disputes between bt and each of gamma and vodafone in … · final determination publication date:...

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 []

Final Determination

Publication date: 11 November 2015

Final determination to resolve disputes regarding BT’s average porting conveyance charges

About this document

This document sets out Ofcom’s resolution of 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.

We have concluded that BT’s charges for conveying ported calls were not cost oriented and that BT should therefore make repayments to Gamma and Vodafone.


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Contents

Section Page

1 Summary 3

2 Number Portability: background and regulation 6

3 The Disputes 13

4 Analysis and provisional conclusions 23

5 Responses to the Provisional Conclusions and Final Determination 45

Annex Page

1 Determination to resolve a dispute between BT and Gamma 69

2 Determination to resolve a dispute between BT and Vodafone 74

3 Further details of modelling approach 79


Glossary of terms

2003 Act – the Communications Act 2003. 2010 Opal APCC Dispute - Determination to resolve Dispute between Opal Telecom and BT about BT’s Average Porting Conveyance Charge, 23 March 2010. Available at: http://stakeholders.ofcom.org.uk/consultations/draft_deter_bt_opal_charge2/statement/ 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.

http://stakeholders.ofcom.org.uk/consultations/draft_deter_bt_opal_charge2/statement/

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


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


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


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/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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DCP – Donor communications provider. DLE – Digital local exchange. DLRIC - Distributed long run incremental cost. ECJ – European Court of Justice. Ethernet appeal – BT’s appeal to the Court of Appeal of the CAT judgment in the Ethernet dispute. The CAT judgement is available at: http://www.catribunal.org.uk/files/1205-7_Ethernets_Judgment_CAT_14_010814.pdf. Ethernet dispute – dispute relating to BT’s charges for Ethernet services resolved by Ofcom in December 2012: http://stakeholders.ofcom.org.uk/binaries/consultations/ethernet-services/annexes/Ethernet_FD.pdf and appealed to the CAT. FAC – Fully allocated cost. Final Determination – this document. 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. ITC - Inter tandem conveyance. LRIC – Long run incremental costs. LRIC+ - Long run incremental costs plus a mark-up for the recovery of common costs. LTC - Local tandem conveyance. MNO – Mobile Network Operator Mobistar case - Case C438-04, Mobistar SA v Institut belge des services postaux et des telecommunications (IBPT), 2006 ECR I-06675: http://curia.europa.eu/juris/liste.jsf?language=en&num=C-438/04. NGN – Next Generation Network.

http://www.catribunal.org.uk/files/1205-7_Ethernets_Judgment_CAT_14_010814.pdf


http://stakeholders.ofcom.org.uk/binaries/consultations/ethernet-services/annexes/Ethernet_FD.pdf


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


http://stakeholders.ofcom.org.uk/binaries/enforcement/competition-bulletins/closed-cases/all-closed-cases/cw_01108/CW_011080613.pdf


http://curia.europa.eu/juris/liste.jsf?language=en&num=C-438/04


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NRA – National regulatory authority. OCP – Originating communications provider. Provisional Conclusions – the document setting out our provisional conclusions in relation to these disputes, published on 30 September 2015. Available at: http://stakeholders.ofcom.org.uk/enforcement/competition-bulletins/open-cases/all-open-cases/cw_01161/?utm_source=updates&utm_medium=email&utm_campaign=cw_01161. RCP – Recipient communications provider. Referring Parties – Gamma and Vodafone. RFS – Regulatory Financial Statements. Available at: http://www.btplc.com/thegroup/RegulatoryandPublicaffairs/Financialstatements/index.htm ROCE – Return on capital employed Supreme Court judgment: British Telecommunications Plc v Telefonica 02 UK Ltd and Others [2014] UKSC 42. TDM – Time division multiplex. The Number case - Case C-16/10, The Number Ltd and Conduit Enterprises Ltd v Office of Communications and British Telecommunications plc, 2011 ECR I-00691: http://curia.europa.eu/juris/liste.jsf?language=en&num=C-16/10. USD – Universal Service Directive. Vodafone – Vodafone Limited, whose registered company number is 1471587.

http://stakeholders.ofcom.org.uk/enforcement/competition-bulletins/open-cases/all-open-cases/cw_01161/?utm_source=updates&utm_medium=email&utm_campaign=cw_01161


http://www.btplc.com/thegroup/RegulatoryandPublicaffairs/Financialstatements/index.htm



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Section 1

1 Summary 1.1 This document (the “Final Determination”) sets out our final 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 Ofcom’s view 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 what it describes as 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.pdf





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Ofcom’s conclusions on the matters in dispute

1.8 In order to determine whether BT has overcharged Gamma and Vodafone in relation to APCCs, we have applied a three step test.

1.8.1 First we have considered whether the way in which BT calculated the APCCs for Gamma and Vodafone was in line with the requirements of GC18.5(a) in light of our Guidance.

1.8.2 Where BT’s approach to calculating APCCs was not consistent with the requirements of GC18.5(a) in light of our Guidance, we have calculated the appropriate level of APCCs that we consider BT should have charged in light of the Guidance.

1.8.3 As a result of our findings, we have then considered whether we should direct BT to make repayments to Gamma and Vodafone and whether interest should be paid on any repayments.

Provisional conclusions

1.9 On 30 September 2015, we issued our Provisional Conclusions4 in relation to the Disputes. We provisionally concluded that the approach that BT had adopted to calculating APCCs was not compliant with the requirements of GC18.5(a) as BT had failed to set the APCCs at LRIC, in line with the Guidance.

1.10 Based on our analysis we provisionally concluded that the APCCs that BT charged Gamma and Vodafone should have been around 50% lower than those actually charged by BT since 1 January 2015. We provisionally concluded 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%”).

Final Determination

1.11 We received responses to the Provisional Conclusions from BT, Gamma, Vodafone, Sky, TalkTalk and Virgin Media and we have taken them into consideration in reaching our final conclusions.

1.12 Our Final Determination sets out our position on the rights and obligations of the Parties. Having taken account of the issues raised, we have decided our overall conclusions should remain unchanged from the Provisional Conclusions.

1.13 We therefore conclude that BT should amend its charges accordingly and make repayments to Gamma and Vodafone for the amount of the overcharge with interest payable at BoE+1%. We consider it appropriate for the parties to resolve the amount payable between themselves and by following the methodology as set out in this Final Determination. In relation to both the interest payments and the repayments covering the period prior to the Disputes being brought to Ofcom, the timing of any actual payments to be made is dependent on the Court of Appeal’s judgment in the Ethernet appeal. As a result, we do not consider that BT should be required to make

4 The document setting out our Provisional Conclusions in relation to these disputes, published on 30

September 2015. Available at: http://stakeholders.ofcom.org.uk/enforcement/competition-bulletins/open-cases/all-open-cases/cw_01161/?utm_source=updates&utm_medium=email&utm_campaign=cw_01161.





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those payments until that judgment is handed down, and then only if the judgment confirms Ofcom’s power to order such repayments and interest. In the meantime, interest on the sums overpaid and not repaid by BT will continue to accrue, subject to the above.

1.14 We noted in the Provisional Conclusions that although we had calculated the APCCs on the basis of corrected 2013/14 data, it was our intention to use the restated 2013/14 data for our Final Determination. BT has been unable to provide us with all the necessary restated data to enable us to do this and we therefore continue to believe that corrected 2013/14 data is the best information available to us for resolving the Disputes. We have made further revisions to this data to reflect additional corrections brought to our attention by BT. The revisions have had minimal impact on the APCCs that we have calculated.

1.15 Our final determinations of these Disputes are set out in Annexes 1 and 2.

1.16 In light of our findings in the Disputes, Ofcom has also opened an own-initiative investigation into BT’s compliance with GC18.5.

Structure of the remainder of this document

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

1.18 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. In Section 5 we consider the responses to the Provisional Conclusions and draw our final conclusions on the matters in dispute.

5 http://stakeholders.ofcom.org.uk/binaries/consultations/dispute-resolution-

guidelines/statement/guidelines.pdf.

http://stakeholders.ofcom.org.uk/binaries/consultations/dispute-resolution-guidelines/statement/guidelines.pdf



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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.


8

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


9

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 Authorisation Directive sets out that the provision of electronic communications networks and electronic communications services may only be subject to a general authorisation. The general authorisation and the rights of use of numbers may be subject only to the conditions listed in the Annex to the Authorisation Directive. The Annex permits number portability requirements in conformity with the Universal Service Directive (“USD”)8. The USD 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.

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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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 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;

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

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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(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;

(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 cost oriented. They should be 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.

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.pdf




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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 promoting competition. We assess the consistency of our resolution of the Disputes with this and our other duties in Section 5.


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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 was 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.



14

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.


15

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.


16

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.






17

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.


18

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/


19

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 explained in paragraph 4.16 of our Provisional Conclusions, we did not consider that Gamma’s arguments about the link between geographic termination rates and APCCs had merit and therefore did not consider that 1 February 2014 formed an appropriate start date for the Disputes. We considered that the appropriate start date for the Disputes therefore depended 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.


20

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 In the Provisional Conclusions we explained that we did 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 considered this was reasonable in the circumstances and in line with our intention when setting the Guidance. Based on our consideration of these points, we therefore provisionally concluded that 1 January 2015 should be the appropriate start date for the Disputes and we based our provisional analysis on the APCCs that applied from this date.

3.43 In its response to the Provisional Conclusions, Gamma requested that we reconsider our position. It argued that the Guidance has to stand to be interpreted on its merits alone and that if Ofcom had considered that CPs would have two to three months to calculate APCCs then it would have clearly stated this in paragraph 8.47.58

3.44 Gamma noted that the consequence of Ofcom’s interpretation is that net exporters of numbers were incentivised to delay compliance with GC18.5 for the maximum period of time. It argued that this could not be the correct approach as the Guidance would

54





Gamma’s 13 October Submission, page 2.


21

want to rectify any problems as expediently as possible, and because the approach had already been signalled in the consultation preceding the Guidance.59

3.45 Gamma submitted that we should uphold what it considers to be the natural and ordinary meaning of the Guidance, but exercise our discretion in the award of any adjustment for the period between publication of the Guidance on 29 September 2015, and the date at which BT amended its charges on 1 January 2015. Gamma suggested a “splitting down the middle” approach to the settlement as an amicable solution.60

3.46 In its response to the Provisional Conclusions, TalkTalk also highlighted concerns regarding the date BT amended its charges following publication of the Guidance. In particular it argued that BT would have been aware from Ofcom’s consultation document published in April 201461 that Ofcom was suggesting that the APCC should be based on LRIC, and it should therefore have taken action at this point to assess its APCC charges. It considered that it would therefore “be entirely reasonable of Ofcom to backdate the revised charges to 1 October 2014 on the basis that BT should have been prepared to reduce the APCC by that date”.62

3.47 We do not consider that CPs ought to have recalculated their APCC charges ahead of a final regulatory decision on the appropriate cost standard to be used when calculating the costs of porting under GC18. As set out above, this is why we said at paragraph 8.61 of the Guidance that we anticipated that CPs would need time to review their porting charges in light of our final decision.

3.48 Our final decision on the appropriate interpretation of reasonable and cost-oriented charges under GC18 was effective from the date of the publication of the Guidance. However, as we made clear at paragraph 8.61 of that Guidance, we were prepared in the circumstances to give CPs a period of two to three months to review their charges and make any necessary changes in order to bring them into compliance with GC18.5. It is not uncommon for Ofcom to put in place such implementation periods following changes in, or clarifications to, policy positions.

3.49 If we had expected CPs to back-date their amended charges to the date of the Guidance, we would have set this out in the Guidance. In the interests of legal certainty we do not consider that it would now be appropriate to require CPs to back date their charges to a time before which we previously had considered it reasonable to have done so.

3.50 We consider that the Guidance was sufficiently clear that we intended to allow an implementation period of two to three months for CPs to review and make the necessary changes to their APCCs after the publication of the Guidance. Our position that we review BT’s APCCs from 1 January 2015 therefore remains unchanged.

59

Gamma’s 13 October Submission, pages 2 and 3. 60

Gamma’s 13 October Submission, page 2. 61

Porting charges under General Condition 18 – consultation document, 24 March 2014: http://stakeholders.ofcom.org.uk/binaries/consultations/gc18-porting-charges-guidance/summary/Porting_charges_under_General_Condition_18.pdf. 62

TalkTalk’s 14 October Submission, page 2.

http://stakeholders.ofcom.org.uk/binaries/consultations/gc18-porting-charges-guidance/summary/Porting_charges_under_General_Condition_18.pdf

http://stakeholders.ofcom.org.uk/binaries/consultations/gc18-porting-charges-guidance/summary/Porting_charges_under_General_Condition_18.pdf


22

Interested Parties

3.51 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

3.52 In resolving the Disputes, we have relied upon:

3.52.1 Dispute submission from Gamma, 2 July 2015.

3.52.2 BT’s comments on Gamma’s dispute submission, dated 10 July and 30 July 2015.

3.52.3 Dispute submission from Vodafone, 30 July 2015.

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

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

3.52.6 BT’s responses to the 1st section 191 Notice, 13, 19, and 24 August 2015 and 3, 10, 15, 22 September 2015, 5 and 9 October 2015.

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

3.52.8 Submissions from Vodafone, dated 21 August and 25 August 2015.

3.52.9 Gamma’s response to the Provisional Conclusions, received 13 October 2015.

3.52.10 TalkTalk’s response to the Provisional Conclusions, received 14 October 2015.

3.52.11 Virgin Media’s response to the Provisional Conclusions, received 14 October 2015.

3.52.12 Vodafone’s response to the Provisional Conclusions, received 14 October 2015.

3.52.13 BT’s responses to the Provisional Conclusions, received 14 October and 26 October 2015.

3.52.14 Sky’s response to the Provisional Conclusions, received 15 October 2015


23

Section 4

4 Analysis and provisional conclusions 4.1 This section sets out the analytical framework we used to assess the issues raised

by the Disputes and the Provisional Conclusions on which we consulted in September 2015. The submissions we received in response to our Provisional Conclusions are addressed in Section 5 of this document, where we also set out our final conclusions on the matters in dispute.

Analytical framework

4.2 As set out at paragraphs 3.29 and 3.50 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: Provisional 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


24

basis of a LRIC+ cost standard to one set using a LRIC cost standard.63 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.64

4.8 Gamma further noted that BT’s APCC is not reciprocal, though it described this as an ancillary concern.65

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”.66 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.67 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

63

Gamma’s Dispute Submission, pages 12-17. 64




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


25

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;68

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;69 and

4.11.3 “The lack of correlation between fixed termination rates and APCC was recognised by Ofcom in the [2013 NMR] Statement itself”.70

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”.71

Ofcom’s provisional 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”.72

4.14 Gamma 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 also used the network modelling information used by Ofcom to set charges in the 2013 NMR to determine a LRIC:LRIC+ ratio. We accepted that neither of these calculations could 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 saw 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 noted that the Guidance states that “CPs should be allowed to set charges based on the technology and topology used in their own networks”.73 Gamma operates a NGN and BT operates a time division multiplex (“TDM”) network; we would not expect them to necessarily incur

68





Guidance, paragraph 8.63. 73

Guidance, paragraph 5.7.


26

similar costs in routing calls to ported numbers. Therefore, we saw 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 did not consider that APCCs needed to be set below FTRs or on a reciprocal basis in order to be considered reasonable.74 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”.75 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).76

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”.77 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.

74

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. 75



BT’s 30 July Submission, paragraph 25.


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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

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.78 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.79 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.80

4.27 Gamma was of the view that the guidance provided by the Competition Appeal Tribunal (“CAT”) in the Termination Rate Disputes Core Issues Judgment81 was more

78

Vodafone’s 25 August Submission. 79

Vodafone’s 25 August Submission, paragraph 8. 80

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


28

relevant in the Disputes than the Supreme Court judgment, which it considered not to be “materially relevant” to this case.82 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.

Ofcom’s provisional assessment of BT’s APCCs

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

4.29 In particular, we did not agree with BT’s analysis of the application of the Supreme Court judgment. In the cases to which the Supreme Court judgment related,83 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.84 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 considered that this was 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:


81

T-Mobile (UK) Ltd v Ofcom [2008] CAT 12. 82

Gamma Dispute Submission, pages 6-10. 83

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/. 84

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/





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

4.33 We disagreed 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 did not consider that the question of whether or not porting conveyance services are contestable was 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.


30

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 needed 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.

