THE COMPUTER LAW SECURITY REPORT 2 CLSR

TELECOMMUNICATIONS

MERCURY AND BRITISH TELECOM - INTERCONNECTION PART h THE STORY SO FAR

Background When Mercury was formed in the first stirrings of liberalization in 1981, it was recognised that breaking BT's 'exclusive privilege', as it was then known, of running telecommunication systems throughout the United Kingdom could not result in effective competition without Mercury being allowed access to the national system. Otherwise the effect would have been rather like confining a road haulier to the motorways, never allowing him on the B roads into the countryside. Interconnection is not a new concept - in the Telegraph Act of 1889 it was made a requirement of licensed system operators that they should provide the means for 'intercommunication' between their systems. For those interested in how the legislators arrive at their concepts, under that Act the Postmaster-General was to determine the appl icable terms and condit ions to govern such interconnection. Substitute the Postmaster-General by the Director-General and you have a procedure very close to that laid down under the 1984 legislation!

The 1984 Act The first agreement between BT's predecessor, the statutory undertaking "British Telecommunications" and Mercury was signed in late 1982. By 1984, with the emphasis being very much on promoting customer choice and competition generally, it was recognised by Government that some firmer foundation would be advisable to secure interconnection in a way which could cater for the facilities becoming available with advancing technology. It was also realised that further impetus was needed for interconnection in order to ensure the negotiation of reasonable terms, not just for Mercury but for other connectable systems such as those run by cellular radio and cable television operators. In fact negotiations on more advanced forms of interconnection between the BT and Mercury networks began well in advance of the enactment of the Telecommunications Act 1984, and continued over most of that year before failing to achieve a conclusion on various material points, culminating in litigation over whether heads of terms endorsed by the parties were or were not binding in law, which the Court found they were not. Ironically the Telecommunications Act 1984 ("the Act") was designed to reduce the prospects of litigation. The Government did not want to have the same kind of regime as prevailed in the States, where new carriers, like MCI, were left to litigate their way to achieving a sensible commercial and competitive position with AT&T and the Bell companies. For one thing, this would have taken too long to achieve and more important, it simply would not have worked, for the US Anti-Trust laws on which these tactics were based are very different from UK competition law which is not a law which in any real sense if directly enforceable by the public. UK law in this respect is administrative and discretionary, depending upon officialdom for its enforcement. Without really departing fundamentally from this principle, it was at least recognised by the legislators that rather than leave Mercury to flounder in the quicksands of existing UK competition law, a new regulatory environment needed to be created, which would have more teeth and a watchdog which

could bite. To this end, under the Act, this watchdog is the Director-General of Telecommunications with specific responsibility for the enforcement of competition in telecommunications in the UK. The rules within which he is to work emanate from the Act but are to be found specifically in the licence regulations. It is the operators' system licences that are the key both to competition, not just between BT and Mercury, but for other operators, service providers, suppliers and customers, and with respect to consumer benefits.

BT's licence conditions Under the Act, the running of a telecommunications system in the United Kingdom is unlawful unless it is done under licence. BT and Mercury fall within particular categories of licensees known as Public Telecommunication Operators and the Act requires that special conditions be included in their licences to require them to connect their systems to other telecommunication systems. BT's Licence, most of which is mirrored by Mercury's, having set out BT's network obligations and in particular the requirement to provide what is known as a 'universal service' goes on eventually to deal, in Condition 13, with connection of systems of other public telecommunication operators such as Mercury and those running cellular radio or cable T.V. systems. It is on Condition 13 that the interconnection determination by the Director-General made in October last year was therefore founded. It provides that any operator wishing to connect with BT's system may request an agreement for such purpose from BT. There must then be a reasonable period for negotiation of the terms and conditions relevant to interconnection, especially the 'points' for such connection, (ie. where one system meets the other) and the charges to be paid to BT for making such connections and for the passing of messages over them. If an agreement fails to come about as a result of this negotiating process, the Director-General can then be called upon, in effect, to 'make' the agreement for the parties. This is another and, to a legal consultant at least, perhaps the most innovative (but not totally unprecedented) feature of the U.K. liberalization process. In Mercury's case, the determination under Condition 13 was initiated by Mercury in January of 1985 after negotiations between Mercury and BT had reached an impasse. After a brief hiatus for the conclusion of the litigation which I have mentioned earlier, the Director-General began work, sifting through and considering in depth the many submissions made to him by both Mercury and BT, holding meetings with the parties for elucidation of their arguments and bringing his own technical, accounting and economic expertise to bear on the problems. In addition, taking the elements of interconnection arrangements which had already been settled between the parties he added to them a good commercial approach to the main issues of system connections and charges.

