Disputes between BT and each of Gamma and Vodafone in … · 2016. 8. 25. · Glossary of terms...

Disputes between BT and each of Gamma and Vodafone in

relation to BT’s average porting conveyance charges

This version is non-confidential.

Confidential redactions are indicated by []

Provisional Conclusions

Publication date: 30 September 2015

Provisional conclusions to resolve a dispute regarding BT’s average porting conveyance charges

About this document

This document sets out for comment Ofcom’s proposal for resolving disputes between BT and each of Gamma and Vodafone regarding BT’s average porting conveyance charges.

Average porting conveyance charges are the charges set by fixed line communications providers to cover the costs of conveying ported calls when a customer has switched communications provider but has kept their original telephone number.

General Condition 18 places obligations on communications providers to provide number portability. These include, amongst other things, the requirement to set wholesale porting charges that are cost oriented and based on the incremental costs of providing portability. Ofcom published guidance to communications providers relating to porting charges on 29 September 2014.

The matters in dispute relate to whether BT’s charges for conveying ported calls are compliant with the requirements of General Condition 18 in light of Ofcom’s guidance.


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Contents

Section Page

1 Summary 2

2 Number Portability: background and regulation 5

3 The Disputes 12

4 Analysis and provisional conclusions 21

Annex Page

1 Responding to these Provisional Conclusions 43

2 Consultation response cover sheet 45

3 [Provisional] Determination to resolve a dispute between BT and Gamma 47

4 [Provisional] Determination to resolve a dispute between BT and Vodafone 51

5 Further details of modelling approach 55


Glossary of terms

2003 Act – the Communications Act 2003. 2013 NMR – Review of the fixed narrowband services markets statement, 26 September 2013. Available at http://stakeholders.ofcom.org.uk/binaries/consultations/nmr-2013/statement/Final_Statement.pdf. 2013 DCC review consultation – Review of mobile donor conveyance charges consultation, 6 December 2013. Available at: http://stakeholders.ofcom.org.uk/binaries/consultations/review-mobile-donor-conveyance-charges/summary/condoc.pdf. 2014 DCC review statement – Review of mobile donor conveyance charges statement, 14 February 2014. Available at: http://stakeholders.ofcom.org.uk/binaries/consultations/review-mobile-donor-conveyance-charges/statement/statement.pdf. 2015 03 termination rates dispute determination – Dispute between BT and each of EE and Three regarding BT’s charges for terminating calls to 03 numbers, final determination dated 12 February 2015. Available at: http://stakeholders.ofcom.org.uk/binaries/enforcement/competition-bulletins/closed-cases/all-closed-cases/cw_01139/Final_determination_cw01139.pdf. 2015 Mobile Call Termination Market Review – Mobile call termination market review 2015-18: statement on the markets, market power determinations and remedies, 17 March 2015: http://stakeholders.ofcom.org.uk/consultations/mobile-call-termination-14/statement/. AFI – Additional Financial Information provided by BT to Ofcom alongside the RFS. APCCs – Average Porting Conveyance Charges. BT – British Telecommunications plc, whose registered company number is 1800000. BoE+1% - Bank of England base rate of interest plus 1%. CAT- Competition Appeal Tribunal. CP – Communications provider. CRF – Common Regulatory Framework. Commission Recommendation - Commission Recommendation of 7 May 2009 on the Regulatory Treatment of Fixed and Mobile Termination Rates in the EU 2009/396/EC, http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32009H0396&from=EN. CVR – Cost-volume relationship. DCCs – Donor Conveyance Charges. DCP – Donor communications provider. DLE – Digital local exchange.

http://stakeholders.ofcom.org.uk/binaries/consultations/nmr-2013/statement/Final_Statement.pdfhttp://stakeholders.ofcom.org.uk/binaries/consultations/nmr-2013/statement/Final_Statement.pdfhttp://stakeholders.ofcom.org.uk/binaries/consultations/review-mobile-donor-conveyance-charges/summary/condoc.pdfhttp://stakeholders.ofcom.org.uk/binaries/consultations/review-mobile-donor-conveyance-charges/summary/condoc.pdfhttp://stakeholders.ofcom.org.uk/binaries/consultations/review-mobile-donor-conveyance-charges/statement/statement.pdfhttp://stakeholders.ofcom.org.uk/binaries/consultations/review-mobile-donor-conveyance-charges/statement/statement.pdfhttp://stakeholders.ofcom.org.uk/binaries/enforcement/competition-bulletins/closed-cases/all-closed-cases/cw_01139/Final_determination_cw01139.pdfhttp://stakeholders.ofcom.org.uk/binaries/enforcement/competition-bulletins/closed-cases/all-closed-cases/cw_01139/Final_determination_cw01139.pdfhttp://stakeholders.ofcom.org.uk/consultations/mobile-call-termination-14/statement/http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32009H0396&from=EN


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DLRIC - Distributed long run incremental cost. ECJ – European Court of Justice. FAC – Fully allocated cost. FTR – Fixed termination rates. Gamma – Gamma Telecom Holdings Limited, whose registered company number is 4237779. GC18.5(a) – General Condition 18.5(a). Guidance – Porting charges under General Condition 18: Guidance on the setting of porting charges in compliance with GC18 and consultation on a new mobile donor conveyance charges, 29 September 2014. Available at: http://stakeholders.ofcom.org.uk/binaries/consultations/gc18-sep14/summary/Statement_on_Porting_Charges_under_GC18.pdf. Interest Guidance - Guidance setting out Ofcom’s approach to interest in the context of resolving disputes involving charges payable under BT’s Standard Interconnect Agreement, which provides an indication of the interest rate that we consider appropriate to adopt in such cases. Available at: http://stakeholders.ofcom.org.uk/binaries/enforcement/competition-bulletins/closed-cases/all-closed-cases/cw_01108/CW_011080613.pdf. LRIC – Long run incremental costs. LRIC+ - Long run incremental costs plus a mark-up for the recovery of common costs. LTC - Local tandem conveyance. NGN – Next Generation Network. NRA – National regulatory authority. OCP – Originating communications provider. Provisional Conclusions – this document. RCP – Recipient communications provider. Referring Parties – Gamma and Vodafone. RFS – Regulatory Financial Statements. Available at: http://www.btplc.com/thegroup/RegulatoryandPublicaffairs/Financialstatements/index.htm Supreme Court judgment: British Telecommunications Plc v Telefonica 02 UK Ltd and Others [2014] UKSC 42. TDM – Time division multiplex. USD – Universal Service Directive. Vodafone – Vodafone Limited, whose registered company number is 1471587.

http://stakeholders.ofcom.org.uk/binaries/consultations/gc18-sep14/summary/Statement_on_Porting_Charges_under_GC18.pdfhttp://stakeholders.ofcom.org.uk/binaries/consultations/gc18-sep14/summary/Statement_on_Porting_Charges_under_GC18.pdfhttp://stakeholders.ofcom.org.uk/binaries/enforcement/competition-bulletins/closed-cases/all-closed-cases/cw_01108/CW_011080613.pdfhttp://stakeholders.ofcom.org.uk/binaries/enforcement/competition-bulletins/closed-cases/all-closed-cases/cw_01108/CW_011080613.pdfhttp://www.btplc.com/thegroup/RegulatoryandPublicaffairs/Financialstatements/index.htm


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Section 1

1 Summary 1.1 This document (the “Provisional Conclusions”) sets out for comment our provisional

assessment of the matters in dispute.

1.2 The disputes, brought by each of Gamma Telecom Holdings Limited (“Gamma”) and Vodafone Limited (“Vodafone”) against British Telecommunications plc (“BT”) (collectively “the Parties”) relate to BT’s average porting conveyance charges (“APCCs”) (the “Disputes”).

1.3 Number portability enables subscribers to retain their telephone number(s) when they switch between communications providers (“CPs”). Wholesale porting charges are levied between CPs to recover certain costs associated with the provision of number portability. In respect of fixed networks, these charges include the APCC.

1.4 General Condition 18.5(a) (“GC18.5(a)”) requires that porting charges, including APCCs, be reasonable, cost oriented, and based on the incremental costs of providing portability.1 Ofcom published guidance on 29 September 2014 relating to porting charges under GC18.5(a) (the “Guidance”), following consultation with industry.2

1.5 The Guidance details how Ofcom considers a CP should set charges to meet the requirements of GC18.5(a). It makes clear that APCCs should be set on the basis of the long run incremental costs (“LRIC”) of either a CP’s own network or a notional next generation network (“NGN”).

1.6 In their dispute submissions, Gamma and Vodafone argued that BT’s APCCs are not compliant with the requirements of GC18.5(a) and that they have been overcharged as a result. In particular Gamma and Vodafone disputed the accuracy of BT’s LRIC calculations. Gamma also asserted that APCCs that are higher than the geographic termination rate3 for the call cannot be reasonable.