4.39 BT suggested that its approach was supported by Ofcom’s reasoning in the 2015 DCC Review Statement,85 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”.86 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 considered that BT had misinterpreted the intention of paragraph 3.10 of the 2015 DCC Statement. In the 2014 DCC Review Consultation87 we set out our reasoning for excluding transmission costs (referred to in that document as “transit costs”).88 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 determination,89 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 questioned 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 did not consider that a commercial-charges-based approach was 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 considered BT’s justification for the level of its APCCs. For the reasons set out above, we provisionally concluded that BT had failed to set its APCCs in a manner that is compliant with the requirements of GC18.5(a). Specifically, we considered that BT’s decision to price the conveyance elements of the APCC on a commercial basis,

85

Available at: http://stakeholders.ofcom.org.uk/binaries/consultations/review-mobile-donor-conveyance-charges/statement/statement.pdf. 86

2014 DCC review statement, paragraph 3.10. 87

Available at: http://stakeholders.ofcom.org.uk/binaries/consultations/review-mobile-donor-conveyance-charges/summary/condoc.pdf. 88

2013 DCC review consultation, paragraphs 4.37 to 4.39. 89

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








31

rather than a LRIC basis, was inconsistent with the Guidance and that as a consequence the APCCs were not cost oriented as required by GC18.5(a).

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

Step 2. Provisional 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 was first necessary to specify the methodology and some key assumptions that we intended to adopt in modelling the costs underlying the APCCs. We then described the calculations that we made; further technical detail is provided in Annex 3.

4.46 We published the model we used alongside the Provisional Conclusions, with confidential data removed, in order that the Parties could 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 fixed90 and mobile91 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”).92

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”.93 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 LRIC as the costs of the network including all service volumes, less the costs of the network were it to provide all services other than the service in question.

90

See Annex 6 of the 2013 NMR Statement, available online: http://stakeholders.ofcom.org.uk/consultations/nmr-13/statement/. 91

See Annex 7 of the 2015 MCT Statement, available online: http://stakeholders.ofcom.org.uk/consultations/mobile-call-termination-14/statement/. 92

Commission Recommendation 2009/396/EC, http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32009H0396&from=EN. 93

Guidance, page 21, footnote 46.

http://stakeholders.ofcom.org.uk/consultations/nmr-13/statement/





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Choice of technology

4.50 In order to implement any calculations we first needed to decide on the technology to model. In the fixed sector there are two distinct technologies in use: TDM and NGN. Fixed CPs predominately use one or the other of these technologies. The choice of technology may affect porting costs by influencing the way CPs route traffic to ported numbers, and the amount of network conveyance used by the DCP to deliver calls to ported numbers.

4.51 In the Guidance we considered whether porting charges should be set using an own network technology approach (where each CP sets its charges based on its own network) or a benchmark technology approach.94

4.52 The Guidance states that:

“In the fixed sector, both NGNs and TDM networks (the latter reflecting depreciated network costs) may be efficient and CPs should be allowed to set charges based on the technology and topology used in their own networks.” 95

4.53 In light of this, while the Guidance explains that either network could be modelled in calculating APCCs, it is also clear that BT can charge APCCs that allow it to recover its (LRIC) costs of conveyance, based on the topology and technology of its own network.

4.54 BT primarily uses TDM technology and sets its APCCs based on this network.96 We therefore considered it appropriate to use estimates based on TDM technology when calculating the appropriate level of APCCs in the Disputes.

Issues raised with BT’s APCC calculation

The appropriate approach to calculating incremental costs

4.55 In its dispute submissions Vodafone made an argument in relation to the appropriate counterfactual to be used in the decremental approach to calculating LRIC:

“The incremental cost in this case will be the cost of the network with rangeholder conveyance incorporated, minus the cost of the network absent portability. By simply charging Vodafone for conveying the call across the tandem node, BT has neglected to take into account the costs avoided were the number not to have been ported, i.e. the “minus” part of the calculation. Absent portability, BT would have conveyed the call to the [donor] DLE for termination, but this cost element is no longer incurred.”97

4.56 In its response to Vodafone’s Dispute Submission, BT re-iterated that it considered Vodafone’s argument to be an “inappropriate re-positioning of the Porting Differential debate”.98 Porting differentials occur where the termination charge received by the

94

Guidance, Section 5. 95

Guidance, paragraph 5.7. 96

See paragraphs A5.2 to A5.8 below. 97


BT’s 6 August Submission, page 2.


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DCP is different to the termination charge of the RCP, where the DCP pays the RCP’s charge when it onward routes the call.99

4.57 BT claimed that Vodafone’s argument would lead to BT paying Vodafone for every onward routed call, and that this would not make sense.100 Vodafone disagreed with this characterisation of the issue, noting that it was not seeking to recover porting differentials via the APCC calculation. Vodafone argued that the termination rate that BT levies on the OCP “is a matter for BT and the OCP and of no interest to [Vodafone]”.101

4.58 We considered these arguments and did not find that characterising this issue as a question of porting differentials to be a helpful approach. Rather we considered that the question raised by Vodafone is one of how the increment of porting traffic should be defined and how related costs should be considered in the calculation of APCCs.

4.59 In effect, Vodafone appeared to be arguing that we should consider the counterfactual case to be one in which the porting service is not provided, the customer remains on the original network and the costs relating to the routing of calls to the customer on the original network are included. As we show with the aid of a stylised example in Figure 4.2 below, Vodafone’s interpretation leads to a lower incremental cost than an approach consistent with our application of LRIC to set termination rates.

Figure 4.2: Comparison of Ofcom’s and Vodafone’s interpretations of the Guidance

Source: Ofcom

99

Ofcom considered porting differentials in relation to non-geographic calls in the NCCN500 dispute. http://stakeholders.ofcom.org.uk/consultations/draft_deter_cw_bt_nccn500/final_determination/. In this dispute, Ofcom concluded that porting differentials should not be recovered via APCCs. 100


Vodafone’s Dispute Submission, page 8.

Including porting Excluding porting Including porting Excluding porting

Ofcom interpretation Vodafone interpretation

Network costs

Network costs less porting traffic

Network costs

Network costs less porting traffic

Additional costs of conveyance and termination

Incremental cost

Incremental cost

http://stakeholders.ofcom.org.uk/consultations/draft_deter_cw_bt_nccn500/final_determination/


34

4.60 We disagreed with Vodafone’s approach. When calculating LRIC, we are not trying to think about how consumers might behave in the absence of a traffic increment; we are trying to identify which assets are needed to provide that increment of output. The calculation of LRIC is an exercise of identification of cost causation, and does not aim to interpret how consumers might behave by constructing counterfactuals.

4.61 This can be seen by taking Vodafone’s argument to its logical conclusion in the context of the removal of a termination increment. If a network stopped providing off-net termination services, we would expect it to lose many subscribers. Were this to happen one possible outcome may be that the network would shut down, suggesting that all network costs could be considered incremental to the termination service.102

4.62 We therefore disagreed with Vodafone’s interpretation of how we should calculate the LRIC of porting and instead believed it would be most appropriate to take a decremental approach to calculating LRIC consistent with the Commission Recommendation and the approach Ofcom has taken in the 2013 NMR and the 2015 Mobile Call Termination Market Review.103

Call groups

4.63 We considered the ten call groups that BT uses to calculate APCCs and the concerns raised by Gamma and Vodafone regarding these groups as detailed in their submissions.

4.64 In its submission, Gamma said that it was unclear whether the costs that BT uses to calculate the APCC are legitimate104 and suggested that in order for Ofcom to calculate the LRIC of an APCC accurately, we would need to understand each call group and the LRIC elements comprising each group.105

4.65 In its submission, Vodafone considered the call groups that BT uses106 and, while not disagreeing in principle with BT using these groups to derive APCCs, highlighted concerns over the way BT establishes the costs associated with each of these call groups.107 Vodafone questioned whether BT is using cost components relating to the incremental cost of routing the call and whether the claimed costs for each of these call groups are calculated on a LRIC basis. It noted that BT had not provided a full breakdown of the cost components used in each call group.108

4.66 We noted that neither party questioned the call groups that BT uses, or the volumes data itself, so we used these in our calculations.

102

Vodafone argued that the counterfactual for removing porting would be that consumers would remain on BT’s network rather than switching to other networks, as porting is designed to remove barriers to switching. While many subscribers might remain, it is a strong assumption that no customers would switch to other networks. This illustrates just how difficult it would be to produce a firm counterfactual were Vodafone’s approach taken. 103

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/ (the “2015 Mobile Call Termination Market Review”). 104



Vodafone’s Dispute Submission, pages 6-20. 107


Vodafone’s Dispute Submission, page 13.




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Approach to calculating the APCC

4.67 Having set out our views on the appropriate methodology to calculate APCCs above, we next considered the most appropriate source of information for the calculations. We considered that the best available source of evidence for this calculation is BT’s top-down LRIC model of its TDM network (“BT’s LRIC model”).

4.68 BT is required to prepare and submit to Ofcom annual statements of costs as part of its regulatory financial statements (“RFS”). The outputs of its LRIC model form part of this submission. BT’s LRIC model is not published, however the methodology adopted is described in BT’s Accounting Methodology Document.109 To inform our analysis, we requested further detailed information from BT under our formal powers. This information related to the way BT currently calculates the APCCs, including obtaining a full description of each call group and the costs components used, and further detail underpinning its LRIC calculations.110

4.69 BT’s LRIC model is explained in more detail in Annex 3. We set out in Figure 4.3 below an example illustrating the steps involved in our APCC LRIC cost calculation which utilises data from the BT LRIC model. At the deepest level of detail the cost-volume relationships (“CVRs”)111 from the BT LRIC model provide us with information on the relationship between costs and volumes, which we required in order to measure the costs associated with the porting conveyance increment.

109

See http://www.btplc.com/Thegroup/RegulatoryandPublicaffairs/Financialstatements/2015/LRICModelRelationshipsandParameters201415.pdf. 110

1st Notice requiring the provision of specified information under section 191 of the Communications

Act 2003, sent to BT on 30 July 2015. BT provided responses on 13, 19 and 24 August 2015 and 3, 10, 15 and 22 September 2015. 111

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.

http://www.btplc.com/Thegroup/RegulatoryandPublicaffairs/Financialstatements/2015/LRICModelRelationshipsandParameters201415.pdf





36

Figure 4.3: Breakdown of APCC calculation using BT’s LRIC model

APCC

Group 1

Group 2

Group 3

…

x 10 call groups

=

Group 3 =

Main switching (ICV002)

Local-tandem transmission length (ICV004)

Inter-tandem transmission link (ICV005)

…

x 8 network components

ICV005 =

Fixed assets – core transmission equipment

Provision and installation

Fixed assets – motor transport (uses CVR CV170)

…

x ~600 cost categories

CV170

Motor transport,

fixed assets and

depreciation

=

A 50% reduction in volumes…

… leads to a 34% reduction in costs.

1

2

Source: Ofcom.


37

4.70 BT’s LRIC model calculates incremental costs on the basis of network components rather than on the basis of services. For each network component it calculates the costs that would be avoided by no longer providing that component, meaning that the chosen increment of output is all volumes using that component.112

4.71 However, as explained in paragraph 4.49 above, we considered that the relevant increment of output for our analysis in the Disputes is porting conveyance. By replicating the calculation from BT’s LRIC model, but instead of removing the total component volumes removing only the proportion of those volumes that relate to porting conveyance, we were able to calculate a porting specific component LRIC.

4.72 The costs of network components are the result of adding together costs from multiple cost categories (each of which may have a different cost driver). The BT LRIC model uses the proportion of fully allocated costs from each cost category that are allocated to each network component113 as the relevant percentage decreases in volumes when calculating the LRIC of that cost category. This “volume proxy” ensured that the LRIC model used the same volume metrics and hence the same underlying cost causation relationships that are used to derive FAC.114

Explanation of our approach

4.73 We therefore adopted a calculation approach that mirrors the methodology used in BT’s LRIC model, with an adjustment to calculate the component LRIC specific to porting conveyance. Our calculation was structured as follows, and is explained in more detail in the sub-sections that follow:

4.73.1 Identify the relevant network components, volumes, cost categories and sources of data;

4.73.2 Calculate, for each cost category by network component, the proportion of cost driver volumes associated with the porting conveyance service increment;

4.73.3 Use CVRs to calculate porting specific incremental costs by cost category;

4.73.4 Aggregate costs to derive total porting specific incremental costs by network component and divide by porting conveyance volumes; and

4.73.5 Map these component unit LRICs to call groups using usage factors.

4.74 Then, in order to calculate the APCC for a given CP, we weighted the unit costs of each call group by that CP’s volumes.

112

See BT LRIC Model: Relationships & Parameters, Section 2.1. 113

This allocation is done on the basis of FAC costs. 114

See BT LRIC Model: Relationships & Parameters, Section 3.1.3 for background information.


38

Identify relevant network components, cost categories and sources of data

4.75 We identified the network components and cost categories relevant to porting using information from BT obtained using our formal powers.115 We included operating costs and a return on capital employed in the relevant costs.

4.76 In order to estimate APCCs as of 1 January 2015 we sought to use the most up-to-date sources of cost and volume data that should have been available to BT at that time. This means that the cost data we ideally sought to use is that from the restated 2013/14 Additional Financial Information (“AFI”),116 and porting conveyance volumes for each CP from November 2014.117

4.77 In practice, BT was unable to provide the restated 2013/14 AFIs and the associated data that was needed to enable us to estimate APCCs prior to publication of the Provisional Conclusions. We therefore used the corrected2013/14 AFI data in our calculations for the Provisional Conclusions. We noted that we intended to use the restated 2013/14 AFI data in reaching our final determination of the Disputes.

Calculate proportion of volume driver associated with the porting conveyance service increment

4.78 We first identified the proportion of the total volume driver accounted for by each component. This was done on a consistent basis to that adopted in the BT LRIC model as described in paragraphs 4.70 to 4.72 above. We then took the ratio of ported minutes to total minutes by component (as obtained under our formal powers118) to calculate the proportion of this that is applicable to the porting conveyance service. These aspects of the calculation are explained in further detail in Annex 3.

4.79 This allowed us to estimate the proportion of component volumes for each network component that are associated with porting conveyance traffic.

Use CVRs to estimate incremental costs by cost category

4.80 We then used CVRs119 to convert these proportional changes in cost driver volumes into proportional changes in costs for each relevant cost category for each relevant

115



The AFIs contain information supporting BT’s RFS, and contain the allocation of both FAC and component LRIC costs from cost categories to network components. The AFIs are not published but are provided by BT to Ofcom annually. 117 BT has established an approach based on taking a sample of data over one month which it uses to calculate the APCC to apply over the next twelve month period. BT sets new APCCs on an annual basis using this approach (unless material changes in traffic distribution or costs occur, in which case it may review the APCC more frequently). In general BT has taken the sample in February and applied the new APCC in April. However, following our Guidance, it took the sample in November 2014 in order to set new APCCs from January 2015. 118



BT’s CVRs are published in the LRIC Model Relationships and Parameters document, available at: http://www.btplc.com/Thegroup/RegulatoryandPublicaffairs/Financialstatements/2014/LRICModelRelationshipsandParameters2014.pdf.




39

network component. We used BT’s published CVRs to the fullest extent possible, but note that in some cases CVRs are not available. Our approach in these cases and the tests we applied to ensure the robustness of our results are explained in further detail in Annex 3.

4.81 The result of this step is the calculation of the incremental costs of porting conveyance by cost category by network component.

Derive unit LRIC by network component

4.82 The incremental costs of porting conveyance at the level of network components could then be summed by network component in order to find a total LRIC of porting conveyance by network component. This was divided by total porting conveyance volumes to produce the incremental cost of porting conveyance by network component on a unit (pence-per-minute) basis.

Calculate costs of call groups on a pence-per-minute basis

4.83 These unit LRIC costs by network component were then mapped to unit LRIC costs by call group using usage factors. The usage factors describe how much of each relevant network component is used by one minute of use of each call group and are shown in Annex 3.

Generate an APCC for a given CP

4.84 The final step of the calculation was to generate an APCC for a given CP, which we did by multiplying that CP’s off-net ported volumes (split by call group) by the pence per minute costs of each of those call groups. This resulted in the total incremental cost incurred by BT of conveying off-net originated calls to numbers ported to that CP, and is the total cost that BT is permitted to recover via the APCC in order to satisfy the cost orientation obligation in GC18.5.

4.85 As explained in paragraph 2.6 however, it is industry convention to recover the cost of porting conveyance from all calls delivered to that CP by BT rather than just from those calls that are not originated on BT’s network. Therefore, we divided the total costs of porting by the total volumes of traffic delivered to the CP in order to generate an APCC. This results in a volume-weighted average cost that, if applied as a 24-hour charge on all exported calls, would recover the total incremental cost of porting that BT has incurred.

