geographic and mobile numbers to be in their calls bundles. However, they do not attach great value on non geographic numbers being included. O2 has constructed its retail call bundles accordingly”.92

6.27 Vodafone added to this by saying that it also considers:

“…publicly available information relating to its competitors’ tariffs, the likely reaction of consumers to pricing across the bundle, the impact on revenues and, critically, the need for a simple and easily comprehensible tariff structure when setting its retail pricing.”

6.28 H3G also appears to have had limited incentives to reduce its 080 retail call prices (as a basis for competing for subscribers). It stated that:

91 Response to question 1 of s191 Information Request 92 Response to question 1 of s191 Information Request


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“H3G’s retail rate for calling 080 numbers was set at the time of launch of our services in 2003 and, for the vast majority of tariffs this has not been changed since. H3G took a commercial decision to set its retail rate in accordance with what the market was offering. Our rates remain competitive and, therefore, until BT issued NCCN 956 we had not considered it necessary to revise those rates”.93

Our views on current mobile prices

6.29 This appears to suggest that MNOs do not believe that low retail charges for 080 calls are as important for their customers as other elements of the services they offer, and so it implies that MNOs may be likely to compete more aggressively on these other elements as opposed to reducing the 080 call price

6.30 The evidence available to us suggests that competitive pressures have (to date) had limited impact on the retail prices of 080 calls. Therefore, it is not certain that any pass-through of an origination payment would flow to lower prices for 080 call prices specifically rather than other elements of the retail mobile tariff package, on which greater competitive efforts appear to be made.

6.31 We recognise that this could benefit mobile customers as a whole. However, as explained above, we consider that reductions in 080 call prices should be weighted more heavily for the purposes of the assessment in this Dispute. Based on the available evidence, we do not currently consider that an origination payment would directly benefit consumers through lower prices for 080 calls.

The views of the Parties and H3G on the outcome of NCCN 911

6.32 In addition to motivations for the current retail pricing of 080 calls, it is useful to consider what happened following the removal of the origination payment in NCCN 911 (see paragraph 3.4)

6.33 Following NCCN 911, the MNOs were solely reliant on the retail charge of 080 calls to recover their costs of origination. It is useful to consider whether this led to an increase in the retail price of 080 calls. This may be informative of the potential pricing response from the 2G/3G MNOs should an origination payment be reintroduced.

6.34 From the submissions made by the 2G/3G MNOs, it would appear that none of the MNOs altered their retail pricing following the removal of the origination payment in light of NCCN 911.

6.35 Vodafone stated that although it objected to the removal of the origination payment, it did not pursue the matter further due to the very low level of outpayment involved and because they had other priorities at the time.

6.36 T-Mobile stated that it did not change its retail prices following NCCN 911:

“At the time BT made this announcement, we were already considering changing our retail pricing structure for calls to 08 numbers and aligning charges for calls to all 08 numbers. This retail price change was finally implemented in May 2009, but was not directly linked to the removal of the origination fee by BT. Furthermore, as the origination payment had never been sufficient to cover our costs of originating calls on a mobile network, while its removal by BT was unwelcome, the commercial impact

93 Response to question 1 of s191 Information Request


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was relatively minor when compared to other challenges facing the business at that time”.94

Our view on the outcome of NCCN 911

6.37 Given that it was not necessary for the 2G/3G MNOs or H3G to increase their 080 retail charges in order to recover the lost origination payment from BT, this may suggest that the MNOs are already (at a minimum) covering their costs of origination. As a result, it is not clear that any reintroduction of an origination charge is likely to flow-through into lower 080 retail prices purely as a result of commercial incentives, particularly given the current motivations for setting retail mobile bundle prices and 080 call charges described above.

External pressures for lower 080 retail call prices

6.38 We also consider whether there are any other pressures for an origination charge to be passed though to lower 080 retail prices as opposed to the price of other mobile services.

6.39 T-Mobile have noted in an internal briefing note that:

[�]

Our view on external pressures for lower 080 retail call prices

6.40 We consider that there may be some pressure from consumers and other stakeholders for 080 call prices to be reduced, and an origination payment may provide an opportunity for MNOs to facilitate a reduction.

Impact on MVNO customers

6.41 In addition to the impact on MNO customers, there is a question of whether a similar pass-through (either direct to 080 call prices or indirect to other mobile services) would occur for MVNO customers. The basis for this consideration is whether the wholesale arrangements between MVNOs and MNOs would allow an origination payment from BT to the originating MNO to be reflected in a lower charge to the MVNO. This may mean MVNO customers could also benefit from an origination payment. However, if the MNO retains the origination payment and MVNOs still pay the same charge to the MNOs, MVNO customers are unlikely to benefit.

6.42 From the submissions we received in relation to the ability of MNOs to pass on an increase in the termination charge, it appears that in some cases it may be difficult, under current contracts, for MVNOs to achieve a reduction in the charge from the MNO which carries their traffic, although it depends on the type of contract in place.

6.43 [�]

6.44 [�]

6.45 [�]

94 Response to question 9 of the s191 Information Request


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Our view on the impact on MVNO customers

6.46 The evidence available to us suggests that the wholesale MVNO customers of some MNOs [�], could automatically see a reduction in the wholesale charge payable. But MVNO customers of other MNOs may require renegotiation of their current agreements to achieve this outcome. In addition, the complications and incentives surrounding the pass through of an origination charge to lower 080 retail prices for MNOs would apply equally to MVNOs if they were to see a reduction in charges. Therefore, it is not clear that retail customers of MVNOs would significantly benefit from an introduction of an origination charge, especially in the shorter term.

Our view on Direct effects and Mobile tariff effects

6.47 Considering all of the evidence above, we do not believe that any origination payment from BT to the MNOs for 080 calls hosted by BT would necessarily have a positive Direct effect on consumers through the retail price of 080 calls.

6.48 However, mobile subscribers could benefit from the Mobile tariff package effect, but this benefit is given less weight in this Dispute given our policy on 080 call prices, the externality between MNOs and 080 SPs, and ultimately the long term interests of consumers described above.

Indirect effect

6.49 The Indirect effect operates through terms and conditions for 080 SPs becoming less favourable as a consequence of an origination payment. In order to assess the significance of this effect, we consider the following:

(i) The incentives of BT to increase hosting charges to take account of origination payments to MNOs;

(ii) The willingness of 080 SPs to pay the additional costs of mobile origination to ensure a low price or zero-rating for calls to their 080 services; and

(iii) The appropriate cost base for calculating the origination payment given the willingness to pay of 080 SPs and the impact this has on the attractiveness of offering 080 services.

BT’s incentives to increase hosting charges

6.50 It is useful to consider other occasions where BT has changed its charges, and whether this affected the hosting agreements they have with 080 SPs. This will inform whether the increased costs would be passed on to 080 SPs, which may reduce the attractiveness of offering 080 services.

6.51 BT has said that, following NCCN 911, it did not adjust its charges to 080 SPs to reflect this reduction in its costs.

6.52 Therefore the cost savings for BT were not – even in part – passed on to 080 SPs. In addition BT has not amended any contracts with 080 SPs since the introduction of


68

NCCN 956 to reflect the increase in revenue they receive from MNOs (and therefore the reduction in costs that needs to be recovered from the 080 SPs).95

Our view on BT’s incentives to increase hosting charge

6.53 The available evidence suggests that a cost reduction does not seem to automatically be passed on to 080 SPs. It is unclear whether a cost increase due to the introduction of an origination payment would be passed on for the 080 SPs to pay. If so, there is the potential for this to have negative implications for the attractiveness of offering a 080 service for 080 SPs.

080 SPs willingness to pay for zero rated 080 calls

6.54 Most calls to 080 numbers that originate on a mobile are subject to a retail charge. Therefore even if the pass-on of an origination charge to 080 SPs reduced the attractiveness of the terms and conditions from the TCP for offering a 080 service, some 080 SPs may actually be willing to pay to secure free or lower priced calls from mobiles to their 080 service.

6.55 In the Orange Direction Oftel recognised this potential, but concluded that there was insufficient evidence that 080 SPs were willing to contribute to the higher costs of mobile origination. The situation could have changed since then, so we have considered whether there is any evidence that 080 SPs are willing to contribute to the additional costs for originating 080 calls on mobile networks.

6.56 As explained in section 3 we approached a selection of 080 SPs for their views on this issue, and we received responses from [�] and COI. Therefore the following analysis considers the evidence available to us and the submissions received from the Parties, H3G, [�] and COI.

Obstacles to zero-rating 080 calls on MNO networks

6.57 Some of the 2G/3G MNOs and H3G state that they consider any request to zero-rate an 080 number on a case by case basis. We asked whether there were any obstacles to 080 SPs negotiating directly with MNOs to secure lower or zero-rated 080 retail call prices (potentially in return for a direct payment to that MNO).