1.7 BT disputed the claims as it believed that its charges for APCCs were compliant with GC18.5(a). BT considered that GC18.5 requires portability charges to be set on a cost-oriented basis and based on the incremental costs of providing portability unless another basis for the charges has been agreed between the parties. It argued that the charges for certain conveyance services that are used to provide porting have been deregulated and that the charges for these services have been agreed on a commercial basis. BT has therefore maintained the commercially agreed prices for the conveyance elements of its APCCs and reduced to LRIC only the switch elements of the APCCs for which no commercially agreed charge exists.

1 http://stakeholders.ofcom.org.uk/binaries/telecoms/ga/GENERAL_CONDITIONS_22Sept2014.pdf.

2 http://stakeholders.ofcom.org.uk/binaries/consultations/gc18-

sep14/summary/Statement_on_Porting_Charges_under_GC18.pdf. 3 Termination rates are the wholesale charges levied by CPs for Fixed Call Termination, which were

set in the 2013 Narrowband Market Review - http://stakeholders.ofcom.org.uk/binaries/consultations/nmr-2013/statement/Final_Statement.pdf.

http://stakeholders.ofcom.org.uk/binaries/telecoms/ga/GENERAL_CONDITIONS_22Sept2014.pdfhttp://stakeholders.ofcom.org.uk/binaries/consultations/gc18-sep14/summary/Statement_on_Porting_Charges_under_GC18.pdfhttp://stakeholders.ofcom.org.uk/binaries/consultations/gc18-sep14/summary/Statement_on_Porting_Charges_under_GC18.pdfhttp://stakeholders.ofcom.org.uk/binaries/consultations/nmr-2013/statement/Final_Statement.pdf


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Provisional assessment of the matters in dispute

1.8 In order to determine whether BT’s APCCs are compliant with the requirements of GC18.5(a) in light of our Guidance, we have first considered how BT has calculated Gamma’s and Vodafone’s APCCs and whether this is in line with the requirements of GC18.5(a).

1.9 We provisionally conclude that the approach that BT has adopted to calculating APCCs is not compliant with the requirements of GC18.5(a). We consider that the requirements of GC18.5(a) apply to all elements of the APCC and that, in line with the Guidance, this means that the APCC as a whole should be set on a LRIC basis unless the parties have agreed otherwise. We do not consider that Gamma and Vodafone have agreed that APCCs should be set at a rate above LRIC.

1.10 Having provisionally concluded that the APCCs that BT has charged Gamma and Vodafone are not compliant with the requirements of GC18.5(a), we have calculated LRIC-based APCCs. We have based our calculations on BT’s own time division multiplex (“TDM”) network and have gathered information from BT in relation to its call groups, network components, cost categories and its underlying cost-volume relationships (“CVRs”)4 in order to complete these calculations.

1.11 Our analysis suggests that the APCCs that BT has charged Gamma and Vodafone should have been around 50% lower than those actually charged by BT since 1 January 2015. We provisionally conclude that BT should amend its charges accordingly, and make repayments of the amounts overcharged with interest calculated at the Bank of England base rate plus 1% (“BoE+1%”).

1.12 Given that the data needed to calculate the exact amounts of the overcharge will not be available at the time we resolve the Disputes, we consider it would be appropriate for the parties to resolve the amount to be repaid between themselves, and by following the methodology as set out in these provisional conclusions.

Structure of the remainder of this document

1.13 In line with Ofcom’s Dispute Resolution Guidelines5 this document sets out for comment the main elements of our provisional reasoning and assessment in relation to the matters in dispute.

1.14 We set out the background to number portability, including the regulation applicable, in Section 2. The background to the Disputes is set out in Section 3 and the analysis underpinning our provisional reasoning and assessment is set out in Section 4.

4 Cost-volume relationships describe how costs change as volumes of a cost driver changes. They

account for fixed common costs, economies of scale and scope, and modularity boundaries. CVRs are described in detail in BT’s documentation of its LRIC model, available online at: http://www.btplc.com/Thegroup/RegulatoryandPublicaffairs/Financialstatements/2014/LRICModelRelationshipsandParameters2014.pdf. 5 http://stakeholders.ofcom.org.uk/binaries/consultations/dispute-resolution-

guidelines/statement/guidelines.pdf.

http://www.btplc.com/Thegroup/RegulatoryandPublicaffairs/Financialstatements/2014/LRICModelRelationshipsandParameters2014.pdfhttp://www.btplc.com/Thegroup/RegulatoryandPublicaffairs/Financialstatements/2014/LRICModelRelationshipsandParameters2014.pdfhttp://stakeholders.ofcom.org.uk/binaries/consultations/dispute-resolution-guidelines/statement/guidelines.pdfhttp://stakeholders.ofcom.org.uk/binaries/consultations/dispute-resolution-guidelines/statement/guidelines.pdf


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Next steps

1.15 The Parties and other interested parties have until 5pm on 14 October 2015 to comment on these Provisional Conclusions.

1.16 After considering any comments received, Ofcom will make a final determination. Details of how to respond to these Provisional Conclusions are set out in Annexes 1 and 2. Our proposed determinations are set out at Annexes 3 and 4. Annex 5 sets out in more detail our approach to modelling APCCs.


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Section 2

2 Number Portability: background and regulation

Introduction

2.1 The Disputes submitted by Gamma and Vodafone relate to BT’s charges for providing number portability. In this section, we provide some background on number portability and how it is provided on BT’s network, as well as the regulation that applies to number portability charges.

Background

Number portability

2.2 Number portability enables subscribers to retain their telephone number, if they wish, when they switch between CPs. It was introduced to encourage switching and is an important facilitator of consumer choice and fosters effective competition in markets for electronic communications services.6

2.3 When a subscriber keeps their telephone number when changing CP, the number is described as ‘ported’ from one CP to another. Calls that the subscriber subsequently receives are usually first routed to the CP that originally held the number being called (the donor CP or “DCP”). The call is then identified as a call to a ported number and ‘onward routed’ to the CP to which the number has been ported (the recipient CP (“RCP”) or gaining provider).

2.4 This is illustrated in Figure 2.1 below, showing three different networks: (A) the originating CP (“OCP”) from where the call to a ported number is made; (B) the DCP which originally held the number before the subscriber first ported-out; and (C) the RCP which currently serves the called customer having ported-in the telephone number.

6 On 27 April 1995, the Director General of Telecommunications asked the Monopolies and Mergers

Commission to examine the issue of telephone number portability. The report found that an absence of portability operated against the public interest and this led to a modification of BT’s operating licence. Following this number portability became a viable commercial option for all CPs and the obligation to provide number portability was included in all telecoms licences: http://www.ofcom.org.uk/static/archive/oftel/publications/1995_98/numbering/mmc95.htm.

http://www.ofcom.org.uk/static/archive/oftel/publications/1995_98/numbering/mmc95.htm


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Figure 2.1: Onward routing for calls to ported numbers

Source: Ofcom.

Porting charges for geographic numbers

2.5 DCPs that have ported-out geographic numbers generally levy porting conveyance charges on RCPs for onward routing calls to ported numbers. In respect of fixed networks, this charge is known as the APCC.

2.6 Geographic APCCs are based only on the costs incurred in the onward routing to ported numbers of traffic originated on a different network to that of the DCP, which we refer to as off-net traffic, not traffic originated on the DCP’s own network (on-net originated traffic). However, industry convention is that the costs to be recovered are spread across all traffic (on and off-net) to ported-out numbers. As a result the APCC is lower than if costs were recovered only through charges applied to off-net traffic.

How porting works on BT’s network

2.7 The APCCs which BT levies for conveying calls to ported geographic numbers vary by CP. This is because the cost of providing onward routing for each CP depends on the amount of conveyance across BT’s network used to onward route these calls, and this will in turn depend on the interconnection arrangements both between BT and the OCP and between BT and the RCP. The components of BT’s network that are required to convey the call will depend on whether (i) BT receives the call from the OCP at the BT Digital Local Exchange (“DLE”) on which the number was originally hosted or, alternatively, at a tandem switch, and (ii) the location of the interconnect that carries the traffic from the BT network to the RCP as identified by a geographic porting prefix.

2.8 The components of BT’s network used to provide onward routing include local exchange handover, local-to-tandem conveyance (“LTC”), single transit and inter-tandem conveyance (“ITC”) (at short, medium and long distances). Where BT receives a call to a ported geographic number from the OCP at a tandem switch, a function called call drop-back enables the routing to the RCP to be determined and onward routed from the tandem switch (i.e. without the additional conveyance costs of maintaining a circuit from the tandem switch to the donor DLE and back again for the duration of the call). This is illustrated in Figure 2.2 below.


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Figure 2.2: How porting works on BT’s network

Source: Ofcom.

