July 1997
The telecommunications industry has a central role to play in meeting the Government’s objective of providing schools with access to advanced on-line services. Affordable and predictable charges for wideband (ISDN2 or equivalent) access to the Internet are a very important first step in meeting this objective.
All companies should have an opportunity to participate in delivering this so that schools have a full range of choice of network operators and service providers. Some companies are already playing an active role. I was pleased to receive a proposal from BT at the end of May to offer schools reduced price access to the Internet for three hours a day. Details of BT’s proposal are in Chapter 6 of this document.
BT’s proposal is an important step in the right direction. BT’s current market position requires it to be subject to constraints on its freedom to set prices. I have already indicated that one obligation placed upon BT not to unduly discriminate between different customers, is not an obstacle to setting special prices for schools. In this consultation I set out how I propose to treat BT’s costs in providing service to schools. The framework I outline allows BT greater flexibility to develop further its offer to give schools a cheaper deal and longer hours of access. It sets cost floors below the level allowed under conventional regulatory practice, and which free BT to respond to the exceptional and particular needs of schools.
I am pleased that BT has agreed to review its offer in the light of the costing work that I have carried out and published in this document. BT will include its final proposal in its response to this consultative document.
Changes are necessary to the arrangements that BT has for paying other operators for the use of their network in order for BT to provide prices to schools which are affordable and predictable and allow schools to access any Internet service provider on any network. This clearly impacts on the revenue streams of other operators. It requires the participation of these other operators in order to meet schools’ needs. Hence the need to consult with the rest of the industry on these arrangements.
I look forward to the industry responding positively to what is a shared goal. Arriving at a solution means that everyone wins – schools because they are better able to exploit an important educational resource, our children because they are better equipped for the future, and the communications industry because they will be strengthening links with an important market and helping a new generation use communications technology effectively.
I intend to move this consultation to a swift conclusion so as not to delay schools benefiting from BT’s offer. A statement on the conclusions of this consultation with BT’s final offer will be published in September.
The initial consultation period will run until Friday 8 August 1997. There will then be a further period up to Friday 22 August 1997 during which comments are invited on any submissions made to Oftel. Comments are invited in particular on the questions at the end of the various chapters which are summarised in Chapter 7.
Written comments should be sent to:
Andrea Konrath
Oftel
50 Ludgate Hill
London EC4M 7JJ
Fax: 0171 634 8893
Written comments will be made publicly available in Oftel’s Library unless confidential. Respondents are therefore asked to separate out any confidential material into a clearly marked annex. Appointments to view written comments in the Library must be made in advance (tel: 0171 634 8765; fax: 0171 634 8946).
Comments can also be sent to Oftel on the Internet via Oftel’s Web pages or by using the following e-mail address:
crs.oftel@gtnet.gov.uk
Oftel intends to set up a link between this document on Oftel’s Web pages and any comments about it placed on respondents’ own Internet pages. Please contact Cate McLaurin at Oftel (tel: 0171 634 8752) to organise this.
Visually impaired customers who wish to have access to the text on computer disk should contact Barbara Powell (tel: 0171 634 8773).
1.1 The Government is committed to schools having access to advanced on-line services over high bandwidth telecommunications networks so that information and communications technology (ICT) can be used effectively. The telecommuni-cations industry has a central role to play in this by not only providing connections to external telecommunications networks, but in ensuring that prices for usage are predictable and affordable, and in providing advanced on-line services.
1.2 The telecommunications industry is already playing an active role, but this needs to be extended and enhanced. Last year Oftel established the Education and Public Access Points Task Force. The Task Force consists of industry, education and consumer representatives. Its terms of reference are to look at how the telecommunications industry might improve access to information and communications technology (ICT) for schools, colleges and public access points. A report of the work of the Task Force and its recommendations was published in February 1997 and can be obtained free of charge from Oftel. (Please contact Elizabeth Watts, tel: 0171 634 8770.) See Annex A for details of its recommendations.
1.3 Earlier this year the cable industry launched a package offering schools within cable franchise areas a flat-rate charge for unlimited access to the Internet. Kingston Communications Limited has also introduced a specific tariff for schools in Hull for local calls. Towards the end of May BT submitted a proposal to Oftel for approval to provide schools with access to the Internet for a predictable fixed rate charge (see Chapter 6).
1.4 Oftel is consulting publicly on BT’s proposal because of BT’s dominant position in the market and because of the implications for other network operators and service providers competing with BT and the choices available to schools. This document is intended to initiate consultation on the regulatory principles Oftel proposes to adopt and on BT’s proposal and to look at how the telecommunications industry as a whole might play a part in helping schools get affordable and predictable access to the Internet.
1.5 Because different telecommunications networks are involved in providing schools with access to the Internet, participation by these network operators is needed to ensure that schools have access not only to low and predictable prices but to a choice of a range of Internet services from different companies. There are two main elements of cost in providing access to the Internet to schools:
The first of these is done by local network operators such as BT, cable companies and Ionica. The second may be also done by those operators if the Internet service provider is directly connected to their network. If the service provider is connected to another network the local network operator hands on the calls to that network.
1.6 As most Internet service providers are not on BT’s network, it is usual for calls to Internet service providers to be conveyed over BT’s and another company’s networks. Under current arrangements if there are two operators involved in carrying the call, the local network operator (eg BT) collects call revenue from the customer and pays the other network operator to carry the call to the Internet service provider. This interworking of networks is called interconnection and payments made are called interconnection charges. If schools are to have low and predictable call bills for access to the Internet and choice of a range of Internet service providers, then action by BT alone is not sufficient. Other companies conveying calls need to participate by pricing their call termination services for schools at affordable rates.
1.7 The implications of this are that there need to be changes to the interconnection arrangements which BT has with other operators for conveying calls from schools to Internet service providers. This will require the participation of other telecommunications companies. Changes to the interconnection payments BT makes to other operators may impact on the charges paid by the Internet service provider for use of the other operator’s network. These wider implications confirm the need to consult publicly on BT’s proposal.
1.8 Thus those parts of the industry which are affected by this consultation are:
1.9 Chapter 2 looks at what schools need to use advanced on-line services effectively focussing specifically on telecommunications needs.
