Determination to Resolve Disputes Between Each of Cable & Wireless
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Determination to resolve disputes between each of Cable & Wireless, THUS, Global Crossing, Verizon, Virgin Media and COLT and BT regarding BT‘s charges for partial private circuits Determinations and Explanatory Statement This is the non-confidential version. Confidential information has been redacted. Redactions are indicated by [] Publication date: 14 October 2009 Determinations to resolve the PPC pricing Disputes Contents Section Page 1 Summary 3 2 Statutory Scheme for the Resolution of Disputes by Ofcom, and Application to the Disputes 9 3 BT‘s relevant regulatory obligations 19 4 Appropriate Level of Service Disaggregation to Resolve the Disputes 23 5 Ofcom‘s approach to assessing overcharging 43 6 BT‘s costs of providing PPCs 71 7 Assessment of overcharging claims 104 8 Repayments 136 Annex Page 1 Determination to resolve the dispute between BT and Cable & Wireless 151 2 Determination to resolve the dispute between BT and THUS 156 3 Determination to resolve the dispute between BT and Global Crossing 161 4 Determination to resolve the dispute between BT and Verizon 166 5 Determination to resolve the dispute between BT and Virgin Media 171 6 Determination to resolve the dispute between BT and COLT Telecommunications 176 7 Constituent parts of a PPC 181 8 Key provisions of the legal and regulatory framework 182 9 History of negotiation between the Parties 198 10 Summary of the RGL Report 203 11 The Economics of cost orientation 205 12 PPC financial data 214 13 Undertaking combinatorial tests 226 14 BT‘s approach to estimating SACs 228 15 BT‘s SAC estimate calculations 229 16 Glossary 230 2 Determinations to resolve the PPC Pricing Disputes Section 1 1 Summary 1.1 Ofcom has resolved the disputes brought by Cable & Wireless UK (―C&W‖), THUS plc (―THUS‖), Global Crossing (UK) Telecommunications Limited (―Global Crossing‖), Virgin Media Limited (―Virgin‖), Verizon UK Limited (―Verizon‖) and COLT Telecommunications (―COLT‖) (collectively, ―the Disputing CPs‖) against British Telecommunication plc (―BT‖) regarding BT‘s charges for services known as partial private circuits (―PPCs‖) (―the Disputes‖). We have concluded that BT has overcharged the Disputing CPs by £41.688 million for certain PPC services (2Mbit/s trunk) and that BT should refund this money. 1.2 These Final Determinations do not resolve the Disputes in relation to BT‘s charges for 140/155Mbit/s terminating segment services and for 34/45Mbit/s trunk services. As we explain in paragraph 1.25, we now have concerns about whether BT has overcharged for certain 140/155Mbit/s terminating segment services and for 34/45Mbit/s trunk services in light of actual financial information becoming available for 2008/09. We therefore intend to issue a separate draft or final determination to resolve the Disputes in relation to these services once we have obtained further data from BT to enable us to assess fully these services and identify whether overcharging has occurred and what, if any, repayments should be required. Introduction 1.3 On 25 June 2008 C&W, THUS, Global Crossing, Virgin and Verizon (collectively ―the Altnets‖) submitted disputes regarding BT‘s PPC charges (―the Altnet Disputes‖). COLT submitted a similarly worded dispute on 20 October 2008 (―the COLT Dispute‖). The Altnets and COLT alleged that BT had overcharged them approximately £180 million for PPC services. 1.4 PPCs are the wholesale inputs used to create leased lines, which are fixed permanent communications connections providing capacity between two points. There are two main parts to PPCs – terminating segments and trunk segments. PPCs are purchased as either a terminating segment or as a terminating segment combined with a trunk segment. Communications Providers (―CPs‖) are able to combine PPCs with their own networks to offer leased line services to their own customers. 1.5 On 25 July 2008, we decided that it was appropriate for Ofcom to resolve the Altnet Disputes on the basis of section 186(3) of the Communications Act 2003 (―the Act‖). On 27 August 2008, we published the finalised scope of the Altnet Disputes as being whether, in the period from 24 June 2004 to 30 September 2008: ―i. BT has or will have overcharged the Parties for PPCs (based on whether or not BT‘s charges for the underlying trunk and terminating elements of those PPCs were, during that time, reasonably derived from the costs of provision based on a forward looking long run incremental cost approach and allowing an appropriate mark up for the recovery of common costs including an appropriate return on capital employed) and, if so; ii. by how much the Parties will have been overcharged; and 3 Determinations to resolve the PPC Pricing Disputes iii. whether and by how much BT should reimburse the Parties.