1. All telecommunications customers in the UK have to be directly connected to at least one operator by a wire, fibre-optic or radio link to connect that customer to a public telecommunications network. The majority of customers are connected to BT. However, many of BT's customers also have access to services provided by a second operator via the BT system using an indirect access code. The term 'indirect access' is often used in different ways. Here, it is used to mean only the situation where a customer contracts to buy a telecommunication service from an operator to which the customer is not directly connected and where the second operator pays the first operator for the use of that connection.
2. This Statement sets out the policy within which BT and other operators should be obliged to provide such 'indirect access' and whether the obligations should be further enhanced to cover 'equal access', where the customer pre-selects the indirect access operator or where there is parity in the number of digits to be dialled (dialling parity), eg dialling 'wxyz' for calls over the first network and 'abcd' for calls over a second network.
3. This Statement also considers the possibility of operators being allowed to connect directly to BT's Access Network, that is connect to a point between the customer's premises and the local exchange (sometimes known as the local loop). In this way, operators would be able to take over BT's customers using part of BT's Access Network and the customer would no longer be directly connected to BT's system.
4. This Statement indicates Oftel's policy taking into account the current development of the telecommunications market and considering where the balance of economic benefit lies. However, that position could change over time as markets develop both nationally and internationally.
5. Oftel recognises that the issues addressed herein are very important to the industry and welcomes comments on any aspects of the Statement: (see paragraphs 48-9).
6. In the early 1980s, that is at the time of BT's privatisation and the establishment of the current regulatory regime for telecommunications in the UK, the Government took the view that telecommunications policy should be to encourage competition based on the establishment of competing infrastructure at all levels of the market. This would allow the telecommunications market to develop in the most efficient way and gradually allow the level of regulation to diminish as market forces prevailed throughout the entire telecommunications network. Nevertheless, the Government recognised that it would take some considerable period for competing infrastructure to develop, particularly in the Access Network, and concluded that allowing indirect access would be a useful means of extending the footprint of competition. It would, in effect, enable customers to access indirectly what competing infrastructure there was. The Government therefore included within BT's (and Mercury's) initial licence provisions a requirement that they provide competitors a facility enabling their customers to access new operators' networks for the purpose of providing competing long-distance and international services.
7. With the duopoly review in 1991, the Government saw no reason to continue treating the local and long-distance markets differently. By ending the domestic duopoly and encouraging cable companies and others to enter the market, it established a framework for such competitors to build their own Access Networks, providing for the first time substantial competition to BT in the provision of direct connections to customers.
8. At the same time, however, the Government recognised that indirect access could continue to offer an important source of competition. It therefore included the same interconnection (and indirect access) requirements in the licences of the new public telecommunications operators (PTOs) and extended, subject to a cost benefit analysis, indirect access provisions in BT's and Mercury's licences applicable to Long Line Operators to include 'Equal Access'. A summary of these provisions is included at Annex A.
9. 'Equal access' can mean different things. In the UK, the existing indirect access arrangements require a customer to dial extra digits or follow additional procedures in order to route calls over the second operator's network. 'Equal access', as defined in the 1991 BT licence modifications (Condition 13A), means the substitution of such an arrangement by one in which there is parity in the number of digits to be dialled or other procedures to be followed in order to route a call over either BT's or the second operator's network.
10. In the United States, where equal access arrangements have been put in place, a different approach is used where the customer is balloted and elects to route long-distance or international calls via a chosen carrier for a given period. (However, it should be noted that the market structure in the US is rather different from the UK as in most cases the local operator is not itself competing in the long distance and international markets).
11. It is important to distinguish between this and any wider meaning of equal access. Some discussion papers and consultants' reports commissioned by various agencies of the European Union and the OECD have used 'equal access' in a much wider sense - the provision of transparent and non-discriminatory terms and conditions for interconnection, for instance. In this document, 'equal access' has a meaning similar to the expression 'dialling parity' used in some of those European documents, the effect of which is described in paragraph 9.