6.58 T-Mobile, [�], Vodafone and H3G all agree that there are no technical barriers to zero-rating 080 calls. However, they all raise other concerns that would affect the commercial practicality of zero-rating 080 numbers.

6.59 T-Mobile suggests that an origination payment is important for zero-rating agreements. It notes that it has received requests from public bodies to zero rate certain numbers, and states that it is willing to enter into arrangements providing those bodies make a payment to them for originating those calls.

6.60 Given the large number of OCPs, T-Mobile acknowledges the potentially high overhead involved for 080 SPs to make such an agreement.

95 H3G suggested to us that BT has increased its charges to 080 SPs from 4ppm to 4.98ppm since NCCN 956 [source: H3G response to Ofcom informal information request]. BT has confirmed to us that 4.98ppm is “the ‘base rate’ for a customer undertaking no volume commitment for a ‘Basic’ 0800 number, i.e. a number that does not use Advanced (call routing) Features”, and states that any change in the base rate is not connected to NCCN 956.


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6.61 Vodafone reiterates this cost recovery position, and says that zero-rating would only be economically viable if another party such as the TCP or the 080 SP were willing to fund the costs generated to enable the call to be zero rated. In particular, it notes the additional costs zero-rating would incur for them. For example, it suggests it would require additional personnel to administer “internal changes”, and that if significant numbers of 080 services were zero-rated, it may result in the network carrying higher volumes of traffic, potentially adversely affecting network quality.

6.62 However, Vodafone also argues that BT’s proposed charging structure for terminating calls to 080 numbers introduces a potential difficulty for such negotiation, as it applies a single rate to all traffic, and takes no account of actual variation in retail pricing – including zero rating. Therefore, Vodafone states that it would still face wholesale costs of [�] even where calls are zero rated at retail level. This artificially inflates the level of wholesale cost that Vodafone would need to recover from the 080 SP or caller in order simply to break even. For this reason, zero rating at wholesale level may turn out to be a precondition for such arrangements to succeed. Vodafone says that at present, BT is not taking account of zero rating and therefore it cannot be confident that BT will, in fact, disapply its wholesale charge to calls originated at zero rate. However, Vodafone also states that it remains hopeful that a satisfactory resolution can be arrived [�].

6.63 H3G added to the cost recovery view by saying that it includes consideration of the [ �] involved in zero-rating 080 numbers as these costs pose a significant margin risk to H3G. Some 080 services, for example, international calling card services, attract typically large volumes of national roaming calls, leading to additional costs for them.

6.64 H3G says that the commercial and legal resources required to negotiate agreements with individual service providers would likely be prohibitive in relation to all but the largest of service providers.

6.65 O2 adds that its experience of negotiating terms has been time consuming, and it expects the arrangements for invoicing and collecting payments to be relatively labour intensive. It therefore concludes that, although this is unlikely to cause problems for a small number of individual agreements, it would not be practicable to use such arrangements for large numbers of 080 SPs.

Our view on obstacles to zero-rating 080 calls on MNO networks

6.66 From the MNOs’ submissions above, it appears to us that there are no fundamental obstacles for zero-rating 080 calls. However, we recognise that zero-rating is done on a case by case basis as we acknowledge that the negotiation costs may be significant, particularly for smaller 080 SPs.

6.67 Additionally, we note Vodafone’s concern that BT’s termination charges (as per NCCN 956) could inhibit negotiations with SPs. We would expect that any arrangements that are put in place should not undermine the incentives on OCPs to zero-rate calls to 080 numbers.

Commercial 080 SP agreements with the 2G/3G MNOs

6.68 We asked the Parties and H3G whether there are currently any direct commercial arrangements in place between MNOs and 080 SPs in order to secure zero-rating of calls to specific 080 services.


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6.69 BT informed Ofcom that none of its 080 SP customers had requested commercial negotiations from them to ensure calls are zero-rated.

6.70 However, it seems that a few 080 SPs have been willing to secure lower 080 retail call prices or zero-rated calls in return for a direct payment to that MNO, and indeed, a few such agreements are in place.

[�]

6.71 [�]

6.72 [�]

6.73 [�]

6.74 [�]

RAC, AA and Green Flag

6.75 T-Mobile also confirmed that it has agreements in place with these breakdown cover providers.

[�]

6.76 [�]

6.77 [�]

[�]

6.78 [�]

COI

6.79 In response to the question “ to what extent would COI be prepared to pay more to ensure your customers were not charged for calling your 080 number(s) from a mobile?”, they responded that they may be prepared to pay “cost”, but would not be willing to pay any premium for such a service. In the time available, we have not had the opportunity to clarify what COI means by ”cost” and would welcome further clarification.

Our view on commercial agreements with 080 SPs

6.80 From the submissions received, it would appear that a very small number of 080 SPs have been willing to pay in order for calls to their 080 services to be free for mobile originated callers and are actively engaged in securing this through commercial agreements. [�]. However, the current limited number of agreements may suggest that 080 SPs, in general, are not actively pursuing the possibility of paying for zero-rated calls from mobiles.

THA agreements with 2G/3G MNOs

6.81 The 2G/3G MNOs zero rate 080 calls for the THA helplines with the prefix 080880 (see Annex 5). This is attributed by some of the MNOs to their corporate social responsibility and the need to protect the caller (see paragraph 2.42). Currently,


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these arrangements tend to be of an informal nature, [�]. However, no origination payment is made by the 080 SP to the MNOs for any calls to these services, meaning the MNOs absorb the costs themselves.

Our view on THA agreements with 2G/3G MNOs

6.82 In light of the submissions above, we recognise the MNOs’ willingness to absorb the origination costs themselves and implement zero-rating 080 calls for charities through the THA for no origination payment.

Our view on the 080 SPs willingness to pay

6.83 As detailed above there is evidence that a very small number of 080 SPs have been willing to contribute to the costs of originating 080 calls on mobile networks. We have no further evidence that 080 SPs are pursuing the possibility of paying MNOs in order to reduce or zero-rate the retail price of calls to their 080 numbers.

Appropriate cost base for origination payment

6.84 Prior to NCCN 911, BT paid MNOs the efficient fixed cost of origination i.e. the same rate it paid the fixed OCPs for originating a call to an 080 number. However, T-Mobile and Orange have stated that they consider BT should pay an origination charge which is at least sufficient to cover the costs of an efficient MNO. T-Mobile argues that this is the only option that would enable MNOs to meet Ofcom’s stated policy objective for 080 calls.

6.85 Additionally, Orange states that in all other circumstances, 080 is essentially a receiving party pays model where the value of initiating the call tends to lie with the recipient more than the caller. In these circumstances it would be appropriate for the recipient to pay the origination cost (and thereby help to stimulate the volume of such calls).

6.86 However, Orange acknowledges that in some cases (such as charities and helplines), it may not be appropriate for the 080 SP to cover the entire cost of origination on a mobile network given the higher costs involved, and in these cases the charge could be waived.

6.87 O2 suggests the following ppm basis for origination payments from BT for calls to 080 numbers from the O2 network. These are based upon the origination charge payable by BT to the originating network under NCCN 956 if the call is zero-rated:

Daytime Evening Weekend

0.6481 0.2967 0.2336

Source: O2 dispute submission

Our view on the appropriate cost base for origination payment

6.88 This raises the question of whether any origination payment from the TCP to the MNO should be based on the efficient costs of originating 080 calls on a fixed network or a mobile network..

6.89 This is because the size of any origination payment will affect the attractiveness of offering an 080 service if the payment has to be funded by the 080 SPs. The fixed


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origination cost is the 24 hour average of the figures shown in the table above – i.e. about 0.4-0.5ppm - which is based on the origination payment from BT to the originating network under NCCN 956 if the call is zero-rated. As noted in section 5, our provisional view of the efficient cost of mobile origination that it is unlikely to exceed 5ppm.

6.90 We face a trade-off between the Direct and Indirect effects. On the one hand, an origination payment has the potential to reduce MNOs’ 080 call prices (subject to the points discussed above about pass-through) which would be consistent with our desired policy outcome on retail call 080 prices. However on the other hand, we are conscious that an origination payment by the TCP would ultimately be paid by the 080 SP (subject to the points discussed above about pass-on). This would make it financially less attractive for 080 SPs to use 080 numbers, which could be to the detriment of consumers’ longer term interests.

6.91 To incentivise free 080 calls from mobiles appears likely to require an origination payment at least equal to the MNOs’ efficient cost of origination. NTS SPs choosing 080 numbers are likely to care about the prices at both ends of the call. Their choice to use a 080 number in preference to other number ranges suggests that they are likely to want the call to be free or as near to free as possible. The 080 SPs therefore themselves face the trade-off between the positive Direct effect of a lower 080 call price and a negative Indirect effect of a larger origination payment.

6.92 Therefore, an important consideration in the selection of the basis for an origination payment is whether there is clear evidence that the majority of those 080 SPs, which do not directly agree a higher contribution with MNOs in exchange for a lower or zero retail 080 call price, are actively interested in contributing to the higher costs of mobile origination (compared to fixed origination).