―1 1.6 On 2 December 2008, we decided that it was also appropriate for Ofcom to resolve the COLT Dispute on the basis of section 186(3) of the Act. On 3 December 2008, we published the scope of the COLT Dispute that we proposed to resolve.2 The wording was identical to that for the Altnet Disputes, apart from reference to the Altnets being replaced with references to COLT. No comments were received from BT or COLT as to the scope of the COLT Dispute. 1.7 Under section 188 of the Act, Ofcom must resolve disputes within four months of the date of the decision to handle the dispute, unless exceptional circumstances apply. 1.8 In this case, Ofcom decided that there are exceptional circumstances, most notably BT‘s restatement of its regulatory financial statements. Within the original four month period for resolving the Disputes we were informed that the PPC financial data published in BT‘s regulatory financial statements which formed the basis of the Disputing CPs‘ Submission was not reliable. Reliable financial data did not become available until October/November 2008, with the result that there was a significant delay in our ability to assess whether there was overcharging. Ofcom could not use data which we knew to be inaccurate and being corrected by BT‘s auditors, and so the need to await the restated data exceptionally justified us taking longer to reach the determinations. 1.9 On 27 April 2009, we published draft determinations and an explanatory statement (―the Draft Determinations‖) setting out Ofcom‘s proposals and rationale for resolving the Disputes, guided by our duties and Community obligations in sections 3 and 4 of the Act. In reaching our Draft Determinations, we also considered the arguments raised by the Altnets, COLT and BT (collectively ―the Parties‖). 1.10 Interested parties were given until the deadline of 29 May 2009 to comment on the proposals set out in the Draft Determinations. The deadline was extended until 5 June 2009 following a request for an extension from the Parties. The Disputing CPs submitted a collective response on 2 June 2009 (―the Disputing CPs‘ Response‖). BT submitted its response on 5 June 2009 (―the BT Response‖). 1.11 Ofcom provided non-confidential versions of these responses to the Parties and invited comments on the representations made in the responses. BT provided comments on 25 June 2009 (the ―BT Comments‖) and the Disputing CPs provided joint comments on 26 June 2009 (―the Disputing CPs‘ Comments‖). 1.12 The Parties raised several new arguments in their responses to the Draft Determinations. 1.13 BT argued that distributed stand-alone cost (―DSAC‖) was not the correct test for overcharging because the method of calculation (in particular the way in which common costs are allocated) means the calculated charge ceiling is too low. It proposed some alternative estimates, based on its view of the ―true‖ stand-alone cost (―SAC‖) for trunk services, which were higher than the DSAC figures used by Ofcom. BT accepted that as part of this approach, it would also be necessary to carry out ―combinatorial tests‖, that is tests for whether prices for combinations of trunk and other services were above the SAC of those combinations of services. In addition to 1 The scope was published in Ofcom‘s Competition and Consumer Bulletin - see http://www.ofcom.org.uk/bulletins/comp_bull_index/comp_bull_ocases/open_all/cw_992/ 2 See http://www.ofcom.org.uk/bulletins/comp_bull_index/comp_bull_ocases/open_all/cw_1002/. 4 Determinations to resolve the PPC Pricing Disputes the estimates of SAC for 2Mbit/s trunk, it provided the results of a sub-set of combinatorial tests which it had carried out. 1.14 BT additionally argued that even if overcharging had taken place, what it described as ―mitigating features‖ existed that should lead us to conclude that it was inappropriate to require repayments to be made. Specifically, BT claimed, first, that Ofcom had somehow approved the structure of PPCs prices, because we rejected BT‘s proposals to rebalance charges in 2004; and second, that any repayments would only benefit the Disputing CPs, rather than the consumers who had ultimately faced the higher charges for leased lines. 1.15 The Disputing CPs accepted that DSAC is a reasonable benchmark for assessing overcharging. But they argued that, having identified that overcharging is occurring using DSAC as a benchmark, we should use a different benchmark to calculate the level of the overcharge and/or repayment. The Disputing CPs proposed that FAC would be a more appropriate benchmark for calculating the level of overcharge and repayment, as it represented a better balance between the interests of the Parties. 1.16 Having taken into account the points made in the Disputing CPs‘ Response, the BT Response, the BT Comments and the Disputing CPs‘ Comments, Ofcom has now published final determinations to resolve the Disputes (the ―Final Determinations‖) (subject to the matters set out in paragraph 1.25). In reaching our conclusions we were guided by our duties and Community obligations under sections 3 and 4 of the Act.