Ofcom’s provisional conclusion on what level of APCC would have been appropriate

4.86 Using the method described above, we calculated a LRIC cost of each call group in pence-per-minute terms. These are shown in Table 4.4.

Table 4.4: 2013/14 LRIC of porting conveyance by Call Group (ppm)

[]

Source: Ofcom.

4.87 We used the above LRICs of porting conveyance by call group to calculate the level of APCCs that we considered it would have been appropriate for BT to charge to each of Gamma and Vodafone from 1 January 2015. We did this using cost data


40

from the 2013/14 AFIs and using the November 2014 volume sample as explained in paragraphs 4.76 and 4.77.

4.88 Accordingly we calculated that BT should have charged 24-hour rates of 0.029ppm for Gamma and 0.030ppm for Vodafone.120

4.89 The APCCs actually charged by BT, on a comparable 24-hour basis, were 0.075ppm for Gamma and 0.064ppm for Vodafone.121

4.90 We calculated the APCCs that we provisionally concluded BT should have charged Gamma and Vodafone as a 24-hour rate for ease of calculation and as a means of identifying the total amount of cost that BT was permitted to recover from each CP through the APCC.

4.91 We noted that BT currently applies a time-of-day gradient to its APCCs, setting different rates depending on whether calls were made in the daytime, evening or at the weekend. The dispute submissions raised no concerns with BT adopting this approach and our decision to calculate each APCC as a 24-hour rate does not prevent BT from setting different rates by time of day so long as it recovers no more cost under such an approach than it would had it applied the 24-hour rate we identified above.

4.92 The APCCs we calculated were based on current traffic volumes and cost data. We would expect BT to re-calculate APCCs from time to time as volume and/or cost data is updated. We noted that BT typically revises its APCCs on an annual basis and the approach we have taken does not prevent BT from continuing to do this on a forward looking basis, so long as it adopts an approach to calculating APCCs that is compliant with the requirements of GC18.5(a).

Step 3. Consideration of whether we should require BT to make repayments to Gamma and Vodafone

Ofcom’s general approach to repayments

4.93 In Step 2, we provisionally concluded that BT overcharged for the services in dispute. Gamma and Vodafone requested that, were we to find that BT had overcharged them for APCCs, we require BT to make repayments with interest.

4.94 Where Ofcom has made a determination of the proper amount of a charge in respect of which amounts have been paid by one of the Parties to the other, section 190(2)(d) of the 2003 Act gives Ofcom the power to give a direction, enforceable by the party to whom the sums are to be paid, requiring the payment of sums by way of an adjustment of an underpayment or an overpayment.

4.95 In reaching a provisional decision on whether we should exercise our discretion to require BT to make a repayment in this case, we were guided by our statutory duties and Community obligations under sections 3 and 4 of the 2003 Act. We also took

120

As noted in paragraph 4.77, these rates are based on 2013/14 data. We intended to base our final calculations on the restated 2013/14 data that BT was due to provide to us. As such, we explained that there may be some change between the APCCs that we had estimated here and those that we finally determine in our final statement. 121

These figures were calculated by multiplying the Day, Evening and Weekend rates by the volume sample from November 2014 and dividing the resulting costs across all exported traffic.


41

account of the findings of the CAT and Court of Appeal in relation to Ofcom’s power under section 190(2)(d) to require repayments in previous judgments.

4.96 The PPC Court of Appeal Judgment122 considered the issue of repayments under section 190 of the 2003 Act. It concluded that Ofcom has “a discretion to make such order for repayment as will best achieve the objectives of the Act and the CRF on the particular facts of the case”.123 The Court said that:

“The starting point must be, in a case of overcharging in breach of an SMP condition, to order repayment of the amount of the excess charge. If, however, the payee can show some good reason why a lesser repayment or no repayment at all would better achieve the objectives of the Act and the CRF then that would provide a principled basis for Ofcom to give a direction for only a partial repayment or to make no direction for repayment at all.” 124

4.97 Although that was a case concerning an SMP condition, we considered it appropriate to take this judgment into account when considering the starting point for repayments in this case concerning a general condition. We also gave consideration to the impact of BT’s overcharging on competition and consumers and the impact that allowing BT to retain profits realised from overcharging might have on incentives for future compliance with cost orientation obligations.

4.98 At the provisional conclusion stage the parties had not put forward evidence to suggest that a lesser repayment or no repayment would better achieve the objectives of the 2003 Act. We therefore provisionally concluded that it was appropriate for us to direct BT to make a repayment to the referring parties reflecting the amount of the overcharge.

The level of any repayments due

4.99 The Guidance was published on 29 September 2014 and BT implemented a reduction of its APCCs on 1 January 2015. We provisionally concluded above that the level of APCCs applied following the Guidance was not in line with GC18.5(a) from this date and that we should use our powers to direct BT to make a repayment in this case. Table 4.5 below sets out the pence per minute rates by which we provisionally concluded BT overcharged each of Gamma and Vodafone.

122

Judgment on the Court of Appeal of 27 July 2012 in British Telecommunications Plc v Office of Communications [2012] EWCA Civ 1051 available at http://www.catribunal.org.uk/files/1146_BT_Judgment_of_the_Court_of_Appeal_270712.pdf. 123

PPC Court of Appeal Judgment, paragraph 83. 124

PPC Court of Appeal Judgment, paragraph 85.

http://www.catribunal.org.uk/files/1146_BT_Judgment_of_the_Court_of_Appeal_270712.pdf


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Table 4.5: APCCs and level of overcharge (ppm)

Current APCC Ofcom calculated APCC

Level of overcharge

Gamma 0.075 0.029 0.046

Vodafone 0.064 0.030 0.034

Source: Ofcom.

4.100 In light of our assessment above, we provisionally concluded that it was appropriate and proportionate for Ofcom to exercise its powers under section 190(2)(d) of the 2003 Act to direct BT to make repayments to the referring parties reflecting the amount of the overcharge from 1 January 2015. This would return BT to the position it would have been in if not for the overcharge.

4.101 In order to calculate the amount of overcharge for the period, up-to-date volume data would be needed to cover the period to determination of the Disputes. Although volume data is available for some of this period, it will not be available for the most recent month(s) at the time that we resolve the Disputes.

4.102 Given the information needed to calculate repayments in the Disputes, we considered that it would be appropriate for the parties to resolve the amount to be repaid (plus interest as set out below) between themselves, and by following the methodology as set out in the Provisional Conclusions. We proposed to make a Determination in these terms.

Interest on repayments

4.103 We also considered whether it would be appropriate for us to award interest on the repayment amounts in the Disputes. In doing so we had regard to the parties’ views as well as the Interest Guidance125 set out in the Gamma Determination.126

4.104 The Interest Guidance sets out Ofcom’s objectives in awarding interest and explains that, when exercising our powers under section 190(2)(d) of the 2003 Act to make a direction requiring a repayment to be made in the context of resolving a dispute, Ofcom will decide whether interest should be payable, and, if so at what rate. The Interest Guidance explains that Ofcom will take account of all relevant considerations, with a view to setting an amount of principal plus interest which would best meet our statutory duties and regulatory objectives, in particular, with a main objective of avoiding CPs having incentives to set unduly high charges.127

4.105 The Interest Guidance states that it is likely to be appropriate to award interest in the majority of cases in which we order repayment, our main objective being to avoid

125

On 25 October 2013, Ofcom issued a determination to resolve a dispute between Gamma and BT concerning the interest rate set out in BT’s Standard Interconnect Agreement. As part of this determination, Ofcom issued guidance setting out Ofcom’s approach to interest, referred to as the “Interest Guidance”. 126

Dispute between Gamma and BT relating to the “Oftel Interest Rate” contained within BT’s Standard Interconnect Agreement (“SIA”), Final Determination, 25 October 2013: http://stakeholders.ofcom.org.uk/binaries/enforcement/competition-bulletins/closed-cases/all-closed-cases/cw_01108/CW_011080613.pdf. 127

Gamma Determination, paragraph A2.1.




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creating an incentive for CPs to set charges that are unduly high.128 The Interest Guidance identifies that the starting point is that the interest rate should generally reflect the time value of the principal to the overcharging firm, i.e. the benefit the overcharging firm enjoys by virtue of the delay between its overcharging and the date on which it makes a repayment.129

4.106 However the Interest Guidance also explains that although we could seek to assess on a case-by-case basis the actual benefit to the overcharging firm as a result of the overcharge in that case, such an in-depth assessment would be complex and is unlikely to be practical. In the Interest Guidance we noted that it is important to adopt an approach which would foster commercial and regulatory certainty and that an appropriate interest rate should be readily calculable using available data.130

4.107 As set out in the Interest Guidance, we consider that the Bank of England base rate plus 1% (“BoE+1%”)131 is likely to be an appropriate rate to reflect the benefit derived by the overcharging firm from the overcharge in most cases.132 However, we recognise that, depending on the facts of the case and taking into account any evidence provided by the parties, it may be appropriate to adopt a different rate in order to ensure that our objectives are met.133

4.108 At the Provisional Conclusions stage, the parties to the Disputes had not put forward arguments as to why we should not follow this approach in this case. Indeed, Gamma had argued that Ofcom should award interest calculated at the BoE+1% in accordance with that outlined by Ofcom in the Interest Guidance.134

4.109 Taking everything into account, we provisionally concluded that the interest rate of BoE+1% as set out in our Interest Guidance was the appropriate interest rate to use in this case.

Timing of interest payments

4.110 In December 2012 Ofcom resolved five disputes between BT and each of Cable & Wireless Worldwide (now Vodafone), Sky, TalkTalk, Verizon and Virgin concerning BT’s charges for Ethernet services.135 We found that BT had overcharged these parties approximately £95 million for Ethernet services during the period 2006/07 to 2010/11. Ofcom’s determinations of these disputes were appealed to the CAT.

4.111 In August 2014, the CAT issued its judgment.136 Whilst the CAT rejected the appeals in large part, it remitted two issues to Ofcom for determination, including the rate of interest payable in respect of BT’s overcharge for Ethernet services. BT is appealing

128

Gamma Determination, paragraph A2.3. 129

Gamma Determination, paragraphs A2.3 and A2.4. 130

Gamma Determination, paragraphs A2.9 and A2.10. 131

We noted that this is the rate which has conventionally been adopted by the High Court in commercial cases and by the CAT when awarding interest on penalties on appeal. 132




Disputes between each of Sky, TalkTalk, Virgin Media, Cable & Wireless and Verizon and BT regarding BT’s charges for Ethernet services, determinations and explanatory statement, 20 December 2012: http://stakeholders.ofcom.org.uk/binaries/consultations/ethernet-services/annexes/Ethernet_FD.pdf. 136

http://www.catribunal.org.uk/files/1205-7_Ethernets_Judgment_CAT_14_010814.pdf.





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the CAT judgment in the Court of Appeal and one of its grounds of appeal relates to whether Ofcom has the power to award interest when resolving disputes.

4.112 Therefore we provisionally concluded that whilst interest is payable on the amount of the overpayment, it shall only be payable at the point at which the Court of Appeal hands down a judgment in this appeal which is unfavourable to BT. If the Court of Appeal determines that Ofcom does not have jurisdiction to award interest, the requirement to make a payment in respect of interest shall fall away.

Provisional Conclusions

4.113 For the reasons set out above, we provisionally concluded that for the period from 1 January 2015 BT has failed to set APCCs for Gamma and Vodafone on the basis of LRIC. As a consequence, we did not consider that BT’s APCCs were compliant with the requirements of GC18.5(a).

4.114 On the basis of data obtained from BT, we calculated LRIC-based APCCs that would have been compliant with GC18.5(a) over this period. These rates indicated that on average, BT overcharged Gamma by 0.046ppm of each ported call and Vodafone by 0.034ppm of each ported call. We provisionally concluded that BT should (i) amend its APCCs to ensure they are compliant with GC18 in light of this determination, and (ii) make repayments to Gamma and Vodafone of the amounts overcharged with interest, calculated at BoE+1%.

4.115 In line with our Dispute Resolution Guidelines, we allowed a two week period for the Parties and other interested parties to provide any comments on our Provisional Conclusions. The deadline for comments was 5pm on 14 October 2015.


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Section 5

5 Responses to the Provisional Conclusions and Final Determination

Introduction

5.1 We received six responses to our Provisional Conclusions, from BT, Gamma, Vodafone, Sky, TalkTalk and Virgin Media.

5.2 In this section, we summarise the issues raised in the responses to the Provisional Conclusions and, having considered those responses, we set out our analysis and final conclusions. The Determinations can be found at Annexes 1 and 2.

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

Stakeholder responses

5.3 With the exception of BT, all other respondents to the Provisional Conclusions agreed with Ofcom’s provisional assessment that BT’s APCCs were not cost oriented in line with the requirements of GC18.5(a).

5.4 BT disagreed with Ofcom’s provisional assessment and maintained that the approach it has taken to reduce only the ‘non-contestable’ switch components of the APCC to LRIC and keep all other components of the APCC at the commercially agreed rates, is consistent with GC18.5(a).

5.5 In particular, BT argued that Ofcom’s Provisional Conclusions “proceed from the fundamental false premise that the Recipient CP (“RCP”) cannot exercise control over who provides various components of the network used to convey ported calls”.137 It argued that contrary to Ofcom’s position, and Vodafone’s 21 August submissions, RCPs now have full control over how they interconnect with BT’s number portability service and therefore full control over the elements utilised beyond the switch that received the call to the ported number.138

5.6 BT claimed that the deregulation of conveyance services and the introduction of DLE handover means that CPs can decide how much of the conveyance either to self-supply, purchase from BT or purchase from another CP. It contrasted this with the position when APCCs were first regulated, where interconnection with BT’s number portability service was only possible at Tandem exchanges and conveyance services were regulated.139

5.7 BT also disagreed that all types of conveyance are covered by GC18.5(a). BT said that when the APCC was first introduced it covered porting and conveyance, however it argued that as regulation has evolved, the conveyance elements have been deregulated and now the APCC is “not limited to porting as such but is the

137

BT’s 14 October Submission, paragraph 3. 138

BT’s 14 October Submission, paragraphs 7 and 8. 139

BT’s 14 October Submission, paragraphs 8 to 11.


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convention used to charge for a service that includes porting. Services that provide conveyance between BT switching nodes are not regulated.”140

5.8 BT argued that Ofcom’s approach to the application of the Guidance, so that it includes not only non-contestable switching elements, but also contestable conveyance elements of porting, would have a negative impact on competition and innovation, contrary to the policy objectives in Article 8 of the Framework Directive.141 In particular BT made the following comments:

5.8.1 It said that Ofcom should recognise that intervention to reduce freely contracted rates to LRIC “threatens to impose price regulation in competitive markets”142 and that this would infringe Ofcom’s obligations to target regulation only at cases in which action is needed. BT considered this to be economically unsound and claimed that there was no proper basis for doing so in either the statement that accompanied the Guidance or the Provisional Conclusions. BT argued that GC18.5 should therefore be interpreted in such a way that competitive service elements fall outside the cost-orientation obligation in that condition.143

5.8.2 It argued that any use of LRIC in the elements it considers to be ‘contestable’ would “affect the incentives for direct routing as low charges will induce some CPs at least to wish to maintain current inefficient arrangements”.144 It said that using the LRIC cost standard more broadly would have a distorting effect on incentives to move to direct routing and it maintained its view that there is a direct parallel with the 03 termination dispute determination “as the underlying conveyance services are the same as for ported numbers”.145 As a result it argued that LRIC is not the appropriate cost standard for porting and especially for conveyance services.

5.9 BT went on to argue that because of the misunderstanding in relation to a RCP’s choices, Ofcom made a number of factual and legal errors in the Provisional Conclusions.

5.10 BT argued that contrary to Ofcom’s conclusion at paragraph 4.34 of the Provisional Conclusions, BT’s approach is consistent with the requirements of Article 30 of the USD. BT noted that the aim of number portability, as set out at recital 4 of the USD, is “that users who so request should be able to retain their number(s) on the public telephone network independently of the organisation providing service” and that case law makes clear that the term relates to the facility for users to retain their existing number when they change network operator.146 BT claimed that Article 30 must be considered by reference to this.

5.11 BT submitted that the scope of the obligation under Article 30(2) is therefore “narrowly limited to the pricing of the network elements actually and unavoidably related to the provision of number portability”.147 It argued that elements which could

140




BT’s 14 October Submission, paragraphs 26 and 46 to 49. 144




BT’s 14 October Submission, paragraph 38.