12. As noted above, the initial focus of indirect access arrangements was in relation to BT's customers. The market for indirect access may be divided into separate markets for residential users and business users. In the residential market, indirect access penetration is around 3½% of the market. The numbers of residential customers who take indirect access have now begun to fall, albeit slowly, due to increased competition for the higher spending residential customers, both from BT and cable operators. In the business market, over 13% of customers use indirect access, and the numbers are growing as both the alternative national networks, Mercury and Energis, and resellers such as Worldcom and ACC continue to use indirect access to access the majority of their customers.
13. Oftel is optimistic that an increasing proportion of the market for direct connections will be contested by other operators over the next few years. Mercury and other operators are now increasing their number of directly connected customers and cable operators, in particular, will have extended their local networks to cover about 75% of UK homes within the next five years. In the meantime, indirect access will remain an important route for many customers who are not in the footprint of competing operators to receive the benefits of competitive telecoms provision. Oftel takes the view that indirect access arrangements over BT's network are appropriate given its dominant position in the Access Network. Conversely, Oftel considers that it is not appropriate for operators without significant market power are to be obliged to allow indirect access over their direct connections as further explained in paragraphs 26-33.
14. The requirement on BT to provide indirect access raises some issues about the economic basis on which this should be done. Historically, BT's tariffs have been unbalanced - typically, the rental and connection charges have earned a lower return than call revenue. If an indirect access operator is able to take the most profitable streams of call revenue (long-distance and international) from a customer, BT's ability to earn profits from that customer is considerably reduced. One effect of indirect access is, therefore, that it encourages more economically efficient tariff structures.
15. However, BT's ability to raise exchange line rental charges has been constrained by a price cap of RPI+2% imposed by Oftel. This reflected concerns about the impact on customers of very rapid rebalancing, particularly at a time when customers' ability to migrate to lower cost providers of direct connections was constrained by the lack of alternatives to BT. In recognition of this, arrangements were put in place enabling BT to levy 'Access Deficit Contributions' (ADCs) from other operators.
16. The Director General, with BT's agreement, has recently ended the cap on exchange line rental price increases, reflecting the increasingly competitive marketplace, and at the same time removed the ADC regime. However, there remain some instances where tariffs are significantly unbalanced. Customers on the BT Light User Scheme, in which the rental element is subsidised, are not permitted to use indirect access arrangements. In addition, BT has recently asked Oftel to give its view on the acceptability of levying an additional fixed charge for use of indirect access on customers on other tariff packages with rentals below the level of the tariff used to monitor BT's compliance with its price control obligations. BT has made no specific proposal for such a charge, but the figure of £1 per calendar month has been mooted. BT appears to be able to do this within their licence, but Oftel has made clear that whilst it has no objection in principle, it would consider the proposals very carefully, consulting with the industry, taking account of : the size of the levy in relation to prevailing tariffs and costs, the potential impact it would be likely to have on the market for 'efficient' entry by indirect access, any distortion that such a levy might cause, and any likely anti-competitive effect.
17. Whilst Oftel takes the view that BT should continue to provide indirect access to other operators, Oftel has also reviewed the question of how that access should be effected. In particular, Oftel has reviewed the case for requiring BT to introduce the 'equal access' facility described in paragraphs 8 and 9. Earlier discussion of equal access produced no clear consensus on whether it would deliver significant net benefits. Oftel therefore concluded in 1994 that a full cost-benefit analysis should be undertaken in accordance with the provisions of condition 13A of BT's licence. NERA, a consultancy firm specialising in economic analysis, was asked to conduct the analysis. The terms of reference and findings of the study were discussed with the industry in draft.
NERA's methodology
18. NERA examined four different options, in each case in addition to customers remaining as they are, for implementing equal access:
Option 1 - pre-selection of an operator but with an override feature enabling the customer to make a different choice for any given call;
Option 2 - as above, but with the customer additionally being able to choose to make all calls on a call-by-call operator selection basis;
Option 3 - a customer to have the choice between pre-selection with no override, or call-by-call selection;
Option 4 - a customer to have call-by-call selection only.