BT’s charges for APCCs

2.9 BT separates the potential routing scenarios through its network into ten “call groups” and charges are based on how much of a given RCP’s traffic uses each of the call groups. For each call group, different network components are consumed so that different costs are incurred. CPs may have calls in one or more of the groups depending upon the extent of their interconnection.

2.10 Table 2.3 below illustrates the ten different call groups based on where the call enters BT’s network, where it is handed over and the network components used.

Table 2.3: BT’s call groups

Group Call received at Call handed over at Network components

used

1 BT Tandem layer switch

The same BT Tandem layer switch, parent of Donor DLE

Main switch


BT tandem layer switch short distance away,

non-parent of Donor DLE

Main switch plus ITC-Short


BT Tandem layer switch medium distance away,


Main switch plus ITC-Medium


BT Tandem layer switch long distance away,


Main switch plus ITC- Long

5 BT Donor

DLE switch BT Donor DLE switch Local switch

6 BT Donor

DLE switch BT Tandem layer switch,

parent of Donor DLE Local switch

plus LTC


8

7 BT Donor

DLE switch BT Tandem layer switch

short distance away, non-parent of Donor DLE

Local switch plus LTC plus ITC-Short

8 BT Donor

DLE switch BT Tandem layer switch medium distance away,


Local Switch plus LTC plus ITC-Medium

9 BT Donor

DLE switch

BT Tandem layer switch long distance away,


Local switch plus LTC plus ITC-Long


Another BT Tandem layer switch, also parent of Donor DLE

Main switch plus ITC-Short

Source: BT.

Regulatory and legal background

2.11 Regulation of electronic communications networks and services in the EU is based around a common regulatory framework (“CRF”) of five Directives.7 These Directives provide Member States with the power and in some cases the duty, to impose regulation at a national level.

2.12 The Framework Directive provides the overall structure for the regulatory regime and sets out the policy objectives and regulatory principles that National Regulatory Authorities (“NRAs”) must follow. The Access Directive sets out the terms on which providers may access each other’s networks and services with a view to providing publicly available electronic communications services.

2.13 The Universal Service Directive (“USD”)8 deals with the obligation to provide a basic set of services to end-users and is particularly relevant to the Disputes.

The Universal Service Directive and GC18.5

2.14 Article 30 of the USD relates to the porting of telephone numbers and places an obligation on Member States to ensure that all subscribers are able to retain their telephone numbers independently of the undertaking providing them with telephony services.

2.15 Article 30(2) of the USD imposes a duty on NRAs, such as Ofcom, to ensure that pricing between operators and/or service providers related to the provision of number portability is cost-oriented.

2.16 In 2006, the European Court of Justice (“ECJ”) held that, subject to the requirement for cost orientation, Article 30(2) USD confers a discretion on NRAs to define the

7 The five directives are; Directive 2002/19/EC - on access to, and interconnection of, electronic

communications networks and associated facilities (the Access Directive); Directive 2002/20/EC - on the authorisation of electronic communications networks and services (the Authorisation Directive); Directive 2002/21/EC - on a common regulatory framework for electronic communications networks and services (the Framework Directive); Directive 2002/22/EC - on universal service and users' rights relating to electronic communications networks and services (the Universal Service Directive) and; Directive 2002/58/EC - concerning the processing of personal data and the protection of privacy in the electronic communications sector (the Privacy Directive). 8 Directive 2002/22/EC, as amended by Directive 2009/136/EC.

http://www.ofcom.org.uk/static/archive/oftel/ind_info/eu_directives/access.pdf


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methodology which appears to them to be the most suitable to make portability fully effective, in a manner which ensures that consumers are not dissuaded from making use of that facility. The ECJ considered that an NRA would be acting within the scope of its discretion by defining a maximum cost-oriented price, provided that it is genuinely possible for new operators to contest the application of maximum prices by operators already present in the market by showing that those prices are too high in relation to their cost structure. In principle, therefore, NRAs may adopt a national measure that lays down the specific method to be used in calculating costs under Article 30(2) USD and which fixes maximum ex ante prices in respect of all CPs on the basis of an abstract model of costs.9

2.17 In the UK, the requirements of Article 30(2) of the USD were implemented into national law through GC18. GC18 obliges a CP to provide number portability10 to its subscribers, and to provide portability11 to other CPs for that purpose.

2.18 GC18.5 obliges CPs to comply with certain principles when levying a charge for the provision of portability:

“The Communications Provider shall, pursuant to a request from another Communications Provider, provide Portability as soon as is reasonably practicable in relation to that request on reasonable terms. Any charges for the provision of such portability shall be made in accordance with the following principles:

(a) subject always to the requirement of reasonableness, charges shall be cost oriented and based on the incremental costs of providing Portability unless:

(i) The Donor Provider and the Recipient Provider have agreed another basis for the charges, or

(ii) The Office of Communications has directed that another basis for charges should be used;

(b) the Donor Provider shall make no charge in relation to System Set-Up Costs or Additional Conveyance Costs;

(c) in respect of mobile portability, the Donor Provider shall make no charge or annual fee for ongoing costs relating to registration of a ported Telephone Number or a Subscriber;

9 Case C438/04 Mobistar v IBPT (the Mobistar case), paragraphs 32 to 37. Although the case

specifically concerned set-up costs incurred by mobile operators in implementing requests for number portability, we consider that the ECJ’s comments apply equally to any costs recovered through wholesale charges for portability. 10

Number portability is defined in GC18 as a facility whereby subscribers who so request can retain their telephone number on a public communications network, independently of the person providing the service at the network termination point of the subscriber provided that such retention of a telephone number is in accordance with the National Telephone Numbering Plan. 11

Portability is defined in GC18 as any facility which may be provided by a CP to another CP enabling any subscriber who requests number portability to continue to be provided with any public electronic communications service by reference to the same telephone number irrespective of the identity of the person providing such a service.


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(d) charges levied by the Donor Provider shall be based on the reasonable costs incurred by it in providing Portability with respect to each Telephone Number;

(e) any direct charges to Subscribers for providing Number Portability do not act as a disincentive to Subscribers against changing their Communications Provider.”12

2.19 In summary, therefore, any charges for the provision of portability must be reasonable and should be cost oriented and based on the incremental costs of providing portability unless, either, the DCP and RCP have agreed another basis for the charges, or Ofcom has directed that another basis for charges should be used.

The Guidance

2.20 On 29 September 2014, following a consultation with industry to which each of the parties to the disputes responded, we published Guidance on the setting of porting charges in compliance with GC18.13 The Guidance sets out how we consider CPs should set porting charges that are reasonable, cost oriented and based on the incremental costs of providing portability as required by GC18. In particular the Guidance sets out that we consider all porting charges should be calculated using a LRIC cost standard as opposed to a LRIC+14 cost standard.15 LRIC takes the service in question as the relevant increment of output over which to measure costs.16 In regard to porting conveyance costs the Guidance makes clear that “the increment would be the donor conveyance of incoming voice calls to ported numbers which originate from CPs other than the DCP”.17 LRIC does not include a contribution to the DCP’s network and non-network common costs.18

The Communications Act 2003

2.21 The dispute resolution provisions of the CRF are reflected in sections 185 to 191 of the Communications Act 2003 (the “2003 Act”). We discuss these in relation to the Disputes referred to us in Section 3 below.

2.22 The 2003 Act also sets out the statutory duties and Community obligations that Ofcom must ensure consistency with when carrying out its functions.

2.23 Our principal duty in carrying out our functions, as set out in section 3 of the 2003 Act, is to further the interests of citizens in relation to communications matters and to further the interests of consumers in relevant markets, where appropriate by

12

http://stakeholders.ofcom.org.uk/binaries/telecoms/ga/GENERAL_CONDITIONS_22Sept2014.pdf. 13

Porting charges under General Condition 18: Guidance on the setting of porting charges in compliance with GC18 and consultation on a new mobile donor conveyance charges, 29 September 2014: http://stakeholders.ofcom.org.uk/binaries/consultations/gc18-sep14/summary/Statement_on_Porting_Charges_under_GC18.pdf. 14

LRIC+ cost standard reflects long run incremental costs including a mark-up for common costs and was considered as a cost option in the Guidance, but rejected in favour of LRIC. 15

Guidance, paragraph 8.59.1. 16

This is consistent with the concept of LRIC as used in the Commission Recommendation of 7 May 2009 on the regulatory treatment of fixed and mobile termination rates in the EU (2009/396/EC). 17

Guidance, page 21, footnote 46. 18

Common costs arise from the provision of a group of services but are not incremental to the provision of any individual service.

http://stakeholders.ofcom.org.uk/binaries/telecoms/ga/GENERAL_CONDITIONS_22Sept2014.pdfhttp://stakeholders.ofcom.org.uk/binaries/consultations/gc18-sep14/summary/Statement_on_Porting_Charges_under_GC18.pdfhttp://stakeholders.ofcom.org.uk/binaries/consultations/gc18-sep14/summary/Statement_on_Porting_Charges_under_GC18.pdf


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promoting competition. We assess the consistency of our proposed resolution of the Disputes with this and our other duties in Section 4.