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be substituted for conveyance by another CP or by self-supply are by their nature not elements which are unavoidably related to onward routing.

5.12 BT reiterated its view 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 RCPs have agreed another basis for charging [].148 BT made reference to the definitions of mobile portability, ‘additional conveyance costs’ and ‘facility’ in GC18 to justify its view that conveyance costs are not covered by GC18.5 [].149

5.13 BT noted Ofcom’s comments in paragraph 4.42 of the Provisional Conclusions, which contrasted the position in the 2015 DCC Statement with that in the Disputes. BT claimed that the contrast that Ofcom was seeking to draw was not borne out by the nature of the Disputes. It argued that a major part of the Disputes concerns whether or not some elements that are contained within the average charge made by BT should be included in the regulated portability service in the first place.150

5.14 BT further argued that Ofcom’s broad interpretation of GC18.5 goes far beyond what it is empowered to do under the USD. It said that the CJEU in The Number case151 made clear that NRAs should interpret narrowly the scope of their power under the USD. BT made reference to paragraph 31 of that judgment, which states: “As an exception to the prohibition on imposing specific obligations on operators individually, the obligations which may be imposed under the Universal Service Directive on undertakings designated in accordance with Article 8(1) thereof to provide universal service are to be interpreted strictly”.152

5.15 BT said Ofcom’s dismissal of the applicability of the Supreme Court Judgement in the 08x case to the Disputes is incorrect as the network elements in question are unregulated and therefore the principles set out in that judgment are relevant to the Disputes.153 “Ofcom should therefore regard the contractually agreed price as the starting point and is entitled to interfere to fix a different price with the minimum of regulatory interference and only where it is necessary to do so to ensure end-to-end connectivity or to ensure that Article 8 objectives are met in cases where they are currently not being met.” 154

5.16 BT further argued that the principle of minimum intervention in commercial freedom and preserving the ability of parties to agree their own interconnection terms applies to both competitive markets and markets where there is SMP. It claimed that regulatory intervention should still be kept to the minimum necessary even where SMP exists.155

5.17 Virgin Media noted that in its “assessment of the charges that comprise the APCC, reductions made by BT following the publication of the Ofcom Guidance appeared to be made to both services BT suggest were contestable, as well as to the non-contestable services”.156 It considered that this approach appeared to undermine the

148


BT’s 14 October Submission, paragraphs 43, 57 and 58. 150

BT’s 14 October Submission, paragraphs 44 and 45. 151

Case C-16/10 The Number Ltd and Conduit Enterprises Ltd v Office of Communications and British Telecommunications plc, ECR 2011 I-00691. 152




BT’s 14 October Submission, paragraphs 54 to 56. 156

Virgin Media’s 14 October Submission, page 2.


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suggestion from BT that only non-contestable elements of the service need to be charged at LRIC.

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

5.18 As noted above, BT disagreed with our interpretation of the requirements of GC18.5 and maintained its justification for the way it has set its APCCs.

5.19 BT’s current interpretation of GC18.5 and its approach to calculating APCCs appears to differ from the position it put to us after we issued the Guidance. BT wrote to Ofcom on 4 December 2014 to explain, amongst other things, how it planned to implement the Guidance. BT explained that:

“[]”157

5.20 Our reading of this letter is that in light of the Guidance, BT intended to []. As we find in this determination, this was not the approach that BT subsequently adopted when setting the APCCs that would apply from 1 January 2015.

5.21 BT’s current position can essentially be summarised as follows:

5.21.1 Services comprising number portability: GC18 was put in place to fulfil the requirements of Article 30 of the USD. Article 30 only relates to the facility for users to retain their number and, as such, the cost orientation obligation is limited to those network elements that, as BT puts it, are “actually or unavoidably” related to the provision of number portability. BT considered that the ECJ’s judgment in The Number case supports this interpretation. It said the impact of Ofcom’s interpretation of GC18 and Article 30 would be to undermine competition and innovation, contrary to Ofcom’s statutory duties and the requirements of Article 8 of the Framework Directive.

5.21.2 Contestability of conveyance services: Conveyance is a contestable service and is therefore not unavoidably related to the provision of number portability. The wording of GC18 itself supports this interpretation and makes clear that the cost orientation requirement only applies to the extent that another basis of charging has not been agreed.

5.22 We address each of these arguments in turn below.

Services comprising number portability

5.23 In onward routing calls, BT incurs conveyance costs to carry the call from the point in its network where it determines that the number has been ported to the point where it hands the call to the RCP. The extent to which conveyance is used will depend on the point at which the call enters BT's network and the interconnection arrangements between BT and the RCP. The locations of interconnection between BT and RCPs will be determined by the totality of traffic flowing between the networks. BT and the RCP will also agree which specific points of interconnection to use for number portability traffic.

5.24 Routing of traffic from BT to the RCP can be summarised as:

157

Letter from BT to Ofcom, dated 4 December 2014, paragraphs 12 and 13.


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For calls from BT's own retail customers to the RCP's own geographic number ranges (i.e. non-ported calls), BT is responsible for this traffic and bears the costs of delivery to the other CP. 158 This should result in the costs of this call routing being efficient, as BT seeks to minimise costs of providing retail services.

For calls from BT’s own retail customers to numbers ported to the RCP, the same approach is taken i.e. BT is again responsible for this traffic and bears the costs of delivery to the RCP.159 Again, this should lead to efficient routing.

Where a call to a ported number originates from another CP, the call is again conveyed from where it is handed over to BT to the point of interconnect with the RCP. In general, the same interconnects are used for these calls as for calls originated on BT’s network (except where DLE handover is used).160 This means where off-net originated ported calls need to route from any particular switch in BT’s network to the RCP, the routing should be the same as for non-ported calls routing from that same switch to the RCP, and this routing should be efficient in BT’s view. The cost of transit from the point where BT determines the number has been ported to this point of interconnect is dependent on the number of tandems involved in call routing, which in turn depends on the interconnection arrangements agreed between the parties. GC18.5 allows BT to recover the costs incurred in routing off-net originated calls via the APCC.

5.25 It is our view that, because of the way calls to ported numbers are routed on BT’s network (as explained above), the conveyance provided by BT from a switch in BT’s network to the RCP is a service related to the provision of number portability covered by Article 30(2) and GC18.5. On this basis we consider the approach taken in the Provisional Conclusions to include the costs of conveyance within the APCC is correct. Further we do not agree with the legal arguments made in BT’s submission. BT considers that its view on what constitutes the regulated porting service is consistent with Article 30 of the USD, GC18 as a whole and case law.

5.26 We do not consider that BT’s narrow interpretation of Article 30(2) is supported by the relevant case law. BT quotes the case of The Number161 which BT considers “made clear that NRAs should interpret narrowly the scope of their power under the USD”.162 We do not consider that this case is relevant to these Disputes. It concerned Article 8(1) of the USD and whether that provision would permit a Member State to impose a wholesale obligation on a specific operator. The court held that that provision should be interpreted narrowly as it was an exception to the prohibition on imposing specific obligations on operators individually in Article 3(2) of the USD.163 We do not consider that the court’s interpretation of Article 8(1) of the USD is relevant to the correct interpretation of Article 30 USD, which sits in an entirely

158

As set out in para 5.1.3 and Appendix D of Annex 1 of the BT Standard Interconnect Agreement (SIA). 159

As set out in para 5.1.3 and Appendix D of Annex 1 of the SIA. 160

For ported calls, DLE handover was introduced as a specific result of the 2010 Opal APCC Dispute regarding routing of ported traffic to Opal. The dispute determined that BT should provide DLE handover on request to Opal but that in making such a request, Opal should bear the costs of interconnect circuits to BT’s DLEs. 161

Case C-16/10, The Number Ltd and Conduit Enterprises Ltd v Office of Communications and British Telecommunications plc, 2011 ECR I-00691: http://curia.europa.eu/juris/liste.jsf?language=en&num=C-16/10. 162


Case C-16/10, The Number Ltd and Conduit Enterprises Ltd v Office of Communications and British Telecommunications plc, paragraph 31.



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separate chapter of the USD. It was also made clear in The Number that conditions to the general authorisation (such as GC18.5) which arise from the Annex to the Authorisation Directive were not in issue in that case.164 BT also makes reference to the opinion of the Advocate General in Polska Telefonia.165 We do not fully understand the point BT is making with regard to this reference; in any event it is clear that in that case (unlike here) the court was focussing on direct charges to subscribers, and the court also cited with approval the Mobistar case, to which we refer below, and to which BT only makes fleeting reference.

5.27 There is support in the relevant case law for a broader interpretation of Article 30 than that suggested by BT. In the Mobistar case166 the ECJ was asked, amongst other things, to consider whether Article 30(2) of the USD refers only to costs related to traffic to the ported number, or whether it also refers to tariffs of costs incurred by operators in executing requests for number porting. In reaching the view that Article 30(2) of the USD concerned both the traffic costs of ported numbers and the set-up costs incurred by Mobile Network Operators (“MNOs”) to implement requests for porting, the ECJ considered that the concept of number portability covered the facility available to a mobile telephone subscriber to retain the same number when changing operator and that the implementation of that facility requires the subscriber's number to be ported from one operator to another and technical operations to allow the forwarding of telephone calls to the ported number.167

5.28 The ECJ noted that number portability is intended to remove the obstacles to consumers’ freedom of choice and thus to ensure the development of effective competition on the telephone services market. Article 30(2) is intended to achieve these aims with an obligation on NRAs to ensure that pricing for number portability does not act as a disincentive for the use of such facilities.168

5.29 We consider this judgment supports our view that GC18.5 (which implements Article 30(2) of the USD) properly covers all costs relating to the provision of number portability – that is to say it includes conveyance of traffic to ported numbers and other costs incurred by operators in executing requests for number porting.

5.30 GC18.5 requires charges for Portability to be cost oriented, where Portability includes:

“any facility which may be provided by a Communications Provider to another Communications Provider 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.”169

164

Case C-16/10, The Number Ltd and Conduit Enterprises Ltd v Office of Communications and British Telecommunications plc, paragraph 29. 165

Case C-99/09 Polska Telefonia Cyfrowa ECR 2010 I-06617, Opinion of AG Bot. 166

Case C438-04, Mobistar SA v Institut belge des services postaux et des telecommunications (IBPT), 2006 ECR I-06675: http://curia.europa.eu/juris/liste.jsf?language=en&num=C-438/04. 167

Case C438-04, Mobistar SA v Institut belge des services postaux et des telecommunications (IBPT), paragraphs 23 and 24. 168

Case C438-04, Mobistar SA v Institut belge des services postaux et des telecommunications (IBPT), paragraphs 26 and 33. 169

GC18.11(k).



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5.31 BT argued that conveyance is not covered by this because it refers to “facility”.170 The term “facility” is not defined in GC18. We consider our interpretation of GC18 is consistent with Article 30, which requires NRAs to “ensure that pricing between operators … related to the provision of number portability is cost-oriented”. We also note that interconnection is specifically identified in Recital 42 to the USD, which explains that “when ensuring that pricing for interconnection related to the provision of number portability is cost-oriented, national regulatory authorities may also take account of prices available in comparable markets”.

5.32 Finally, as set out above, on the basis that we consider GC18.5 to apply to all the network elements used in the process of conveying ported calls, we do not consider the Supreme Court judgment to be relevant to the Disputes for the reasons set out in the Provisional Conclusions (see in particular paragraph 4.29 above). Unlike here, no regulatory conditions had been imposed in relation to the charges which were at issue in that case, and the Supreme Court made this distinction clear. For completeness, however, we address briefly BT’s points in so far as they relate to our duty to act in accordance with Article 8 of the Framework Directive.

5.33 BT argued that the approach we proposed would be contrary to Article 8 of the Framework Directive, for example, Article 8(2)(b) in relation to distortion and restriction of competition in conveyance and Article 8(5)(d) in relation to efficient investment and innovation in new infrastructures.

5.34 In considering Article 8, we are mindful that “number portability is a key facilitator of consumer choice and effective competition in a competitive telecommunications environment”171 and lowers the barriers to switching providers. Ensuring that charges from providers that lose retail customers (i.e. DCPs) to those gaining retail customers (i.e. RCPs) are in line with efficiently incurred costs is consistent with this objective. In any case, it is not clear that competition in the conveyance market is distorted since the costs recovered through the APCC, as covered by GC18.5, are only relevant to ported traffic, not the generality of conveyance traffic.

5.35 BT also argued that, by including conveyance in the charges set to LRIC, incentives to move to direct routing would be diminished. We do not consider that allowing charges related to onward routing – the mechanism used to deliver portability traffic in the UK – to be higher than they would otherwise be if set on a LRIC basis is appropriate. It is our view that charges for onward routing should be set on a LRIC basis as concluded in the Guidance and that any case for direct routing should be determined against these costs.

5.36 We have also considered BT’s arguments that GC18.2 and GC18.11(a) support its approach.172 We do not consider that BT’s argument regarding GC18.2 is relevant. GC18.2 refers specifically to the process for porting a number that should be followed by MNOs. It does not provide a definition of number portability within GC18.2 and is not concerned with routing of calls to ported numbers. We do not understand the relevance of GC 18.11(a)(ii) as this concerns Additional Conveyance Charges (ACCs) and GC18.5 prohibits the recovery of ACCs. It has not been argued that APCCs are related in any way to ACCs. The Disputes relate to whether the APCC has been set at a level to recover relevant costs on a LRIC basis or not. ACCs cannot be recovered.

170


See recital 40 to the USD. 172

BT’s 14 October Submission, paragraph 43.


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Contestability of conveyance services

5.37 BT seems to argue in its response that as conveyance is a contestable service, it is not unavoidably related to the provision of number portability. We do not consider this to be the case. Whether or not a service is required to enable number portability to occur appears to us to be a question of fact, rather than one of whether it is competitive or not. Regardless of whether conveyance is a contestable service, the interconnection agreements in place between the DCP and the RCP will determine how ported calls are conveyed between the two and transferred to the end-user and therefore for number portability to functionally take place. We therefore consider that any network elements included in this call routing, including porting conveyance, are unavoidably linked to the provision of number portability.

5.38 BT argued that CPs could avoid paying conveyance as the relevant markets - LTC and ITC - are competitive. We do not consider that whether services that are a part of the porting service are competitive is relevant in the context of the provision of number portability, which is an obligation arising from the USD. We would, however, note that there are some important differences between off-net originated calls to ported numbers compared to the transit of calls to non-ported numbers:

For calls to ported numbers, under the onward routing scenario, the originating CP cannot determine that the number has been ported from BT to another CP and so must route the call via BT. In contrast, for calls to non-ported numbers, the originating CP can determine the point of termination of the call based on the number range and could route directly to the terminating CP; and

Since an originating CP does not know that a number has been ported from BT, it will route traffic as if the call was to a number still hosted on the BT network; it does not know which CP will ultimately terminate the call. The RCP has no control over this routing since it is BT that determines the point on its network where the number was originally hosted. On the other hand, for calls to non-ported numbers, CPs can determine routing that allows them to reduce the amount of inter-tandem conveyance incurred on transit calls.

5.39 As we do not consider that whether services that are a component of the porting service are competitive is relevant, we have not in resolving these Disputes undertaken a full analysis of competitive conditions in the provision of these services as related specifically to number portability. However, we would note that to avoid these conveyance charges, a CP has two options: purchase transit products from third party CPs or interconnect to each DLE in BT's network from which it ports a number and to every tandem that is a parent of each of these DLEs.173 In relation to these options:

Regarding transit services, conveyance between tandem switches in BT's network has been competitive since 2005 and alternative CPs have offered competing products for non-ported traffic, but we are not aware that products related to transit of numbers ported from BT have been developed. We would also note that TalkTalk [] uses DLE handover [] (though we note BT's point that there has been less time for such products to develop). This is in contrast to the range of CPs that interconnect to the DLEs for a range of non-ported traffic,

173

This would suggest it is the responsibility of the RCP to determine routing of ported calls on BT’s network. The BT Standard Interconnect Agreement identifies at Appendix D of Annex A that this traffic, like calls from BT to a CP’s own geographic number ranges, is the responsibility of BT.


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and offer services to third parties (for example to deliver traffic to BT geographic numbers and to collect Carrier Pre-Selection traffic).