Benefits of equal access
19. The benefits of equal access identified by NERA fell into two categories. First, what NERA describes as the 'Type 1' benefits, which are the direct benefits accruing to customers who opt to take service from an indirect operator because of the availability of equal access. These are the savings which they enjoy through lower call prices, better quality, more service features and increased ease of making calls through dialling fewer digits than a call-by-call selection would require. In order to measure these direct benefits, NERA looked at the likely impact of the various options on the scale of customer migration to indirect operators. NERA found that option 4, call-by call selection, because it involves customers dialling extra digits for all calls, was unlikely to be attractive to them and thus to offer little benefit. The options likely to deliver the most significant benefits were options 1 and 2, which allow customers to pre-select the operator, so that no extra dialling would be involved. Even here, though, the direct benefits were relatively small - around £20m over 10 years - because equal access would not be greatly more attractive to customers than the existing indirect access arrangements, with in both cases there being the need to dial extra digits. Option 3 had £7m 'Type 1' benefits.
20. Second, NERA looked at indirect benefits - 'Type 2' benefits - which would accrue to BT's customers as a result of equal access being introduced. These benefits would accrue because the migration which equal access encourages leads to competitive pressure on existing operators. The impact of this pressure may take the form of lower prices, better quality of service or greater innovation. NERA estimated that, under options 1 and 2, these benefits would be in the region of £60m over ten years, £36m for option 3 and nil for option 4.
21. Some operators criticised the estimation of Type 2 benefits. BT argued that the methodology used was apt to overstate the benefits, whilst other respondents suggested that the benefits were understated by a considerable margin. In considering these responses, we noted that NERA had conducted a number of sensitivity tests of its findings. Unless extreme assumptions were made - such as an increase in the 'Type 2' benefits of 50% - NERA's overall conclusion on benefits held good and the figures produced by NERA for this study were likely to be of about the right order of magnitude.
Costs of equal access
22. Against these benefits, NERA estimated the gross costs of introducing equal access - including system development and staff costs as: £162m each for options 1 and 2, £160m for option 3; and £47m for option 4.
The net costs and benefits were thus:
Leaving aside option 4 which had no gross benefits, the effect of introducing equal access would be at least a net cost to the UK of some £83m over ten years.
Oftel's conclusions on equal access
23. The NERA study raised doubts about the overall economic benefit of introducing equal access. In addition, Oftel is concerned that its introduction could discourage operators from developing alternative access networks if they risked the benefits of their investments to competing operators. Oftel concluded, on balance, that there is no case for directing BT to provide equal access. (In Hull, Kingston Communications only provides local calls and allows customers to choose alternative operators for long distance and international calls. However, this is a special situation as, for historic reasons, BT is not authorised to operate in Hull).
24. A number of respondents, whilst accepting that the cost-benefit analysis was broadly correct, commented that the result stemmed from the drafting of Condition 13A and the definition of equal access it contains. It was argued that the Condition rules out the form of equal access which generates the most significant benefits - in which customers are balloted on their choice of long-distance and international carrier, and those who do not respond are apportioned between operators. Our view is that the ballot approach might be appropriate where competition is being introduced into the market for the first time. But UK customers already have access to a range of competing services and are increasingly knowledgeable about them.
25. It has also been suggested that the scope of the Condition - focusing only on access to long-distance and international services - is too restrictive. It is argued that customers should have an entirely free choice of services irrespective of the network over which they are provided. This is really a different issue relating to allowing 'open access'. In fact, customers can, broadly speaking, have access now to all other operator's services from BT's network. However, as a general policy, open access would raise issues on infrastructure competition as operators would be discouraged from building new networks if
there was a risk that they could not earn an appropriate return. For this reason, Oftel has concluded that open access to non-dominant networks should not be pursued.
6. The original focus of indirect access arrangements was in providing for BT customers to have access to other operators and given its dominance in direct connections to customers, BT remains the focus of indirect access policy. Nevertheless, the steady development of other operators' access networks suggests that it may be helpful for Oftel to clarify its position on indirect access from non-dominant networks. Whilst, PTO's licences provide for indirect access, this is subject to a number of tests including the need to ensure that the requirements of fair competition are satisfied and that, in all the circumstances, indirect access is reasonably required.