1.10 Chapter 3 explains what processes are involved in providing schools with access to the Internet and the series of transactions taking place between schools, network operators and Internet service providers. It also considers the implications of providing a flat rate charge for unlimited usage.
1.11 Chapter 4 gives details of the telecommunications regulatory framework. It sets out the criteria which BT would have to meet for the Director General to permit BT to offer a tariff for network services for schools as a class of customer. It also sets out a clear, watertight definition of schools which would be eligible for such a tariff.
1.12 Chapter 5 provides details of Oftel’s proposed approach to estimating the cost floors for BT’s prices. Oftel’s approach is based on the objectives of enabling BT to provide affordable and predictable prices, promoting fair competition and minimising regulation.
1.13 Chapter 6 provides details of BT’s proposal.
1.14 Chapter 7 summarises the questions to which responses are invited.
1.15 Oftel will publish a statement on the outcome of this consultation in September. This will set out Oftel’s conclusions on the issues raised in this document and confirm the regulatory arrangements that apply to BT in relation to its proposed schools’ tariff.
1.16 Subject to the outcome of consultation on the principles set out in Chapter 4, and the application of these principles in Chapter 5, Oftel would expect to apply similar principles if BT wished to offer further network services to enable schools to access advanced on-line services at special rates.
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2.1 Access to external telecommunications networks is just one of the elements that schools need if they are to use information and communications technology (ICT) effectively. They will also require:
2.2 Oftel’s Task Force and the team led by Dennis Stevenson which carried out an independent inquiry into ICT in UK schools at the request of Tony Blair and David Blunkett shared the conviction that access to advanced on-line services was a prerequisite for the effective use of ICT in schools.
2.3 Oftel’s Task Force and the Stevenson inquiry identified a number telecommunications issues which required action if advanced on-line services are to be used effectively by schools. These included:
2.4 Annex A sets out the Task Force recommendations relating to schools, and the recommendations of the Stevenson inquiry relating to external networks.
2.5 The low speed of access to on-line services when using dial-up with a modem over a standard phone line (PSTN) was considered by Oftel’s Task Force to be a barrier to the effective use of on-line services in schools. The Task Force considered that all schools should have access to a baseline bandwidth to enable effective use of on-line services. The purpose of this baseline is not to set a standard that would limit innovation and progress to higher bandwidth connections, but rather it is a minimum level at which on-line services can be used effectively in schools. The Task Force recommended a baseline of ISDN2 basic rate access or equivalent offering bandwidth of up to 128kbit/s. The reasons for the Task Force selecting this bandwidth as the baseline are explained in Annex A.
2.6 Any baseline needs to be kept under review as demand for ICT in schools changes and with developments in communications technology. The Task Force will be considering this along with how to meet the needs of the small minority of schools which are unable, for technical reasons, to get ISDN2 or equivalent.
2.7 Bandwidth needs will vary with the size of the school and what the network is used for. Larger schools may require primary rate ISDN30 or a dedicated private circuit.
2.8 The cable industry’s package and BT’s proposal both involve a special tariff for schools to access the Internet. The majority of on-line services are currently accessed via the Internet. Schools may also value using the telecommunications network for video-conferencing and other applications. Oftel invites representatives of the educational community to consider whether other on-line services and applications available over ISDN2 in addition to Internet access are required by schools and whether the telecommunications industry should look at the practicalities of developing special charging arrangements for schools for such applications.
(1) Comments are invited on whether other on-line services and applications in addition to Internet access are needed by schools.
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3.1 This chapter explains the processes involved when schools access the Internet. When customers (including schools) use the Internet they usually get two bills – a call bill from the telecommunications company providing the line over which they access the Internet and a bill from the Internet service provider for use of the Internet. The former bill is usually variable and the charges are usage dependent whereas the latter is usually a fixed charge per month. It was noted in Chapter 2 that both the level and variable nature of call charges have deterred schools from using the Internet. As Internet service provider charges are usually fixed they are easier for schools to manage. The focus of this document is on the call bill paid by schools, not the Internet service provider bill.
3.2 The Internet service provider offers a dial-up telephone number called a point of presence (PoP). The customer can access this through a variety of telecommunications links (Figure 1). Internet service providers charge different rates for connecting to the Internet in different ways. The charges for using a dial-up connection via a modem and a standard telephone line are lower than using ISDN2 or a dedicated leased line. The charges levied by Internet service providers for schools wanting access for a local area network as opposed to dial-up access for a single PC are higher and may present a barrier for some schools, particularly small primary schools.
3.3 A number of transactions take place between schools, network operators and service providers to deliver Internet services to schools. These involve transactions between:
3.4 The call charges paid by schools and other customers for accessing the Internet are usually local call rate charges. This means that the Internet service provider is either physically located in the same local call area as the customer or uses a local call rate number (such as 0845, 0645, 0345). In the latter case the school when accessing the Internet only pays local call rate charges even though the Internet service provider is not physically located in the local call area. Most national Internet service providers use local rate numbers as they do not have actual points of presence in each local call area.
3.5 When a call to a local call rate number originates on one operator’s network but terminates on another operator’s network, under the current interconnect arrangements, the operator on whose network the call originates pays an interconnection charge to the operator which terminates the call for the Internet service provider. The current interconnect charge is 2.02p per minute in the daytime. These charges are recovered by originating operators in the prices charged to customers.
3.6 These pence per minute interconnection charges clearly impact on BT’s and other originating operators’ ability to provide schools with affordable and predictable charges for access to the Internet which is not below cost and which enables schools to use any Internet service provider. For example, based on a school year of 38 weeks and usage of 8 hours a day, the interconnection payments that BT would need to recover through its charges to schools would be £1,842 per annum. This is in addition to its costs for providing local access.
3.7 Proposals to change the pence per minute costs incurred by BT and other originating operators through these interconnection charges would enable them to offer schools affordable and predictable prices for calls to Internet service providers on any network. This could enhance the attractiveness of the cable industry’s and Kingston Communications Limited’s current packages to schools and any further offers which may be made.
3.8 The other bill the school pays covers the Internet service provider’s costs. These include charges paid to the operator which terminates calls and the costs of routers, servers and leased lines which the service provider uses to provide the Internet service.