6.93 This issue was considered in the Orange Direction, where Oftel concluded that:

“in the absence of evidence that service providers are actively interested in attracting and paying for calls from mobiles, the principles of cost causation, cost minimisation and the distribution of benefits weigh heavily towards current practice”.

6.94 At the time, this meant that MNOs received a payment from the TCP for the efficient cost of origination on a fixed – not mobile – network.

6.95 We are aware of the following changes in market conditions since 2001 that were especially relevant to Oftel’s reasoning:

(i) Between 2001 and 2008, total mobile subscriptions (both pre-and post-pay) have increased from 44.9 million96 to 76.8 million.97

(ii) The proportion of households which rely exclusively on a mobile connection for all their communications needs increased from 6% in 200198 to 12% in 2009.99

96 Ofcom Communications Market Report, 2005. Figure 3.12 http://www.ofcom.org.uk/research/cm/cm05 97 Ofcom Communications Market Report, 2009. Figure 4.19 http://www.ofcom.org.uk/research/cm/cmr09 98 Ofcom Communications Market Report, 2005. Figure 3.44 http://www.ofcom.org.uk/research/cm/cm05 99 Ibid Fig. 4.62


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(iii) In 2003, a mobile phone was the main method of making and receiving calls for 21% of UK adults.100 In 2009, this stood at 38%.101

(iv) 22% of mobile-only households were from socioeconomic group DE102 compared with 8% for ABC1 household in 2009.103.We consider that the provision of free 080 calls is particularly important for this demographic given our statutory duty to consider the needs of persons with disabilities, the elderly and those on low incomes.

6.96 An important issue in the Dispute is the balance between the price paid by the caller to an 080 number, and the price paid by the 080 SP. In considering the second question in the Dispute, there are effectively three options that span the range of possibilities for the origination payment and the resulting pricing structure between the two ends of the 080 call (in each case, for the purposes of this discussion, assuming full pass-through by the MNOs and full pass-on by the TCP):

(i) The 080 SP pays no contribution to the MNO’s origination cost while the caller is charged a positive price to at least cover the remaining costs – the current scenario; or

(ii) The 080 SP pays a contribution to the MNO’s origination cost, based on the lower efficient cost of origination on a fixed network (which is currently paid by BT to OCPs that do not charge for 080 calls), and the caller pays a higher price for 080 calls from mobile networks compared to fixed networks; or

(iii) The 080 SP pays the full efficient mobile costs of origination and the call is free to the caller.

6.97 In the first two cases, 080 call prices from mobile would not (generally) be free as MNOs seek to recover their origination costs. They would therefore be more expensive for callers than 080 calls from fixed lines which are free. This would reflect the fact that the efficient costs of origination on mobile networks are significantly higher than on fixed networks. In this respect, to the extent that differences in call price reflected differences in costs, it would in principle provide a reasonably efficient price signal to consumers. In other words, since it is lower cost to make calls to 080 numbers from fixed networks, call prices would, as at present, provide incentives for consumers where possible to use fixed rather than mobile networks (unless their preference for using a mobile network is sufficiently large to more than offset the higher cost).

6.98 In order to justify the second option (efficient cost of fixed origination), we believe we need two key pieces of evidence as indicated by the Principles in our analytical framework. First, we need to consider the retention of the MNOs. This is because if the MNOs are already covering (and exceeding) their costs through the retail price to

100 Ofcom Communications Market Report, 2004. Figure 62 http://www.ofcom.org.uk/research/cm/cmpdf/cmr04_print 101 Ofcom Communications Market Report, 2009. Footnote 44 http://www.ofcom.org.uk/research/cm/cmr09 102 Based on the National Readership Survey’s system of demographic classification used in the United Kingdom. ‘D’ represents Semi and unskilled manual workers and ‘E’ represents Casual or lowest grade workers, pensioners and others who depend on the welfare state for their income based on the chief income earner’s occupation. 103 Ofcom Communications Market Report, 2009. Figure 4.63 http://www.ofcom.org.uk/research/cm/cmr09


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callers, it may not be fair or reasonable for BT to also contribute to their costs. Second, we need sufficient evidence that an origination payment will be passed through to lower 080 call prices rather than be retained by the MNOs or used disproportionately to reduce other mobile prices (Mobile tariff package effect). As detailed above, this is because we consider that the Mobile tariff package effect should have less weight in the Dispute given our policy on 080 call prices, the externality between MNOs and 080 SPs, and ultimately the long term interests of consumers as per our statutory duties. As explained above we do not consider it is sufficiently certain that such an origination payment from BT to the MNOs is likely to have a positive Direct effect on consumers. But we do not consider that the willingness to pay of 080 SPs is in question, given that they already pay the efficient cost of fixed origination for 080 calls originated on a fixed line (indirectly through the hosting charge), and also paid the same amount to MNOs prior to NCCN 911.104

6.99 In order to justify the third option and so a higher origination payment from BT (i.e. based on the efficient costs of origination rather than the efficient costs of fixed call origination), we consider, in the context of the Dispute, that we need evidence of the 080 SP’s willingness to pay to ensure low or zero-rated call prices from mobiles to their 080 services.105 As described in the Orange Direction, consumers (in most instances) have access to a fixed line phone (either private residential line or via a public payphone) that offers a satisfactory substitute to using a mobile. However, the proportion of mobile-only households has increased over time (see paragraph 6.95(ii)), and this may affect the willingness to pay of 080 SPs.106 However, despite the changes since 2001, the option of making a freephone call from a fixed line phone is still available to the majority of consumers, or the alternative is to be charged for the added convenience of using a mobile and the extra costs this decision incurs.

6.100 The need for strong evidence of SPs’ willingness to pay is especially important given the uncertainty surrounding the Direct effect and whether any origination payment would actually pass-through into lower 080 retail call prices.

6.101 Based on the evidence presented above, we do not consider that there is sufficient evidence in the context of the Dispute to demonstrate significant appetite among 080 SPs to contribute to the additional costs of mobile origination.

6.102 We consider that the evidence currently available to us on the preferences of 080 SPs is insufficient to justify an origination payment based on the efficient mobile costs of origination. Therefore we currently consider that any origination payment should continue to reflect the efficient costs of fixed 080 origination.

6.103 Additionally, as per the Orange Direction, it is open to the MNOs to recover the remaining efficient mobile costs of origination elsewhere in the retail offering, although we recognise that this may not lead to free 080 calls.

6.104 However, if we had strong evidence of 080 SPs’ willingness to pay an increased origination payment in order to reduce 080 call prices from mobile, this may justify a departure from this position and the appropriate trade-off between Direct and Indirect

104 Effectively, SPs still pay the fixed origination payment for mobile originated calls given the lack of change in SP contracts following NCCN 911. 105 This view takes as given the current regulatory policy position, such as the designation of 080 numbers in the NTNP – see paragraph 2.30. 106 However we note the particular sensitivity for socioeconomic group DE as referenced in paragraph 8.96.


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effects might be different. In such circumstances, it might be appropriate for any origination payment to reflect the efficient costs of mobile origination.107

Our overall view on the effects on consumers

6.105 Taking into account the submissions above on Direct and Indirect effects and a consideration of our statutory duties, we consider that an origination payment for 080 calls hosted on BT’s network as requested by T-Mobile, O2 and Orange is unlikely to benefit consumers, as it will not necessarily result in a pass-through to 080 retail call prices. This is true whether the origination payment is based on the efficient costs of fixed or mobile call origination.

6.106 Additionally, the current limited number of agreements between MNOs and SPs may suggest that 080 SPs, in general, are not interested in paying MNOs to achieve lower or free 080 calls from mobiles. Taking account of the evidence currently available to us, we consider therefore that the introduction of an origination payment based on the efficient costs of mobile call origination may have negative implications for the attractiveness of offering an 080 service for some 080 SPs, potentially reducing the availability and/or quality of 080 services without sufficient certainty that it would reduce the retail 080 call price.

6.107 However, if we had clear evidence on the willingness to pay of 080 SPs and the likelihood of MNOs passing-through origination payments into lower 080 call prices, then an increased origination charge may be justifiable.

Effects on competition 6.108 We now consider whether an origination payment could distort competition, either

between OCPs, or between TCPs.

Competition between OCPs

The views of the Parties and H3G on competition between OCPs

6.109 T-Mobile argues that there is a competitive concern between OCPs as fixed network operators’ costs of call origination are met whereas those of mobile network operators are not, and this places MNOs at a competitive disadvantage as against fixed network operators.

6.110 It argues that this is because there is some competition at the margins between fixed and mobile providers, and this would be distorted without an origination fee as MNOs are unable to zero-rate calls to 080 numbers without incurring a financial loss.