Determination

The Determination, published on 11th October 1985, is a public document. It contains a great amount of what the lawyers call "boiler plate" in its latter stages but the first eight clauses in particular contain the crucial elements. As a quick summary, these cover the levels of interconnection; the provision of points of

JULY - AUGUST THE COMPUTER LAW AND SECURITY REPORT

connection; the charges for connections; call charges; the provision of an international point of connection; international services; numbering and routing and billing arrangements. All of these elements have an impact on both competition and customer benefit. The two levels of connection are "3L", the connection of a BT exchange line to the Mercury system, and "3J", the connection of the two systems at a BT trunk exchange. Using these two types of connections as and when they become available, customers will be able specifically to choose to route calls over the Mercury system either directly, using Mercury service lines, or indirectly, using the BT system to reach the point of connection where the customers' messages pass into the Mercury system. At the same time Mercury may utilise the points of connection to transfer messages onto the BT system for final delivery where, as yet, Mercury is unable to serve the called party at the distant end. These levels of interconnection are made available through points of connection which are to be provided in accordance with strict time limits. The initial connections had to be made by 30th March 1986. Additional capacity at these connections and different connections at other exchanges can also be requested by Mercury and such connections must be provided within six months of Mercury's notification. Where there are difficulties in meeting these time limits, there is a procedure for a Committee to consider and determine what is a reasonable period in all the circumstances. I shall discuss this shortly. Connection charges, the actual cost Mercury has to pay for physical connection of its system to BT at various points, are based on direct costs and the "consequential incremental" costs of providing capacity at the particular exchange concerned. This cost-based approach, which is required by BT's licence condition 13, is also reflected in the Determination on call charges. These charges appear to be designed to be an incentive for Mercury to extend its system as rapidly as possible and rely as much as possible on its own facilities. One table of charges for example, applies a particular range where only one "segment" of BT's system is utilised whereas another table applies where more than one segment is used. Clearly, the margins for Mercury and its competitiveness vis a vis BT will be greatly influenced by this charging approach and Mercury will be endeavouring, wherever it can, to rely upon not more than one segment of the BT system. These interconnection call charges are geared both to minutes

of call time in the normal way and to the same cheap, standard and peak rates as BT operates for the generality of its customers. Protection is provided for Mercury against BT changing its tariff structure by altering its distance-related rates or time bands in which event the Mercury tariffs under the Determination are also to be adjusted; in such a case if BT and Mercury cannot agree upon this, the Director-General can determine the matter for them With regard to numbering and routing, the background here is the BT and Mercury licence condition on numbering. The Determination provides that BT should make available to Mercury a suitable access code and number groups to facilitate interconnection. BT must make the necessary adjustments within its system to cater for the numbers thus used. This part of the Determination is vital to Mercury in giving it the basis to allocate numbers which will promote freedom of choice. Indeed BT's licence condition shows that the objective is to achieve numbering plans which for example, include as few digits as practicable and do not confer any undue advantage or disadvantage on either party. If the Director-General believes that these objectives are not being achieved, and in particular that numbering plans are not compatible, he can ultimately make a determination to remedy these problems. Prior to April 1990, PTO's are required by their licences to consult Oftel - the Office of Telecommunications about their numbering plans and they must also consult a body approved by the Director-General which is to represent both PTOs and other interested parties. Apparently this representative body is to be set up shortly and it seems likely to be the case that the fall-back of the Director-General's determination on this aspect will become more and more academic as numbering arrangements necessarily have to be worked out in a manner which is ultimately for the benefit of the customer. Finally on the particular aspects of the Determination, the billing arrangements are such that essentially the operator chosen by the calling customer to carry a call will be the party to render a bill to the customer. Where customer choice is not involved and the case is, for example, simply one of a Mercury customer calling a BT customer, it is the originating operator, the operator whose system is first used for the call, who will bill the customer and will therefore be charged for any onward conveyance services provided by the other operator, all at the segment rates set out in the Determination.

Colin Long, Solicitor~ Report Correspondent

RISK MANAGEMENT

PROFESSIONAL INDEMNITY INSURANCE: A NEW NIGHTMARE FOR THE PROFESSIONS At this years annual conference of AIRMIC, the Association of Insurance and Risk Managers in industry and commerce, two major insurance problems were identified: USA product liability and Professional negligence. The common feature of both problems is that insurance cover is only available at such a high cost that many companies' trading viability is seriously affected by the premiums required. Amongst others, accountants, architects and even insurance brokers are having to allocate up to 20% of their fee income to meet premiums, and the cost of funding mandatory excesses within the cover. In this article I shall be looking at the background to the crisis, and at the problems it has produced for insurance buyers and

insurance companies alike. In a future article I will examine the only sure means of long term premium reduction: claims avoidance by risk management.

The background The period beginning in the late 1970's and ending in late 1984/early 1985 was one of the most dramatic, and traumatic, that the insurance industry has ever seen. Attracted by high interest rates on money received as premiums but not paid out as claims until some considerable time later, investment income poured into the insurance industry. Competition for policyholders business increased and throughout the period premium rates fell, insurers offered wider and wider cover to attract business, and scientific underwriting became a thing of the past. One leading insurer had an unofficial directive