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Section 3

3 The Disputes

Issues in dispute

3.1 Ofcom received a dispute referral from Gamma on 2 July 2015 in relation to the APCCs charged by BT for the porting of calls from its network (“Gamma’s Dispute Submission”). On 30 July 2015 we received a further dispute referral from Vodafone which also related to BTs charges for APCCs (“Vodafone’s Dispute Submission”). As both disputes were closely related, we decided that it was appropriate to consider them at the same time.

Submissions from Gamma

3.2 In its dispute submission, Gamma argued that BT’s APCCs are not compliant with the requirements of GC18.5(a) and that it has been overcharged as a result.

3.3 Gamma argued that APCCs being higher than the geographic termination rate breaches GC18.5 and the requirement of reasonableness as it leaves the RCP with a per minute cost to recover “whilst simultaneously handing the incumbent Donor Communications Provider operator a retail advantage for service to its monopoly on that number”.19

3.4 Gamma disputed the accuracy of the calculation of LRIC used by BT to arrive at its APCCs. Gamma referred to the 2013 Narrowband Market Review (“2013 NMR”)20 and geographic termination rates in support of this. Gamma considered that it would be reasonable to expect a similar magnitude of reduction in APCCs to that it experienced in relation to geographic call termination charges following the 2013 NMR.21

3.5 Gamma argued that BT breached the requirement of reasonableness in GC18.5 from 1 February 2014 as this was the date the geographic termination rate was reduced to LRIC. Gamma therefore requested that the scope of the dispute considered the reasonableness of BT’s APCCs charged from 1 February 2014.

3.6 Gamma was of the view that even if Ofcom were not to consider the situation from 1 February 2014, then BT is still in breach of the Guidance by not implementing any reduction in its APCCs on the effective date of the Guidance. Gamma argued that the effective date of the Guidance should be the date it was published by Ofcom, this being 29 September 2014.

3.7 Gamma recognised that it did not have sufficient data from BT to calculate the correct LRIC and that it was “unable to provide a reasoned estimate for the true LRIC of the APCC other than to demonstrate a plausible and evidenced concern that BT

19

Gamma’s Dispute Submission dated 2 July 2015, page 10. 20

Review of the fixed narrowband services markets statement, 26 September 2013: http://stakeholders.ofcom.org.uk/binaries/consultations/nmr-2013/statement/Final_Statement.pdf. 21

Following the 2013 NMR, call termination rates changed from being set on a LRIC+ basis to LRIC pricing.

http://stakeholders.ofcom.org.uk/binaries/consultations/nmr-2013/statement/Final_Statement.pdf


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have materially erred in their calculation”.22 As such, Gamma asked that Ofcom calculate the LRIC of the APCC components in order to resolve the issues in dispute.

3.8 Gamma noted that, whilst Ofcom’s dispute resolution powers were recently considered in the British Telecommunications Plc v Telefonica 02 UK Ltd and Others Supreme Court judgment dated 9 July 2014 (the “Supreme Court judgment”),23 it did “not believe that the conclusions in the Supreme Court Judgment are materially relevant to this case” on the basis that “the Supreme Court Judgment related to a largely unregulated product…whereas this case concerns a specific breach of GC18 and Ofcom guidance pursuant to it”.24 It nevertheless put forward arguments as to why it believed that the objectives in Article 8 of the Framework Directive would be met by Ofcom accepting its dispute and finding in Gamma’s favour.

3.9 In its submission Gamma also brought up the following concerns:

i) Gamma argued that BT’s APCCs should be reciprocal and that “BT’s charges have historically been materially more than those it states it is prepared to pay in reverse, without any reference to the different costs incurred by other operators”.25

ii) Gamma questioned whether the ten scenarios used by BT to blend costs are legitimate. It considered that because of the way BT ports the calls through its system, Gamma is being charged for part of the network that it does not consume. It considered that in order for a calculation of LRIC to be accurate, a consideration of all of the scenarios BT uses would be necessary.26

iii) Gamma claimed that the terms of the current DLE handover product are neither fair nor reasonable which “represents a further competitive distortion and raises additional compliance issues relevant to Ofcom’s analysis”.27

Submissions from Vodafone

3.10 In its submission, Vodafone questioned the reduction in the level of BT’s APCCs following the publication of the Guidance. It said that it was unconvinced that the APCC set by BT represented the LRIC charge of conveying ported calls across BT’s network.28

3.11 Vodafone considered that BT had erred in the methodology used for establishing the costs associated with each of the call scenarios29 and asserted that the costs for APCCs are significantly above what can be considered reasonable under the Guidance.

22

Gamma’s Dispute Submission, page 17. 23

British Telecommunications Plc v Telefonica 02 UK Ltd and Others [2014] UKSC 42. The Supreme Court judgment and its relevance to the Disputes is discussed in more detail in paragraph 4.29. 24



Gamma’s Dispute Submission, pages 17 and 18. 27


Vodafone’s Dispute Submission of 30 July 2015, page 6. 29

BT’s charges for APCCs vary depending on the path the call is routed through within its network. There are 10 scenarios that BT uses as a basis for these charges – see paragraphs 2.9, 2.10 and Table 2.3 above.


14

3.12 In its submission, Vodafone discussed the different call scenarios and raised a number of concerns regarding the calculation methodology that BT has used in each case.

3.13 In particular Vodafone argued that “where calls are delivered to a tandem node by the OCP, BT has failed to use cost components relating to incremental cost of routeing the call (compared to the counterfactual of a non-ported number), instead using cost components relating to the full cost of routeing the call”.30

3.14 In its submission, Vodafone also argued that BT has presented “no evidence that its claimed costs for any of the Groups are calculated on a LRIC basis” and that in “comparison to both the absolute level of LRIC-based call termination charges, and the relative difference between LRIC+ and LRIC rates on a variety of regulated charges, the rates that BT claim as LRIC-based are excessive”.31

Submissions from BT

3.15 We provided BT with copies of the dispute submissions of Gamma and Vodafone on 3 July 2015 and 3 August 2015 respectively. We invited BT to comment on the submissions.

3.16 In its response to Gamma’s submission, BT said that:

3.16.1 It had “never agreed that LRIC should be applied beyond the limited scope for it set by the European Commission (i.e. termination rates)”.32 However following the Guidance, it initiated a review of its porting charges and updated its rates. It believed that its current APCCs are fully compliant with GC18.5.

3.16.2 It refuted Gamma’s assertions that the Supreme Court judgment can only apply in situations where there is no specific regulatory obligation.33 BT considered that the Supreme Court is the relevant authority and that the judgment “appears to apply whether the dispute relates to a regulated or to an unregulated service”.34

3.16.3 The dispute should not consider APCCs back to 1 February 2014, as suggested by Gamma. BT considered that for “Ofcom to amend the prices from a time before the opening of the dispute and/or its Guidance (together with an appropriate period for contractual negotiation) would breach the principles of legal certainty”.35

3.16.4 BT also argued that the comparison between the APCC and geographic termination rates made by Gamma has no relevance to the assessment of BT’s compliance with GC18.5.36

3.17 BT provided further submissions on 30 July 2015. It argued that the arrangements that it has in place for number portability are fully compliant with GC18.

30

Vodafone’s Dispute Submission, page 13. 31


BT’s 10 July Submission, paragraph 3. 33

Gamma’s Dispute Submission, pages 6 and 7. 34



BT’s 10 July Submission, paragraphs 10 to 14.