6.111 Therefore T-Mobile has to charge the caller, and given that most consumers have access to both a fixed line and a mobile phone, consumers will have the choice whether to call to an 080 number from a fixed line (which would be free) or from a mobile phone (and pay a charge). As a result, T-Mobile argues that BT indirectly encourages marginal customers (i.e. consumers who could use either a fixed line or a mobile phone) to make those calls from a fixed line in preference to calling from a mobile phone, thus distorting competition between fixed and mobile network operators, leaving MNOs at a competitive disadvantage.

107 A future change in regulatory policy on 080 numbers might also affect this analysis.


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Our view on competition between OCPs

6.112 As a preliminary point we note that the same conditions and opportunity to receive an origination payment are available to all OCPs, based on their retail prices for 080 calls.

6.113 In response to T-Mobile’s argument, first, we do not consider fixed and mobile access to be within the same market, and as such, we would not expect significant substitutability between the two. This was our conclusion in the Fixed Narrowband Retail Services Markets document108:

“Our evidence suggests that while there is some substitutability between fixed and mobile access, consumers predominantly view the two types of access as meeting different needs and have a strong preference to purchase both fixed and mobile access. We, therefore, believe that fixed and mobile access are more appropriately considered to be in a separate markets.”

6.114 Second, the underlying concern suggested by T-Mobile is that there is excessive substitution of callers from mobile-originated to fixed-originated 080 calls caused by the difference in origination payments.

6.115 Excessive substitution can be defined relative to the extent of substitution that would occur if the relative retail prices of mobile-originated and fixed-originated 080 calls reflected the difference in efficient costs of origination. In general, the outcome described by T-Mobile appears to be a normal result in a competitive market – different operators have different cost bases and therefore their retail prices are likely to differ. It is therefore for the caller to determine whether they are willing to incur the higher cost of using a mobile to call an 080 service.

6.116 However, while this applies for call prices in general, our policy on 080 call prices is that they should be zero-rated or as low as possible, without distinguishing between mobile or fixed-originated calls. Therefore, although substitution may be efficient from one perspective if the relative prices reflect the difference in the efficient costs of origination, the role of 080 numbers means that it is not necessarily preferable to maintain a cost-based structure of retail pricing between fixed and mobile because we would prefer both to be free.

6.117 Third, T-Mobile’s concern also rests on the difference in origination payments being the cause of excessive substitution. But, as discussed above, it is not clear to us that there is (or would be) complete pass-through of origination payments into 080 call prices. MNOs take account of a range of factors in deciding their 080 prices and the extent of the price differentials between mobile-originated and fixed-originated do not necessarily reflect only differences in origination payments.

6.118 Given these considerations and the evidence currently available to us, our provisional view is that we have insufficient evidence to suggest that the absence of an origination payment would lead to a distortion of competition.

Competition between TCPs

6.119 If other TCPs are faced with the same origination charge where one is payable, it seems reasonable to take the view that a distortion of competition between TCPs will

108 Fixed Narrowband Retails Services Markets. Ofcom, 2009. http://www.ofcom.org.uk/consult/condocs/retail_markets/fnrsm_condoc.pdf


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not arise. In order to assess the likelihood of this, it is useful to consider whether other TCPs can avoid an origination payment if BT were required to make one, and if not, any differential in the level of origination payment faced by BT and other TCPs.

6.120 As detailed above, we do not believe that other TCPs are able to replicate the charging of BT based upon location information, and as a result, our understanding is that generally other TCPs are still paying an origination charge to the MNOs. Therefore if an origination payment made by BT is equal to the fixed cost of origination, then other TCPs would be in a similar position i.e. BT and all other TCPs would be paying the same origination payment to the MNOs. As a result, there is no apparent risk of distorting competition among TCPs.

6.121 However, if BT was required to make an origination payment that equalled the efficient mobile cost of origination whilst other TCPs continued to make a payment based on the (lower) efficient costs of fixed origination, then this would create an origination payment differential. Other TCPs could potentially use this difference to offer better discounts to 080 SPs compared to BT. In these circumstances, there is a potential risk that BT could be disadvantaged relative to the other TCPs, with the potential for distorting competition.

6.122 We acknowledge that there could be a risk of a distortion of competition even if no origination payment is made by BT. If other TCPs are unable to match BT by ceasing the origination payment to MNOs (while maintaining payment to fixed OCPs for 080 calls), there is an origination payment differential (in favour of BT). Consequently there could be a risk that competition among TCPs is distorted if BT passes on to 080 SPs its lack of needing to make an origination payment when other TCPs still continue to pay. Therefore, the disadvantage of BT making no origination payment is that it confirms BT in a (currently) more favourable position on 080 calls from mobile than other TCPs.

6.123 It should be noted, however, that to date BT has not adjusted its hosting charges to 080 SPs following the removal of the 080 origination payment to MNOs in November 2008 and we have no evidence of any distortion of competition between TCPs.

Our views on the effects on competition

6.124 As detailed above, we do not consider the concern raised by T-Mobile is a material competitive concern. If BT was required to make an origination payment at the efficient cost of mobile origination, whereas other TCPs were not, BT could be disadvantaged in competition among TCPs. But if BT was to pay the cost of fixed origination, other TCPs would be in a similar position and the potential risk of a distortion of competition among TCPs by introducing an origination payment from BT is low. We have not identified any other mechanism for competition between OCPs or TCPs to be distorted if an origination payment was introduced from BT. Therefore for an origination payment at the fixed cost of origination we do not believe there are mechanisms that would materially distort competition, and thus consider that this particular aspect of Principle 2 is likely to be satisfied.

6.125 However, we do acknowledge the potential competitive distortion that could be caused if other TCPs cannot stop paying an origination charge to MNOs for 080 calls, while BT can. As noted above, this does not appear to have been a significant issue to date. However if this situation was permanent and/or due to a barrier from BT to other TCPs matching the absence of an origination payment, it is likely to be problematic because BT may be able to take advantage of this favourable position, meaning there could be a material distortion of competition.


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6.126 If, however, it was temporary (or any ongoing inability of other TCPs to match and stop making origination payments to MNOs was not due to BT), then we consider that, on balance, this temporary competitive disadvantage is likely to be more than offset by the advantages of the absence of an origination payment by BT.

6.127 Any provisional conclusion that BT should not make an origination payment according to the application of the three Principles is therefore contingent on BT addressing in a suitably timely manner the barrier that its billing system as a transit operator may create for other TCPs to match BT’s termination charges (in this case, the absence of an origination payment to MNOs for 080 calls).

6.128 If BT was able to inform the TCP of the originating network for any specific transited traffic, it would assist some other TCPs in matching BT’s position. However, some TCPs may still be unable to match BT’s termination charges, for example they may need to improve their own billing systems, but in this case, the barrier to matching would lie with the other TCP, not BT.


6.129 Principle 3 is: an origination payment from BT should be reasonably practicable to implement.

Practicability of payments

6.130 Given our provisional conclusion that that any origination payment should currently be based on the efficient cost of fixed origination, all TCPs would be paying the same amount to all OCPs for originating calls to 080 services. This was the case prior to NCCN 911, when the MNOs were in receipt of an origination payment from BT, and this system appears to have been both practicable and relatively easy to implement. Therefore, we have not identified a reason why such a mechanism for payment could not be reintroduced should it be agreed that an origination payment was fair and reasonable under the analytical framework.109

6.131 As a result, we consider that this particular aspect of Principle 3 is likely to be satisfied.

Conclusion: Whether an origination payment is fair and reasonable

6.132 In the current circumstances, we are not in a position to conclude whether an origination payment is fair and reasonable, as this depends on the level of the MNO’s average retail call prices for calls to 080 numbers. As explained in section 5, we are currently unable to form a clear view on these average prices. We therefore consider that the 2G/3G MNOs should establish their respective average mobile retail 080 prices as discussed in section 5. This would enable each 2G/3G MNO’s retention to be calculated and Principle 1 to be applied.110

6.133 In addition to Principle 1, it is also important for the 2G/3G MNOs to demonstrate that such a payment would benefit consumers and would not distort competition.

109 We note that if differential payments to fixed and mobile OCPs were introduced, there could be a practicability issue in TCPs identifying the originator of the call and therefore the appropriate payment. 110 Note that as outlined in Section 5, the implied retention estimates from the headline rates suggests that any average call price that was calculated by the MNOs would generally need to be significantly lower than these headline rates to reduce the implied retention below our current provisional view of efficient costs of mobile origination.


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Although we recognise the potential for a positive Mobile tariff package effect, we do not believe it should be given as much weight in the Dispute as the Direct effect due to the externality between OCP and 080 SP and our desired policy outcome on 080 retail call prices. Currently, we do not consider there is sufficient evidence to support a view that there would be a significant Direct benefit to consumers, as an origination payment of any size may not pass-through into lower retail 080 prices. In contrast, we consider the risk of a distortion of competition – either between OCPs or TCPs – is low. However, these views could change should further evidence become available.

