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Introduction

1.1  This document explores the implications of Next Generation Networks (NGNs) for access and interconnection arrangements in the UK . Ofcom believes there is an opportunity for the development of competing next generation core networks. However, a key pre-requisite for the development of these networks is the availability of access and interconnection to BT's network. Therefore this document has particular focus on the regulatory and competitive implications of BT's NGN plans, known as ‘21st Century Network' (21CN).

1.2  In considering those implications, we take the principles proposed in Phase 2 of Ofcom's Strategic Review of Telecommunications (‘Telecoms Review'), and consider their practical application to NGNs in general and 21CN in particular. In doing so Ofcom hopes to facilitate the timely development of access and interconnect arrangements consistent with those principles.

Background: NGNs and 21CN

1.3  A number of operators are currently considering plans to deploy ‘Next Generation Networks' (NGNs). NGNs essentially deliver convergence between the traditional world of public switched telephone networks, and the new world of data networks. From an operators perspective they provide a means of migrating from the old world to the new world, delivering substantial cost savings due to the economies of scope inherent in a single converged network. From a consumers perspective they can offer innovative new services, greater control and personalisation, ease of migration between services as well as offering continuity for existing PSTN services.

1.4  BT set out specific proposals for its NGN, 21CN, earlier this year and this is likely to be one of the most significant deployments of NGN technology anywhere in the world. However, other operators are known to be developing similar deployment plans, including most of the operators that compete with BT in the UK market.

1.5  BT's plans for 21CN are for a new single multi-service network to replace all of its existing networks. BT's stated aims for the programme are to reduce costs (by £1 billion per annum by 2008/09), improve speed to market for new services, and improve customer experience ^(-1-).

1.6  BT also set out several key milestones for its programme:

• Trials of the new technology were to be initiated during 2004, with next generation voice services being delivered to 1,000 customers by Jan 2005.
• Broadband services will be available to 99.6% of UK homes and businesses by summer 2005, with growth in broadband services being met by a new ‘Multi-Service Access Node' platform.
• The mass migration of PSTN customers is expected to start in 2006, and reach more than 50% by 2008.
• Broadband dial tone is expected to be available to most customers in 2009

Ofcom's involvement

1.7 21CN represents the most significant change in BT's network since competition was introduced two decades ago. Major technology changes, which occur naturally in competitive as well as regulated markets, are always likely to disrupt existing models of competition. In this case it also creates the first ever opportunity to ensure that the network of an incumbent operator accommodates competition from the outset. Furthermore, it coincides with the establishment by the Telecoms Review of a new regulatory settlement

1.8 Ofcom's role is to ensure that there is clarity as to the regulatory policy requirements necessary to support effective competition. This does not mean that it is either desirable or appropriate for Ofcom to become involved in the detailed design of BT's network. Ofcom must however ensure that BT is able to provide access to its network in a manner that supports the further development of competitive markets. By providing clarity as to those regulatory policies that flow from this access obligation, Ofcom can help BT and others be clear about the constraints within which they should design their networks. That is the purpose of this consultation process.

1.9 Ofcom considers that its approach to NGNs should be guided by the key regulatory principles proposed in the Telecoms Review. They are that Ofcom should:

1. promote competition at the deepest levels of infrastructure where it will be effective and sustainable;
2. focus regulation to deliver equality of access beyond those levels;
3. as soon as competitive conditions allow, withdraw from regulation at other levels;
4. promote a favourable climate for efficient and timely investment and stimulate innovation, in particular by ensuring a consistent and transparent regulatory approach;
5. accommodate varying regulatory solutions for different products and where appropriate, different geographies;
6. create scope for market entry that could, over time, remove economic bottlenecks; and
7. in the wider communications value chain, unless there are enduring bottlenecks, adopt light-touch economic regulation based on competition law and the promotion of interoperability.

1.10 This consultation focuses on questions and issues raised by the practical application of the first five principles to NGNs and explores some of the issues raised in the Telecoms Review in more detail. It does not set out preferred solutions, since solutions are more likely to be effective if they are determined by industry, through a process of commercial negotiation, than if they are determined by regulatory intervention. Ofcom must however be prepared to become more directly involved where the process of commercial negotiation fails.