27. The development of competing telecommunications infrastructure in recent years suggests that by encouraging local competition, the UK is creating one of the most competitive markets for telecoms in the world and is spreading competitive benefits to a wider cross-section of the community than has been achieved in other jurisdictions. The policy of encouraging competing infrastructure is now being followed or considered by many other countries.
28. A particular concern of Oftel, therefore, is that companies entering the market, investing substantially in infrastructure and providing alternative direct connections to the trunk networks for customers, should not be exposed to cherry-picking by indirect access operators. Although there are pricing structures that new entrants could adopt to mitigate this problem, these pricing structures may result in reduced potential consumer welfare and slow down the provision of competing infrastructure. In addition, Oftel's view is that, when applied to new networks, indirect access is likely to exploit the high initial costs experienced by such networks and discourage the development of competing infrastructure. Therefore, when considering the question of whether non-dominant operators should be required to provide indirect access, it remains of the view that this is generally undesirable.
29. Oftel has considered the countervailing benefits to customers of having the greater freedom of choice. On examination, however, Oftel considers that customers would enjoy this freedom of choice anyway provided that BT is mandated to provide access to such services. In other words, a customer who values the services offered by an indirect operator will be able to enjoy these services by remaining with or reverting to BT. If this is a very significant factor for customers, one might expect the lack of indirect access on non-dominant networks to constitute a disadvantage to those networks. Under these circumstances, other operators may themselves choose to make indirect access a feature of their networks.
30. There are some important caveats to these arguments. Oftel is aware that some customers who migrate to other operators are unaware at the time that they will be unable to make use of other operators through indirect access. The extent to which this confers a material disadvantage on them is limited, given that, as noted above, they can switch back to BT if they place a particularly high value on that indirect access, and given that the imminent arrival of number portability on a large scale will remove much of the difficulty of that switching process. Nevertheless, this information shortfall could clearly be a source of irritation to some customers, and Oftel intends to investigate what more could be done to raise awareness amongst customers of this issue as part of our project on "Promoting better customer information".
31. The second major caveat concerns the increased market share which currently non-dominant operators may be expected to gain in future. Some Conditions in non-dominant PTO licences may be triggered when the operator in question becomes 'well-established', a phrase which is defined as meaning that the operator has 25% or more of the 'relevant market'. 'Well-established' is not the same as 'dominant', but below 25% of a relevant market, we would consider it to be unlikely for an operator to be able to exercise significant market power or be viewed as well established.
32. Oftel considers that a similar trigger threshold - 25% of customer connections in a relevant market - should usefully guide the Director General's consideration of requests to require that operator to provide indirect access. If an operator does not have 25% of the connections in a relevant market, Oftel would be unlikely to conclude that indirect access should be required. If the operator did have 25% or more of connections, Oftel would want to consider other market conditions, such as the share of connections held by other operators, the existence of any barriers to switching or whether, in the longer run, mandating indirect access under such circumstances was likely to enhance competition or diminish it. Consideration of these factors would create a framework in which a request to mandate indirect access could be considered.
33. Oftel has also considered what would happen if the market develops such that a number of operators combined had obtained a significant market share although no individual operator other than BT exceeded 25%. In these circumstances, assuming BT remained dominant, Oftel would continue to take the view that only BT should be mandated to provide indirect access as this would ensure that indirect access was available to the extent that customers require it.
Indirect access from public payphones
34. A third major caveat relates to indirect access from public payphones. The payphone market, whilst clearly linked to the telecoms market as a whole, has certain unique characteristics. In particular, Oftel is concerned that customers using payphones may legitimately expect a minimum set of services, including forms of indirect access, to be provided from the payphone. On the other hand, the recent entry into the payphone market of a number of new companies, who might be expected to face the same entry barriers through high start-up costs, could suggest that again indirect access should not be mandated on their payphones. Oftel will be consulting on what arrangements should apply to such operators in respect of the provision of services.
