‘Ladder pricing’ for calls to 08 numbers: stairway to litigation?

I have spent the last day and a half in court (British Telecommunications Plc (Termination charges: 080 calls, NCCN 1007) v Office of Communications and British Telecommunications Plc v Office of Communications (Ethernet Extension Services)) helping an intervening client argue, inter alia, that a fundamental disagreement was the same as a dispute. Sometimes these things do seem to end up like mediaeval theological debates. Another issue in the case was whether Ofcom had jurisdiction to accept and determine disputes whilst allegedly similar issues were subject to appeal. Perhaps more interesting to readers of this blog was one of those ‘similar issues’ currently before the CAT in multiple proceedings – a pricing concept described as ‘ladder pricing’.

‘Ladder pricing’ is a methodology for setting interconnection termination charges for calls to certain non-geographic numbers whereby the interconnection termination charges vary by reference to the retail price charged by the originating communications provider. In essence, the greater the retail price, the greater the interconnection charge. Those who like to see the numbers should look at the relevant section of BT’s carrier price list: 1.06 (which implements NCCN 1007 discussed below).

By way of backdrop, within the UK (and more generally the EU) communications providers are generally free to set their own interconnection charges unless and until a regulator has carried out a market review, found that a particular communications provider has market power and imposed appropriate remedies, which may include cost orientation.It would therefore seem to be a simple matter to identify what regulatory constraints (if any) applied and whether they are being complied with. However, in practice this issue turned out to not be quite so simple.

Ofcom first considered the question in its 5 February 2010 Determination to resolve a dispute between BT and each of T-Mobile, Vodafone, O2 and Orange about BT‘s termination charges for 080 calls, in which Ofcom applied rather convoluted reasoning involving three cumulative principles to BT’s proposed introduction of ladder pricing for calls to 080 (Freephone numbers) to reach the conclusion that BT’s pricing proposal was not fair and reasonable and that BT should therefore revert to its prior pricing structure. In fairness to Ofcom, they constructed the principles on top of a prior CAT finding that disputes should be resolved in a way that was fair (as between the parties) and reasonable (from a regulatory perspective). Ofcom’s determination was appealed.

BT then subsequently proposed ladder pricing in relation to calls to 0845 (local numbers) and 0870 (national numbers), and that proposal was considered by Ofcom in its 10 August 2010 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  in which it applied the same three principles to reject that further proposal. Again, the decision was appealed.

BT then made a different ladder pricing proposal in relation to 080 calls in NCCN 1007, and the most recent appeal concerned whether Ofcom was right to accept that issue as a dispute for resolution.

Meanwhile, there is an open consultation (closing today) on Ofcom’s general policy relating to Non-Geographic Numbers.

Why network effects require ongoing interconnection rules (and other regulatory interventions)

I write today’s blog from sunny Switzerland. The news seems rather slow and I can’t bear to write a top ten lists of things that either happened in 2010 or to watch in 2011, so today’s post will try to explain what network effects (or externalities) are and why even in a minimalist government intervention capitalist society telecoms networks require ongoing interconnection regulation. Sounds a bit dry, but stick with it – the same principle can be applied in other circumstances and once you have the tool in your box, you’ll be surprised how often it can be used to help to explain otherwise strange regulatory interventions.

We’ll start with a thought experiment (no cats will be hurt in this one). Imagine a small town with 12 inhabitants. There are two telecoms networks – network A has ten customers and network B 2 customers. It is an unregulated town and although network B has asked network A to connect the networks together, network A has refused, so customers on each network can only call other customers on that network. You arrive in town in your zero-emission car and become inhabitant 13. Network A and B both offer you telephone service – identical price and conditions. Which one do you take service from?

Most people choose network A as they can call more people. As most newcomers join network A it keeps getting bigger and the pull becomes stronger. This is a network effect or externality, and is often described as ‘the value of joining a network is proportionate to the number of people connected to that network’.

Within telecoms, network effects are to some extent neutralised by the impositions of a rule requiring the two networks to connect their networks together so that the thirteenth person can call all 12 people in town regardless of which network they join (this also has strong social benefits – and this is sometimes described as the ‘any to any’ principle).

Of course, without more a bare interconnection obligation doesn’t address the unequal bargaining power of networks A and B, nor some of the other advantages network A might possess such as economies of scale, scope or network density, but I’ll come back to those another time.

This is well-understood in telecoms regulations, forming part of the WTO reference paper and forming part of EU and Us telecoms telecoms policy.

However, any network can also show network effects. The balance that regulators and governments need to address before intervening in those markets (particularly in emerging markets such as social networking) is whether they also have the same characteristics as telecoms markets of large capital requirements, sunk costs and incumbency that create barriers to entry in telecoms markets.