Regarding direct interconnection, BT argues that CPs could interconnect to each switch in its network. We do not disagree with this technically but we do not think the technical ability to interconnect to every switch is relevant. Rather, the question is where they actually interconnect. LTC was de-regulated in 2009 and ITC in 2005. There has therefore been sufficient time for CPs to consider interconnection with BT, taking account of de-regulation of these markets. Where further interconnection has been efficient, we would expect CPs - in agreement with BT - would have deployed further interconnection and that this could be used for the handover of porting traffic. Specifically related to DLE interconnection, we are not considering whether the DLE handover product is fit-for-purpose or not. However, we note that [].

5.40 We do not consider that the potential for new transit services to be developed or for CPs to interconnect at other points in BT's network in the future is a basis for considering that conveyance provided by BT in relation to delivering number portability traffic should be excluded from those services subject to GC18.

5.41 BT has also maintained that the wording of GC18.5(a) supports its interpretation and that it makes clear that the cost orientation requirement only applies to the extent that another basis for charging has not been agreed. BT therefore considered that because [], this meant that the cost orientation requirement in GC18 does not apply to the conveyance elements of the APCC.

5.42 We disagree with BT’s interpretation of GC18.5(a) and maintain our reasoning as set out in paragraphs 4.28 to 4.44 of the Provisional Conclusions. Article 30(2) of the USD places a duty on NRAs such as Ofcom to ensure that pricing between operators related to the provision of number portability is cost-oriented. GC18.5(a) implements this requirement. It does not permit (and cannot properly be interpreted as permitting) non cost-oriented charges to be applied, whether by Ofcom or the agreement of the parties, as this would be inconsistent with the requirements of Article 30(2) of the USD. In any event, it is clear that the referring parties have not agreed another basis for the charging of porting conveyance, as demonstrated by the correspondence supporting the Disputes. We consider this is further demonstrated by the fact that all respondents to the Provisional Conclusions, except BT, agreed with our approach and interpretation of GC18.5(a).

5.43 We note Virgin Media’s comments in relation to the reductions that BT made to its APCCs following the Guidance but do not consider that they add anything to the arguments that we make above.

Conclusions on whether BT’s APCCs are cost orientated

5.44 For the reasons set out above and in paragraphs 4.28 to 4.44 of the Provisional Conclusions, we remain of the view that porting conveyance forms part of portability as defined in GC18.11(k) and therefore falls to be regulated under GC18.5. We do not consider the question of whether the service is contestable or not has any bearing on this.

5.45 We conclude that all the elements that form part of the APCC should be cost oriented in accordance with GC18.5(a) and in light of our Guidance. For the reasons set out above, and noting that BT accepts that it has not set APCCs on this basis, we conclude that the APCCs set by BT since 1 January 2015 were not cost oriented.


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


5.46 Again, with the exception of BT, most respondents to the Provisional Conclusions broadly agreed with the approach that Ofcom had taken to calculating APCCs that were consistent with the requirements of GC18.5(a).

5.47 Vodafone agreed with Ofcom’s findings that the APCC was not set in line with GC18.5(a); however it considered that Ofcom had misunderstood Vodafone’s view in relation to the structure of costs that should be used to determine the APCC.174 It made a number of comments in relation to this:

5.47.1 It explained that whilst there are new elements in the call path when a number has been ported, there is also a reduction in costs to BT as some parts of its network are no longer used. It considered that Ofcom’s analysis failed to take account of the reduction in costs for the elements of BT’s network that are no longer incurred.

5.47.2 In particular Vodafone stated that “when carrying out the analysis of calculating the additional costs of porting conveyance, these should be based upon the incremental costs of the additional elements minus the costs (once again calculated on an incremental basis) of the elements forgone”.175

5.47.3 Vodafone made clear that its argument was not a matter of determining “some hypothetical counterfactual of what might have happened absent portability” and explained that BT had received payment from the originating network for conveying the call to the terminating DLE but was no longer actually providing this function.176 Vodafone noted that if this concept was not accepted, then “the only logical conclusion can be that BT is overcharging the originator hence should be reimbursing the LTC service that they are not providing”.177

5.47.4 Vodafone also provided an alternative to the example used by Ofcom in paragraph 4.61 of the Provisional Conclusions, to support its arguments. Vodafone claimed that unless its approach was followed, in the extreme case of BT losing all its customers BT would continue to be paid for carrying calls to the donor DLE even though it was not doing so and even though there would no longer be a need for the tandem-DLE connection.178

5.47.5 It noted that this could lead the range holder to having a negative APCC, however clarified that it was not their intent in this scenario to request a

174

We discussed Vodafone’s view on this issue at paragraphs 4.55 to 4.62 of the Provisional Conclusions (as set out in Section 4 above). 175

Vodafone’s 14 October Submission, page 5. 176


Vodafone’s 14 October Submission, footnote 4. 178

Vodafone’s 14 October Submission, page 5.


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payment from BT. It noted that if this were the case, then the APCC would (theoretically) fall to zero as there would be no incremental costs.179

5.48 Gamma noted that, while it agreed in principle with Vodafone’s argument in relation to the appropriate counterfactual to be used in the decremental approach to calculating the LRIC,180 in the context of the Disputes it considered Ofcom’s approach to be a reasonable compromise in practice.181

5.49 Gamma explained that it could not find any material issue with the methodology that Ofcom used in its calculations and agreed in principle with the APCC being recalculated in the final determination using the restated 2013/14 AFI data.182 However, it suggested that variance analysis be performed by Ofcom should there be a material difference in the final APCC numbers calculated when using this data.183

5.50 Vodafone also commented that it is “satisfied that, given the information readily available to Ofcom about BT’s costs, the approach adopted by Ofcom represents a reasonable one”.184 However it considered there to be a weakness in BT’s underlying cost data that has been used in the calculations. It highlighted Figure 4.3 above and questioned whether BT carrying an incremental minute to a ported number (versus the number being resident on BT’s network) would really lead to a difference in the costs of BT maintaining its vehicle fleet.185

5.51 Vodafone noted that Ofcom has placed regulatory scrutiny on BT’s cost attribution through the analysis carried out by Cartesian.186 Vodafone considered that we should instruct BT to recalculate the APCC to take this into account once the cost attribution activity has reached its conclusions, and preferably require BT to retrospect the recalculated APCC to 1 January 2015.187

5.52 Gamma reiterated its position that it considers only network resources consumed in the provision of number portability should be charged for and it asked that Ofcom provide confirmation that any common costs have been removed when completing the calculations.188 Gamma also noted that, given the level of the APCCs we proposed to determine, it did not intend to argue the point about the reasonableness of an APCC that exceeds the termination rate any further in the context of the Disputes.189

179


As explained in the Provisional Conclusions, paragraph 4.55. 181



Gamma noted that it disagreed with the current methodology for calculating BT’s cost of capital; however it recognised that an allowance for it is fair and reasonable and that in the context of the Disputes, it would be unlikely to be able to persuade Ofcom to adopt a different approach. 184



See paragraphs 5.69 to 5.71 for an explanation of Cartesian’s work. 187


Gamma’s 13 October Submission, pages 3 and 4. See paragraphs 4.110 and 4.111 for details of the Ethernet appeal. 189

With regard to the termination rate argument, Gamma requested on page 3 of its submission that paragraph 4.16 of the Provisional Conclusions is qualified to say that, in principle Ofcom see no reason for the APCCs to be capped at the termination rate “on the basis of the arguments brought by Gamma in this dispute”. We have considered this request but do not think it necessary to amend or qualify the paragraph at this stage. We always make decisions based on the information before us


56

5.53 Sky supported the Provisional Conclusions, and noted that it would expect BT to recalculate Sky’s APCCs based on the latest up to date LRIC cost data for porting conveyance and Sky’s volume traffic. It requested that Ofcom publish BT’s LRIC cost data in the Final Determination, so that it would be able to review any re-calculations that BT completes moving forward.190

5.54 BT provided further comments on the Provisional Conclusions on 27 October 2015 where it explained that it had identified “a number of anomalies in the model” that Ofcom used in calculating the LRIC of ported calls”.191 It identified four concerns in its comments.

5.55 BT’s first concern was that having reviewed the mapping of cost categories against the CVRs, it had discovered a number of discrepancies. It grouped these into three categories:

5.55.1 BT considered that certain costs appeared to be mapped differently in the model as compared to BT’s published Relationships & Parameters (“R&P”) for 2013-2014 and it provided a table of the costs it considered had been mapped incorrectly in the model.192

5.55.2 BT explained that it had sent amended LRIC AFI data to Ofcom [] (the “corrected 2013/14 AFI data”) and it believed that these corrected mappings had not been reflected in Ofcom’s model. It provided a table of the cost categories it believed were affected by this.193

5.55.3 BT said that a small number of cost categories were used in the model that had no mappings in the published R&P and which did not appear in the corrected mappings file that was provided to Ofcom []. It provided a table of proposed changes to the mappings that Ofcom used in the model.194

5.56 BT’s second concern was with regard to how the model calculates the share of each cost line attributable to each component.195 It explained that the way the model calculates this only takes into account the “big 5” increments196 within the network increment, which BT believed overstated the share of total BT costs accounted for by each component. It considered that this overstatement would carry forward into the calculation of ported costs.197

5.57 BT’s third concern related to how the model converts each capital employed cost category into a capital cost, by applying the return on capital employed (“ROCE”) for

and we will consider any future arguments in relation to this concept if and when these are brought to us. 190

Sky’s 15 October Submission, page 1. 191

BT’s 26 October Submission, page 1. 192




The model calculates the share of each cost line attributable to each component (referred to in Annex 3 as the “volume proxy”) by dividing the FAC costs for the component (in columns E to X in the tab “selected costs” in the model) by the total FAC costs (column Z in tab “selected costs” in the model). 196

BT referred to the following increments as the “Big 5”: Core (column K in the model), ICV052 (column DF in the model), ICV050 (column EI in the model), ICV038 (column FV in the model) and RoN (column GB in the model). 197

BT’s 26 October Submission, page 3.


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the increment. It believed that this would cause a distortion in the calculations of percentages attributable to each increment. BT argued that the model should perform LRIC calculations for the capital employed cost categories as they appear in the AFI (before the ROCE is applied to the capital cost). Once the component LRICs for each capital employed cost category have been calculated, BT suggested that they could be converted to capital costs by applying the component ROCE.198

5.58 Finally BT’s fourth concern was that, having compared the output of Ofcom’s model to the output of BT’s LRIC model, it had found some differences. The effect is that Ofcom’s calculation of the LRIC for component [] is significantly lower than the output of BT’s LRIC model. BT considered that Ofcom’s modelling approach (i.e. calculating LRIC based on the proportion of costs avoided if the increment volume is no longer required) does not work where a single component accounts for 100% of a particular cost line. In such circumstances, where an increment accounts for 100% of the FAC, BT considered that reducing the volume by 100% would save the entire cost in the long run. The LRIC for the cost lines for component [] should therefore equal the FAC.199

Ofcom’s final conclusion on what level of APCC would have been appropriate

Response to Vodafone’s comments on determining the additional network elements

5.59 We disagree with Vodafone’s view of the network elements which are incremental to the provision of porting. Vodafone seems to choose its approach to calculating incremental costs because it matches the way in which BT charges the OCP upon receiving the call; BT charges the OCP the regulated FTR plus a commercially-set rate for the conveyance needed between the tandem switch at which the call was passed to BT, and the DLE from which the call is expected to be terminated.

5.60 Vodafone argued that by charging the OCP in this way for all calls and then porting a proportion of them to other CPs BT is making a “windfall gain”, as it does not account for costs avoided by porting a call when charging either the RCP, OCP, or both. Instead, Vodafone argued that BT charges the OCP as though all traffic is terminated on its network, and then in addition charges RCPs for any costs incurred in porting calls to them.

5.61 We do not believe Vodafone’s is the correct counterfactual to use when calculating the incremental cost of porting, for the reasons set out in paragraphs 4.55 to 4.62 of the Provisional Conclusions.200 Furthermore, we do not consider that how BT chooses to charge the OCP is relevant to the matter of calculating the costs incurred by BT in porting a call to the RCP.

5.62 The suggestion that BT is charging the OCP for services that are not used is illustrated by Vodafone’s example, in which BT would continue to be paid for conveyance to the DLE despite having no customers for whom this conveyance would be necessary. However, this is not an issue that falls within the scope of the Disputes.

198


BT’s 26 October Submission, pages 3 and 4. 200

We therefore do not believe Vodafone’s comment on how to deal with a negative APCC is relevant, as this is only a consequence of its chosen counterfactual, not of ours.


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5.63 We also draw attention to Section 6 of the Guidance in which we considered in detail the various options for charging rules and decided against implementing any rule that would lead to OCPs bearing porting costs. A consequence of the counterfactual proposed by Vodafone would effectively be to leave OCPs bearing some porting costs. We have not assessed whether BT is actually charging OCPs for services that are not used for ported calls and therefore express no view on this matter other than to note that if OCPs do have concerns about this, then they should raise them with BT in the first instance.

Response to other issues raised by stakeholders

5.64 In the Provisional Conclusions we used corrected 2013/2014 AFI data in completing our calculations, however we explained that we intended to use the restated 2013/2014 AFI data when reaching our final determination. In response to this, Gamma requested that a detailed variance analysis be performed should there be a material difference in the final APCC numbers.

5.65 Within the timeframes of these Disputes, BT has been unable to provide us with all the necessary restated data to enable us to use this in our calculations.201 We have therefore continued to use corrected 2013/2014 AFI data as we consider this remains the best information available to us to calculate the level of APCC that it would have been appropriate for BT to charge Gamma and Vodafone.

5.66 However we have also noted that the 2013/2014 AFI data were corrected [] since they were initially produced, due to the identification of a number of errors in the original publication. []. While updating the model for the Disputes, we have noticed that the Provisional Conclusions used []. We have updated the model to use the corrected 2013/2014 AFI data, as we believe these to be the most appropriate data available to us. This has led to a reduction in the APCCs we have calculated of about 4%.

5.67 The 2013/14 restatements correct for a number of different errors and changes in allocation methodology, many of which would not have an impact on the APCCs. It is unclear exactly how these changes in data would interact with each other but on the basis of the information available to us it appears that the overall impact on the APCCs would be limited.

5.68 We note Vodafone’s comments about the “weakness” of BT’s underlying cost data and the example of vehicle fleet costs used to support its position. We agree with Vodafone that we would not expect that the costs of maintaining a vehicle fleet would have a material impact on the incremental costs of porting conveyance. We chose this example for the intuitive shape of its CVR rather than its materiality in the cost stack. Vehicle fleet costs form a negligible proportion of the costs included in the APCCs we have calculated (less than []%) and so we do not believe this example shows any anomaly in the underlying data.

5.69 As noted by Vodafone, Cartesian has been engaged by Ofcom to review BT’s RFS against the new Regulatory Accounting Principles introduced by Ofcom in May

201

BT has provided us with “restated” volume figures for 2013/14, which showed significant changes from those previously submitted. We have not been able to assess the accuracy of these new volume figures and have not considered it necessary to do so as it would not be appropriate to use the restated volume data without corresponding restated costs data (which BT has not provided).


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2014.202 The initial findings of the review have been published and form part of Ofcom’s “Review of Cost Attribution Methodologies”.203 Cartesian has stated that it is “satisfied that BT’s cost attribution system is free from bias”.204

5.70 The main errors identified by Cartesian have been corrected by BT within its 2013/14 restatement of its RFS and would therefore have been taken into account in the APCCs, had BT provided us with all the necessary information to enable us to make the calculations. However, as we note above, it appears that the impact on the APCCs of using the restated 2013/14 data would be limited.

5.71 Cartesian’s work has also highlighted some attribution methodologies, largely relating to corporate overheads, which may be inappropriate. A decision has not yet been reached on what changes, if any, should be made as a result of these findings. Any changes that we do require to be made will be forward looking and we would expect BT to take account of them when it next calculates the APCCs. We do not, however, believe that it would be appropriate for us to require that any APCCs recalculated as a result of any changes made to these attribution methodologies be retrospectively applied.

5.72 In response to Gamma’s statement that it “would be grateful for explicit confirmation [that superfluous common costs and network elements have been removed]”, we note that as described in Annex 3, our approach to calculating APCCs has been based only on the incremental costs of those network elements used in porting, using ported volumes as the increment. We have not included costs that are common across a wider increment than ported traffic, as explained in paragraphs 5.75 and 5.76, below. We also direct Gamma to Table A5.1 of the Provisional Conclusions (reproduced as Table A3.1 below), in which the usage factors for all network elements used in our calculations are set out. These describe the actual usage of network elements by calls of each of the ten call groups.