15

3.18 In particular BT argued that GC18.5 requires DCPs to charge portability on a cost-oriented basis and based on the incremental costs of providing portability unless the DCP and RCP have agreed another basis for the charges. It argued that the charges for certain conveyance services that are used to provide porting have been deregulated and that the charges for these services are set on a commercial basis. BT has therefore maintained the commercially agreed prices for these services in its calculations of APCCs and reduced to LRIC only the switch element of the APCC for which no commercially agreed charge exists.37

3.19 BT argued that this was the same approach that Ofcom adopted when it determined a price for onward routing in the case of donor conveyance charges (“DCCs”) in the 2014 DCC review statement38 and was consistent with the approach Ofcom took in the 2015 03 termination rate dispute determination,39 “where Ofcom relied on a benchmark analysis to assess whether BT’s rates under review were compliant with the objectives of Article 8 of the Framework Directive and whether BT’s rates led to consumer detriment”.40

3.20 After BT received Vodafone’s submissions, it responded to say that the comments previously supplied in response to the Gamma dispute were relevant to its response to Vodafone’s dispute submission. It added that “the way in which Vodafone is seeking to portray Call group costs in its submission is just an inappropriate re-positioning of the Porting Differential debate”.41 [].42 [].43

Further submissions from Vodafone

3.21 Vodafone made further submissions to Ofcom on 21 August and 25 August 2015 following BT’s submission dated 30 July 2015. It made a number of additional observations about BT’s analysis:

i) In response to BT’s assertion that in these cases the most efficient use of network resources is the direct routing of ported calls,44 Vodafone contended that although many CPs interconnect directly, it is not possible for CPs to avoid APCCs altogether. It explained that “Vodafone has been involved in a series of initiatives to attempt to route such calls directly, none of which have resulted in successful avoidance of the APCC”.45

ii) It disagreed with BT that regulation has been removed on certain aspects of the APCC. It considered that although regulation has been removed on the conveyance services that BT was using as a proxy for its costs in calculating the

37


Review of mobile donor conveyance charges, statement and direction, 14 February 2014: http://stakeholders.ofcom.org.uk/binaries/consultations/review-mobile-donor-conveyance-charges/statement/statement.pdf. 39

Dispute between BT and each of Three and EE regarding BT’s charges for terminating calls to 03 numbers, Final Determination, 12 February 2015: http://stakeholders.ofcom.org.uk/binaries/enforcement/competition-bulletins/closed-cases/all-closed-cases/cw_01139/Final_determination_cw01139.pdf. 40


BT’s 6 August Submission, page 2. 42




Vodafone’s 21 August Submission, page 2.

http://stakeholders.ofcom.org.uk/binaries/consultations/review-mobile-donor-conveyance-charges/statement/statement.pdfhttp://stakeholders.ofcom.org.uk/binaries/consultations/review-mobile-donor-conveyance-charges/statement/statement.pdfhttp://stakeholders.ofcom.org.uk/binaries/enforcement/competition-bulletins/closed-cases/all-closed-cases/cw_01139/Final_determination_cw01139.pdfhttp://stakeholders.ofcom.org.uk/binaries/enforcement/competition-bulletins/closed-cases/all-closed-cases/cw_01139/Final_determination_cw01139.pdf


16

APCC, this did not mean regulation of the APCC or the cost components within it has been removed.46

iii) Vodafone also disagreed with BT’s approach that only the switch element of porting conveyance should be based on LRIC with the charges for the remaining elements being set at commercial rates. Vodafone disagreed that conveyance services were contestable in the context of ported calls and disputed BT’s claims that CPs could self-build or purchase these services. Vodafone also questioned whether the charges for conveyance set out in BT’s price list reflected commercially negotiated rates for conveyance, claiming that these were default rates that did not reflect the rates that it and other CPs actually paid for those services.47

iv) It considered BT’s argument that the Supreme Court judgment is the relevant authority on Ofcom’s approach to resolving the dispute to be misguided.48

Ofcom’s duty to handle disputes

3.22 Ofcom has the power to resolve the following types of disputes referred to it by one or more of the parties:

a) a dispute relating to the provision of network access (section 185(1) of the 2003 Act);

b) a dispute relating to entitlements to network access that a CP is required to provide by or under a condition imposed on him under section 45 of the 2003 Act between that CP and a person who is identified, or is a member of a class identified, in the relevant condition (section 185(1A) of the 2003 Act); and

c) a dispute between CPs, which is not an ‘excluded dispute’, relating to rights or obligations conferred or imposed by or under a condition set under section 45 of the 2003 Act or any of the enactments relating to the management of the radio spectrum (section 185(2) of the 2003 Act).

3.23 Sections 186(1) and (2) of the 2003 Act provide that where a dispute is referred to Ofcom in accordance with section 185, Ofcom must decide whether or not it is appropriate to handle the dispute. Section 186(3) provides that Ofcom must decide that it is appropriate for it to handle a dispute falling within section 185(1A) or section 185(2) unless there are alternative means available for resolving the dispute which would be consistent with the requirements of section 4 of the 2003 Act and would be likely to result in prompt and satisfactory resolution.

Ofcom’s powers when determining a dispute

3.24 Ofcom’s powers in relation to making a dispute determination are limited to those set out in section 190 of the 2003 Act. Except in relation to disputes relating to the management of the radio spectrum, Ofcom’s main power is to do one or more of the following:

46

Vodafone’s 21 August Submission, pages 4 and 5. 47

Vodafone’s 21 August Submission, pages 5-10. 48

Vodafone’s 25 August Submission, page 1.


17

a) make a declaration setting out the rights and obligations of the parties to the dispute (section 190(2)(a));

b) give a direction fixing the terms or conditions of transactions between the parties to the dispute (section 190(2)(b));

c) give a direction imposing an obligation on the parties to enter into a transaction between themselves on the terms and conditions fixed by Ofcom (section 190(2)(c)); and

d) 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 (section 190(2)(d)).

3.25 A determination made by Ofcom to resolve a dispute binds all the parties to that dispute (section 190(8)).

Ofcom’s duties when determining a dispute

3.26 When resolving a dispute under the provisions set out in sections 185 to 191 of the 2003 Act, Ofcom is exercising one of its regulatory functions. As a result, when Ofcom resolves disputes it must do so in a manner which is consistent with both Ofcom’s general duties in section 3 of the 2003 Act, and (pursuant to section 4(1)(c) of the 2003 Act) the six Community requirements set out in section 4 of the 2003 Act, which give effect, amongst other things, to the requirements of Article 8 of the Framework Directive.49

Accepting the Disputes

3.27 Having considered both Gamma’s and Vodafone’s submissions and subsequent comments made by the parties, we were satisfied that the Disputes fell within section 185(1A) of the 2003 Act.

3.28 On 23 July 2015 we informed Gamma and BT of our decision that it was appropriate for us to handle their dispute for resolution in accordance with section 186(3) of the 2003 Act. Following its submissions, Vodafone was added as a party to the Disputes on 10 August 2015. The scope for the Disputes was updated on the Competition and Consumer Enforcement Bulletin on 11 August 2015 to reflect this.50

Scope of the Disputes

3.29 We set out the following scope for the Disputes on 11 August 2015:

“To determine whether the APCCs that BT has charged Gamma and Vodafone for the period from 29 September 2014 to the date of the determination were set in accordance with General Condition (GC) 18.5(a).

If BT’s APCCs were not set in accordance with GC18.5(a), to determine what the APCCs should have been for that period (or the

49

Directive 2002/21/EC of 7 March 2002 (as amended). 50

See http://stakeholders.ofcom.org.uk/enforcement/competition-bulletins/open-cases/all-open-cases/cw_01161/.

http://stakeholders.ofcom.org.uk/enforcement/competition-bulletins/open-cases/all-open-cases/cw_01161/http://stakeholders.ofcom.org.uk/enforcement/competition-bulletins/open-cases/all-open-cases/cw_01161/


18

relevant part of that period) and what payments (if any) BT should make to Gamma and/or Vodafone as a result.”

3.30 In its submission, Gamma commented that it had not invested to allow DLE handover of ported calls because the terms and conditions imposed by BT are “neither fair nor reasonable and prevent any operator without significant national residential scale from benefiting from such investment”.51 As Gamma does not yet purchase this product, it has not impacted the calculation of Gamma’s APCC by BT. Further, it does not appear from Gamma’s submission that DLE handover formed part of the commercial negotiations between Gamma and BT relevant to these disputes. Therefore, we did not consider this to be in the scope of the Disputes.

3.31 Vodafone raised a similar issue in relation to DLE handover, [].52 [].

Relevant timeframe for the Disputes

3.32 In its dispute submission, Gamma identified two possible start dates for the Disputes:

i) 1 February 2014, being the date from which BT reduced its geographic termination rates. Gamma argued that it could not be reasonable for APCCs to materially exceed geographic termination rates and that this situation arose when BT reduced its geographic termination rate; and

ii) 29 September 2014, being the date from which Gamma believes that the Guidance should take effect.

3.33 As noted above, BT disagreed with both of the dispute start dates proposed by Gamma. BT considered that the Guidance allowed it two to three months from the date that the Guidance was published to revise its charges and that therefore the appropriate start date for the Disputes was the date that it changed its APCCs, i.e. 1 January 2015.

3.34 For the reasons we explain in paragraph 4.16 below, we do not consider that Gamma’s arguments about the link between geographic termination rates and APCCs have merit and therefore do not consider that 1 February 2014 forms an appropriate start date for the Disputes. The appropriate start date for the Disputes therefore depends on what Ofcom intended to do when it set the Guidance.

3.35 In its submission Gamma said that it considered the Guidance was clear as to the date from when it should be applied.53 Gamma quoted paragraph 8.47 of the Guidance:

“Therefore, our objective remains to provide CPs with greater clarity as to the appropriate interpretation of reasonable and cost-oriented charges under GC18 with effect from the date of this guidance, and to facilitate the resolution of disputes if CPs subsequently fail to agree commercial terms. We have explained above why we do not propose to set the actual level of any rates other than the DCC on an ex-ante forward looking basis.”