3.9 An Internet service provider’s costs vary with volume of usage. The service provider dimensions its system to cope with the expected volume of traffic over it, making an allowance for the sharing of assets and aiming for a particular quality of service. Although Internet service providers currently offer flat rate tariffs to customers (ie a fixed amount per month irrespective of usage) this does not reflect the reality of their cost function.
3.10 The introduction of additional traffic on the Internet service provider’s network could impose extra costs on the service provider because it may have to purchase additional assets to maintain its quality of service. If this investment was not made the responsiveness of the Internet service to the customer would deteriorate.
3.11 Internet service providers claim that they are able to offer flat rate charges because they rely upon per minute based charging on the telephone network to act as a deterrent to customers staying on-line for long periods. Clearly, any proposal to change the structure of telecommunications charges for Internet access for schools could impact on this.
3.12 It has been suggested that schools need predictable and affordable telecommunications charges rather than charges based on unlimited usage and so long as they can purchase a set number of hours of usage at affordable rates, and have a means of controlling their usage then their needs will be met. This suggests that it might be appropriate to develop telecommunications prices for Internet access covering a range of different levels of usage and introducing some method by which schools can use up to a limit that they have paid for so that they get the predictability they need. Usage limits could either be imposed by the telecommunications company or the Internet service provider. Oftel considers that there may be some merit in imposing the usage limit at the Internet service provider end rather than the limit being imposed by the telecommunications company. Some Internet service providers might choose not to impose usage limits but to offer an unlimited service and schools who valued the unlimited nature of such a service could choose to take service from them.
3.13 Predictable usage bands might be in the interests of small primary schools who may be relatively low users and might benefit from a low use predictable tariff that would enable both the telecommunications company and the Internet service provider to offer them lower charges than an unlimited usage pricing structure.
3.14 For a pricing structure based on predictable usage bands to work effectively there would need to be some means for schools to monitor levels of usage on-line and for a warning to be given that the usage limit was being approached and for temporary suspension of the service. Any usage bands will need to offer broad hours of use. Usage bands structured in the following way might meet schools’ needs:
3.15 Concern has been expressed by some Internet service providers that introducing flat-rate charges for unlimited use of the telephone network, as Oftel’s Task Force recommended, could lead to schools using the telephone network and the Internet service provider’s network in a open-ended fashion with no deterrent to excessive usage. This could either result in higher charges to schools or the introduction of usage dependent charges at the Internet service provider end. This might defeat the object of making the total charges paid by schools for Internet use affordable and predictable.
3.16 It has been suggested to Oftel that this is likely to be more problematic for service providers specialising in educational markets since they do not have other Internet customers to subsidise any loss-making usage by schools. It has been suggested that educational specialist Internet service providers, which many schools value, could be driven out of the market if Internet service providers serving general markets decided to subsidise any use by schools from revenue from the rest of their customer base. Specialist educational Internet service providers would not have these revenue streams to provide any subsidy and would either face a loss or have to put up prices which would put them at a competitive disadvantage.
3.17 Some Internet service providers currently offer schools a free Internet service. Despite this specialist educational Internet service providers which levy a charge have remained popular with schools. If schools value the service provided by Internet service providers specialising in education they are likely to be willing to pay a higher rate to reflect the value they place on such services. Specialist Internet service providers’ competitive position could be worsened by any competitor offering cross-subsidised tariffs but the effect might not be so great as to make their business unsustainable.
3.18 The explanation in this chapter of how access to the Internet is provided to customers, including schools, highlights several issues which have implications for prices charged to schools:
(2) Comments are invited from the industry on the impact that a flat rate structure for telecommunications charges offering unlimited access to the Internet would have.
(3) Comments are invited from the education community on whether schools’ needs would be met by predictable usage limits and what those limits should be.
(4) Comments are invited from the industry on how predictable usage limits could be implemented, and on Oftel’s suggestion that limits could be imposed by the Internet service provider rather than the telecommunications company.
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4.1 The only Telecommunications Act licensee with formal regulatory controls on its prices which are relevant in the context of developing affordable and predictable prices for schools is BT. Other operators are free to develop affordable and predictable prices to meet the needs of schools without any regulatory controls.
4.2 The regulatory controls on BT’s prices are necessary because of its dominant position, to prevent it pricing in a way that would be exploitative or otherwise anti-competitive. One of the requirements on BT is that it must not set prices which are predatory. The usual test of a predatory price is that it is set below long-run average incremental cost. This is the test for predation used in the Oftel Guidelines on Fair Trading.
4.3 Last year Oftel clarified that no changes would be required to BT’s licence to enable BT to provide schools with affordable and predictable prices for PSTN (ordinary telephone line) or ISDN2 access to the Internet and other on-line services.
4.4 Condition 17 of BT’s licence prevents it from showing undue preference or exercising undue discrimination against particular persons of any class or description. The Director General confirmed to BT that he would not regard it as unduly discriminatory for BT to provide all schools as a class of customer with affordable and predictable prices for network services for access to the Internet and other on-line services providing that BT’s proposals met the following criteria:
(a) The prices should only made available to schools as defined in statute (see paragraph 4.12 below).
(b) The same prices should be available to all schools where service is practicable (although it would be possible to develop different pricing structures for primary and secondary schools for example) with no geographic variation in pricing throughout the country. This is to ensure that schools in rural areas where BT’s costs might be higher pay the same as schools in areas of the country where costs may be lower. It also prevents BT targeting price reductions in particular areas of the country where it faces competition from other telecommunications companies. A policy of geographic averaging of BT’s prices enables schools throughout the UK to benefit from the downward pressure on prices that competition in particular areas of the country may exert on BT’s prices.
(c) Network services should be available on the same terms to any independent service provider if BT were to choose to offer packages which bundled in enhanced services such as Internet services. Regulatory controls exist to ensure that BT’s enhanced services (eg BT Net) buy network services on essentially the same terms as independent service providers so as to ensure that BT competes fairly with them.