6.134 To the extent that any such origination payment should be made by BT given the evidence available to us in the Dispute, we conclude that in current circumstances the level should not exceed the efficient cost of origination on a fixed network. Given that 080 SPs currently pay fixed originators an origination payment based upon the efficient cost of fixed origination, we would not anticipate a significant Indirect effect on consumers, or a material risk of a distortion to competition, following an introduction of an origination payment on this basis.

6.135 Our provisional conclusion that any origination payment should be at the efficient cost of fixed rather than mobile origination is based on the fact that we have insufficient supporting evidence that the majority of 080 SPs are willing to contribute to the additional costs of mobile origination, and the uncertainty surrounding the Direct effect. Given the prevailing regulatory policy (which we take as given for the purpose of this Dispute), without evidence to the contrary, we consider that any origination payment higher than the fixed cost of origination could have adverse incentives on 080 SPs for offering 080 services, which ultimately could negatively impact on consumers.

6.136 However, if further evidence became available on the willingness to pay of 080 SPs and the likelihood of MNOs passing-through origination payments into lower 080 call prices, it may be fair and reasonable for a higher origination payment to be made. We consider that there could be circumstances in which it would be fair and reasonable for the 2G/3G MNOs to receive a payment from BT sufficient to cover their efficient costs of originating calls to 080 numbers hosted by BT. We also note that a change in regulatory policy could affect the future circumstances (as stated above, Ofcom is proposing to review the operation of the regulatory regime for 08 and 09 numbers in 2010/11).


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Section 7

7 Repayments Introduction

7.1 In the preceding sections, we have provisionally concluded that it could be fair and reasonable for BT to impose termination charges for calls to 080 numbers hosted on its network as long as certain conditions are met. Since we have provisionally concluded on the facts that these conditions are not all met by the arrangements notified in NCCN 956, we are proposing to determine that the parties are required to revert to the terms on which they were trading prior to the imposition of NCCN 956.

7.2 Section 190(2)(d) of the Act gives us the power, for the purpose of giving effect to a determination by Ofcom of the proper amount of charge in respect of which amounts have been paid by one of the parties of the dispute to the other, to give a direction, enforceable by the party to whom the sums are to be paid, requiring the payment of sums by way of an adjustment of an underpayment or an overpayment.

7.3 In their submissions, Vodafone, Orange and O2 requested that BT be required to reimburse them fully for any payments made under the new NCCN 956 charging arrangement should the outcome of the Dispute be determined in their favour.

7.4 We now consider whether we should exercise our discretion to require BT to make a payment to the 2G/3G MNOs, by way of an adjustment of an overpayment, and if so, what the level of any such payment should be.

7.5 In deciding whether it is appropriate to make such a direction, we have been guided by our duties and Community obligations under sections 3 and 4 of the Act.

7.6 We note the position set out by the CAT in the TRD core issues judgment as follows:

“Section 190(2)(d) of the 2003 Act is a straightforward provision designed to ensure that Ofcom’s determination of what is a reasonable rate is backdated to the time at which that rate would have come into effect had the OCCN been accepted. It should ordinarily follow on form a determination that this kind of adjustment takes place. Otherwise the party which has wrongly resisted the proposed OCCN is in a better position than they would have been in had they accepted it without challenge”.

7.7 This Dispute relates to the introduction of the NCCN 956 by BT. Ofcom has provisionally concluded that while it may be fair and reasonable for BT to impose a termination charge for 080 calls hosted on its network, the arrangements notified in NCCN 956 do not meet the necessary criteria for them to be fair and reasonable. We therefore consider that it is reasonable for BT to repay any amounts paid to it by the MNOs under NCCN 956.

7.8 We have considered carefully the incentives and regulatory signals this approach gives to the industry. We are concerned that the incentives and benefits for consumers and competition should be safeguarded. If we allow BT to keep any payments made under NCCN 956, this could act as an incentive on BT to introduce charging arrangements in future that may not be fair and reasonable. We consider


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that to require repayments gives an incentive to BT in future to act fairly and reasonably in adjusting its charging structures. A decision by Ofcom not to require repayments in this case would distort these incentives by putting BT in a more favourable position by introducing charging arrangements that are not fair and reasonable than if it had not done so.

Level of payments and interest

7.9 We therefore consider that it is appropriate for BT to repay any payments made by the 2G/3G MNOs following the introduction of the NCCN 956 as this will return them to the position that would have prevailed prior to the introduction of the NCCN 956. We propose to request from the Parties details of payments made so as to determine the level of such payments.

7.10 We further propose that BT should be required to pay interest on the amounts that it had overcharged.

7.11 In considering whether to require BT to pay interest on the overpayments, we have considered the terms and conditions on which the 2G/3G MNOs purchase 080 call termination from BT as set out in Standard Interconnect Agreement (“SIA”).111 Paragraph 13.13 of the SIA states that:

“13.13 If any charge (or the means of calculating that charge) for an Operator service or facility has retrospective effect (for whatever reason) then the Operator shall, as soon as reasonably practicable following publication in the Carrier Price List, adjust and recalculate the charges in respect of such service or facility using the new charge and calculate the interest for any sum overpaid or underpaid at the Oftel Interest Rate.”

7.12 The “Oftel Interest Rate” is defined in Annex D to the SIA112 as:

“three eighths of one per cent (3/8%) above the London Inter Bank Offered Rate being the rate per annum of the offered quotation for sterling deposits for delivery on the due date for payment for a period of three months as displayed on page 3750 on the Telerate Service (or any other page that may replace page 3750 on that service) at or about 11 am London time on the due date of payment provided that if such a rate is not so displayed London Inter Bank Offered Rate shall mean the rate quoted by National Westminster Bank PLC to leading banks in the London interbank market at or about 11 am London time on the due date of payment for the offering of sterling deposits of a comparable amount for a period of three months. Such interest shall be calculated on a daily basis.”

7.13 We consider that the SIA clearly envisages a situation such as that arising in the current Dispute and sets out that where this occurs interest will be payable on any sums overpaid or underpaid at the Oftel Interest Rate.

7.14 We therefore provisionally conclude that it is appropriate for BT to be required to pay interest on any required repayments at the Oftel interest Rate. This is the interest rate that governs the SIA and was in place over the entire period of the Dispute.

Provisional conclusions

111 http://www.btwholesale.com/pages/static/Pricing_and_Contracts/Reference_Offers/Telephony.html 112 Annex D can also be found at http://www.btwholesale.com/pages/static/Pricing_and_Contracts/Reference_Offers/Telephony.html


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7.15 In light of our assessment above, we have provisionally concluded that it is appropriate and proportionate for Ofcom to exercise its powers under section 190(2)(d) of the Act to require BT to repay any amounts paid under NCCN956 together with interest on these amounts at the Oftel Interest Rate. This will return BT to the position that would have prevailed prior to the introduction of the NCCN 956.


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Section 8

8 Ofcom’s provisional conclusions Conclusions on the questions in the scope

8.1 We conclude that there are three key principles that we can apply to determine the questions in the scope, taking into account consideration of previous relevant regulatory decisions and benchmarks. We consider that these principles are consistent with our obligations, in particular the Community requirements under section 4 of the Act, the duties set out in Article 8 of the Framework Directive (Directive 2002/21/EC) and our general obligations under administrative law.

8.2 In light of our assessment in sections 4 to 6, we have reached the following provisional conclusions on whether the three principles are met for each of the two questions in the scope.

Whether it is fair and reasonable for BT to impose any termination charge for calls to 080 numbers hosted on its network, which originate on a 2G/3G MNO’s network

8.3 The three Principles applied to this first question in the scope of the Dispute are:

1. The 2G/3G MNOs should not be denied the opportunity to recover their efficient costs of originating calls to 080 numbers hosted on BT’s network. This means:

• It is not fair and reasonable for BT to impose termination charges unless the average retention by the 2G/3G MNOs (which is the average retail price minus any termination charge) is greater than the efficient cost of mobile origination.

2. The termination charge should:


(ii) avoid a material distortion of competition either among OCPs or among

TCPs.

3. The implementation of BT’s charging structure should be reasonably practicable.

Principle 1

8.4 We conclude that, on the basis of the evidence before us, we are not able to confirm the MNOs’ average retail prices. For this reason, we are thus currently unable to assess whether Principle 1 is currently met. We note though the implied retention estimates from the headline rates, which suggests that any average call price that was calculated by the MNOs would generally need to be significantly lower than these headline rates to reduce the implied retention below our current provisional view of efficient costs of origination.113

113 Further detail on this is set out at paragraph 5.52


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8.5 In reaching this provisional conclusion we have also reached a view on the following aspects of Principle 1:

• We are minded to consider that the efficient cost of origination of 080 calls on a mobile network is unlikely to exceed 5ppm.

(i) As regards the role of the Parties, in the first instance it is for the MNO to:

(i) provide an estimate of its own average retail 080 call price, subject to a reasonable verification procedure; and

(ii) liaise with the MVNOs and resellers with which it has a contractual relationship to do likewise, subject to the requirement to comply with competition law.