5.73 We have considered Sky’s request that we publish LRIC cost data to enable it to review any recalculated APCC that BT charges Sky. We remain of the view that the LRIC cost data is confidential and that we would therefore require clear justification to publish this data. We do not consider that publication of the LRIC cost data is necessary for us to be able to resolve the disputes before us as we have provided both Gamma and Vodafone with details of the APCC that we consider BT should charge.

5.74 We would, however, encourage BT to take steps to ensure that the APCCs that it charges all CPs are consistent with the requirements of GC18.5 and to provide sufficient information to those CPs to enable them to confirm that this is the case.

Response to BT’s modelling concerns

5.75 BT’s first concern was that our mapping of cost categories against CVRs contained a number of discrepancies. We have reviewed this mapping by cross-referencing the

202

The Regulatory Accounting Principles are, in order of priority: Completeness; Accuracy; Objectivity; Consistency with regulatory decision; Causality; Compliance with statutory accounting standards; and Consistency of the Regulatory Financial Statements as a whole from one period to another. 203

Review of BT’s cost attribution methodologies, consultation, 12 June 2015: http://stakeholders.ofcom.org.uk/consultations/cost-attribution-review/. 204

BT Cost Attribution Review, a report for Ofcom by Cartesian, page 18: http://stakeholders.ofcom.org.uk/consultations/cost-attribution-review/.

http://stakeholders.ofcom.org.uk/consultations/cost-attribution-review/

http://stakeholders.ofcom.org.uk/consultations/cost-attribution-review/


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lists provided with BT in its response with the R&P for 2013/14 and with the amended data sent by BT earlier this year. We agree with BT that some cost categories had been mapped incorrectly, and have updated these mappings in the model. The net impact of these changes has been to increase the APCCs calculated for both Gamma and Vodafone by approximately 2%.

5.76 We have also taken into account BT’s second concern over the correct denominator for calculating the “volume proxy” in the model and have changed the total used from the “big 5” increments to the total network FAC. This has had very little impact on the outputs of the model (a reduction of around 0.01%) as the costs used as the denominator when calculating the “volume proxy”, are also used later as the numerator when converting from a proportion of costs to a total cost.205 The only cases in which LRIC differs due to this change are cases in which the volume proxy under the revised approach results in a move to a different segment of the CVR (with a different gradient). This only occurs for a small minority of cost categories.

5.77 We also agree with BT’s third concern that the ROCE should be applied at the end of the calculations rather than at the beginning, as in the Provisional Conclusions, due to the potential for causing some distortions. We have updated the model to account for this. This change has had almost no impact on the outputs of the model (being visible only at the fifteenth decimal place in our outputs).

5.78 We disagree with BT’s fourth concern that our approach is inappropriate where a single component accounts for 100% of the cost line. We recognise that our calculation for the LRIC of component [] is significantly lower than BT’s. This is due to the differences in the increment used by BT and in our model and was discussed in the Provisional Conclusions in paragraphs A5.11 to A5.13 (in particular, footnote 138). BT’s increment for a given component is that component’s total volumes, while our increment is the volumes of components used to provide portability.

5.79 We do not disagree with the principle that where a single component accounts for all of the costs in a given cost category, it follows that removing all volumes of that component would remove all costs from that cost category, and as such the LRIC would equal the FAC using the component volumes as the increment. However, in our model we only remove a proportion of the volumes of each component, not all volumes. Therefore BT’s argument that it would have no need of the cost category in question does not hold because, absent porting conveyance, there would still remain some volumes of the component incurring costs to that category (for example, non-ported traffic terminated by BT). We believe that these cost categories and components should be considered similarly to all others, with costs falling in accordance with the CVR of the cost category rather than as BT has suggested.

Conclusion on the appropriate level of APCCs

5.80 For the reasons set out above, we remain of the view that the approach to calculating APCCs that we set out in Section 4 is appropriate. However as noted above, BT has highlighted some discrepancies in our modelling and we have taken these into

205

For example, assume we calculated (using the approach taken in the Provisional Conclusions) a volume proxy of 10% for a given component and cost category based on component costs of £10 and total category costs of £100, and that after applying the CVR this led to a LRIC cost proportion of 5%. In this case, LRIC for the component in that cost category would be £5 ( = 5% * £100 ). If BT’s approach led to total costs increasing to £200, the volume proportion would be 5%, and the CVR would lead to a LRIC cost proportion of 2.5%. LRIC for the component would again be £5 ( = 2.5% * £200).


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account in our revised calculations of the APCCs that BT should have charged Gamma and Vodafone since 1 January 2015.

5.81 Using the methodology described in Section 4, with the amendments as noted above, we have re-calculated a LRIC cost of each call group in pence-per-minute terms (see Table 5.1). The amendments caused some minor changes to the LRIC to those calculated in the Provisional Conclusions (see Table 4.4 above).

Table 5.1: 2013/14 LRIC of porting conveyance by Call Group (ppm)

[]

Source: Ofcom.

5.82 We then used the above LRICs of porting conveyance by call group to recalculate the level of APCCs that we consider it would have been appropriate for BT to charge to each of Gamma and Vodafone from 1 January 2015. As noted at paragraphs 5.64 to 5.67 above, we did this using the corrected 2013/2014 AFI data as we consider this to be the best information available to us to perform these calculations. The amendments caused some minor changes in the APCC 24 hour rates that we calculated in the Provisional Conclusions and we set out in Table 5.2 below a comparison of the APCCs set by BT and those that we have calculated for the Provisional Conclusions and Final Determination.

Table 5.2: Comparison of APCCs206

Current APCC Provisional APCC Final APCC

Gamma 0.075 0.029 0.029

Vodafone 0.064 0.030 0.029

Source: Ofcom.

5.83 There have been some amendments to our model as noted above and therefore some minor changes to the APCC rates calculated in the Final Determinations as compared to the Provisional Conclusions. Switching to using the corrected 2013/14 AFI data has led to a reduction of around 4%, while updating the CVR mappings has led to an increase of around 2%. No other modelling changes have had a material impact on the outputs.

5.84 It is still evident from our revised calculations that the level of APCC that BT charged Gamma and Vodafone for the period from 1 January 2015 was not in line with the level of APCC that we consider BT should have charged in this period. As a result, and for the same reasons as set out in the Provisional Conclusions, we have gone on to consider whether we should require BT to make repayments to the referring parties.

206

The figures for the current APCC in Table 5.2 have been calculated by multiplying the Day, Evening and Weekend rates by the volume sample from November 2014 and dividing the resulting costs across all exported traffic.


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Consideration of whether we should require BT to make repayments to Gamma and Vodafone


5.85 In the event that Ofcom were to direct repayments to Gamma and Vodafone, BT made the following comments

5.85.1 It said that “Ofcom does not have the power to order retrospective payments in dispute resolution proceedings” as the CRF does not give Ofcom the power to penalise or remedy historic regulatory breaches.207 It suggested that interpreting section 190(2)(d) of the 2003 Act to include powers to order retrospective payments would result in legal anomalies, such as the lack of any provision for limitation periods.

5.85.2 It argued that even if Ofcom were to have the power to order repayments, it “should exercise its discretion not to order any repayment in a case such as the present one where this is the first time that Ofcom has applied its new guidance in the September Statement”.208

5.85.3 BT submitted that Ofcom should adopt the same approach to repayments as it proposed to do in relation to interest in the Provisional Conclusions and defer any payment until the Ethernet appeal has been determined. It argued that the question of whether Ofcom has the power to impose retrospective payment on BT is also one of the grounds in that appeal and that if the Court of Appeal finds in BT’s favour then it would be in a position of having to seek repayment itself.209

5.86 Vodafone noted Ofcom’s provisional view that it would be appropriate for the parties to resolve the amount to be repaid between themselves; however it raised some concerns with the negotiations that this may involve. In particular, it was concerned with the way BT may apply the 24-hour rates identified by Ofcom to generate Day/Evening/Weekend (D/E/W) rates.210 Vodafone argued that the rationale for time-of-day charging – incentivising users to make calls when the network is less busy – was not relevant in relation to APCCs as the party paying the APCC has no control over when calls are made that generate the APCC.211 Vodafone asked that Ofcom set out its views in regard to the D/E/W rates, rather than the 24-hour rates, in the Final Determination.212 Vodafone made no comments about the interest rate proposed in the Provisional Conclusions or the timing of the payment of interest.

207




As noted at paragraph 4.90 of the Provisional Conclusions, we calculated a single 24-hour APCC rate that would enable BT to recover its incremental porting costs. Historically, BT has set different APCC rates based on the time of day that a call is made – i.e. whether the call is made during the day, during the evening or at weekends. 211


Vodafone’s 14 October Submission, pages 7 and 8.


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5.87 Gamma agreed with the interest rate suggested by Ofcom in the Provisional Conclusions of BoE+1% and did not argue with the interest only being payable at the point the Court of Appeal hands down a judgment in the Ethernet appeal.213

5.88 TalkTalk noted that Ofcom had provisionally concluded that BT should be required to repay the overcharged amount, however it questioned Ofcom’s use of the interest rate of BoE+1%. TalkTalk considered that this rate “is effectively the default option set out in Ofcom’s Interest Guidance”, and that Ofcom had not given any reasons as to why the default option would be suitable in these disputes. TalkTalk argued that Ofcom should determine a rate that would meet the main objective identified in the Interest Guidance of avoiding an incentive for CPs to set unduly high charges. It stated that it would expect Ofcom to set out its reasoning in full in the Final Determination.214

5.89 Virgin Media agreed with Ofcom’s provisional conclusion that interest is payable on any overpayments received by BT, however it considered that Ofcom was wrong to provisionally conclude that the interest should only become payable at the point at which the Court of Appeal hands down a judgment in the Ethernet appeal. It argued that this would deprive any CP who has made overpayments of full repayment until that judgment, and that “[g]iving BT the potential use of these funds for longer that is necessary would appear contrary to the Principles set down in Ofcom’s original Guidance on interest repayment from the Gamma Determination”.215

Ofcom’s final conclusion on whether we should require BT to make repayments to Gamma and Vodafone

Ofcom’s approach to repayments

5.90 Ofcom considers that it does have the power under section 190(2)(d) of the 2003 Act to require payments in respect of charges paid before the matter in question was brought to Ofcom to resolve using its dispute resolution powers. As BT itself notes, it has raised this argument before the Court of Appeal in the Ethernet case. That being the case, we do not consider it appropriate to set out our response to their legal argument in this Final Determination.

5.91 Based on the particular facts of the case and our statutory duties, we consider it appropriate to exercise our discretion and award repayments to the referring parties for the reasons set out in our Provisional Conclusions. We have received no evidence to suggest, as BT contends, that making such an award would have negative consequences for BT’s customers.

5.92 In using our discretion to order repayment, we are not intending to penalise BT for any breach, but instead seeking to put the parties back into the position they would have been in had the overcharge not occurred. We consider that this is reasonable in the context of these disputes, where BT has received the benefit of the overcharge since 1 January 2015.

213

Gamma’s 13 October Submission, pages 4 and 5. 214

TalkTalk’s 14 October Submission, paragraph 3. 215

Virgin Media’s 14 October Submission, page 2.


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The level of any repayments due

5.93 The Guidance was published on 29 September 2014 and BT implemented a reduction of its APCCs on 1 January 2015. We have determined above that the level of APCCs applied following the Guidance was not compliant with GC18.5(a) from this date and that we should use our powers to direct BT to make a repayment in this case. Table 5.3 below sets out the pence per minute rates by which we believe BT has overcharged each of Gamma and Vodafone.

Table 5.3: APCCs and level of overcharge (ppm)

Current APCC Ofcom calculated APCC

Level of overcharge

Gamma 0.075 0.029 0.046

Vodafone 0.064 0.029 0.035

Source: Ofcom.

5.94 In the Provisional Conclusions, we explained that we considered it would be appropriate for the parties to resolve the amount to be repaid (plus interest) between themselves, and by following the methodology as set out in the conclusions. We note that none of the parties objected to this approach and we remain of the view that it is appropriate in the circumstances, in particular considering the absence of the latest volume data being available to us.

5.95 We have considered Vodafone’s request that we specify the time of day rates that should apply in relation to APCCs in the Final Determination. Whilst we believe that there may be some merit in Vodafone’s argument that the incentive properties of time-of-day charging are not relevant for APCCs, we do not consider that it is appropriate or necessary for us to specify time-of-day rates in the Disputes.

5.96 The question of time-of-day charging was not something that was raised with us as an issue in the dispute submissions and we do not consider that it falls within the scope of the Disputes. To set time-of-day rates other than those currently used by BT would necessitate us seeking the views of all the parties to the Disputes. We have made clear that the actual APCC rates that BT sets (should it choose to apply time-of-day gradients) should result in it recovering no more costs than it would using the 24-hour rate that we have identified in this document. Vodafone will be able to compare the payments that it makes under the APCCs that BT sets with the 24-hour rate that we have determined and bring to our attention any non-compliance by BT in this regard.

Interest on repayments

5.97 We note TalkTalk’s comments about the interest rate that Ofcom proposed in the Provisional Conclusions and its criticism that we have not provided reasons as to why the default option was suitable for the Disputes. For the reasons set out below we do not consider that it would be appropriate to set a higher rate of interest in the Disputes.

5.98 As we explained in the Interest Guidance, we considered it important to provide an indication of our approach to interest and the interest rate that we are generally likely to adopt in order to help provide a stable and predictable regulatory framework and to help enable us to resolve disputes in four months. We therefore set out the interest


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rate that we would generally apply when directing repayments (i.e. BoE+1%) and provided our reasoning for selecting this rate.216

5.99 We noted that this rate was “likely to be an appropriate rate to reflect the benefit derived by the overcharging firm from the overcharge in most cases”,217 but recognised that, depending on the facts of a particular case, it may be appropriate to depart from the BoE+1% rate in order to ensure our objectives were met. We made clear, however, that the onus was on the parties to put forward evidence to justify that an alternative rate should apply in any individual case.218

5.100 We explained in the Interest Guidance why we considered BoE+1% to be an appropriate rate of interest to apply when overcharging has occurred and therefore the onus lies with TalkTalk to persuade us that this is an inadequate rate of interest in the Disputes. TalkTalk has provided no evidence to demonstrate that BoE+1% is an inappropriate rate and has provided no alternative rate that it believes we should use.

5.101 Moreover, we would note that TalkTalk is not a party to the Disputes. Our determinations to resolve the Disputes will be binding on BT in relation to Gamma and Vodafone. Gamma, in its dispute submission, expressly requested that we use the BoE+1% rate when applying interest and neither Vodafone nor BT has raised objections to our proposed use of this rate.219 We therefore do not consider that it would be appropriate for us to determine that a different rate of interest should apply.

Timing of repayments

5.102 We provisionally concluded that whilst we considered interest should be payable on the amount of the overpayment (and liability for interest would accrue from the date of the overpayment), it should only have to be paid at the point at which the Court of Appeal hands down judgment in the Ethernet appeal, provided that judgment confirmed Ofcom’s powers to require the payment of interest. As explained in the Provisional Conclusions at paragraph 4.111, this is because one of the grounds of the appeal relates to whether Ofcom has the power to award interest when resolving disputes.

5.103 We have considered Virgin Media’s concern that this approach would be contrary to the principles in the Interest Guidance, however we remain of the view that delaying this payment is reasonable in the circumstances of the Disputes. We note that Gamma did not seek to argue this point and Vodafone made no comment on this in its response to the Provisional Conclusions.

5.104 As set out above, we consider that the appropriate rate of interest to apply to the repayment to be BoE+1%. Therefore, in light of the particular circumstances of this case and the sums of money involved, we do not consider that delaying the payment of an award of interest would be inconsistent with our statutory duties under sections 3 and 4 of the Act.

216

Paragraph A2.2 of the Interest Guidance: see http://stakeholders.ofcom.org.uk/binaries/enforcement/competition-bulletins/closed-cases/all-closed-cases/cw_01108/CW_011080613.pdf. 217

Paragraph A2.12 of the Interest Guidance. 218

Paragraph A2.13 of the Interest Guidance. 219

Whilst BT disagrees that we have the power to require repayments or order that interest be paid on repayments, it has not made any comment as to the rate of interest that should apply if it is ultimately decided by the courts that Ofcom does have these powers.




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5.105 In its response to the Provisional Conclusions, BT noted that the question of whether Ofcom has the power to impose retrospective payments on BT when resolving disputes is also one of BT’s grounds of appeal in the Ethernet Appeal. BT argued that, to ensure consistency, any award of repayment in the Disputes should therefore also only be payable at the point the Court of Appeal hands down judgment in the Ethernet Appeal.