35. A number of operators have in recent times been offering substitute indirect access services behind 0800 or other free service numbers. Oftel would take the same view of requests that non-dominant operators be required to provide indirect access via such a mechanism as for the more usual means of a short access code.
Access to numbers
36. Oftel is considering what measures might be adopted to remove barriers to the growth and delivery of indirect access services. One significant barrier could be the absence of suitable short number codes to facilitate indirect access. Under the current Numbering Scheme, codes assigned for 'choice of operator' purposes are designated 'Type B'. 270 such 4-digit codes are shown as free within the Numbering Scheme, but a number of these are not currently useable by customers on the BT network, because BT is currently using the codes for other purposes. Similarly, other operators, such as Vodafone, Orange and Telewest use some of these codes for other purposes. Overall this results in over 100 such 4-digit Access Codes being currently unavailable. Withdrawal of these codes from their existing uses is being progressed with the operators concerned, so that the full 270 codes should be available for indirect access purposes.
37. Beyond this currently agreed action, there are number of areas for potential further action to make available additional 'Type B' codes. There are at present 4 3-digit Type B codes allocated: 131, 132, 133 (for access to Mercury) and 144 (for access to BT's chargecard), and one reserved for access to BT - 128. Clearly, if these codes were withdrawn and replaced with new 4 digit codes, this would make further access codes available. All these codes were allocated prior to Oftel taking control of the Specified Numbering Scheme. In addition, Oftel could take action to withdraw certain existing Type A and Type C codes for re-allocation as Type B codes.
38. Even if such action were taken, there would still be a finite number of suitable codes, and Oftel would need to take a view on how eligibility for codes should be assessed. One argument would be that the unique value of short codes lies in the ability which they offer customers to access an alternative network with a minimal penalty in terms of having to dial extra digits.
39. Oftel intends to pursue the question of what steps are necessary as respects withdrawal and re-allocation of existing codes in its review on numbering policy. The question of how requests for such codes will be prioritised will be discussed in that exercise and also in Oftel's ongoing work on the future regulatory regime for Independent Service Providers.
Other barriers to indirect access
40. In the 'Residual barriers to competition' project, Oftel is considering a number of issues which may potentially affect the ability of indirect access operators to compete successfully with BT. A number of operators have complained about the effect of BT's policy of charging operators for 'data management amendments', that is changes to the data held within the BT network which enables calls to be routed to other operators' numbers. In particular, Oftel has received complaints about BT's DMA charges in respect of indirect access services behind '0800' and other service numbers. Oftel considers that there may be a case for the sharing of some DMA costs between BT and other operators (although this principle is unlikely to extend to the setting up of 4-digit indirect access codes themselves) and is consulting with the industry separately on these issues. It intends to reach initial conclusions on DMAs by September of this year, with a subsequent progress statement in December.
Direct Connection to the Access Network
41. BT continues to enjoy considerable benefits of scale and scope through having a UK wide Access Network. Ownership of the exchange line gives BT substantial control over the services delivered to customers. One way of overcoming this, would be to allow other operators to take over the exchange line at some convenient point. This would open up a number of opportunities for operators to compete with BT without the substantial investment needed to lay individual connections and without undue risk to the new operator.
42. Additionally, Oftel has noted that the US Telecommunications Act 1996 has ended the local exchange monopoly in the States and provides for other operators to have unbundled access and connection to any feasible point in the Access Network. Oftel understands that the motivation in the US is to encourage competitors to enter the local call market as quickly and smoothly as possible. The precise technical issues and charging arrangements have still to be determined.
43. Direct connection to the Access Network would mean that BT would lease the exchange line (or part of it) to a second operator. The other operator would then take over 'ownership' of BT's customer and it would convey all incoming and outgoing calls over what would now be its own network. The second operator's bills to customers would cover both call conveyance and exchange line rental.
44. The most convenient point to connect to the Access Network would probably be at BT's local exchange with calls being diverted at the Main Distribution Frame (MDF) to the second operator's switch which would be located in a nearby building (see diagram at Annex B). This would allow other operators to avoid the necessity of paying for the cost of the call being switched by BT (the bundling of which in current interconnect charges payable to BT has been subject to criticism by a number of parties). It is likely though that the second operator would still prefer to place some equipment in BT's local exchange premises.