(d) The prices to schools for use of the telecommunications network should cover BT’s geographically averaged long-run incremental costs of the use of the relevant segments of the network. The long-run incremental cost is the additional cost incurred by the provision of that particular service, on the basis of a long-run assessment of costs in which all elements of cost are considered to be variable. Prices set on this basis would ensure that BT’s other customers were not paying a subsidy towards low prices for schools and would allow other network operators to compete effectively with BT in serving schools.
(e) The tariff would allow access to service providers on other operators’ networks so schools could benefit from choice of service.
4.5 Oftel has applied these rules to estimate the cost floors which BT could price down to for providing schools with PSTN dial-up or ISDN2 access to the Internet. The estimated cost floors are set out in Chapter 5.
4.6 Subject to the outcome of this consultation, Oftel would consider that BT would be acting in compliance with the regulatory framework if any new network service BT wished to offer to enable schools to access advanced on-line services met the criteria outlined above. The definition of a network service is set out in the proposed modification to Condition 18 of BT’s licence. If technology is introduced which brings BT’s costs down Oftel would consider reviewing the cost floors set out in Chapter 5.
4.7 Oftel will be concerned to ensure that BT gives independent service providers serving schools sufficient notice of any new offers for schools to enable them to plan accordingly. In order to avoid breaching the prohibition in its licence on showing undue preference to any related business carried out by BT, BT’s service provider business should not be privy to information about new network services or associated technical interfaces before independent service providers. This issue arose in the context of BT’s introduction of its Education On-Line tariff for schools and colleges of further education where BT failed to give independent service providers sufficient notice.
4.8 BT has now developed in-house guidelines aimed at avoiding repetition of the problem that occurred with the Education On-Line tariff. These guidelines commit BT to give sufficient notice about new products, services or tariffs to service providers and equipment suppliers who have registered a general interest in receiving such information. Oftel would expect BT to comply with these guidelines in introducing any new offerings for schools, and any breach to constitute a breach of its licence conditions prohibiting undue discrimination and preference.
4.9 Special rules apply to BT when it is offering Internet services because of its dominance. If it was shown that BT’s Internet service was subsidised unfairly and was having or could have a material effect on competition, then Oftel could take regulatory action to prevent such cross-subsidy. Oftel has been investigating BT CampusWorld and BTNet following complaints of unfair cross-subsidy by competitors. Oftel intends to make a statement shortly on its interim findings in relation to both BT CampusWorld and BTNet.
4.10 As the cable industry and other telecommunications operators do not have significant market power they are not subject to the same regulatory restrictions as BT. Therefore some aspects of the cable industry’s offer for schools may not meet the requirements outlined above. For example, the cable industry’s current offer is restricted to the use of Internet service providers which are situated in cable local call areas.
4.11 If special telecommunications prices are to be developed for schools it is necessary to have in place a watertight definition of this class of customer to determine exactly which establishments would be eligible for such a tariff. The purpose of such a definition is threefold:-
4.12 As schools are clearly defined in statute Oftel proposes that statutory definitions are used to define schools as a class of customer. The following definition is therefore proposed – schools are institutions, as defined in statute, whose primary purpose is the education of young people of statutory school age. The relevant statutory definitions are:
4.13 These definitions include independent and special schools. They include schools with sixth forms but exclude sixth form colleges. Sixth form colleges fall within the definition of further education colleges. Oftel’s Task Force will be reviewing the telecommunications needs of this sector in the Autumn.
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5.1 Oftel’s proposed approach is based on the following objectives:
5.2 The approach outlined in this chapter is intended specifically for schools as a special class of customer. It sets no precedents for the accepted principles for setting retail, service provider or interconnection charges generally. The cost floors set out in this chapter are the floors below which BT cannot price. They are not regulated prices for schools; it is for BT to decide what prices it wishes to charge. The estimated cost floors in this chapter do not include retail costs. To the extent that incremental retail costs are incurred by BT as a result of supplying this service to schools, it would be appropriate to reflect these in the cost floors and in the prices BT charged. If the volumes of traffic resulting from the introduction of this service turned out to be very substantial, which Oftel doubts, additional costs may be incurred in reconfiguring the network to cope with this volume. The cost floor estimates in this chapter do not include any allowance for such reconfiguration of the network.
5.3 This chapter sets out:
5.4 Oftel’s approach is based on estimating BT’s costs of conveying calls from the school to the Internet service provider. These costs are built up from the different transmission and switching elements involved (Figure 1) which include two stages:
(a) the originating end – the cost of providing a line and conveying and switching calls from the school to the first Digital Main Switching Unit (DMSU). This DMSU (the `first DMSU’) is assumed to be the point of interconnect when the service provider is on another operator’s network. This includes the costs of the concentrator and conveyance and switching to the Digital Local Exchange (DLE).
(b) the terminating end – onward conveyance and switching of calls from the `first DMSU’ to the service provider when this is on BT’s network. Oftel’s costings are based on the service provider being connected to BT’s network at a concentrator. This is connected to a DLE which is connected to a DMSU which is in turn connected to the `first DMSU’.
Separate cost floors have been estimated for each of these stages. These can be added together where BT is both the originating and terminating operator.
Figure 1 Network elements costed
5.5 The assumption about where the service provider is connected represents a typical arrangement. In some cases the service provider may connect at a different point. One approach would be to allow for differential cost floors to reflect these specific arrangements. It may, however, be preferable to use cost floors based on the typical arrangement in the interests of transparency of costs and simplicity.
5.6 Oftel proposes that the cost floors for BT should be established on an incremental cost basis, using a capacity based measure of costs. This means that costs would be calculated on the basis of the capacity required to provide the school with a switched connection held open permanently or held open for a fixed period of time. This would give BT the flexibility to offer a flat rate charge for unlimited use or predictable charges based on usage for a fixed number of hours, thus meeting schools’ needs for predictable charges.
5.7 Oftel proposes that BT’s long-run average incremental cost is calculated by taking the additional costs in the long-run of providing ISDN2 or PSTN access to schools on the base of BT’s existing network and services that it currently provides. These cost estimates do not include any share of the costs of the network elements that already exist and would not need to be expanded in order to provide this service. For example, schools are generally already connected to the telephone network and the necessary ducts are already in place. These would not need to be added to in order to provide ISDN2 or PSTN connection so none of these costs are included in the estimate of incremental costs. This approach would enable BT to develop affordable prices for schools that cover their genuinely additional costs. Annex B provides details of the methodology and sources used to calculate the cost floors.