51



Gamma’s Dispute Submission, page 11.


19

3.36 Gamma considered that the words “with effect from the date of this guidance” meant that BT should have implemented a reduction in its APCCs from the date the Guidance was published (or at least have back-dated any price reductions to this date).

3.37 BT’s view was that the Guidance published by Ofcom in September 2014 was not intended to be immediately implemented by CPs.54 BT quoted paragraph 8.61 of the Guidance in support of its position:

“In the case of fixed CPs, we anticipate that CPs are likely to need some time to review their porting charges in light of our guidance. We would not expect this to take longer than two to three months from the date of this document.”

3.38 Gamma contended that the interpretation of paragraph 8.61 is that “it may take “two to three months” to calculate the APCC before giving it retrospective effect to the date of the Guidance” (Gamma’s emphasis).55

3.39 BT disagreed with Gamma’s comments and considered that the “Guidance was clearly intended to be prospective and the basis for future negotiations as regards future prices”.56 It was of the view that if Ofcom were to amend prices from before the opening of the Disputes, this would breach the principles of legal certainty.57

3.40 Having considered the arguments of the parties, we do not agree with Gamma’s interpretation of the Guidance. Our intention when publishing the Guidance was that CPs would have two to three months to implement the Guidance and this was not intended to have retrospective effect from this date.

3.41 Paragraph 8.47 was intended to explain our objective when setting the Guidance and our intention that, from the date of the Guidance, we will have provided greater clarity as to the appropriate interpretation of reasonable and cost-oriented charges under GC18. Therefore, from this date, CPs would be able to review their porting charges in line with the Guidance with a view to implement any changes necessary within two to three months as set out in paragraph 8.61.

3.42 BT reduced its APCCs after three months and we consider this is reasonable in the circumstances and in line with our intention when setting the Guidance. Based on our consideration of these points, we therefore provisionally conclude that the appropriate start date for the Disputes is 1 January 2015 and have based our analysis on the APCCs that applied from this date.

Interested Parties

3.43 Sky UK Ltd, Virgin Media Plc, TalkTalk Plc, Simwood eSMS Limited, aql Wholesale Limited and Daisy Group Ltd have all expressed an interest in the Disputes.

Information relied on in resolving the Disputes

3.44 In resolving the Disputes, we have relied upon:

54




BT’s 10 July Submission, paragraph 8.


20

3.44.1 Dispute submission from Gamma, 2 July 2015.

3.44.2 BT’s comments on Gamma’s dispute submission, 10 July 2015.

3.44.3 BT’s further comments on Gamma’s dispute submission, 30 July 2015.

3.44.4 Dispute submission from Vodafone, 30 July 2015.

3.44.5 Gamma’s response to the 1st section 191 Notice, 31 July 2015.

3.44.6 BT’s comments on Vodafone’s dispute submission, 6 August 2015

3.44.7 BT’s responses to the 1st section 191 Notice, 13, 19, and 24 August 2015 and 3, 10, 15 and 22 September 2015.

3.44.8 BT’s responses to the 2nd section 191 Notice, 20, 26 and 27 August 2015.

3.44.9 Submission from Vodafone, 21 August 2015.

3.44.10 Submission from Vodafone, 25 August 2015.


21

Section 4

4 Analysis and provisional conclusions 4.1 In this section, we set out the analytical framework that we have used to assess the

issues raised by the Disputes and the conclusions that we propose to reach.

Analytical framework

4.2 As set out at paragraphs 3.29 and 3.42 above, the scope of the Disputes that we are resolving is to determine whether the APCCs that BT has charged Gamma and Vodafone since 1 January 2015 were set in accordance with GC18.5(a). If the charges were not set in accordance with GC18.5(a) we will determine what the APCCs should have been and whether repayments should be made as a result.

4.3 Our analytical framework therefore involves three steps:

Step 1: Assess whether BT has set the APCCs in a manner that is compliant with the requirements of GC18.5(a). This involves us taking a view on the appropriate interpretation of GC18.5(a), taking into consideration the points made on this issue by the parties, and assessing whether BT has set its APCCs in a manner that complies with this. If we identify that the APCCs are compliant with GC18.5(a), it would not be necessary for us to carry out any further analysis and we would propose to resolve the Disputes in BT’s favour. However, if we identify that the manner in which BT has set the APCCs was not compliant with the requirements of GC18.5(a), we would move to Steps 2 and 3 of our framework.

Step 2: Identify a level of APCC that would have been compliant with the requirements of GC18.5(a).

Step 3: Consider whether we should require BT to make repayments to Gamma and Vodafone for any APCC overcharging.

Step 1: Assessment of whether BT’s APCCs are cost oriented in line with the requirements of GC18.5(a)

Submissions from Gamma and Vodafone

4.4 At the heart of the Disputes is the interpretation of the requirements of GC18.5(a) set out in the Guidance. Prior to the publication of the Guidance, CPs had set APCCs on the basis of a LRIC+ cost standard. We explained in the Guidance that, going forward, we intended to interpret the cost-orientation requirement of GC18.5(a) in accordance with a LRIC cost standard in this regard.

4.5 In its submission, Gamma outlined some calculations it had made to estimate the scale of reduction in APCCs it would expect when moving from a charge set on the


22

basis of a LRIC+ cost standard to one set using a LRIC cost standard.58 It took two approaches to these estimates:

4.5.1 The first was based on the reduction in geographic fixed termination rates (“FTRs”) that was seen in the 2013 NMR when the cost standard for FTRs changed from LRIC+ to LRIC;

4.5.2 The second was based on historic data as reported in the 2010 Regulatory Financial Statements (“RFS”) for the Single Tandem Transit service. Gamma used the ratio of the fully allocated cost (“FAC”) to the distributed long run incremental cost (“DLRIC”) for this service, and the weighted average of the ratios between DLRIC and LRIC for each of the key cost components of this service, to create a benchmark ratio of LRIC to FAC for the services included in the APCC.

4.6 Both of Gamma’s approaches estimated that the reduction in APCCs when moving from LRIC+ to LRIC should have been much larger than the actual reduction in its APCC made by BT.

4.7 In its submission Gamma also argued that “it cannot be reasonable that an APCC exceeds the regulated geographic termination rate” as this would leave the RCP with a per-minute deficit.59

4.8 Gamma further noted that BT’s APCC is not reciprocal, though it described this as an ancillary concern.60

4.9 In its submission, Vodafone questioned the reduction in BT’s APCCs following the move from LRIC+ to LRIC after the Guidance was published. It explained that “[w]hereas the move to from LRIC+ to LRIC resulted in a reduction in a 58% in mobile termination rates, an 85% reduction in fixed termination rates and a 50% reduction in MNP Donor Conveyance Charges, BT’s proposals to Vodafone resulted in only an approximate [] in APCCs, still leaving us at a net loss for terminating calls to ported numbers”.61 As a result, Vodafone explained that it was unconvinced that the APCC set by BT represented the LRIC charge of conveying ported calls across its network.

BT’s comments on the Gamma and Vodafone submissions

4.10 BT argued that the approach taken by Gamma to calculating the anticipated scale of reduction in APCCs was flawed as there is no relevant basis of comparison between FTRs and APCCs.62 FTRs were set on the basis of a hypothetical NGN, while BT’s charges were set on the basis of its own network technology and topology.

4.11 BT also rejected Gamma’s suggestion that it would not be reasonable for APCCs to exceed the FTR. BT argued that there is no relevant basis for the comparison made by Gamma, for the following reasons:

4.11.1 In the 2013 NMR, Ofcom did not simply reduce FTRs to LRIC but redistributed the common costs previously recoverable from FTRs to the

58

Gamma’s Dispute Submission, pages 12-17. 59




BT’s 30 July submission, paragraphs 33-36.


23

origination charge. This rebalancing of where to recover these costs should have no bearing on the cost that the DCP incurs in providing onward routing;63

4.11.2 There is no single APCC that can be compared with call termination – a CP may be charged an APCC below FTRs based on the mix of call groups that it uses, which is based on the way in which it has chosen to interconnect with BT;64 and

4.11.3 “The lack of correlation between fixed termination rates and APCC was recognised by Ofcom in the [2013 NMR] Statement itself”.65

4.12 BT rejected Gamma’s suggestion that APCCs should be set on a reciprocal basis, noting that “[g]iven the differences in technology and topology between BT and Gamma, there is no reason to suppose the network costs incurred by BT and Gamma would be the same”.66

Ofcom’s views

4.13 In our Guidance we acknowledged that CPs may not have all the necessary information to demonstrate that a charge was not compliant with GC18. We stated that we “would expect that parties bringing a dispute would set out, based on the information available to them, why they considered charges were not compliant with GC18 and we would expect DCPs to provide sufficient cost data and reasoning to justify the level of their charges”.67

4.14 Gamma has used historic data for one of the services provided on BT’s network (using the same technology and topology) to estimate a LRIC:FAC ratio. It has also used the network modelling information used by Ofcom to set charges in the 2013 NMR to determine a LRIC:LRIC+ ratio. We accept that neither of these calculations can be taken as robust estimates of the reduction in the APCC that Gamma should have experienced, since the first is based on historic data for a single service on BT’s network whilst the latter, as noted by BT, uses a different technology.