Application of Ofcom's proposed regulatory principles to 21CN

The regulatory principles

1.11  We start by considering the general application of each of the regulatory principles to NGNs, with particular reference to BT's 21CN. The first four principles are all relevant, and are considered in turn, since they tend to raise distinct issues. The fifth principle is also relevant, but tends to cut across the first four. The last two principles are less relevant to NGNs.

Principle 1: Competition at greatest depth

Two aspects to ‘depth' are considered:

1.12 Geographic depth within the topology of 21CN, ie how close to the customer is access provided. There are three geographic levels within 21CN at which it might be possible to provide access: the local loop (MDF/MSAN sites), the metro node and the core node. It is likely that a combination of access remedies will be required, focussing on access at MDF/MSAN sites in those geographies where this is likely to result in sustainable competition, and providing metro node access elsewhere.

1.13 Service level depth. There is likely to be a choice between end-to-end services (e.g. wholesale calls), service-specific interconnection services (e.g. voice call origination), a generic interconnection service (e.g. bitstream interconnection) or physical unbundling (e.g. LLU). Consistent with its regulatory principles, Ofcom believes regulation should be focussed as deep in this service stack as possible, recognising that this might vary with different geographies. If, for example, some form of access is made available at the MSAN, then there would be a preference for this to be at the physical or bitstream level rather than service specific.

Principle 2 : Equality of access.

1.14 The design of key regulated access and interconnection products must support equality of access. In particular, new regulated 21CN access and interconnect products will need to support ‘equivalence of inputs', so that BT uses the same products, at the same price, managed using the same systems and processes as alternative providers. Reduced time to market is expected to be one of the key benefits of 21CN, so an effective process for the introduction of new regulated products will also be important. Even where existing regulated products currently support equivalence of access, they may have to evolve in light of new capabilities introduced by 21CN. For example, the requirement to support equivalence of access to the local access network might require changes to the existing LLU service, and may require consideration of some form of bitstream access at the MSAN.

Principle 3: Regulatory withdrawal.

21CN might allow for regulatory withdrawal because:

1.15 21CN may be the vehicle for the delivery of improved equivalence in relation to BT's wholesale services. This should allow other providers to compete in downstream markets and create the conditions where BT's downstream services, particularly at the retail level, could be deregulated.

1.16  At the wholesale or network level a key theme of 21CN is convergence. If convergence is effective, this should allow a reduction in service specific wholesale regulation, and a greater focus on generic access and interconnection remedies (LLU, bitstream interconnection).

Principle 4: Favourable climate for investment.

1.17 An important general principle is that regulation of NGNs should not simply be seen as a “zero-sum” game, where Ofcom’s primary concern is to decide how the benefits of BTs investment in 21CN should be divided between BT and the rest of industry. Instead, the aim should be to promote a favourable investment climate for industry as a whole, in order to deliver the greatest possible benefit to consumers of an industry wide migration to NGN.

1.18 There are a number of ways in which Ofcom can influence the investment climate:

• Providing regulatory clarity and predictability
• Ensuring alternative providers have confidence in BT's regulated products
• Setting appropriate regulated returns for BT's regulated products, that take account of the commercial and technical risks associated with its investment in 21CN
• Ensuring the migration to 21CN minimises the impact on existing investments (and thereby also minimises the perceived risk associated with new investments) whilst enabling BT to close its existing networks as soon as reasonable

Application of principles to key forms of access and interconnection

1.19 The practical application of these principles is considered in four key areas:

• Access and interconnection at the level of the local access network (MDF sites / MSAN nodes)
• Access and interconnection at the level of the core network (Metro nodes)
• Access to the intelligence and applications layers of 21CN
• Systems and processes

The focus at this stage is on generic access and interconnection remedies, such as physical unbundling and bit-stream interconnection, which can be used to deliver a broad range of downstream services.

Access at the local access network level (MDF/ MSAN site )

1.20 At the MDF/ MSAN site there are two main alternatives for the provision of access to the local access network, ie local loop unbundling (LLU), and some form of interconnection with the MSAN. Applying the first regulatory principle, Ofcom would favour the deeper option, ie LLU, where this can lead to effective and sustainable competition. However, two factors suggest that an alternative to LLU, ie some form of interconnect with the MSAN, should be considered, at least in some areas, as a more effective means of promoting competition at this level.