5.8 It should be noted that this approach is different from that used for the estimation of network element costs for network price setting purposes. There, a long-run network incremental cost approach has been adopted and other existing costs are included. The methodology for calculating the network costs for price setting purposes has been based on the `scorched node’ assumption, ie that the starting point for the calculation of incremental cost is that no network exists. The methodology proposed for schools could not be applied more widely in setting charges for BT’s network services, because the costs of establishing the network would not be recovered through prices set on this basis.
5.9 Oftel has estimated BT’s cost floors for PSTN dial-up access and ISDN2 access to the Internet based on its understanding of BT’s costs. Whilst this chapter only deals with cost floors for PSTN and ISDN2 access, Oftel considers that, subject to consultation, the principles of the approach set out could equally apply to other forms of access to the Internet for schools, eg dedicated leased lines.
5.10 It would be open to BT to decide how to structure any prices to take account of these floors. For example, BT may not want to charge a one-off connection fee but instead spread the connection cost over a number of years to reduce upfront charges. Oftel would only be concerned about this arrangement if it tied the school into an unreasonably long contract with BT. Similarly, BT could develop some predictable usage-based prices rather than offering a flat-rate charge for unlimited use. Providing BT’s prices were at or above Oftel’s estimated cost floors Oftel would be satisfied that they met the rule of being above BT’s long-run incremental cost.
5.11 Oftel has estimated the cost floors for BT as the originating operator (Table 1) which covers part of the cost of conveying calls to an Internet service provider. These floors take into account the cost of using the network up to the first DMSU which is the point at which a terminating operator can interconnect with BT’s network (Figure 2). These cost floors do not take into account the incremental cost of retail services. However, Oftel does not expect this to alter the cost floors significantly as the costs for retail services on an incremental basis are likely to be low. Oftel would expect that majority of retail costs would be incurred by the Internet service provider rather than by the telecommuni-cations company selling the network connection. Nor do these cost floors take into account interconnection payments or the costs of the operator terminating the call.
Figure 2 Network elements costed in Table 1
Table 1 – Cost floors for BT for unlimited use of the network from the school to the first DMSU (point of interconnect)
| Connection | Annual unlimited usage (calls and rental) | |
| ISDN2 | £155 | £375 per annum |
| PSTN | £ 70 | £195 per annum |
Notes:
(1) Excludes retail costs.
(2) ISDN2 costs assume both channels are in full use.
5.12 Oftel has also calculated cost floors for BT as the originating operator based on different usage assumptions (Table 2). When usage reaches 4.5 hours a day the cost floor is the same as for unlimited use. The exact level of this breakeven point depends on the assumed pattern of traffic throughout the day. Under a capacity charging approach to costing, limiting usage leads to a reduction in cost if capacity can be used by other users. The additional capacity has a value to other users only if it is available at a time when there is no existing spare capacity. The general pattern of network usage is such that capacity is fully utilised for only a few hours each day. For this reason, once usage of a telecommunications system rises above 4 or 5 hours a day it is unlikely that such cost savings would be available. In these circumstances, limiting usage does not reduce costs.
TABLE 2 Cost floors for BT for different levels of use of the network from the school to the first DMSU
| Limited usage | ISDN2 | PSTN |
| 1 hour a day | £160 per annum | £ 90 per annum |
| 2 hours a day | £220 per annum | £120 per annum |
| 4 hours a day | £340 per annum | £180 per annum |
Notes:
(1) Assumptions are the same as in Table 1.
(2) The network elements costed are as shown in Figure 2.
5.13 It was noted in Chapter 3 that where the Internet service provider is attached to a network other than that of the originating operator, an interconnection charge is payable by the originating operator to the terminating operator. These payments for local call rate services are currently 2.02p per minute in the daytime period. It is clearly difficult for BT to develop prices for schools which are affordable and predictable and not below cost unless current interconnection arrangements with terminating operators are changed.
5.14 The costs of terminating operators are currently recovered through these interconnection payments they receive from BT or other originating operators and through charges they make to Internet service providers for terminating calls. There are a number of alternative approaches for covering the costs of terminating operators and changing the interconnection arrangements so that schools have access to affordable and predictable tariffs.
5.15 One option would be for BT and other originating operators to pay lower interconnection rates to terminating operators for schools accessing the Internet. BT would need to cover any lower interconnection rate(s) in the prices it charged schools so that it was not pricing below cost. There are two basic approaches to implementing such interconnection rate(s):
5.16 An alternative option, which Oftel considers has a number of advantages, would be for other telecommunications companies to agree changes to the interconnection arrangements for Internet traffic from schools. Under this approach there would be no interconnection charge payable by the originating operator to the terminating operator for schools’ Internet traffic. The elimination of pence per minute interconnection payments for these calls would make it much easier for BT to establish prices covering its costs, as an originating operator, which are non-usage sensitive with the confidence that they were above the relevant measure of cost.
5.17 It should be emphasised that under this approach it is not intended that terminating operators should provide their services for nothing. Instead they would be renumerated for their costs through the charge they made to the Internet service provider. This proposal changes the structure of charges that schools would pay for use of the Internet in the following way:
the prices that BT charges would only cover BT’s costs as the originating operator. The prices would be the same for use of any Internet service provider on any network, but may vary according to the level of use;
5.18 Oftel would not propose to stipulate how Internet service providers and terminating operators should price their services to schools, except to set cost floors for BT’s prices for terminating calls when the Internet service provider is on BT’s network (see Tables 3 and 4). Since this is a fairly competitive part of the market Oftel would anticipate offerings to be made available that suited the requirements of schools. If schools wanted to have prices that were usage independent, Oftel would expect that Internet service providers and terminating operators in competing for this business, would offer pricing structures of this type. In order for schools to have affordable prices Oftel would look to terminating operators to offer Internet service providers charges based on incremental cost for schools’ Internet traffic. Oftel would expect this to be achieved by competition rather than regulation.
5.19 Under Option 2 BT would be required to recover its costs for call termination in the prices it charges schools to useBT’s own Internet service provider. BT would be required to offer the prices it charged its service provider business for call termination on the same terms to competing service providers offering an Internet service to schools.
