BT 2005 Annual Report Download - page 20

Network Charge Control
We operate under interconnection agreements with most
other operators. Our charges for a range of interconnect
services are controlled by Ofcom, under the Network
Charge Control (NCC) regime. The current NCC period
began on 1 October 2001 and will last until 30 September
2005. The controls are designed to ensure that our
charges are reasonably derived from costs, plus an
appropriate return on capital employed. Depending on
the degree of competition for these services, charges are
cap-controlled each year by RPI minus X (where X ranges
from 7.5% to 13%) for services Ofcom considers unlikely
to become competitive in the near future and safeguard
cap-controlled (ie no increases above RPI during any
relevant year of the overall control period) for services
likely to become competitive. Those services considered
fully competitive are not subject to direct charge controls.
The main network price caps are listed below:
Basket
XFactor in
RPI – X formula Duration
Call termination 10 30 Sept 2005
Call origination 10 30 Sept 2005
Tandem layer 13 30 Sept 2005
Safeguard cap 0 30 Sept 2005
Interconnect specific 8.25 30 Sept 2005
Local exchange FRIACO 7.5 30 Sept 2005
BT must publish a notification to Ofcom and other
operators if we intend to amend existing charges or to
offer new services. Notice periods range from 28 to 90
days for regulated services, depending on the degree to
which they are judged to be competitive.
In 2004, Ofcom began a review of the NCC, to
determine the controls to apply from 1 October 2005. On
23 March 2005, Ofcom issued a consultation document
(‘Review of BT’s Network Charge Controls’) proposing a
further four-year NCC regime, with a review of BT’s
market power in two specific markets (deregulation being
proposed for one of these markets). Ofcom is also
proposing some re-definitions of basket services, and
consulting on a range of values of X for these services
(reflecting the fact that some of the relevant factors in
setting X are yet to be resolved). We will respond to
Ofcom’s proposals by 1 June; Ofcom is expected to
publish a statement by the end of July 2005.
The various services and proposed ranges of X within
Ofcom’s 23 March consultation document are listed
below:
Basket
XFactor in
RPI – X formula
Call termination 2.25 to 6.25
Call origination 0.5 to 4.5
Single transit 11 to 14
Local-tandem conveyance 0 (safeguard)
Interconnection circuits 1.5 to 5.5
Product management, policy and planning 2.5 to 6.5
Local exchange FRIACO 7.5 to 11.25
Single tandem FRIACO 8.5 to 12.25
Inter-tandem conveyance / transit No control (propose
to de-regulate)
Number portability
The number portability charge control runs from 1 August
2002 until 31 July 2006. The charges are controlled by a
RPI minus X formula, with X set at 5%. This control is not
contained in an SMP condition, but in a non-binding
undertaking given by BT to Ofcom. Under the new
regime, General Condition 18 requires all providers to
offer number portability, among other things, on
reasonable terms and for charges to be cost-orientated.
Wholesale access charge control
The charges for wholesale access services (both analogue
and digital) are also subject to price control. The charges
for the line rental (residential and business products), line
transfer and new line installations have been set by Ofcom
and are subject to a price control of RPI minus 2%,
effective from 1 September 2002 for four years. The
control applies to the aggregate of all charges (rental,
transfer and installation) as well as to line transfers
separately. We are also under an obligation to notify
Ofcom and service providers if we intend to amend
existing charges or introduce new charges. Notice periods
range from 28 to 90 days, depending on the specific
service.
On 28 November 2003, Oftel published its statement
on the fixed narrowband wholesale exchange line market.
This statement contained new obligations on BT to
provide Wholesale Business ISDN2 Line Rental with cost-
oriented prices and to provide residential ISDN2 and
ISDN30. We launched the required products but the price
level was referred to Ofcom as a dispute by Energis on
25 October 2004. On 2 February 2005, Ofcom
determined that BT’s price was set at too high a level and
that BT must refund Energis an amount for each line
rented during the period from 23 November 2003 to
30 September 2004.
Additionally, during the year a small-scale consultation
was carried out which aligned the price control formulae
for Wholesale Access, NCC and PPC (Partial Private
Circuits) but this did not affect the Wholesale Access
control in a material way.
Partial Private Circuit Charge Control
PPCs are leased lines that BT sells to other network
operators. On 1 October 2004, Ofcom introduced a PPC
charge control to replace the annual determinations
previously carried out by Oftel. The control arises from
regulation established in the Leased Lines Market Review
(LLMR) and deals with PPC terminating segments (the
‘access’ part of the leased line network).
The control is a four year RPI-X type control with three
separate baskets:
&Low Bandwidth Basket (RPI-4%);
&High Bandwidth Basket (RPI-6.5%); and
&Equipment Basket (RPI-8.9%).
Charges prior to the control were maintained as
starting charges and BT is required to make price
reductions each year which comply with the controls.
However, control formulae are constructed to allow BT
some discretion in the timing of the price changes and the
ability to meet the control by re-balancing different
elements of the PPC charges.
PPCs are also subject to obligations to notify operators
and Ofcom if we intend to revise charges or other
contractual conditions. The notification periods range
Operating and financial review BT Group plc Annual Report and Form 20-F 2005 19