5.106 We have carefully considered BT’s response and its position that Ofcom does not have the power to order retrospective payments in dispute resolution proceedings. We acknowledge that this legal argument is one of BT’s grounds of appeal to the Court of Appeal against the CAT’s judgment in the Ethernet dispute.

5.107 We do not agree with BT’s view of Ofcom’s dispute resolution powers under the CRF. However, as we have decided that interest should only have to be paid after the Court of Appeal has handed down judgment, assuming that it confirms Ofcom’s power to direct such payment, we consider that it would be appropriate for any direction to repay an overpayment for the APCCs paid between 1 January 2015 and the date at which the Disputes were brought to Ofcom for resolution, to be similarly payable only after the Court of Appeal has handed down judgment in this regard.

Conclusion on whether we should require BT to make repayments to Gamma and Vodafone

5.108 Based on the evidence and representations received as noted above, and in line with our statutory duties (see paragraphs 5.121 to 5.124 below), we have decided that it would be appropriate to exercise our power under section 190(2)(d) of the 2003 Act to direct repayment in respect of the APCCs which have been overpaid by Gamma and Vodafone for the period from 1 January 2015, plus interest at BoE+1% (such interest to accrue from 1 January 2015).

5.109 However repayment of the overpayments from 1 January 2015 to 2 July 2015 for Gamma (the date at which Gamma brought the dispute to Ofcom) and from 1 January 2015 to 30 July 2015 for Vodafone (the date at which Vodafone brought the dispute to Ofcom), as well as the interest on these repayments, shall only have to be paid after the Court of Appeal hands down a judgment in the Ethernet appeal and that judgment confirms Ofcom’s powers to direct such repayments. If the Court of Appeal determines that Ofcom does not have jurisdiction to award payments for the period before which a party brings a dispute for resolution, the requirement to make a payment for the period before the Disputes were brought shall fall away.

5.110 BT should therefore make immediate repayment to Gamma and Vodafone of the amounts overcharged from the dates that the Disputes were brought to Ofcom to the date on which it revises its APCCs to those determined in this document. The interest on these overpayments shall accrue from 1 January 2015, but shall not need to be paid until after the Court of Appeal hands down judgment in the Ethernet appeal and that judgment confirms Ofcom’s powers to direct such repayments in respect of interest.

Other stakeholder comments

5.111 BT raised a concern that Ofcom had allowed Vodafone an opportunity to respond to BT’s submissions on the Disputes and had taken these comments into account in the Provisional Conclusions, without allowing BT to comment on these further Vodafone submissions. BT noted that it had only had two weeks to comment on these further


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submissions and that it had “serious concerns regarding the propriety of the procedural approach adopted by Ofcom” as a result.220

5.112 We reject BT’s concerns about the procedural approach that we have adopted in the Disputes. In line with our Dispute Resolution Guidelines,221 we shared the initial submissions of the Parties with each other so that each was aware of the arguments being made by the other.222 We do not typically share further responses with the parties to a dispute until the provisional conclusions stage as, in our experience, to do so is likely to result in a cycle of further submissions being made by the parties. This can have the effect of delaying our ability to reach provisional conclusions and resolve disputes within four months.

5.113 Vodafone’s further submissions related to issues that BT had raised in its own comments on Gamma and Vodafone’s dispute submissions, which appeared not to have been raised by BT with those parties during the negotiations on APCCs. They were issues that Ofcom already needed to address in the Provisional Conclusions (as a result of the comments made by BT) and this would have been the case whether or not Vodafone had made its further submissions. The comprehensiveness of BT’s response to the Provisional Conclusions demonstrates that it has had adequate time to respond to the points made.

5.114 TalkTalk commented in its response to the Provisional Conclusions that “it should be a matter of great concern to Ofcom that BT has overinflated its APCC charges by 100% (when compared to the correct cost level calculated by Ofcom)”.223 It argued that this showed that BT has no incentive or willingness to comply with its cost-orientation obligations without other providers having to challenge them by bringing a dispute to Ofcom.

5.115 TalkTalk further noted that there are many CPs affected by the Disputes as they also purchase APCCs from BT. It noted that it “would expect BT to apply the logic determined by Ofcom in this dispute to all APCC charges, including the retrospective repayment plus appropriate interest”, but requested that Ofcom make clear in the Final Determination that it also expects this to occur.224

5.116 We note TalkTalk’s comments on BT’s compliance with GC18. We take this matter very seriously and have decided separately to commence an investigation into BT’s compliance with GC18.5 using our enforcement powers under the 2003 Act.225

5.117 As noted above, our determination of disputes is only directly binding on the parties to the disputes (in this case BT, Gamma and Vodafone). BT typically applies the outcome of disputes to all relevant customers and we therefore expect that it would

220


Dispute Resolution Guidelines: Ofcom’s guidelines for the handling of regulatory disputes, 7 June 2011: http://stakeholders.ofcom.org.uk/binaries/consultations/dispute-resolution-guidelines/statement/guidelines.pdf. 222

Vodafone’s initial submissions were made in its dispute submission of 30 July 2015 and BT’s initial submissions were made in its response of 6 August 2015. BT’s response deemed the comments that BT made in response to Gamma’s dispute submission to form part of its response to Vodafone and therefore these submissions (from 10 July and 30 July 2015) were also shared with Vodafone. 223



Details of the investigation can be found on Ofcom’s Competition and Consumer Enforcement Bulletin, see: http://stakeholders.ofcom.org.uk/enforcement/competition-bulletins/open-cases/open-complaints/.



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

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


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review the APCCs that it has charged all customers since 1 January 2015 to identify whether it has overcharged those customers and, if so, take remedial action.

Summary of Ofcom’s final conclusions

5.118 For the reasons set out above, we conclude that BT’s charges for APCCs in the period since 1 January 2015 did not comply with the requirements of GC18.5(a). We have separately decided to open an investigation into this issue.

5.119 We further conclude that the approach that we have taken to calculating appropriate APCCs is reasonable and consistent with both the requirements of GC18.5(a) and with our statutory duties.

5.120 We therefore conclude that BT should amend its APCCs so that they are compliant with GC18.5(a) in accordance with the findings in this document, and make repayments to Gamma and Vodafone of the amounts overcharged with interest, calculated at BoE+1%. In relation to both the interest payments and the repayments covering the period prior to the Disputes being brought to Ofcom, the timing of any payments is dependent on the Court of Appeal’s judgment in the Ethernet appeal.

Assessment of consistency of Ofcom’s final determination with our statutory duties and Community obligations

5.121 We consider that our resolution of the Disputes is consistent with our duties and Community obligations under sections 3 and 4 of the 2003 Act. In particular as discussed at paragraph 5.34, we consider that ensuring that charges for APCCs are in line with efficiently incurred costs lowers the barriers to switching providers and therefore promotes the interests of consumers and facilitates competition.

5.122 As explained above, GC18 was introduced to ensure that consumers were able effectively to switch between CPs by enabling them to keep their telephone numbers. It requires that any charges for number portability be set on a cost oriented basis.

5.123 By ensuring that BT complies with this obligation and only charges CPs the incremental costs it incurs in conveying ported traffic, we are protecting consumers and competition by ensuring that the charges do not act as a disincentive to switching.

5.124 In setting out our assessment, we have also kept in mind our duty under subsection 3(3)(a) of the 2003 Act to ensure our regulatory activities are, among other things transparent, accountable, proportionate and targeted only at cases where action is needed. This document sets out the Parties’ arguments and the reasoning that underpins our assessment, including why we consider that action is needed in this case. The parties had an opportunity to comment on our provisional assessment of the Disputes and we have taken their comments into consideration in reaching these final conclusions.


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Annex 1

1 Determination to resolve a dispute between BT and Gamma

Determination under sections 188 and 190 of the Communications Act 2003 (“2003 Act”) for resolving a dispute between British Telecommunications Plc (“BT”) and Gamma Telecom Holdings Limited (“Gamma”) concerning BT’s average porting conveyance charges (“APCCs”).

WHEREAS— (A) Section 188(2) of the 2003 Act provides that, where Ofcom has decided pursuant to section 186(2) of the 2003 Act that it is appropriate for it to handle a dispute, Ofcom must consider the dispute and make a determination for resolving it. The determination that Ofcom makes for resolving the dispute must be notified to the parties in accordance with section 188(7) of the 2003 Act, together with a full statement of the reasons on which the determination is based. Ofcom must publish so much of its determination as (having regard, in particular, to the need to preserve commercial confidentiality) it considers appropriate to publish for bringing it to the attention of the members of the public, including to the extent that Ofcom considers pursuant to section 393(2)(a) of the 2003 Act that any such disclosure is made for the purpose of facilitating the carrying out by Ofcom of any of its functions; (B) Section 190 of the 2003 Act sets out the scope of Ofcom’s powers on resolving a dispute which may include, in accordance with section 190(2) of the 2003 Act:

a) making a declaration setting out the rights and obligations of the parties to the dispute;

b) giving a direction fixing the terms or conditions of transactions between the parties to the dispute;

c) giving a direction imposing an obligation, enforceable by the parties to the dispute, to enter into a transaction between themselves on the terms and conditions fixed by Ofcom; and

d) for the purpose of giving effect to a determination by Ofcom of the proper amount of a charge in respect of which amounts have been paid by one of the parties to the dispute to the other, giving a direction, enforceable by the party to whom sums are to be paid, requiring the payment of sums by way of adjustment of an underpayment or overpayment;

(C) On 22 July 2003, shortly before the coming into force of the relevant provisions of the 2003 Act, the Director published a notification in accordance with section 48(1) of the 2003 Act entitled ‘Notification setting general conditions under section 45 of the Communications Act 2003’226, under Part II of the Schedule to which the Director set (among

226

See at: http://www.ofcom.org.uk/static/archive/oftel/publications/eu_directives/2003/cond_final0703.pdf.

http://www.ofcom.org.uk/static/archive/oftel/publications/eu_directives/2003/cond_final0703.pdf


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others) General Condition 18 (“GC18”), which took effect on 25 July 2003, requiring in paragraph 18.2(a) (“GC18.2”) that—

“The Communications Provider shall, pursuant to a request from another Communications Provider, provide Portability [(other than Paging Portability)] as soon as is reasonably practicable in relation to that request on reasonable terms [and in accordance with the Functional Specification]. Any charges for the provision of such Portability shall be made in accordance with the following principles:


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

ii) the [Director] has directed that another basis for charges should be used;”

(D) On 29 December 2003, Ofcom took over the responsibilities and assumed the powers of the Director and, notifications made by the Director are to have effect as if made by Ofcom under the relevant provisions of the 2003 Act; (E) The Number Portability and technology neutrality Statement, dated 30 March 2006, removed the wording “and in accordance with the Functional Specification” and the Changes to the Mobile Number Porting Process Statement, dated 8 July 2010, renumbered GC 18.2 as GC 18.5 and replaced references to “the Director” with “the Office of Communications”; (F) On 29 September 2014, Ofcom published a Statement on Guidance and consultation on Porting charges under General Condition 18227; (G) On 2 July 2015, Gamma referred a dispute with BT to Ofcom for dispute resolution requesting a determination that BT has overcharged Gamma for the APCCs for the porting of calls from its network from 1 February 2014 (which depends on whether or not BT’s charges for those services were cost oriented during that time) and, if so, by how much they have been overcharged and should therefore be reimbursed; (H) On 30 July 2015, Vodafone referred a similar dispute with BT to Ofcom for dispute resolution requesting a determination that BT has overcharged it for the APCCs for the porting of calls from its network (which depends on whether or not BT’s charges for those services were cost oriented) and, if so, by how much they have been overcharged and should therefore be reimbursed; (I) Having considered the submissions of all the parties to the disputes referred by Gamma and Vodafone, Ofcom set the scope of the issues in dispute to be resolved as follows-

“To determine whether the APCCs that BT has charged Gamma and Vodafone for the period from 29 September 2014 to the date of the

227

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




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

(J) On 30 September 2015, Ofcom issued draft determinations to BT, Gamma and Vodafone in these disputes;

(K) In order to resolve this dispute, Ofcom has considered (among other things) the information provided by the parties and Ofcom has further acted in accordance with its general duties set out in section 3 and the Community requirements set out in sections 4 and 4A of the 2003 Act;

(L) A fuller explanation of the background to the dispute and Ofcom’s reasons for making this Determination is set out in the explanatory statement accompanying this Determination; and

NOW, THEREFORE, OFCOM MAKES, FOR THE REASONS SET OUT IN THE ACCOMPANYING EXPLANATORY STATEMENT, THE FOLLOWING DETERMINATION FOR RESOLVING THE DISPUTE:

I Declaration of rights and obligations, etc. 1. During the Relevant Period, BT has overcharged Gamma for the provision of number portability services for which BT has charged APCCs. 2. Ofcom gives a direction to BT to amend its APCCs in accordance with the methodology set out in the explanatory statement. 3. Ofcom gives a direction to BT to pay to Gamma, by way of adjustment of an overpayment for those services, a sum to be calculated by BT and Gamma in accordance with the methodology set out in the explanatory statement, for the period from 1 January 2015 to 1 July 2015. Unless otherwise already paid by BT to Gamma, this sum shall be payable within five working days after the Court of Appeal hands down its judgment in the Ethernet Determination provided that judgment does not find that Ofcom has no jurisdiction under section 190(2) of the 2003 Act to make a direction as set out above. 4. Further, Ofcom gives a direction to BT to immediately pay to Gamma, by way of adjustment of an overpayment for those services, a sum to be calculated by BT and Gamma in accordance with the methodology set out in the explanatory statement, for the period from 2 July 2015 to the date of this Determination.

5. Finally interest at a rate of the Bank of England base rate plus 1% compounded annually and accruing from 1 January 2015 shall be payable by BT to Gamma on the amounts to be calculated by the parties in paragraphs 3 and 4 above. Unless otherwise already paid by BT to Gamma, these sums shall be payable within five working days after the Court of Appeal hands down its judgment in the Ethernet Determination provided that judgment does not find that Ofcom has no jurisdiction under section 190(2) of the 2003 Act to direct BT to pay interest as set out above.


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II Binding nature and effective date 6. This Determination is binding on BT and Gamma in accordance with section 190(8) of the 2003 Act. 7. This Determination shall take effect on the day it is published. III Interpretation 8. For the purpose of interpreting this Determination—

a) except as otherwise defined in this Determination, words or expressions used in this Determination (and in the recitals hereto) shall have the same meaning as they have in the 2003 Act;

b) headings and titles shall be disregarded; and

c) the Interpretation Act 1978 shall apply as if this Determination were an Act of Parliament.

9. In this Determination—

a) “2003 Act” means the Communications Act 2003 (c.21);

b) “BT” means British Telecommunications plc, whose registered company number is 1800000, and any of its subsidiaries or holding companies, or any subsidiary of such holding companies, as defined by section 1159 of the Companies Act 2006;

c) “Director” means the Director General of Telecommunications as appointed under section 1 of the Telecommunications Act 1984;

d) “Ethernet Determination” means British Telecommunications PLC v Office of Communications & Ors (Case No 1205-7/3/3/13);

e) “Gamma” means Gamma Telecom Holdings Limited, whose registered company number is 4287779 and any of its subsidiaries or holding companies, or any subsidiary of such holding companies, as defined by section 1159 of the Companies Act 2006;

f) “Ofcom” means the Office of Communications;

g) “Relevant Period” means the period between 1 January 2015 and the date of this Determination; and

h) “Vodafone” means Vodafone Limited, whose registered company number is 1471587 and any of its subsidiaries or holding companies, or any subsidiary of such holding companies, as defined by section 1159 of the Companies Act 2006.


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Neil Buckley Director of Investigations A person duly authorised in accordance with paragraph 18 of the Schedule to the Office of Communications Act 2002 11 November 2015


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Annex 2

2 Determination to resolve a dispute between BT and Vodafone

Determination under sections 188 and 190 of the Communications Act 2003 (“2003 Act”) for resolving a dispute between British Telecommunications Plc (“BT”) and Vodafone Limited (“Vodafone”) concerning BT’s average porting conveyance charges (“APCCs”).

