OFTEL

1
OFTELs Approach to Tariff Packages for Accessing
the Internet

• Penny Hierons
• Economic Adviser

2
Introduction

• What concerns are there about tariffs for
  accessing the Internet?
• What can OFTEL do to meet these concerns?
• Can it all be left to OFTEL?
• Frequently raised issues

3
Concerns about current tariffs

• Usage prices are above costs for calls to the
  Internet
• Existing tariff structures do not meet the needs
  of Internet users

4
What can OFTEL do in relation to NTS tariffs?

• OFTEL has existing proposals for more pricing
  flexibility
• Other proposals include
• two-part charging
• discounts for large users
• adjusting the retail uplift for volume growth

5
Tariff structures

• Main focus of attention has been the lack of an
  unmetered tariff
• Have been recent offerings in this area, such as
  Callnet
• However, such tariffs are not widely available

6
What can OFTEL do to encourage new tariff
structures?

• Independently, not very much
• In this area, OFTELs role is mainly the
  resolution of disputes
• If no dispute exists, there is no rationale for
  OFTEL to impose new tariff structures

7
Can it all be left to OFTEL?

• Operators are free to set new retail tariff
  structures
• If the structure of interconnection is an issue,
  it is up to operators to negotiate with BT
• In the event of a dispute, OFTEL can determine
  the charge

8
General Issues

• Marginal or average cost
• Size of marginal costs
• Prices at different times of day

9
Marginal or average cost pricing?

• Has been a call for prices to be set at marginal
  cost
• In general, efficiency is maximised by setting
  price equals marginal cost
• But BT could not recover total costs, so need a
  mark-up
• Could be an argument for a lower mark-up on
  Internet calls, but evidence is weak

10
Size of marginal costs

• Has been asserted that marginal cost of
  additional usage is close to, or equal to, zero
• Additional traffic creates a demand for
  additional circuits, ports and switching capacity
• Marginal cost of long distance conveyance can be
  estimated as around 0.3-0.4ppm

11
Prices at different times of day (1)

• Argument is that off-peak usage is costless
• While incremental cost is zero, this does not
  imply that a zero price is appropriate
• This is because off-peak periods could have the
  potential to become peak periods
• Peak load pricing is usually proposed to deal
  with this

12
Prices at different times of day (2)

• Argument is that peak usage is too expensive
  relative to off-peak usage
• No generally accepted answer to how prices should
  vary between different times of day and week
• Prices varied by time of day to flatten the
  traffic load curve.
• BTs load curve suggests the current differences
  are reasonable

13
Conclusion

• OFTELs aim is to provide tariff flexibility for
  operators and service providers
• OFTEL can help by bringing NTS prices more into
  line with costs
• Industry needs to play its part in terms of
  interconnect pricing
• OFTEL hopes that progress on all these fronts can
  be made quickly