5.20 This approach has the following advantages:
However, as noted above it does change the structure of charges that schools pay.
5.21 BT as the terminating operator would be required to set its prices at or above its long-run incremental cost. Table 3 shows the cost floors Oftel has calculated for BT as the terminating operator for unlimited use of BT’s network from the first DMSU to Internet service provider’s point of presence. Figure 3 shows the network elements costed in Table 3.
Figure 3 Network elements costed in Tables 1 and 3
TABLE 3 Cost floors for BT for unlimited use of the network from the first DMSU to the Internet service provider’s point of presence
| Annual unlimited usage | |
| ISDN2 | £290 per annum |
| PSTN | £145 per annum |
Note: Assumptions are the same as those in Table 1
5.22 Table 4 shows the cost floors Oftel has calculated for limited use of BT’s network from the first DMSU to the Internet service provider.
5.23 At 5 hours usage a day the cost floor is the same as for unlimited usage.
5.24 The cost floors estimates in Table 1 combined with the estimated cost floors in Table 3 gives the estimated cost floor that BT could price down to for schools for unlimited access to an Internet service provider on BT’s network. The costs floors estimates in Table 2 combined with the cost floors estimates in Table 4 gives the estimated cost floors that BT could price down to for schools for limited use. These combined cost floors are shown in Figures 4 and 5.
Figure 4 Cost floors for ISDN2 where BT is the originating and terminating operator
TABLE 4 Cost floors for limited usage of BT’s network from the first DMSU to the Internet service provider’s point of presence
| Limited usage | ISDN2 | PSTN |
| 1 hour a day | £ 60 per annum | £ 30 per annum |
| 2 hours a day | £120 per annum | £ 60 per annum |
| 4 hours a day | £240 per annum | £120 per annum |
Figure 5 Cost floors for PSTN where BT is the originating and terminating operator
5.25 Both of the above options involve the ability of originating and terminating operators to identify schools as a discrete class of customer in respect of their use of the telecommunications network to access the Internet. If changes are to be made to interconnection arrangements it is important that the industry can have a means of identifying schools as such a discrete customer class and that telecommunications networks have a practical and effective means of identifying schools’ Internet traffic for charging and billing purposes. Oftel therefore proposes to allocate a new numbering code for use solely by schools to access the Internet.
5.26 Following Oftel’s review of the National Numbering Scheme in 1996, codes beginning 08 are now set aside to be used for non-geographic specially tariffed services. At present 080X codes are designated for freephone services, 084X codes for local rate call services and 087X for national rate call services. Other O8XX codes are available for other specially tariffed non-geographic services such as the Internet access service for schools.
5.27 It is therefore proposed to designate the 0820 code for use for access to the Internet, and possibly access to other advanced on-line services, for schools. This code will be made available to operators and the rules on it will be published at the conclusion of consultation on this document.
5.28 Oftel considers that telecommunications companies are likely to derive benefit from providing predictable and affordable services to schools through enhancement of their brand image and corporate reputation, and by nurturing a future customer base that can use communications technology effectively. All telecommunications companies playing a role could probably derive these benefits. It has been suggested, though, that originating operators which have a direct relationship with the schools would gain the most benefit. Terminating operators are currently largely invisible to schools. Internet service providers may also benefit through getting a greater volume of business from schools.
5.29 Given that either of the options outlined above would require the participation of terminating operators it may be appropriate for those who bill schools (ie originating operators or Internet service providers) to brand their services jointly with terminating operators.
(5) Comments are invited on Oftel’s proposed cost floors for BT including:
(a) Basing the floors on BT’s long-run incremental cost;
(b) Using a capacity based charging approach;
(c) The calculation and level of the floors and the methodology in Annex B;
(d) The reasonableness of the assumptions in defining the originating and terminating segments; and
(e) The reasonableness of the approach set out in Annex B for calculating the cost floors for limited use.
(6) Comments are invited on the implications of the two options:
(a) Option 1 – a lower interconnection rate which is negotiated by BT and terminating operators.
(b) Option 2 – Oftel’s proposals for changing the interconnection arrangements so that terminating operators recover their costs through Internet service providers.
(7) Comments are invited on the proposal to allocate the 0820 numbering code to schools’ Internet use.
(8) Comments are invited on how terminating operators can have a fair share of the branding advantages if they participate by pricing their services for schools at affordable rates.
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6.1 This chapter provides details of BT’s proposal submitted to Oftel towards the end of May in response to Oftel’s Task Force recommendations to provide schools with affordable and predictable access to on-line services.
6.2 BT is considering its response to Oftel’s further costing work as set out in Chapter 5 and intends to include its final proposal in the light of this work in its public response to this consultation document. Oftel will continue discussions with BT on its proposal. Oftel intends to publish BT’s final proposal in its statement on the conclusions of this consultation.
6.3 BT’s offer relates to PSTN or ISDN2 access to any Internet service provider chosen by a school (the definition of a school is as set out in Chapter 4). BT’s proposed prices are set out in Table 1.
6.4 The prices in Table 1 relate to call charges for access to an Internet service provider. The school may use the line for other purposes, eg normal telephony or videoconferencing, and BT proposes to charge for calls to these other services at standard business rates.
6.5 BT is not proposing to raise a separate charge for ISDN2 connection.
6.6 Usage is limited to an average of 3 hours per school day throughout the school year. BT recognises that some schools will want to use the Internet for longer than 3 hours per day. BT is reviewing the 3 hours per day limit in the light of Oftel’s costing work with a view to extending the time allowance if possible.
6.7 BT’s proposed prices assume that Internet service providers will charge schools separately for access to Internet content.
TABLE 1 BT’s proposed prices
| Connection | 3 hours of use per school day | |
| ISDN2 | No separate charge | £790 per annum |
| PSTN | £100 | £445 per annum |
6.8 In arriving at these proposed prices for schools BT has:
6.9 BT has structured these prices to cover BT’s costs as the originating operator and its interconnection payments to terminating operators at BT’s proposed new rate. BT’s proposed prices are above Oftel’s estimated cost floors for BT as the originating and terminating operator in Chapter 5 on the assumption that the cost of ISDN2 connection is recovered through the annual usage charge. However, it is less clear that BT’s proposed interconnection payments to terminating operators cover the cost floor (see paragraph 6.11 below).