4.15 Within the restrictions of the available data, we considered that Gamma’s reasoning gave us sufficient grounds to believe that BT’s APCCs may not have been set in a manner that was compliant with the requirements of GC18.5(a) and that it was appropriate for us to consider the matter as a dispute.

4.16 In relation to Gamma’s other points, in principle we see no reason for APCCs to be capped at the rate of FTRs. The two are fundamentally different services which make use of different parts of BT’s network (though they may share certain network components).

4.17 In relation to Gamma’s point about reciprocity, we note that the Guidance states that “CPs should be allowed to set charges based on the technology and topology used in their own networks”.68 Gamma operates a NGN and BT operates a TDM network; we would not expect them to necessarily incur similar costs in routing calls to ported

63





Guidance, paragraph 8.63. 68

Guidance, paragraph 5.7.


24

numbers. Therefore, we see no reason to expect or require the APCCs charged by BT to Gamma and charged by Gamma to BT to be reciprocal.

4.18 We therefore do not consider that APCCs need to be set below FTRs or on a reciprocal basis in order to be considered reasonable.69 However, given our concerns that BT’s APCCs may not have been set in a manner that was compliant with the cost orientation requirements of GC18.5(a), we requested that BT provide us with cost data and reasoning to justify the level of its APCCs to both Gamma and Vodafone.

BT’s justification for its charges

4.19 BT set out its approach to calculating APCCs in its submission to us of 30 July 2015. BT considered that the Supreme Court judgment is the relevant authority on the approach to be taken on dispute resolution in the current disputes. BT made reference to the Supreme Court’s position that: “[t]he whole scheme of the Directives is to leave the arrangements for interconnection to the parties unless there are grounds for regulatory intervention”.70 It submitted that “GC18.5 foresees that the wholesale porting rates should be cost-oriented and based on incremental costs unless operators have agreed another basis for the charge” (BT emphasis).71

4.20 BT believed that conveyance charges were “competitive” and as a result contractual arrangements relating to these charges should prevail and that Ofcom should not interfere “unless there is clear evidence that the Article 8 objectives of the Framework Directive are negatively affected”.72 BT noted that commercial rates for conveyance services had been agreed with both Gamma and Vodafone.

4.21 BT recognised paragraph 4.42 of the Guidance, which states that portability is not a contestable service, but argued that this must be read in light of paragraph 4.11 of the Guidance, which discusses the history of how porting conveyance charges have been set, using network services that were historically regulated but have had regulation removed.

4.22 BT justified not pricing all of the components of the APCC on a LRIC basis on the grounds that conveyance charges have already been commercially agreed with Gamma and Vodafone and that therefore there is no requirement that they be set on a LRIC basis. Table 4.1 below sets out the network components used to provide porting conveyance and BT’s views as to whether these are contestable or not.

Table 4.1: Table of network components used by BT and BT’s view on contestability

Network component Contestability

Local switch Non-contestable

Main switch Non-contestable

Inter-tandem conveyance – Short Contestable

Inter-tandem conveyance – Medium Contestable

69

We would, however, note that the APCCs we consider BT should have set for Gamma and Vodafone (see paragraph 4.88) are below the FTRs. 70



BT’s 30 July Submission, paragraph 25.


25

Inter-tandem conveyance – Long Contestable

Local tandem conveyance Contestable

Source: BT.

4.23 BT has therefore only set at LRIC the cost of the local switch and main switch components, as these are the only components of a ported call it considers not to be contestable. It has kept all other components of the APCCs that it charges at their commercially agreed rates.

Comments from Gamma and Vodafone

4.24 Vodafone disagreed with BT’s interpretation of GC18.5 and its approach to setting APCCs.73 Vodafone noted that paragraph 32 of the Supreme Court judgment draws a clear distinction between Ofcom’s ‘regulatory’ and ‘adjudicatory’ functions:

“The existence side by side of both adjudicatory and regulatory functions follows from the scheme of the Directives, but is particularly clearly spelled out in section 190 of the Communications Act, which I have already quoted. The section distinguishes between Ofcom’s powers in the course of dispute resolution to declare the rights and obligations of the parties (section 190(2)(a)), to fix the terms of transactions between the parties (section190(2)(b)) and to impose an obligation to enter into a transaction on terms fixed by Ofcom (section 190(2)(c)). The first of these powers is plainly adjudicatory. The second and third are regulatory.”

4.25 Vodafone considered that the present dispute was one where the terms of the transaction needed to be fixed to comply with GC18.5. Further Vodafone did not consider that, as per GC18.5, it had “agreed another basis for the charges” with BT.74 It also noted that GC18.5 continues to impose an obligation of “reasonableness” even if there has been a commercial agreement between the parties and that any such agreement has to take into account regulatory requirements.

4.26 Vodafone also made representations in the event that Ofcom did consider that the approach taken in the Supreme Court judgment should be followed in the current disputes, noting that the threshold for intervention was not high.75

4.27 Gamma was of the view that the guidance provided by the Competition Appeal Tribunal (“CAT”) in the Termination Rate Disputes Core Issues Judgment76 was more relevant in the Disputes than the Supreme Court judgment, which it considered not to be “materially relevant” to this case.77 Gamma made similar arguments to Vodafone about the role that Ofcom performs in resolving disputes and suggested that the appropriate starting point was to consider the reasons for the variation in the charges.

73

Vodafone’s 25 August Submission. 74

Vodafone’s 25 August Submission, paragraph 8. 75

Vodafone’s 25 August Submission, paragraphs 9-12. 76

T-Mobile (UK) Ltd v Ofcom [2008] CAT 12. 77

Gamma Dispute Submission, pages 6-10.


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Ofcom’s assessment of BT’s APCCs

4.28 We do not agree with BT’s approach to setting the APCC.

4.29 In particular, we do not agree with BT’s analysis of the application of the Supreme Court judgment. In the cases to which the Supreme Court judgment related,78 the market in question at the relevant time (i.e. that for non-geographic numbers) was not subject to specific regulation by Ofcom and the judgment dealt with the approach that Ofcom should adopt to resolving disputes in such circumstances. The position in the Disputes is different: Ofcom has imposed regulation that applies to the charges in question in the form of GC18.5(a). The Disputes concern compliance by BT with that regulation. The Supreme Court does not address the approach Ofcom should adopt to disputes about compliance with regulatory obligations.79 BT’s reference to the Supreme Court’s comments about leaving interconnection to the parties unless there are grounds for regulatory intervention fails to recognise that Ofcom – in light of the requirements of the relevant Directives – has previously determined that there were grounds for regulatory intervention in this area, and accordingly imposed GC18 with which BT (and all other CPs) are required to comply.

4.30 GC18.5(a) obliges BT to comply with certain principles when levying a charge for the provision of portability and we consider that this is the appropriate starting point for our resolution of the Disputes.

4.31 GC18.5(a) requires in relation to charges for Portability that:

“…Any charges for the provision of such portability shall be made in accordance with the following principles:

(a) subject always to the requirement of reasonableness, charges shall be cost oriented and based on the incremental costs of providing Portability unless:

(i) The Donor Provider and the Recipient Provider have agreed another basis for the charges, or

(ii) The Office of Communications has directed that another basis for charges should be used;”

4.32 As we understand it, BT appears to have interpreted this to mean that the requirement to set cost oriented prices only applies to what it characterises as the non-contestable elements of porting services and not those elements where it says it

78

Determination to resolve a dispute between BT and each of T-Mobile, Vodafone, O2 and Orange about BT’s termination charges for 080 calls, 5 February 2010: http://stakeholders.ofcom.org.uk/enforcement/competition-bulletins/closed-cases/all-closed-cases/cw_01036/ and Determination to resolve a dispute between BT and each of Vodafone, T-Mobile, H3G, O2, Orange and Everything Everywhere about BT‘s termination charges for 0845 and 0870 calls, 10 August 2010: http://stakeholders.ofcom.org.uk/enforcement/competition-bulletins/closed-cases/all-closed-cases/cw_01042/. 79

The Supreme Court draws the distinction between the case where regulation has and has not been put in place inter alia at paragraph 9 of the judgment, where it notes that the appeal there had nothing to do with the case in which a party had been found to have SMP in a relevant market, in other words where regulation had been put in place. The relevant regulation here is in the form of general conditions, rather than SMP conditions, but the distinction noted by the Supreme Court applies equally.

http://stakeholders.ofcom.org.uk/enforcement/competition-bulletins/closed-cases/all-closed-cases/cw_01036/http://stakeholders.ofcom.org.uk/enforcement/competition-bulletins/closed-cases/all-closed-cases/cw_01036/http://stakeholders.ofcom.org.uk/enforcement/competition-bulletins/closed-cases/all-closed-cases/cw_01042/http://stakeholders.ofcom.org.uk/enforcement/competition-bulletins/closed-cases/all-closed-cases/cw_01042/


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has agreed rates with other CPs on a commercial basis. BT has justified its position on the basis of what Ofcom said in paragraph 4.11 of the Guidance.