45. Although Oftel recognises that direct connection to the Access Network is feasible, it would run counter to the UK policy of encouraging alternative infrastructure. It would involve the leasing of part of BT's network at a regulated price to its competitors and hence would discourage rather than encourage operators to build their own Access Networks. It would undermine the value of the investment other operators, particularly cable companies, have made in building their own infrastructure to gain customers and hinder the development and upgrading of existing Access Networks.
46. The UK's aim is that all customers should have the choice of at least three operators. These might comprise BT, a cable operator, a radio access operator and/or an indirect access operator. For many residential customers, this is now a reality. In the major cities, specialist operators are starting to build their own Access Networks to connect large business customers and businesses often have a choice of several operators already. UK operators are likely to have invested £7½ billion in building alternative Access Networks to BT by the end of 1996 and considerable further investment is planned. Any move to allow operators to take over BT exchange lines would undermine past investments and jeopardise future plans.
47. Our conclusion, therefore, is that direct connection to the BT Access Network would adversely affect the development of competition and would not be in the interests of the UK consumer.
48. Oftel welcomes comments on this Statement by the end of September 1996, which should be sent to :
Vince Affleck
Interconnection Manager
Oftel
50 Ludgate Hill
London, EC4M 7JJ
Comments on this document can also be sent to Oftel on the Internet (if they are relatively short) in the form of the web pages or by using the following e-mail address:
press.ofice.Oftel@gtnet.gov.uk
1. Conditions 13.1(a) and © of BT's licence places an obligation on BT to connect its systems to those of any operator who runs a 'Relevant Connectable System' (RCS) when requested by that operator to do so, and to provide to such an operator the services reasonably required to enable the operator to provide services to its customers. The rules governing Relevant Connectable System status are somewhat complex, but it is sufficient to note for these purposes that all the main network operators in the UK - those classified as 'public telecommunications operators' - and also some service providers, have RCS status. It should also be noted that all the licences of the other public telecommunications operators (PTOs) themselves contain similar provisions to condition 13. The provisions of Conditions 13.1 (a) and © may also oblige BT to provide RCSs with indirect access to BT's customers.
2. Condition 13.1(b), in any event, places a specific requirement on BT that, in respect of so-called 'long-line PTOs' (PTOs with systems that extend over more than 50 linear km), it shall:
"...establish and maintain such Points of Connection as will enable persons running telecommunication systems connected to the [Long-line PTO's] system and persons running telecommunication systems connected to [BT's system] to exercise freedom of choice as to the extent to which Messages are conveyed by means of [BT's system] and in routing Messages so conveyed;"
In other words, customers connected to BT must be given the choice as to whether their calls are carried in whole by BT, or (by inference) in part by another long-line PTO.
3. As well as these general provisions covering indirect access, BT's licence and other PTO licences contain specific measures covering so-called 'equal access'. The indirect services described hitherto generally involve customers having to dial extra digits and/or follow additional procedures in order to use the indirect service. 'Equal access', on the other hand, as defined in the licence is parity in the number of digits dialled to access an indirectly-provided service as for the equivalent service provided by the operator to whom the customer is directly-connected. This could be achieved either by a customer dialling extra digits for each call made, for instance, 1234 for calls over the BT system, 1235 for calls over the Mercury system and 1236 for calls over the Energis system, or by customers electing to route calls over a given network for a subsequent period.
4. Condition 13A of BT's licence and its equivalents include the obligation to provide such 'equal access' in respect of competitors' trunk and international services. However, the Director General can only impose such an obligation on the licensee where he has conducted a cost-benefit analysis. There are other important qualifications to the Director General's power to direct BT to provide equal access. It should also be noted that the condition includes specific provisions for sharing of the licensee's costs between itself and the operators who are recipients of the equal access provided.
How an operator could build a bypass netwoork of directly connceted customers using BT's copper loop