6.10 In order to keep prices to schools as low as possible and to allow schools using Internet service providers on other operators’ networks to benefit from this price, BT proposes changes to the interconnection payments it makes to other operators for schools’ Internet traffic. BT proposes a reduction in the interconnection payments from 2.02p per minute in the daytime to a charge at or below 0.15p per minute.
6.11 BT claims that this proposed new interconnection rate will cover the terminating operator’s costs. However, Oftel’s calculations of the floors for BT’s costs for call termination suggest that this might not be the case (see Table 4 in Chapter 5 which sets out estimated cost floors for BT as the terminating operator for 2 and 4 hours use per annum). BT has calculated this charge based on its long-run incremental cost for single transit – the charge for traversing one main switching stage.
6.12 This reduced interconnection charge will require the agreement of terminating operators and a distinct numbering code to identify schools’ Internet traffic. Oftel’s proposal to allocate the 0820 numbering code for schools’ Internet traffic as set out in Chapter 5 would apply.
6.13 BT has suggested that Oftel should determine this lower interconnection rate.
(9) Comments are invited on BT’s proposed offer.
(10) Comments are invited from the educational community on whether the level of usage of 3 hours per day is adequate and whether schools would value a choice of further usage limits and prices.
(11) Comments are invited from the industry on BT’s proposed interconnection charge.
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(1) Comments are invited on whether other on-line services and applications in addition to Internet access are needed by schools (Chapter 2 paragraph 2.8)
(2) Comments are invited from the industry on the impact that a flat rate structure for telecommunications charges offering unlimited access to the Internet would have (Chapter 3 paragraph 3.12 to 3.17)
(3) Comments are invited from the education community on whether schools’ needs would be met by predictable usage limits and what those limits should be (Chapter 3 paragraphs 3.12 to 3.14)
(4) Comments are invited from the industry on how predictable usage limits could be implemented, and on Oftel’s suggestion that limits could be imposed by the Internet service provider rather than the telecommunications company (Chapter 3 paragraphs 3.12)
(5) Comments are invited on Oftel’s proposed cost floors for BT including:
(a) Basing the floors on BT’s long-run incremental cost;
(b) Using a capacity based charging approach;
(c) The calculation and level of the floors and the methodology in Annex B;
(d) The reasonableness of the assumptions in defining the originating and terminating segments; and
(e) The reasonableness of the approach set out in Annex B for calculating the cost floors for limited use. (Chapter 5 and Annex B)
(6) Comments are invited on the implications of the two options:
(a) Option 1 – a lower interconnection rate which is negotiated by BT and terminating operators (Chapter 5, paragraph 5.15)
(b) Option 2 – Oftel’s proposals for changing the interconnection arrangements so that terminating operators recover their costs through Internet service providers (Chapter 5, paragraphs 5.16 to 5.20)
(7) Comments are invited on the proposal to allocate the 0820 numbering code to schools’ Internet use (Chapter 5, paragraphs 5.25 to 5.27)
(8) Comments are invited on how terminating operators can have a fair share of the branding advantages if they participate by pricing their services for schools at affordable rates (Chapter 5, paragraphs 5.28 to 5.29)
(9) Comments are invited on BT’s proposed offer (Chapter 6)
(10) Comments are invited from the educational community on whether the level of usage of 3 hours per day is adequate and whether schools would value a choice of further usage limits and prices (Chapter 6 paragraph 6.6)
(11) Comments are invited from the industry on BT’s proposed interconnection charge (Chapter 6 paragraphs 6.10 to 6.11)
1 Information Highways: Improving access for schools, colleges and public access points – Recommendations of Oftel’s Task Force to the telecommunications industry – Oftel (February 1997).
2 Information and communications technology in UK schools. An independent inquiry. Report of the inquiry led by Dennis Stevenson (March 1997).
A1 Oftel’s Task Force made the following recommendations to the telecommunications industry concerning schools. The telecommunications industry should:-
(a) Ensure that a baseline of digital connectivity at ISDN2 or equivalent is available to all schools throughout the UK and take appropriate action to address the needs of schools which are unable to access ISDN2 or equivalent.
(b) Introduce more affordable charges for telecommunications links for schools. This should take the needs of primary schools into account, particularly the small size of many primary schools and their lower spending power.
(c) Develop charges which are predictable and controllable to enable effective budgeting of on-line expenditure.
(d) Where possible develop flat-rate charges which allow for unlimited usage so as to not restrict access to the Internet.
(e) Play its part in actively promoting and disseminating the benefits of external telecommunications links to schools.
(f) Allow schools to purchase network connections separately from services so that they are free to choose which company they buy services from and are not tied into taking service from the company providing the network connection.
(g) Work in partnership with software producers, equipment manufacturers and others to ensure that schools have the full range of services they need and can access them in a user friendly way.
A2 Oftel’s Task Force considered the benefits of selecting ISDN2 as a baseline were that it:
(a) “The overall aim should be to ensure that all our children, over a certain age, and all teachers have access to the World Wide Web and the e-mail facility via the Internet.
(b) Specifically:
- make the cost of usage of the Internet by schools easily affordable and predictable by negotiating with the telecommunications industry with a view to reconstructing the current regulatory framework.
- give every child from, say, the age of nine and every teacher their own e-mail identity.”
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B1 Oftel commissioned Analysys Limited to carry out a study to estimate BT’s long run incremental cost floors for providing schools with PSTN or ISDN2 access to the Internet.
B2 This study has estimated the average cost to BT of providing:
B3 The costs of providing an ISDN2 service to schools more than 4km from the nearest local concentrator or UXD5 local switch (estimated at approximately 3.5% of schools for this study) have been excluded, since special access arrangements would have to be made to provide them with an ISDN2 service.
B4 The ISDN2/PSTN service provided by BT to schools is assumed to consist of:
handed over to another licensed operator for onward conveyance to a service provider of the school’s choice (at no cost to BT);
conveyed onwards by BT to a service provider of the school’s choice (the costs of this onward conveyance being excluded from the cost of this particular service).
