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.

Regulatory holidays all WACC'd out?

How can national regulatory authorities (NRAs) promote investment in next generation access networks (NGAs) ?  It’s a common question, to which some would reply that “not interfering” would be an appropriate answer.  In other words, let those who are willing to risk investment in these uncertain times exploit their investment unregulated by NRAs – let them have a “regulatory holiday” (see, for example, the explanation from our friends at Ofcomwatch).

In previous blogs we have suggested that we think regulatory holidays are a bad idea.  We cannot see that regulation and investment are mutually incompatible.  We believe that it is highly likely that investment in NGAs will introduce new economic bottlenecks. Where an NGA is deployed, no effective and sustainable infrastructure competition will be possible in the short or medium term.  NRAs will therefore find that there will be at least some form of dominance in wholesale access to super-fast broadband.  The remedy for the dominance will be the requirement to provide access at a cost-orientated price, with an allowable regulated mark-up, the old favourite Weighted Average Cost of Capital.

We consider that those who protest that investment is impossible in super-fast broadband should explain to simple regulatory lawyers such as ourselves what is wrong with the old model of wholesale access at cost + WACC?  Doesn’t WACC include an assessment of risk? (See, for example, Ofcom’s statement on its approach to risk in the assessment of the cost of capital).

BT 21CN (NGN) Security Threat?

We were interested to read over the weekend that there may be hardware trapdoors or software trojans in Huawei next generation network equipment supplied to BT for its 21CN NGN network, according to a report in The Sunday Times.

At what point does this become a regulatory issue?  The Privacy and Electronic Communications (EC Directive) Regulations 2003 impose an obligation on providers of public electronic communications services to:

“take appropriate technical and organisational measures to safeguard the security of that service”  (See Reg. 5).

The service provider can require the network provider to comply with its reasonable requests concerning implementation of these appropriate measures.  Where a significant security risk remains, then subscribers are supposed to be told.

We look forward to Ofcom investigating whether BT has done the appropriate technical due diligence on Huawei equipment and the statement from BT that it has addressed the security risks to its public electronic communications services!