• If it does not do so, we are minded to consider that BT is entitled to estimate the applicable average retail call prices using information available to it, but taking account of reasonable and verified comments made by the MNO and/or MVNOs.

• Details of the arrangements, such as the degree of accuracy of any estimates and verification procedures should be the subject of negotiation between the Parties.

8.6 We propose that the Parties should follow the approach set out above and negotiate to agree a suitable price or methodology in order to establish whether this Principle is satisfied.

Principle 2

8.7 As regards termination charges in general, we consider that, if there were changes in the structure of termination charges, and if other TCPs were able to match BT’s termination charges, then there would be different circumstances and our provisional conclusions in relation to Principle 2 would not necessarily apply.

8.8 We provisionally conclude that, in current circumstances, it is unlikely that NCCN 956 will further the interests of consumers and competition. This is because there is likely to be a negative Direct effect of an incentive on MNOs to raise 080 call prices, without competitive pressure for an offsetting positive Indirect effect of pass on of higher termination charges into more favourable terms and conditions for SPs. In the alternative, i.e. if there is pass on to SPs by BT, there is a risk of a distortion of competition among TCPs.

8.9 We consider that, to be fair and reasonable, any termination charges should avoid a disincentive effect on MNOs to zero-rate calls.

Principle 3

8.10 We provisionally conclude that, while we recognise the issues of practicality raised by the 2G/3G MNOs, we expect that it should be possible to reach a practical solution within the parameters that we have set out and that this solution can be achieved through further commercial negotiation. We therefore consider that Principle 3 should not be a barrier to NCCN 956 being considered fair and reasonable.


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Whether the 2G/3G MNOs as originating mobile network operators, should receive a payment from BT sufficient to cover their costs of originating calls to 080 numbers hosted by BT

8.11 The three Principles applied to this second question in the scope of the Dispute are:

1. The 2G/3G MNOs should not be denied the opportunity to recover their efficient costs of originating calls to 080 numbers hosted on BT’s network. This means:

• It is not fair and reasonable for the 2G/3G MNOs to receive an origination payment unless their average retention on 080 calls is less than the efficient cost of mobile origination

2. The origination charge should:

(i) provide benefits to consumers; and (ii) avoid a material distortion of competition either among OCPs or among

TCPs.

3. The implementation of an origination payment from BT should be reasonably practicable.

Principle 1

8.12 As set out above, we consider that although we are not able to confirm the average retail price, the Parties should follow the approach set out above and negotiate to agree a suitable price or methodology in order to establish whether this Principle is satisfied. We note though the implied retention estimates from the headline rates, which suggests that any average call price that was calculated by the MNOs would generally need to be significantly lower than these headline rates to reduce the implied retention below our current provisional view of efficient costs of origination.

Principle 2

8.13 We provisionally conclude that, in current circumstances, there is insufficient evidence available to us to support a view that a mobile origination payment for 080 calls hosted on BT’s network will provide benefits to consumers, An origination charge may have negative implications for the attractiveness of offering a 080 service for SPs, potentially reducing the availability and/or quality of 080 services, without sufficient certainty that it would reduce the retail 080 call price.

8.14 To the extent that any such origination payment should be made by BT, we provisionally conclude that, in current circumstances and given the prevailing regulatory policy (which we take as given for the purpose of this Dispute), the available evidence suggests that the level should not exceed the efficient cost of origination on a fixed network (not the cost of mobile origination). This is because we have insufficient supporting evidence that the majority of 080 SPs are willing to contribute to the additional costs of mobile origination, and the uncertainty surrounding the Direct effect on 080 call prices.

8.15 However we also consider that there would be a change in circumstances, and our provisional conclusions above would not necessarily apply if we had clear evidence that NTS SPs were willing to pay towards the origination costs, that the 2G/3G MNOs would pass origination payments through in the form of lower 080 call prices, or if


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there was a change in regulatory policy (e.g. Ofcom is proposing to review the operation of the regulatory regime for 08 and 09 numbers in 2010/11).

Principle 3

8.16 We note that prior to NCCN 911, the 2G/3G MNOs were in receipt of an origination payment from BT and, as far as we are aware, this system was reasonably practicable to implement.

8.17 Therefore, we have not identified a reason why such a mechanism for payment could not be reintroduced, should it be agreed that an origination payment was fair and reasonable. We provisionally conclude that Principle 3 is satisfied.

Overall conclusion

8.18 In light of all the relevant factors and the available evidence, our overall provisional conclusion is that neither the termination charges set out in NCCN 956 nor a payment to cover the costs of origination of any of the 2G/3G MNOs has in the present circumstances been demonstrated as being fair and reasonable.

8.19 For this reason we provisionally conclude that the Parties to the Dispute, namely BT and each of T-Mobile, Vodafone O2 and Orange, should revert to the terms on which they were trading prior to the introduction of NCCN 956.

8.20 We further provisionally conclude that, to the extent that BT has overcharged one or more of the 2G/3G MNOs as a result of NCCN 956, it should repay any payments made by the 2G/3G MNOs and pay interest on those payments.

Assessment of our draft Determination against Ofcom’s statutory duties and Community requirements

8.21 We have carefully considered our powers, obligations and duties in deciding on the appropriate means of resolving the Dispute. For the reasons set out below, we consider that our determination to resolve the Dispute is consistent with both Ofcom’s general duties in section 3 of the Act, and (pursuant to section 4(1)(c) of the Act) the six Community requirements set out in section 4 of the Act, which give effect, amongst other things, to the requirements of Article 8 of the Framework Directive.

8.22 We consider that the following duties have particular relevance to the Dispute:

(i) the duty to further the interests of citizens (i.e. all members of the public in the United Kingdom) in relation to communication matters (section 3(1)(a));

(ii) the duty to further the interests of consumers in the relevant markets, where appropriate by promoting competition (section 3(1)(b));

(iii) the duty to secure the availability throughout the United Kingdom of a wide range of electronic communications services (section 3(2)(b));

(iv) the duty to have regard to the principles under which regulatory activities should be transparent, accountable, proportionate, consistent and targeted only at cases in which action is needed; as well as any other principles appearing to Ofcom to represent the best regulatory practice (section 3(3));


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(v) the duty to have regard to the desirability of promoting competition in relevant markets (section 3(4)(b));

(vi) the duty to have regard to the vulnerability of children and others whose circumstances appear to Ofcom to put them in need of special protection (section 3(4)(h));

(vii) the desirability of preventing crime and disorder (section 3(4)(j));

(viii) the duty to have regard to the needs of persons with disabilities, of the elderly and of those on low incomes (section 3(4)(i));

(ix) the duty to have regard to the extent to which, the furthering or securing of our functions is reasonably practicable (section 3(4)(m));

(x) the duty to have regard, in particular, to the interests of consumers in respect of choice, price, quality of service and value for money (section 3(5));

(xi) the duty to promote competition (section 4(3));

(xii) the duty to to secure that OFCOM’s activities contribute to the development of the European internal market (section 4(4));

(xiii) the duty to promote the interests of all persons who are citizens of the European Union (section 4(5)); and

(xiv) the duty to encourage, to the extent Ofcom considers it appropriate, the provision of network access and service interoperability for the purposes of securing efficiency and sustainable competition in communications markets and the maximum benefit for the customers of communications network and services providers (sections 4(7) and 4(8)).

8.23 We consider the duties set out at (i), (ii), (x), (xiii) and (xiv) are of particular relevance to resolving the Dispute, i.e. the interests of citizens and consumers. This is because as set out at paragraphs 2.36 and 2.37, we consider that it is in the interests of citizens and consumers to be able to rely on the fact that calls to 080 numbers will be free to the caller, and if they are not free, that they are as close to free as possible. In particular, this is because 080 numbers are often used for charitable services or for other purposes that confer a social benefit on citizens. We consider that it is important that they can rely on the fact that such services are available for free to caller from a fixed or mobile provider, and those prospective callers are able to rely on continued free provision.

8.24 We consider that the duties set out at (ii), (iii), (x), (xiii) and (xiv) are of particular relevance to resolving the Dispute, because of the potential for the charging arrangements to affect the attractiveness to service providers to make use of 080 numbers. This is to the ultimate benefit of consumers in terms of availability, choice and quality of services available on calls to 080 numbers.

8.25 We consider that the duties set out at (ii), (v), (xi) and (xiv) are of particular relevance for resolving the Dispute since we consider that the issues raised could have an impact on competition as summarised at paragraphs 4.17 to 4.21 and, therefore, on the offer of electronic communications services to consumers in terms of choice, price, quality of service and value for money.


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8.26 Charges imposed should not undermine the pressure for effective competition (whether competition between those already in the market place or competition via entry by efficient operators).

8.27 We do not consider that BT’s termination charges will further effective competition, not least because of our understanding that other TCPs are unable to match BT’s charges. We also consider that there is currently a lack of competitive pressure for BT to pass on higher termination charges in the form of more favourable terms and conditions for 080 SPs. We therefore consider that BT’s charges should not be imposed in their current form set out in NCCN 956.