• BT's deployment of ‘broadband dial-tone' to its narrowband customers could create a major challenge for LLU-based operators. BT will be able to migrate customers to broadband almost immediately whilst the manual LLU process is likely to take several days at best.
• LLU is unlikely to be viable in all geographies, particular in those areas (eg rural areas) where there is a lower number of households connected to each MDF site. But if metro interconnect is the only alternative option where LLU is not viable, any potential for competition in backhaul would be eliminated.

1.21  A number of options are explored for MSAN interconnection, including ‘soft LLU' where operators might take control of a line card in BT's MSAN and pick up the associated transport stream using some form of bitstream interconnection.

Access at the core network level (Metro node).

1.22  The current level of interconnection with BT's existing core network suggests that conveyance between metro nodes is potentially competitive. However, in moving to 21CN there may be differences in the location and topology of metro nodes compared to existing networks which might, albeit temporarily, lessen competition at this level.

Intelligence and application layers.

1.23  It is possible that 21CN will create new access bottlenecks at the intelligence and application layers. For example, an alternative provider may be able to deliver a voice service based on the use of bitstream access at the MSAN, but they may need access to additional functionality at the application layer (e.g. customer location data, session control functionality) in order to be able to compete effectively. Some of these functions may be needed on a reciprocal basis, others may relate solely to BT, whilst others could be developed on a commercial basis.

Systems and processes.

1.24  The operational processes and systems associated with key products must support equality of access, so that alternative providers are able to order and manage key products using the same processes and systems as BT's retail activities. A key enabler of this is likely to be BT's Next Generation OSS, a distributed OSS architecture based on off-the-shelf commercial systems linked by standard industry interfaces. This is expected to replace the vertically integrated OSS systems currently in use.

Transition to the new world

1.25  The transition from the current world to the world of NGNs raises particularly complex issues. These generally divide into issues associated with product migration, and issues associated with geographic rearrangement.

1.26 21CN will require a number of product migrations - from dial-up internet access to always-on IP, from PSTN voice to voice over IP, from traditional SDH leased lines to Ethernet, from ATM to IP/MPLS, from voice VPNs to IP VPNs, and so on. These migrations are the inevitable consequence of the new network technology, and will deliver benefits to industry as a whole, as well as consumers. They will however have to be carefully project managed, and will almost certainly require the establishment of new cross-industry working groups and processes. Where retail services are based on current regulated wholesale products, it will be particularly important to ensure that those retail services are not disrupted because of changes in the underlying network inputs.

1.27  21CN will also lead to substantial geographic rearrangement of networks. This is likely to be more contentious, since the benefits are asymmetric. A key goal of regulatory policy over the last 20 years has been to encourage competition in conveyance services, by providing incentives for alternative operators to build out to as many points of interconnection with BT as possible. This has been successful, particularly in relation to voice conveyance. However, many of the points of interconnection to which other operators have deployed may no longer be available within 21CN, since BT proposes to shift many of the points of interconnection within its trunk network, and withdraw interconnection at local exchange level. Unlike the product migration, whilst BT may benefit from this change, alternative providers could face significant costs.

1.28  It would clearly not be appropriate for Ofcom to determine the locations of BT's network nodes. However, it is important that BT takes account of the costs imposed on alternative providers when re-arranging its network. One way of ensuring this is if BT recompenses alternative providers for these costs. Ofcom would prefer that the level and form of compensation is resolved through commercial negotiation, but is prepared to become more directly involved where necessary.

Service specific issues

1.29  21CN raises a number of issues specific to particular services. In relation to voice services the issues include:

• Current voice competition is based largely on the ability of alternative providers to purchase call origination from BT, using Indirect Access (IA), Carrier Pre-Selection ( CPS ), and Number Translation Services (NTS). Over the last few years IA/ CPS /NTS operators have built out extensively, first to BT's trunk exchanges and more recently to BT's local exchanges. BT will need to give particular consideration to these operators during the proposed re-arrangement of points of interconnection.
• Voice competition also depends on the ability of alternative providers to purchase narrowband access from BT, in the form of Wholesale Line Rental. However, 21CN will result in technical convergence of narrowband and broadband access. These will not only use the same copper loop, they will also use the same (or at least similar) line-cards in the same MSAN. It will be necessary to consider whether separate narrowband and broadband access products continue to make sense in the world of 21CN. An alternative would be a converged wholesale access product covering narrowband and broadband.
• We expect competition based on Voice over IP to become increasingly important. This is likely to require some form of Quality of Service (QoS) enabled bitstream interconnection, and it may also require access to some application-layer functionality. A substantial amount of work is required to specify this form of access, which will be an important basis for facilitating competition in converged voice and data services. This may allow some withdrawal of voice-specific regulation, although we would need to ensure that competition was also effective for customers not buying broadband services.

