Opal Telecom -v- BT: an alternative technologically neutral approach

On 14 Septemer 2009 Ofcom published its draft determination to resolve the dispute between Opal Telecom and BT on Opal’s proposed termination rates to be effective from 1 October 2009.  In summary, Ofcom looked at the technology being deployed by Opal Telecom as part of its NGN network in order to determine whether it was appropriate for Opal Telecom to claim that it would be fair and reasonable for it to charge termination rates equivalent to BT’s single tandem termination rate.  The draft answer was, “No”.

Another approach to the dispute would have been to be technologically neutral.  Under the current market review in fixed geographic call termination markets, all operators have SMP in the market for termination on their own networks.  Consequently, all operators are subject to SMP Condition BC1 (or in the case of BT, SMP Condition BA1), which requires them to provide network access on terms, conditions and charges that are fair and reasonable.  BT is subject to further conditions, including SMP Condition BA3, which requires BT to base its charges for fixed geographic call termination on forward looking long run incremental costs (“LRIC”).

In deciding what is fair and reasonable for other operators, Oftel and Ofcom have consistently held that termination rates that are suitably reciprocal with BT’s are de facto fair and reasonable and compliant with SMP Condition BC1.  The “suitable” reciprocity refers to the weighted average of relevant BT termination rates, dependent upon the mix of geographical call termination traffic sent from the other operator to BT on the basis of a sample.  Currently the industry standard reciprocity agreement applies two weighting factors, depending upon whether the other operator is a single or multi-switch operator.  The single switch weighting is based upon a traffic sample in May of each year, to determine the proportion of calls sent to BT which are single tandem or local exchange terminated to be applied to the charges from October for the following year.  The multiple switch weighting uses the single switch weighting factor, together with a second factor to determine the percentage of those calls which are terminated by the operator as multi-switched calls.  This factor is recalculated twice a year, based upon samples of traffic in May and November.

Opal Telecom claimed it was a single switch operator.  This was not a factor in dispute.  Instead, Opal Telecom claimed that terminating traffic on its NGN network was the equivalent of terminating traffic on a single tandem switch.  Ofcom’s draft determination therefore had to analyse and take a view on the technology being deployed by Opal Telecom in its NGN network to come to a view on this claim.

We suggest that instead of considering the technology at issue, an alternative and possibly simpler approach would have been to ignore Opal Telecom’s technology (NGN, traditional TDM switched or otherwise).  An argument can then be made to state that the fair and reasonable termination rate is the higher of:

  1. BT’s equivalent termination rate, weighted for the single switch operator rate in accordance with the traffic sent to BT AND weighted for a multi-switch operator rate in accordance with traffic sent by BT to a hypothetical TDM network engineered to carry the same volume of traffic and have the same geographical coverage as the other operator’s actual network; or
  2. the other operator’s actual charges for fixed geographic call termination based upon forward looking long run incremental costs.

There is a question as to whether this formula fully complies with all the six principles of pricing and cost recovery used by Ofcom, particularly the principle of reciprocity (where services are provided reciprocally, charges should also be reciprocal), as the other operator’s termination rates under the second limb may be higher than BT’s termination rates.  However, provided the charges are at LRIC, then this may be the price to enable the new market entrant to deploy a new technology fairly (i.e. without an effective susbisdy from all operators sending traffic to be terminated on the new network).  There is also the praticability principle (the mechanism for cost recovery needs to be practicable and relatively easy to implement).  Without speaking to a network engineer, we cannot say whether it would be practical for a hypothetical TDM network to be agreed for the purposes of determining whether a TDM network equivalent to the other operator’s network would be a multi-switch network with any given number of switches.  As for the practicability of the other operator determining its LRIC rates, the burden of proof would be on the other operator to determine its costs to justify the higher termination rate.

We consider you could even propose that such a technology neutral approach could be used no matter what the nature of the other operator (i.e. fixed, mobile, nomadic (WiMAX) etc.), but maybe that it taking matters too far.

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