8.28 We also consider that the duties set out at (vi) and (viii) are relevant to the Dispute as children, the elderly and those with disabilities or on low incomes may have cause to call 080 numbers that are zero-rated as THA helplines (see Annex 5). We note that many of the charitable organisations that offer help to these social groups have contact numbers with an 080 prefix Therefore any change in the pricing of such calls may have a direct effect on the accessibility of these services and therefore on these groups.

8.29 We consider that our Determination will not cause any disincentive to keep charitable and special public numbers free to the public because in reaching our provisional conclusions we have taken into account our view that that 080 calls ought to be free to the caller, and if they are not free, that they are as close to free as possible and in addition have specifically identified that any termination charges should avoid a disincentive for calls to 080 numbers to be zero-rated.

8.30 We also consider that the duty set out at (vii) is relevant to the Dispute, i.e. the desirability of preventing crime and disorder. This is because as set out at paragraph 2.42, zero-rated 080 calls offer confidentiality to the caller, i.e. the call will not appear on the caller’s bill. We consider that organisations such as Crimestoppers rely on the fact that their contact number is 080 and zero-rated in order to give callers the ability to call in confidence. In taking account of our view that that 080 calls ought to be free to the caller, and if they are not free, that they are as close to free as possible, we consider that our Determination acknowledges the desirability of preventing crime and disorder.

8.31 In addition we consider that the duty set out at (xiv) is also relevant, namely the duty to encourage the provision of network access and service interoperability for the purposes of securing efficiency and sustainable competition in communications markets and the maximum benefit for the customers of communications network and services providers. We consider this duty to be of relevance for resolving the Dispute since the Dispute concerns the charges for the service of call termination, which is essential for encouraging interoperability between different networks, so that customers of one network can call, and receive calls from, the customers of other networks.

8.32 Further, given that the service of call termination facilitates the development of communications between customers of different networks, we consider the duty set out at (xii) is relevant, the development of the European internal market.

8.33 We have considered the need for any charging or payment arrangements to be reasonably practicable to implement given our duty set out at (ix) above and following the submissions made by the Parties. This was of particular relevance to our consideration of Principle 3 in our analysis.


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8.34 Finally, we consider our duties set out at (iv) and in Section 3(3) of the Act to be relevant, namely to have regard to the principles under which regulatory activities should be transparent, accountable, proportionate, consistent and targeted only at cases in which action is needed, as well as any other principles appearing to us to represent the best regulatory practice. In particular:

• Transparency and Accountability: we consider that this document clearly sets out the Parties’ arguments and our reasoning that underpins our provisional conclusions, and we note that the Parties have also been invited to make representations, have made submissions and responded to requests for information. We have also addressed comments made by interested parties where appropriate. The details of the Dispute have also been published on the CCEB. The Parties will also have an opportunity to comment on our provisional conclusions in advance of our final Determination.

• Proportionate: We consider that our proposal is proportionate because it is limited to the issues identified in the scope of the Dispute and to the greatest extent possible, it furthers the desirable effects we have identified and avoids the undesirable effects, making the appropriate trade-offs where necessary. The draft Determination also seeks to place the Parties in the same position that they would have been in if the situation prior to NCCN 956 had continued.

• Consistency: in developing our approach, we have considered relevant NTS policy and previous Oftel / Ofcom decisions and applied a consistent analysis.

• Targeted: Our resolution is targeted in that it resolves the Dispute as between the parties to the Dispute.


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Annex 1

1 Responding to this consultation How to respond

A1.1 Ofcom invites written views and comments on the issues raised in this document, to be made by 5pm on 12 January 2009.

A1.2 Ofcom strongly prefers to receive responses using the online web form at http://www.ofcom.org.uk/consult/condocs/draft_deter_opal_telecom_bt/, as this helps us to process the responses quickly and efficiently. We would also be grateful if you could assist us by completing a response cover sheet (see Annex 3), to indicate whether or not there are confidentiality issues. This response coversheet is incorporated into the online web form questionnaire.

A1.3 For larger consultation responses - particularly those with supporting charts, tables or other data - please email [email protected] attaching your response in Microsoft Word format, together with a consultation response coversheet.

A1.4 Responses may alternatively be posted or faxed to the address below, marked with the title of the consultation. Matthew Peake 4th Floor Competition Group Riverside House 2A Southwark Bridge Road London SE1 9HA Fax: 020 7783 4109

A1.5 Note that we do not need a hard copy in addition to an electronic version. Ofcom will acknowledge receipt of responses if they are submitted using the online web form but not otherwise.

A1.6 It would be helpful if you can explain why you hold your views and how Ofcom’s proposals would impact on you.

Further information

A1.7 If you want to discuss the issues and questions raised in this consultation, or need advice on the appropriate form of response, please contact Matthew Peake on 020 7783 4160.

Confidentiality

A1.8 We believe it is important for everyone interested in an issue to see the views expressed by consultation respondents. We will therefore usually publish all responses on our website, www.ofcom.org.uk, ideally on receipt. If you think your response should be kept confidential, can you please specify what part or whether all of your response should be kept confidential, and specify why. Please also place such parts in a separate annex.


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A1.9 If someone asks us to keep part or all of a response confidential, we will treat this request seriously and will try to respect this. But sometimes we will need to publish all responses, including those that are marked as confidential, in order to meet legal obligations.

A1.10 Please also note that copyright and all other intellectual property in responses will be assumed to be licensed to Ofcom to use. Ofcom’s approach on intellectual property rights is explained further on its website at http://www.ofcom.org.uk/about/accoun/disclaimer/

Next steps

A1.11 Following the end of the consultation period, Ofcom intends to publish a final Determination by 5 February 2010.

A1.12 Please note that you can register to receive free mail updates alerting you to the publications of relevant Ofcom documents. For more details please see: http://www.ofcom.org.uk/static/subscribe/select_list.htm

Ofcom's consultation processes

A1.13 Ofcom seeks to ensure that responding to a consultation is easy as possible. For more information please see our consultation principles in Annex 2.

A1.14 If you have any comments or suggestions on how Ofcom conducts its consultations, please call our consultation helpdesk on 020 7981 3003 or e-mail us at [email protected] . We would particularly welcome thoughts on how Ofcom could more effectively seek the views of those groups or individuals, such as small businesses or particular types of residential consumers, who are less likely to give their opinions through a formal consultation.

A1.15 If you would like to discuss these issues or Ofcom's consultation processes more generally you can alternatively contact Vicki Nash, Director Scotland, who is Ofcom’s consultation champion:

Vicki Nash Ofcom Sutherland House 149 St. Vincent Street Glasgow G2 5NW Tel: 0141 229 7401 Fax: 0141 229 7433 Email [email protected]


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Annex 2

2 Ofcom’s consultation principles A2.1 Ofcom has published the following seven principles that it will follow for each public

written consultation:

Before the consultation

A2.2 Where possible, we will hold informal talks with people and organisations before announcing a big consultation to find out whether we are thinking in the right direction. If we do not have enough time to do this, we will hold an open meeting to explain our proposals shortly after announcing the consultation.

A2.3 We will be clear about who we are consulting, why, on what questions and for how long.

A2.4 We will make the consultation document as short and simple as possible with a summary of no more than two pages. We will try to make it as easy as possible to give us a written response. If the consultation is complicated, we may provide a shortened Plain English Guide for smaller organisations or individuals who would otherwise not be able to spare the time to share their views.

A2.5 We will consult for up to 10 weeks114 depending on the potential impact of our proposals.

A2.6 A person within Ofcom will be in charge of making sure we follow our own guidelines and reach out to the largest number of people and organisations interested in the outcome of our decisions. Ofcom’s ‘Consultation Champion’ will also be the main person to contact with views on the way we run our consultations.

A2.7 If we are not able to follow one of these principles, we will explain why.

After the consultation

A2.8 We think it is important for everyone interested in an issue to see the views of others during a consultation. We would usually publish all the responses we have received on our website. In our statement, we will give reasons for our decisions and will give an account of how the views of those concerned helped shape those decisions.

114 In the case of disputes we will consult for ten working days from the publication date of the draft determination; this reflects the four month deadline for Ofcom to issue its final determination.


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Annex 3

3 Consultation response cover sheet A3.1 In the interests of transparency and good regulatory practice, we will publish all

consultation responses in full on our website, www.ofcom.org.uk.

A3.2 We have produced a coversheet for responses (see below) and would be very grateful if you could send one with your response (this is incorporated into the online web form if you respond in this way). This will speed up our processing of responses, and help to maintain confidentiality where appropriate.

A3.3 The quality of consultation can be enhanced by publishing responses before the consultation period closes. In particular, this can help those individuals and organisations with limited resources or familiarity with the issues to respond in a more informed way. Therefore Ofcom would encourage respondents to complete their coversheet in a way that allows Ofcom to publish their responses upon receipt, rather than waiting until the consultation period has ended.