1.30  In relation to residential data services:

• We expect 21CN to result in further erosion of dial-up internet access. It is unlikely to be efficient to provide IP services using voice-band modems, when the voice-band signal is in turn being carried over an IP network. Flat rate dial-up services are likely to disappear first, since they are already similar in price to entry-level broadband services, and so it may be appropriate to agree a process for the future withdrawal of FRIACO in line with customer demand. Metered dial-up services are likely to be required for longer, but may eventually be displaced by entry-level internet access services based on native-mode IP.
• Alternative providers wishing to interconnect with BT in order to provide data services can currently do so using either ATM (DataStream) or IP (IPStream). The margin between these two is regulated by Ofcom. However, 21CN is likely to result in convergence of these different layers of interconnection, and therefore erosion of the regulated margin between them. It might be appropriate to replace the two existing forms of broadband interconnection with a single converged IP interconnection service, including the option of a basic ‘best-efforts' service, as well as the option of MPLS-based QoS management.
• A key aim of 21CN is that it will provide ‘broadband dial tone' to all BT's narrowband customers. Consumers will be able to plug a broadband device into their phone line, and immediately be able to subscribe to BT's broadband service just as they can turn on ‘select services' today. However, whilst seamless migration from narrowband to broadband is clearly beneficial for consumers, it creates a major challenge for LLU-based operators. LLU will have to evolve significantly if it is to support ‘equality of access' when compared to broadband dial tone. A suitable approach to LLU-based competition founded on the concept of equivalence needs to be identified in a NGN world.

1.31  In relation to business services:

• Competition in the business market is under-pinned by the availability of wholesale access from BT, currently in the form of SDH -based PPCs. However, there is already a trend in the business market towards new transmission technologies, notably Ethernet, and this is likely to accelerate as 21CN-driven convergence allows Ethernet to be used for voice as well as data services. A wholesale Ethernet access service is likely to be required, but will be different in design to the current PPC design, due to major differences between SDH and Ethernet technology.
• It is possible that traditional leased line services will be provided on 21CN using circuit emulation technology over an ATM or IP/MPLS network. However, this may be inefficient. It might be more effective for BT to provide direct access to virtual ATM or IP/MPLS transmission capacity, via a service similar in character to the current DataStream service.
• A more focussed option might be to address the underlying access bottleneck for businesses services directly, and do so at the deepest possible service level, deregulating elsewhere. One means of doing so might be for BT to provide selective access to dark fibre in those geographies where it has significant market power ( SMP ). This might reduce the need for the more widespread regulation of downstream products such as PPCs.

Industry Engagement

1.32 Ofcom is keen to provide clarity over the principles of the regulatory regime as soon as possible in order to support industry negotiations on 21CN access and interconnection. However, for such a negotiation process to be effective, it will be necessary for BT to engage in an open and transparent manner with alternative operators. It will also be necessary for alternative operators to commit significant resource, commercial and technical, to the development of possible solutions.

1.33 Ofcom recognises that many of the issues raised by 21CN are technical in nature; for example new interconnect products may depend on the development of appropriate technical standards. In the past these would have been expected to have been addressed by the UK Network Interoperability Consultative Committee (NICC). However, the level of challenge created by 21CN is likely to require some restructuring of NICC, in order to provide adequate focus on 21CN issues, and is likely to require a significantly increased level of resource commitment from industry. One means of improving the level of engagement between operators and NICC might be for Chief Technology Officers of the major operators to attend NICC board meetings. Ofcom encourages the exploration of this and other options for ensuring that the technical issues raised by 21CN are addressed in a timely manner.

Next steps

1.34 Ofcom is committed to helping the industry meet the ambitious timetable set out for the implementation of next generation networks. This consultation closes on 13th January 2005 . Ofcom expects to publish a statement early in 2005 summarising the responses, and considering how to take the various issues forward.

Footnotes

1.- BT news release June 9th 2004

The full document is available via the link at the top right of this page.

• Responses to consultation: Next Generation Networks - Future arrangements for access and interconnection
• Next Generation Networks - Future arrangements for access and interconnection [pdf]

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