WHEREAS— (A) Section 188(2) of the 2003 Act provides that, where Ofcom has decided pursuant to section 186(2) of the 2003 Act that it is appropriate for it to handle a dispute, Ofcom must consider the dispute and make a determination for resolving it. The determination that Ofcom makes for resolving the dispute must be notified to the parties in accordance with section 188(7) of the 2003 Act, together with a full statement of the reasons on which the determination is based. Ofcom must publish so much of its determination as (having regard, in particular, to the need to preserve commercial confidentiality) it considers appropriate to publish for bringing it to the attention of the members of the public, including to the extent that Ofcom considers pursuant to section 393(2)(a) of the 2003 Act that any such disclosure is made for the purpose of facilitating the carrying out by Ofcom of any of its functions; (B) Section 190 of the 2003 Act sets out the scope of Ofcom’s powers on resolving a dispute which may include, in accordance with section 190(2) of the 2003 Act:

a) making a declaration setting out the rights and obligations of the parties to the dispute;

b) giving a direction fixing the terms or conditions of transactions between the parties to the dispute;

c) giving a direction imposing an obligation, enforceable by the parties to the dispute, to enter into a transaction between themselves on the terms and conditions fixed by Ofcom; and

d) for the purpose of giving effect to a determination by Ofcom of the proper amount of a charge in respect of which amounts have been paid by one of the parties to the dispute to the other, giving a direction, enforceable by the party to whom sums are to be paid, requiring the payment of sums by way of adjustment of an underpayment or overpayment;

(C) On 22 July 2003, shortly before the coming into force of the relevant provisions of the 2003 Act, the Director published a notification in accordance with section 48(1) of the 2003 Act entitled ‘Notification setting general conditions under section 45 of the Communications Act 2003’228, under Part II of the Schedule to which the Director set (among

228

See at: http://www.ofcom.org.uk/static/archive/oftel/publications/eu_directives/2003/cond_final0703.pdf.

http://www.ofcom.org.uk/static/archive/oftel/publications/eu_directives/2003/cond_final0703.pdf


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others) General Condition 18 (“GC18”), which took effect on 25 July 2003, requiring in paragraph 18.2(a) (“GC18.2”) that—

“The Communications Provider shall, pursuant to a request from another Communications Provider, provide Portability [(other than Paging Portability)] as soon as is reasonably practicable in relation to that request on reasonable terms [and in accordance with the Functional Specification]. Any charges for the provision of such Portability shall be made in accordance with the following principles:


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

ii) the [Director] has directed that another basis for charges should be used;”

(D) On 29 December 2003, Ofcom took over the responsibilities and assumed the powers of the Director and, notifications made by the Director are to have effect as if made by Ofcom under the relevant provisions of the 2003 Act; (E) The Number Portability and technology neutrality Statement, dated 30 March 2006, removed the wording “and in accordance with the Functional Specification” and the Changes to the Mobile Number Porting Process Statement, dated 8 July 2010, renumbered GC 18.2 as GC 18.5 and replaced references to “the Director” with “the Office of Communications”; (F) On 29 September 2014, Ofcom published a Statement on Guidance and consultation on Porting charges under General Condition 18229; (G) On 2 July 2015, Gamma Telecom Holdings Limited (“Gamma”) referred a dispute with BT to Ofcom for dispute resolution requesting a determination that BT has overcharged Gamma for the APCCs for the porting of calls from its network from 1 February 2014 (which depends on whether or not BT’s charges for those services were cost oriented during that time) and, if so, by how much they have been overcharged and should therefore be reimbursed; (H) On 30 July 2015, Vodafone referred a similar dispute with BT to Ofcom for dispute resolution requesting a determination that BT has overcharged it for the APCCs for the porting of calls from its network (which depends on whether or not BT’s charges for those services were cost oriented) and, if so, by how much they have been overcharged and should therefore be reimbursed; (I) Having considered the submissions of all the parties to the disputes referred by Gamma and Vodafone, Ofcom set the scope of the issues in dispute to be resolved as follows-

“To determine whether the APCCs that BT has charged Gamma and Vodafone for the period from 29 September 2014 to the date of the

229

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




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

(J) On 30 September 2015, Ofcom issued draft determinations to BT, Gamma and Vodafone in these disputes;

(K) In order to resolve this dispute, Ofcom has considered (among other things) the information provided by the parties and Ofcom has further acted in accordance with its general duties set out in section 3 and the Community requirements set out in sections 4 and 4A of the 2003 Act;

(L) A fuller explanation of the background to the dispute and Ofcom’s reasons for making this Determination is set out in the explanatory statement accompanying this Determination; and

NOW, THEREFORE, OFCOM MAKES, FOR THE REASONS SET OUT IN THE ACCOMPANYING EXPLANATORY STATEMENT, THE FOLLOWING DETERMINATION FOR RESOLVING THE DISPUTE:

I Declaration of rights and obligations, etc. 1. During the Relevant Period, BT has overcharged Vodafone for the provision of number portability services for which BT has charged APCCs. 2. Ofcom gives a direction to BT to amend its APCCs in accordance with the methodology set out in the explanatory statement. 3. Ofcom gives a direction to BT to pay to Vodafone, by way of adjustment of an overpayment for those services, a sum to be calculated by BT and Vodafone in accordance with the methodology set out in the explanatory statement, for the period from 1 January 2015 to 29 July 2015. Unless otherwise already paid by BT to Vodafone, this sum shall be payable within five working days after the Court of Appeal hands down its judgment in the Ethernet Determination provided that judgment does not find that Ofcom has no jurisdiction under section 190(2) of the 2003 Act to make a direction as set out above. 4. Further, Ofcom gives a direction to BT to immediately pay to Vodafone, by way of adjustment of an overpayment for those services, a sum to be calculated by BT and Vodafone in accordance with the methodology set out in the explanatory statement, for the period from 30 July 2015 to the date of this Determination. 5. Finally, interest at a rate of the Bank of England base rate plus 1% compounded annually and accruing from 1 January 2015 shall be payable by BT to Vodafone on the amounts to be calculated by the parties in paragraphs 3 and 4 above. Unless otherwise already paid by BT to Vodafone, these sums shall be payable within five working days after the Court of Appeal hands down its judgment in the Ethernet Determination provided that judgment does not find that Ofcom has no jurisdiction under section 190(2) of the 2003 Act to direct BT to pay interest as set out above.


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II Binding nature and effective date 6. This Determination is binding on BT and Vodafone in accordance with section 190(8) of the 2003 Act. 7. This Determination shall take effect on the day it is published. III Interpretation 8. For the purpose of interpreting this Determination—

a) except as otherwise defined in this Determination, words or expressions used in this Determination (and in the recitals hereto) shall have the same meaning as they have in the 2003 Act;

b) headings and titles shall be disregarded; and

c) the Interpretation Act 1978 shall apply as if this Determination were an Act of Parliament.

9. In this Determination—

a) “2003 Act” means the Communications Act 2003 (c.21);

b) “BT” means British Telecommunications plc, whose registered company number is 1800000, and any of its subsidiaries or holding companies, or any subsidiary of such holding companies, as defined by section 1159 of the Companies Act 2006;

c) “Director” means the Director General of Telecommunications as appointed under section 1 of the Telecommunications Act 1984;

d) “Ethernet Determination” means British Telecommunications PLC v Office of Communications & Ors (Case No 1205-7/3/3/13);

e) “Gamma” means Gamma Telecom Holdings Limited, whose registered company number is 4287779 and any of its subsidiaries or holding companies, or any subsidiary of such holding companies, as defined by section 1159 of the Companies Act 2006;

f) “Ofcom” means the Office of Communications;

g) “Relevant Period” means the period between 1 January 2015 and the date of this Determination; and

h) ”Vodafone” means Vodafone Limited, whose registered company number is 1471587 and any of its subsidiaries or holding companies, or any subsidiary of such holding companies, as defined by section 1159 of the Companies Act 2006.


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Neil Buckley Director of Investigations A person duly authorised in accordance with paragraph 18 of the Schedule to the Office of Communications Act 2002 11 November 2015


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Annex 3

3 Further details of modelling approach A3.1 As explained in Sections 4 and 5 we have based our calculation of the appropriate

level of APCCs on BT’s existing LRIC model, but have modified the calculations in order to measure LRIC over the porting conveyance increment rather than the component increment used by BT. In this annex we provide further technical details of BT’s LRIC model that are relevant to our calculation.

A3.2 Other than those comments discussed in paragraphs 5.54 to 5.58 and 5.75 to 5.79, we did not receive any comments from stakeholders on our modelling approach.

Usage factors

A3.3 As illustrated in Figure 4.3 above, each of the ten call groups can make use of a set of eight network components involved in providing porting conveyance. Usage factors provide a mapping between call groups and network components by describing the use that each call group makes of each network component.

A3.4 We sought the relevant usage factors from BT under our formal powers and they are presented in Table A3.1 below.230

Table A3.1: Usage factors for 2013/14 provided by BT

Group

1

Group

2

Group

3

Group

4

Group

5

Group

6

Group

7

Group

8

Group

9

Group

10

Local exchange

processor - - - - 1.000 1.000 1.000 1.000 1.000 -

Main exchange

switching 0.621 1.646 1.646 1.646 0.903 2.045 2.045 2.045 1.646

Local - tandem

transmission link - - - - - 0.731 0.731 0.731 0.731 -

Local - tandem

transmission length - - - - - 2.989 2.989 2.989 2.989 -

Inter - tandem

transmission link - 1.141 1.141 1.141 - - 1.141 1.141 1.141 1.141

Inter - tandem

transmission length - 4.718 16.127 35.945 - - 4.718 16.127 35.945 4.718

Core/Metro

(voice) 1.000 1.037 1.011 1.011 1.650 1.651 1.688 1.663 1.663 1.037

iNode (call set up

and features) 1.000 1.037 1.011 1.011 1.000 1.001 1.038 1.013 1.013 1.037

Source: BT.

A3.5 Table A3.1 shows that some call groups may use the same set of components but with different intensities. For example, call groups 2, 3 and 4 each make use of the

230


Act 2003, sent to BT on 30 July 2015. BT provided responses on 13, 19 and 24 August 2015 and 3, 10, 15 and 22 September 2015.


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inter-tandem transmission length network component, but call group 4 uses this network component more heavily than call group 3 (which in turn uses it more than call group 2) due to the different physical distances covered.

A3.6 BT has identified the “Core/Metro (voice)” and “iNode (call setup and features)” network components as being relevant to porting conveyance. In the course of verifying these usage factors we understand from BT that they relate to its next generation network (21CN).

A3.7 BT considers these network components to be relevant to porting conveyance because some customers are connected to 21CN, for example, customers in South Wales migrated as part of BT’s Pathfinder trial. We understand that for calls to these customers, CPs interconnect to BT’s TDM tandem exchanges. BT then routes these calls via gateways to 21CN. Where a customer that was connected to 21CN has subsequently ported their number, the call would then route back from 21CN via the gateway to a tandem exchange and then to the RCP.

A3.8 The Guidance allows CPs to set APCCs based on the technology and topology of their own networks. Where a CP uses both TDM and NGN it may be efficient to set APCCs taking account of the costs of both technologies, for example by blending the costs of the two technologies based on the proportion of traffic using each technology. However, based on information provided by BT, it is our current understanding that calls do not use either TDM or NGN but, rather, use either TDM or TDM plus NGN.

A3.9 We understand that a call that uses both TDM and NGN would use the same TDM components as if the NGN was not involved, meaning that no TDM costs that are recoverable via the APCC are avoided. We therefore do not consider that NGN costs should be recovered via the APCC as this would appear to be an inefficient level of costs. We have therefore adjusted the usage factors related to the “Core/Metro (voice)” and “iNode (call setup and features)” network components from those shown in Table A3.1 to zero. The effect of this is to treat all ported calls as if they use BT’s TDM network.

CVRs

A3.10 Like all of the network components in BT’s LRIC model, each of the eight network components associated with porting has underlying costs from around 600 cost categories attributed to it. These costs are recorded on both a FAC and LRIC basis in the AFIs that BT submits to Ofcom every year.

A3.11 Each of the cost categories has a CVRs associated with it. CVRs describe how costs change as volumes of an underlying cost driver change, and an example is shown in Figure A3.2 below.


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Figure A3.2: Illustrative example of a CVR

Source: Adapted from Figure 2.1 in BT’s LRIC Model Relationships and Parameters document.

Identifying CVRs

A3.12 Most cost categories have a specific, or “independent”, CVR published in BT’s LRIC model documentation.231 However, some cost components have “dependent CVRs”, meaning that the costs in that cost category are driven by costs in another cost category.232

A3.13 Calculating dependent CVRs would require us to build close to a fully-functional LRIC model for BT’s entire network, which we do not consider would be feasible within the timescales of the Disputes or a proportionate solution. Therefore, for the purposes of the Disputes, where cost categories are dependent we have assumed a linear relationship between variable costs and volumes. We were able to identify the amount of fixed costs by cost category from the output data of BT’s LRIC model reported in the AFIs.233 The cost categories with dependent CVRs account for only around []% of the total relevant costs across all relevant network components, so we consider this to be a proportionate solution.

A3.14 Some cost categories have no CVR listed in BT’s documentation but we note that none of the affected cost categories contribute costs to those network components relevant to porting conveyance, and hence will not affect our calculations.

231

See Appendix 2 of the BT LRIC Model: Relationships and Parameters document. 232

See Section 2.3 of the BT LRIC Model: Relationships and Parameters document. 233

We have compared our outputs of component-based (as opposed to porting-increment-based) LRICs against those reported in the AFI and are confident our approach replicates BT’s calculation in a robust manner. There are a small number of discrepancies between our outputs and BT’s, caused by the inclusion of some common costs in certain network components as presented in BT’s LRIC model. This results in LRIC outputs that do not appear to follow the proportions of the associated CVRs of the cost categories in question. It seems that this is correct when producing results on a component LRIC basis (as these costs are common only to the full increment of the given component) but that it would be incorrect to include these costs when calculating costs for only a portion of this increment. We therefore have not made any correction for these discrepancies.

Cost

Volume (call minutes)

Fixed costs

Variable costs

Intercept indicates presence of fixed costs

Curve indicates presence of economies of scale or scope

Exogenous cost driver (i.e. main switch investment is driven by customers’ demand for calls


82

Identifying the relevant segment of a CVR

A3.15 Each CVR is defined by BT as a series of linear line segments (they are “piecewise linear”), and the number of these can vary by CVR. In our calculations we mirror the approach taken in BT’s LRIC model of identifying the relevant segment for a given change in volumes.

A3.16 For each CVR we have information on the x and y co-ordinates of each of the points which are joined up by these linear line segments. To calculate any given point on the CVR given an x coordinate we take the closest points below and above this coordinate (which we call the upper and lower bounds) and linearly interpolate between them.

Volume proxy

A3.17 As noted in paragraph 4.72, BT’s LRIC model proxies volumes using the costs allocated to each network component on a FAC basis. Most cost categories in BT’s LRIC model are debits (i.e. costs), but some are credits (i.e. revenues). Using the volume proxy approach works regardless of whether a cost category is a debit or credit category.

A3.18 However, in our modelling we have identified a small minority of cost categories that contain a mixture of credits and debits. This causes problems for the volume proxy approach as the proportions of FAC will not be properly representative and may lead to volume proxies lower than 0% or greater than 100%. In these cases we have manually overridden our CVR-based calculation and have instead used BT’s component LRIC outputs. However, this issue does not affect a material proportion of the total costs.

Volume adjustment

A3.19 As we explain in paragraphs 4.70 and 4.71, BT’s LRIC model was not designed to calculate the incremental costs of the porting conveyance service, and instead calculates incremental costs on a ‘component basis’. This means that a LRIC is calculated for each network component, taking all traffic over that network component as the relevant increment of output over which to measure costs.

A3.20 Given our finding that the appropriate increment of output over which to measure LRIC for the purposes of setting APCCs is the porting conveyance increment we have adjusted for this. The “volume adjustment” compares porting volumes by component to total volumes by component and allows us to derive the proportion of component volumes for each network component that are associated with porting conveyance traffic.

Using CVRs to calculate the LRIC of porting conveyance

A3.21 Having identified each CVR, specified the piecewise linear segments, understood that volumes are proxied and identified the adjustment necessary to the component increment to adjust to the porting conveyance increment, we are ready to use CVRs to calculate component LRIC specific to the porting conveyance increment.

A3.22 This process is illustrated in a stylised example in Figure A3.3 below.

3.22.1 The proxied component volume is identified, which for the sake of illustration we assume to be 70%;


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3.22.2 This component volume is adjusted to reflect the porting conveyance increment, which we assume to be 55%; and

3.22.3 For each cost category a linear interpolation between the relevant lower and upper bounds of the CVR is used to calculate the proportional reduction in costs for this change in volumes.

Figure A3.3: Using CVRs to calculate incremental costs

Costs

Cost driver volume

Proxied component volume (e.g. 70%) identified

This results in a reduction in costs according to the shape of the CVR (e.g. 37%)

1

3

Adjust to porting component volume (e.g. 55%)

2

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