Purpose of this Statement
BT's August proposal
Structure of this Statement
Chapter 2 - Meeting schools' telecommunications needs
Introduction
Levels of use
Type of connection
Type of services
Type of customers
Conclusion
Chapter 3 - Regulatory context
Introduction
Rules for BT's prices
Pre-notification of independent service providers and other interested parties
Interconnection arrangements
Ring fencing
Introduction
Oftel's proposals in the Consultative Document
Consultation responses
BT's August proposal
Revised price floors
Conclusion
Chapter 5 - High speed digital access for all schools in the UK
Introduction
Current situation
Universal availability
Annex B - Oftel's approach to estimating BT's price floors for unlimited use
Annex C - Oftel's approach to estimating BT's price floors for limited use
2. This Statement focuses on the prices that BT can offer schools for access to on-line services and applications for educational purposes. It focuses on BT because its market position means its actions impact on the rest of the telecoms industry.
3. The aim of the framework set out in this Statement is to enable the whole telecoms industry to meet schools' needs so that schools have choice. The cable industry and other telecoms companies are already offering schools affordable and predictable rates for access to the Internet.
WHAT CAN BT OFFER SCHOOLS UNDER Oftel'S FRAMEWORK?
4. BT's prices need to be set on a fair basis to enable other operators to compete with BT. Oftel has therefore set out a method for calculating the levels down to which BT can price when serving schools. This method is based on calculating the additional costs which are incurred by BT in providing service to schools. If BT prices at or above these levels for schools, it means that other BT customers are not subsidising schools' prices.
5. However, BT could not set prices at this level for all its customers as it would not recover the costs of building and running the network. For this reason, pricing on this basis must be limited to schools as defined in statute.
6. Oftel has looked at the regulatory rules that affect BT's prices for schools in the light of what local education authorities and other educational bodies told Oftel about what schools need. The rules Oftel has set out in this Statement would enable BT to offer schools a range of services including affordable and predictable prices for:
7. BT's proposal, submitted to Oftel in its consultation response in August, will give schools access to any Internet service provider on any operator's network for 10 hours' use per school day from 8am to 6pm. BT's proposed prices (which cover call bills, not Internet service provider charges) are:
9. These prices are above the level that Oftel has estimated for BT's costs of serving schools, therefore Oftel will permit BT to price at this level and will not judge these prices as being anti-competitive.
WHAT DOES THIS MEAN?
10. This Statement explains that:
1.2 Because of the central role of the telecommunications industry in this, Oftel established the Education and Public Access Points Task Force in 1996 to look at what the telecommunications industry might do to enable schools, colleges and public access points to use advanced on-line services effectively. The Task Force consists of education, consumer, public library and industry representatives. A report of its work and recommendations was published in February 1997 and can be obtained free of charge from Oftel (contact Elizabeth Watts, tel: 0171 634 8770).
1.3 The cable industry already provides schools in cable franchise areas with free connection and flat-rate charges for unlimited access to the Internet for £600 per annum for ISDN or equivalent, or from as low as £100 per annum for unlimited Internet access over an ordinary phone line. Schools in Hull have access to a special tariff from Kingston Communications. Towards the end of May 1997, BT submitted a proposal to Oftel to provide schools with a predictable fixed rate charge for access to the Internet for 3 hours a day.
1.4 Oftel consulted publicly on BT's proposal because of BT's dominant position in the market and because its proposal has implications for other network operators and service providers which might affect the choices available to schools. The focus of this Statement and the Consultative Document that preceded it is on BT's prices. This is because BT is the only Telecommunications Act licensee with formal regulatory controls on its prices. These controls are necessary, because of BT's dominant position, to prevent it pricing in a way that would be exploitative. BT is also subject to a rule to prevent unduly discriminatory behaviour, especially where it has the effect of harming or excluding competition. Other telecommunications operators are free to develop affordable and predictable prices that meet schools' needs with fewer regulatory controls. Oftel's aim has been to ensure that the regulatory framework for BT's prices enables the wider telecommunications industry to participate in meeting the needs of schools.