4.33 We disagree with BT’s interpretation of what was said in the Guidance. Paragraph 4.11 of the Guidance was not intended to separate components of the APCC into “contestable” and “non-contestable” elements but instead provides a background to the history of regulation of the services that were used to determine the APCC prior to the Guidance being issued. Paragraph 4.42 of the Guidance makes it clear that portability is not a contestable service – this includes all component service elements that make up portability. This is because only the DCP is able to provide porting to the RCP, and so the RCP cannot exercise control over who provides various elements of the porting service even if some of these elements, when purchased in a different context, may be contestable.

4.34 Moreover, we do not consider that the question of whether or not porting conveyance services are contestable is relevant to the Disputes. The regulation in GC18.5 was not imposed on BT as a result of us carrying out a market review and finding SMP. Rather it was imposed on all CPs as a means of protecting the interests of consumers and ensuring that the cost to them of switching providers is kept to a minimum. GC18.5(a) requires all porting charges – including the APCC – to be cost oriented. In so requiring, it implements the obligation in Article 30(2) USD which requires that Ofcom “ensures that pricing between operators … related to the provision of number portability is cost-oriented”. Article 30 does not draw the distinction that BT seeks to draw and GC18 must be read in light of the requirements of Article 30 USD.

4.35 Our position to this effect is made clear in paragraph 4.97 of the Guidance, where we state that: “all porting charges (both conveyance and non-conveyance, and those both in the fixed and mobile sectors) should be set using a LRIC cost standard” (emphasis added).

4.36 In calculating the APCC, BT has historically used the charges for conveyance services to derive the costs used in certain call scenarios involved in routing porting traffic (as shown in Table 2.3). CPs have previously agreed to APCCs set using this approach when LRIC+ was considered to be a reasonable cost basis for setting charges. However, our Guidance concluded that looking forward, we would interpret the requirement for cost orientation in this regard as meaning LRIC for the purposes of GC18.5(a), and that this applies to the APCC as a whole. We anticipated that, following the publication of our Guidance, CPs would seek commercial discussions with BT about the level of the APCC.

4.37 Where the costs of certain elements of the APCC have previously been determined based on commercially agreed rates for conveyance services, any such commercial discussions would need to include consideration of whether these commercial rates continued to be cost oriented, in light of any guidance given by Ofcom.

4.38 It is clear that Gamma and Vodafone do not now agree that BT’s current APCCs are cost oriented: their correspondence supporting the Disputes demonstrates this. Therefore, we need to determine whether BT’s APCCs are cost oriented, in compliance with GC18. As we have set out above, it is our position that in making that assessment we should consider the APCC based on assessing the costs of all components at LRIC for the reasons explained in our Guidance.


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4.39 BT suggested that its approach was supported by Ofcom’s reasoning in the 2015 DCC Review Statement,80 in which Ofcom decided to exclude transmission costs from the DCC. These costs were excluded as we “considered that it was not appropriate for these costs to be recovered through the DCC as the cost of interconnection links are already recovered between the donor provider and the recipient provider under separate commercial arrangements”.81 BT argued that the comparison between mobile networks and fixed networks was apt as neither are co-located and both require conveying calls in order to route ported calls between switches.

4.40 We consider that BT has misinterpreted the intention of paragraph 3.10 of the 2015 DCC Statement. In the 2014 DCC Review Consultation82 we set out our reasoning for excluding transmission costs (referred to in that document as “transit costs”).83 These costs were excluded as they were no longer considered to be efficiently incurred, as the majority of mobile network operators had achieved or were close to achieving direct interconnection with each other. This is in contrast to the issues in dispute which relate not to whether certain costs should be included within the APCC, but the approach to assessing the level of the costs.

4.41 BT also argued that its approach was consistent with that adopted by Ofcom in the 2015 03 termination rate dispute determination84, in which BT noted that Ofcom had used a commercial-charges-based approach as its primary benchmark in assessing how to resolve a dispute over the level of the termination rate BT charges to CPs for calls to 03 numbers hosted by BT.

4.42 We question the relevance of BT’s comparisons between the two sets of disputes. The 2015 03 termination rate dispute concerned termination rates which were not subject to regulatory conditions. Given that the porting charges in the current disputes are the subject of existing regulation, we do not consider that a commercial-charges-based approach is appropriate for resolving these Disputes, which concern compliance with regulatory obligations.

Ofcom’s provisional view on whether BT’s APCCs are cost oriented in line with the requirements of GC18.5(a)

4.43 We have considered BT’s justification for the level of its APCCs. For the reasons set out above, we provisionally conclude that BT has failed to set its APCCs in a manner that is compliant with the requirements of GC18.5(a). Specifically, we consider that BT’s decision to price the conveyance elements of the APCC on a commercial basis, rather than a LRIC basis, is inconsistent with the Guidance and that as a consequence the APCCs are not cost oriented as is required by GC18.5(a).

4.44 As a result we consider that BT should be required to amend the level of its APCCs. We therefore consider that it is appropriate for us to calculate the level of APCCs that should have been charged by BT to Gamma and Vodafone since 1 January 2015.

80

Available at: http://stakeholders.ofcom.org.uk/binaries/consultations/review-mobile-donor-conveyance-charges/statement/statement.pdf. 81

2014 DCC review statement, paragraph 3.10. 82

Available at: http://stakeholders.ofcom.org.uk/binaries/consultations/review-mobile-donor-conveyance-charges/summary/condoc.pdf. 83

2013 DCC review consultation, paragraphs 4.37 to 4.39. 84

http://stakeholders.ofcom.org.uk/binaries/enforcement/competition-bulletins/closed-cases/all-closed-cases/cw_01139/Final_determination_cw01139.pdf.

http://stakeholders.ofcom.org.uk/binaries/consultations/review-mobile-donor-conveyance-charges/statement/statement.pdfhttp://stakeholders.ofcom.org.uk/binaries/consultations/review-mobile-donor-conveyance-charges/statement/statement.pdfhttp://stakeholders.ofcom.org.uk/binaries/consultations/review-mobile-donor-conveyance-charges/summary/condoc.pdfhttp://stakeholders.ofcom.org.uk/binaries/consultations/review-mobile-donor-conveyance-charges/summary/condoc.pdfhttp://stakeholders.ofcom.org.uk/binaries/enforcement/competition-bulletins/closed-cases/all-closed-cases/cw_01139/Final_determination_cw01139.pdfhttp://stakeholders.ofcom.org.uk/binaries/enforcement/competition-bulletins/closed-cases/all-closed-cases/cw_01139/Final_determination_cw01139.pdf


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Step 2. Consideration of what level of APCC it would have been appropriate for BT to charge Gamma and Vodafone

4.45 In order to calculate what level of APCCs we consider would have been compliant with GC18.5(a) it is first necessary to specify the methodology and some key assumptions that we intend to adopt in modelling the costs underlying the APCCs. We then describe the calculations that we have made; further technical detail is provided in Annex 5.

4.46 We have published the model we have used alongside these Provisional Conclusions, with confidential data removed, in order that the Parties may more fully understand and comment on our approach to the calculations.

The Guidance

4.47 As noted in paragraph 2.20, we set out in the Guidance the appropriate cost standard, increment and choice of network technology and topology to be used when setting cost-oriented porting charges in compliance with GC18.5(a).

Cost standard

4.48 In the Guidance we identified the appropriate cost standard for setting APCCs as being LRIC. This is the cost standard that we use in setting fixed85 and mobile86 termination rates, consistent with the Commission Recommendation of 7 May 2009 on the regulatory treatment of fixed and mobile termination rates in the EU (the “Commission Recommendation”).87

Relevant increment

4.49 We also specified in the Guidance that the relevant increment of output over which to measure costs is “the donor conveyance of incoming voice calls to ported numbers which originate from CPs other than the DCP”.88 We noted that this was consistent with the concept of LRIC as used in the Commission Recommendation, which also explains the use of a “decremental approach”. This involves the calculation of L

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