A3.4 We strongly prefer to receive responses via the online web form which incorporates the coversheet. If you are responding via email, post or fax you can download an electronic copy of this coversheet in Word or RTF format from the ‘Consultations’ section of our website at www.ofcom.org.uk/consult/.

A3.5 Please put any parts of your response you consider should be kept confidential in a separate annex to your response and include your reasons why this part of your response should not be published. This can include information such as your personal background and experience. If you want your name, address, other contact details, or job title to remain confidential, please provide them in your cover sheet only, so that we don’t have to edit your response.


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Annex 4

4 The Draft Determination Dispute between BT and each of T-Mobile, Vodafone, O2 and Orange

Determination under sections 188 and 190 of the Communications Act 2003 (“2003 Act”) for resolving a dispute between British Telecommunications plc (“BT”) and each of T-Mobile (UK) Limited (“T-Mobile”), Vodafone Limited (“Vodafone”), Telefonica O2 UK Limited (“O2”) and Orange Personal Communications Services Ltd (“Orange”) (together the “Parties”) about BT’s termination charges for 080 calls introduced through NCCN 956.

WHEREAS—

(A) section 188(2) of the 2003 Act provides that, where Ofcom has decided pursuant to section 186(2) of the 2003 Act that it is appropriate for it to handle the dispute, Ofcom must consider the dispute and make a determination for resolving it. The determination that Ofcom makes for resolving the dispute must be notified to the Parties in accordance with section 188(7) of the 2003 Act, together with a full statement of the reasons on which the Determination is based, and publish so much of its Determination as (having regard, in particular, to the need to preserve commercial confidentiality) they consider appropriate to publish for bringing it to the attention of the members of the public, including to the extent that Ofcom considers pursuant to section 393(2)(a) of the 2003 Act that any such disclosure is made for the purpose of facilitating the carrying out by Ofcom of any of its functions;

(B) section 190 of the 2003 Act sets out the scope of Ofcom’s powers in resolving a dispute which may, in accordance with section 190(2) of the 2003 Act, include—

(i) making a declaration setting out the rights and obligations of the Parties to the dispute;

(ii) giving a direction fixing the terms or conditions of transactions between the Parties to the dispute;

(iii) giving a direction imposing an obligation, enforceable by the Parties to the dispute, to enter into a transaction between themselves on the terms and conditions fixed by Ofcom; and

(iv) for the purpose of giving effect to a determination by Ofcom of the proper amount of a charge in respect of which amounts have been paid by one of the Parties to the dispute to the other, giving a direction, enforceable by the party to whom sums are to be paid, requiring the payment of sums by way of adjustment of an underpayment or overpayment;

(C) on 3 June 2009, BT notified the industry of NCCN 956 which proposed with effect from 1 July 2009 a termination charge by BT for calls to 0800 and 0808 numbers hosted on its network. The termination charges vary depending on the retail charge applied by the originating communications provider.

(D) on 16 September 2009, T-Mobile submitted a dispute with BT to Ofcom for resolution;


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(E) on 6 October 2009, Ofcom decided that it was appropriate for it to handle the dispute, and informed BT and T-Mobile of this decision;

(F) on 6 October 2009, Ofcom published details of the dispute on its website and invited comments from stakeholders on the scope of the dispute;

(G) On 9, 26 and 30 October 2009, Ofcom received further dispute submissions from Vodafone, O2 and Orange, respectively, all of which related to BT’s termination charges in NCCN 956.

(H) on 16 November 2009, Ofcom decided that it was appropriate for it to handle these disputes. We considered that the principal issues raised by Vodafone, O2 and Orange were essentially the same as the issues raised by T-Mobile and therefore we considered it appropriate to join Vodafone, O2 and Orange to the existing dispute between T-Mobile and BT. Ofcom published details of this decision on its website and set out the finalised scope of the dispute;

(I) Ofcom set the scope of the dispute to be resolved as to determine whether:

i) whether it is fair and reasonable for BT to impose any termination charge for calls to 080 numbers hosted on its network, which originate on the 2G/3G MNOs networks; and

ii) whether the 2G/3G MNOs, as originating mobile network operators, should receive a payment from BT sufficient to cover their costs of originating calls to 080 numbers hosted by BT.

(J) in order to resolve this dispute, Ofcom has considered (among other things) the information provided by the Parties and Ofcom has further acted in accordance with its general duties set out in section 3 of, and the six Community requirements set out in section 4 of the 2003 Act;

(K) a fuller explanation of the background to the dispute and Ofcom’s reasons for making this Determination is set out in the explanatory statement accompanying this Determination; and

NOW, therefore, Ofcom makes, for the reasons set out in the accompanying explanatory statement, this Determination for resolving this dispute—

I Declaration of rights and obligations, etc.

1 It is hereby declared that;

The Parties should revert to the trading conditions that applied before NCCN 956 came into effect; and

BT should make payments to the 2G/3G MNOs by way of an adjustment for overpayments together with interest made following the introduction of NCCN 956 until the date of this final Determination.

BT has overcharged T-Mobile for the period 1 July 2009 to [insert date]. The level of the overcharge is determined at [£ ]. Ofcom gives a direction to BT to pay T-Mobile, by way of adjustment of overpayment for 080 call termination in the period 1 July 2009 to [insert date] the sum of [£ ] plus interest calculated at the rate specified in paragraph 13.13 of the Agreement.


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BT has overcharged Vodafone for the period 1 July 2009 to [insert date]. The level of the overcharge is determined at [£ ]. Ofcom gives a direction to BT to pay Vodafone, by way of adjustment of overpayment for 080 call termination in the period 1 July 2009 to [insert date] the sum of [£ ] plus interest calculated at the rate specified in paragraph 13.13 of the Agreement.

BT has overcharged O2 for the period 1 July 2009 to [insert date]. The level of the overcharge is determined at [£ ]. Ofcom gives a direction to BT to pay O2, by way of adjustment of overpayment for 080 call termination in the period 1 July 2009 to [insert date] the sum of [£ ] plus interest calculated at the rate specified in paragraph 13.13 of the Agreement.

BT has overcharged Orange for the period 1 July 2009 to [insert date]. The level of the overcharge is determined at £XX. Ofcom gives a direction to BT to pay Orange, by way of adjustment of overpayment for 080 call termination in the period 1 July 2009 to [insert date] the sum of [£ ] plus interest calculated at the rate specified in paragraph 13.13 of the Agreement.

II Binding nature and effective date

2 This Determination is binding on BT, O2, Orange, T-Mobile and Vodafone;

3 This Determination shall take effect on the day it is published.

III Interpretation

4 For the purpose of interpreting this Determination—

a) headings and titles shall be disregarded; and

b) the Interpretation Act 1978 shall apply as if this Determination were an Act of Parliament.

5 In this Determination—

a) “2003 Act” means the Communications Act 2003 (c.21);

b) “2G/3G MNOs” means each of T-Mobile, Vodafone, O2 and Orange;

c) “Agreement” means the BT Standard Interconnect Agreement that each of the 2G/3G MNOs entered into with BT;

d) “BT” means British Telecommunications plc (BT) is a wholly whose registered company number is whose registered company number is 1800000, and any of its subsidiaries or holding companies, or any subsidiary of such holding companies, all as defined by section 736 of the Companies Act 1985, as amended by the Companies Act 1989;

e) “NCCN 956” means Network Charge Control Notice 956 issued by BT on 3 June 2009;

f) “O2” means Telefónica O2 UK Limited (O2) is a wholly whose registered company number is whose registered company number is 1743099, and any of its subsidiaries or holding companies, or any subsidiary of such holding


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companies, all as defined by section 736 of the Companies Act 1985, as amended by the Companies Act 1989;

g) “Ofcom” means the Office of Communications;

h) “Orange” means Orange Personal Communications Services Limited (Orange) is a wholly whose registered company number is whose registered company number is 2178917, and any of its subsidiaries or holding companies, or any subsidiary of such holding companies, all as defined by section 736 of the Companies Act 1985, as amended by the Companies Act 1989;

i) “T-Mobile” means T-Mobile (UK) Limited (T-Mobile) is a wholly whose registered company number is whose registered company number is 020302161, and any of its subsidiaries or holding companies, or any subsidiary of such holding companies, all as defined by section 736 of the Companies Act 1985, as amended by the Companies Act 1989;

j) “Vodafone” means Vodafone Group Services Limited (Vodafone) is a wholly whose registered company number is whose registered company number is 3802001, and any of its subsidiaries or holding companies, or any subsidiary of such holding companies, all as defined by section 736 of the Companies Act 1985, as amended by the Companies Act 1989;

Neil Buckley

Director of Investigations

A person duly authorised in accordance with paragraph 18 of the Schedule to the Office of Communications Act 2003

5


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Annex 5

6 Charities using THA zero-rating arrangements

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draft determination to resolve a dispute between bt and ... · pdf file2 ofcom’s...

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