As a consequence, OFTEL proposed and BT agreed that the DGT should have the power until 1997 to waive access deficit contributions (ADCs) subject to specified market share and other conditions. No operator could receive a waiver in respect of a share in excess of 10% in the relevant market, and no further waivers could be granted when the combined shares of all non BT operators reached a 15% threshold.

It will be seen that the current arrangements (apart from the waiver) have something in common with the so-called Efficient Component Pricing Rule (ECPR) or Baumol Willig rules, which have been put forward as a logical basis for setting interconnection prices. Under the ECPR, interconnection charges comprise the incremental cost of providing the service and the opportunity cost (the profit foregone by the operator providing interconnection services as a result of its loss of the relevant business) (see Baumol and Sidak, 1994; Laffont and Tirole, 1994). Under the system operating since 1991 (ignoring the waiver) interconnection charges are equal to the fully allocated cost of services provided plus a contribution to BT's access deficit (estimated on a fully allocated cost basis), which varies directly with the profitability of the final service provided. Conceptually, the two procedures have a considerable amount in common but also some significant differences - notably the lower payments made under the ADC regime by an operator which by-passes the BT network at either the originating or the terminating segment of the call.

In mid 1992, BT and Mercury invited OFTEL to issue a new interconnection Determination, to replace the 1985 version. This was finally published in December 1993 (Table 1.7) together with a table of access deficit contributions (ADCs) (see Table 1.8). In accordance with the arrangement for ADC waivers, OFTEL determined that the two relevant markets to which the market share conditions should relate are domestic and international telecommunications services. In the course of 1994, waivers were granted to a number of companies. At present, only Mercury pays access deficit contributions, on its international calls, where - as the data in Section 2.1 below demonstrate - its share of the market substantially exceeds 10%.

Concurrently with its work on the 1993 BT/Mercury determination, in June 1992 OFTEL initiated a fundamental review of interconnection policy. In part, the review was a response to strong feelings expressed by other operators that the data used by OFTEL to calculate fully allocated costs were flawed or not subject to adequate external verification. Following a consultation period, in March 1994, OFTEL issued a statement on Interconnection and Accounting Separation: The Next Steps (OFTEL, 1994a). The statement expressed OFTEL's intention to require BT separately to account for its network and retail businesses, in recognition of the continued use of other operators would have to make of parts of BT's network in order to provide services to their own customers. BT would be required to conduct transactions between its network and retail businesses at transfer prices equal to those charged to other operators for interconnection under BT's licence. This procedure was intended to ensure equality of treatment of BT's retail business and those of its competitors, and to expose any failure of the retail business.