B5 The ISDN2/PSTN call termination service provided by BT to Internet service providers (solely for the termination of calls originating from schools using one of the above services) is assumed to consist of:
B6 This study has estimated the additional costs to BT, in the long run, of providing these services, over and above the set of services that it currently provides (sometimes called the Long Run Service Incremental Cost). As such, these cost estimates do not include any share of the costs of network elements that already exist, and would not need to be expanded (even in the long run) in order to provide this service. What are included are the costs of the additional capacity that would be needed (even if only in the long run) in order to provide these services. It should be noted that this approach is therefore different from that proposed for the estimation of network element costs for interconnect price-setting purposes, where a Long Run Network Incremental Cost approach is proposed.
B7 As indicated above, this study has estimated the costs of unlimited usage of the ISDN2/PSTN service. In practice, this means that the estimated cost of usage represents the cost of reserving the appropriate amount of capacity (2 x 64kbit/s per ISDN2 line, 1 x 64kbit/s per PSTN line), for the exclusive use of this service, between each local concentrator or UXD5 switch and the relevant tandem switch (DMSU or DJSU), including the capacity in the switches. Calls are also assumed to be of very long duration, so that the costs of call set-up are assumed to be negligible.
B8 The cost estimates produced by this study are based upon BT national averages and do not reflect the specific characteristics of schools as a class of customer distinct from the average of all customers.
B9 This study has followed a bottom-up approach to estimating the Long Run Service Incremental Cost of providing these services, building upon earlier work by ICAS Task Group 19 and Analysys. Further details of the network elements and classes of cost included and excluded from the cost estimates, together with the sources of cost data used, are provided in the following sections.
ISDN2 service to schools within reach of a Digital Local Concentrator
B10 For schools within ISDN2 reach of a digital local concentrator, the network elements used to deliver an ISDN2 service are assumed to be as in Figure 1.
B11 In this case, the network elements that are included and excluded from the Long Run Service Incremental Cost are shown in Table 1.
Table 1
| Network Element | Included | Excluded |
| Customer connection | NTE Final drop |
|
| Local loop | Cable | Civil works |
| Host or remote concentrator | ISDN2 line card Processor Local facing port |
Common components |
| Remote-local transmission | Electronics | Fibre Civil works |
| Local processor | Concentrator facing port Processor Tandem facing port |
Common components |
| Local-tandem transmission | Electronics | Fibre Civil works |
| Tandem switch | Local facing port Processor Tandem facing port |
Common components |
B12 For schools within ISDN2 reach of a UXD5 local switch (but not a digital local concentrator), the network elements used to deliver an ISDN2 service are assumed to be as in Figure 2.
B13 In this case, the network elements that are included and excluded from the Long Run Service Incremental Cost are shown in Table 2.
| Network Element | Included | Excluded |
| Customer connection | NTE Final drop |
|
| Local loop | Cable | Civil Works |
| Remote access multiplexer | ISDN2 line card Common components |
|
| Remote-local transmission | Electronics | Fibre |
| Host concentrator | Mutliplexer facing port Processor Local facing port |
Common components |
| Local-tandem transmission | Electronics | Fibre Civil works |
| Tandem switch | Local facing port Processor Tandem facing port |
Common components |
| Local processor | Concentrator facing port Processor Tandem facing port |
Common components |
| Host or remote concentrator | PSTN line card Common components |
B14 The network elements used to deliver a PSTN service to schools are assumed to be as in Figure 3.
B15 In this case, the network elements that are included and excluded from the Long Run Service Incremental Cost are shown in Table 3.
| Network Element | Included | Excluded |
| Customer connection | NTE Final drop |
|
| Local loop | Cable | Civil works |
| Host or remote concentrator | PSTN line
card Processor Tandem facing port |
Common components |
| Remote-local transmission | Electronics | Fibre Civil works |
| Local processor | Concentrator
facing port Processor Tandem facing port |
Common components |
| Local-tandem transmission | Electronics | Fibre Civil works |
| Tandem switch | Local facing
port Processor Local facing port |
Common components |
B16 The network elements used by BT to transport PSTN/ISDN calls from the originating tandem switch (DMSU/DISU) to an ISP point of presence on BT’s network are assumed to be as in Figure 4.
B17 The network elements that are included and excluded from the Long Run Service Incremental Cost of call termination are shown in Table 4.
Table 4
| Network Element | Included | Excluded |
| Tandem-tandem transmission | Electronics | Fibre Civil works |
| Tandem switch | Tandem facing port Processor Local facing port |
Common components |
| Local-tandem transmission | Electronics | Fibre Civil works |
| Local processor | Tandem facing port Processor Concentrator facing port |
Common components |
| Host concentrator | Local facing port Processor |
Common components Line card |
B18 The following classes of cost have been included within the estimates of the Long Run Service Incremental Cost:
• economic depreciation
• cost of capital
B19 The following classes of cost have been excluded from the estimates of the Long Run Service Incremental Cost:
• accommodation
• motor transport
• computing
• power
• MAI
• D&P
• miscellaneous
B20 In addition to estimating the Long Run Service Incremental Costs of unlimited usage, this study has also estimated the costs of limited usage. These estimates are based upon an analysis of the extent to which each network element would typically be used during a normal weekday by ordinary PSTN/ISDN traffic (ie normal call traffic, not Internet access by schools). The cost of using each network element for one hour per day is then computed as follows:
Cost of 1 hour’s use per day = annual cost of unlimited usage x 1 hour/average hours of use per day by ordinary PSTN/ISDN traffic
B21 The total cost of one hour’s use per day of each service is then simply computed as the sum, over all of the network elements used, of the cost of one hour’s use per day of each network element.
B22 Cost data has been gathered from a number of sources as follows:
• BT ISDN product cost estimates for 1995/6 (as supplied to Oftel by BT on 1 March 1996)
• ISDN remote access multiplexer equipment capital costs from a European equipment manufacturer
• BT top-down access cost estimate (LRIC) for 1994/95
• BT Local Loop Cost Study (LLCS) for 1994/95
• ICAS Task Group 19 bottom-up (LRIC) cost models for 1994/95.