1. OFTEL’s 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, OFTEL’s 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. BT’s load curve suggests the current differences are reasonable

13. Conclusion OFTEL’s 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