PURPOSE OF THIS STATEMENT
1.5 This Statement confirms the regulatory framework within which BT can offer special prices to schools for access to on-line services. It follows publication of the Oftel Consultative Document in July 1997 - Access to the Internet for Schools - Consultation on BT's proposal. That document set out proposals for the regulatory rules that would apply; included Oftel's estimates of BT's price floors calculated in accordance with those rules; and discussed options for the treatment of interconnection payments. The document also outlined BT's initial proposal which had been submitted to Oftel to provide a special price for schools to access any Internet service provider.
1.6 BT's proposal and the discussion in this Statement are only concerned with the telecommunications charges incurred between the school and the Internet/on-line service provider. They do not cover the costs involved in providing Internet or on-line services. Internet/on-line service provider charges are additional costs which schools face when using the Internet/on-line services.
1.7 Some respondents were critical of the timing of Oftel's consultation and the short length of time allowed for responses. Oftel appreciates both the timing and time scales were far from ideal. These reflected the timing of BT's proposal to Oftel and the objective of not delaying regulatory decisions so that schools could benefit from any special BT prices as early as possible in the academic year.
1.8 In spite of these difficulties, Oftel received over a hundred responses, of which over half were from educational representatives. A list of those who responded is included at Annex A.
BT'S AUGUST PROPOSAL
1.9 BT's response included a revised proposal which took account of Oftel's Consultative Document and offered schools longer hours of use compared with BT's initial proposal. This is referred to in this document as BT's August proposal to distinguish it from BT's original proposal. BT's proposal allows schools access to any Internet service provider on any operator's network for 10 hours' use per school day from 8am to 6pm. BT's proposed prices are:
for digital access to the Internet (ISDN2), no separate connection charge and an annual charge of £790 covering rental and usage for schools connected to BT's network using Internet service providers on BT's network. When the Internet service provider is connected to another operator's network the prices paid by schools may vary depending on the charges made by that other operator.
for access using an ordinary telephone line (referred to in this document as PSTN (Public Switched Telephone Network), a connection charge of £100 and an annual charge of £445 covering rental and usage, when the school is connected to BT's network using Internet service providers connected to BT's network. When the Internet service provider is connected to another operator's network the prices may vary.
BT's proposal is that normal business rate call charges will apply if schools want to use the line before 8am or after 6pm. BT's proposal is that if schools want to use the line to access services other than the Internet service, normal business rate call charges will apply.
STRUCTURE OF THIS STATEMENT
1.10 Chapter 2 discusses the comments made about the telecommunications needs of schools. In the light of these needs and taking account of responses from the industry, Oftel has reviewed the regulatory framework proposed for BT's prices to ensure that schools' needs can be met.
1.11 Chapter 3 sets out the regulatory context within which BT can offer special prices for schools.
1.12 Chapter 4 reviews Oftel's price floor estimates for BT in the light of comments made by respondents. These price floors are the levels which BT would be permitted to price down to without its prices being considered as having an anti-competitive effect. They are not regulated prices for schools; it is for BT to decide what prices it wishes to charge. Chapter 4 sets out revised price floors for ISDN2 and PSTN access to the Internet and potentially other on-line services. Annex B provides details of the methodology used to calculate price floors for unlimited use and Annex C sets out the methodology for calculating price floors for limited use.
1.13 Chapter 5 describes current availability
of BT's ISDN2 service to schools and sets out the commitment that BT has
made to ensure that all schools can have high speed digital access to the
Internet from BT by the end of the year 2000. This will be in addition
to the range of high speed digital services offered to schools by other
telecoms companies.
2.3 Oftel expects the telecommunications industry will meet these needs through normal competitive pressure. In designing special prices for schools, telecommunications companies will wish to take into account the rich source of information about schools' needs that this consultation exercise has generated.
2.4 It should be noted that the price floors for BT set out in Chapter 4 are based on specific segments of the telecommunications network which schools use when they dial-up Internet/on-line service providers. Other services and applications which schools might wish to use would have different price floors if they involved use of different elements of the telecommunications network.
LEVELS OF USE
Unlimited use
2.5 Oftel's Education and Public Access Points Task Force had recommended that, where possible, schools' call bills for access to on-line services should be designed as a flat rate charge which allowed for unlimited use. This would remove the problem of unpredictable call bills and allow schools to use on-line services effectively both during and outside of school hours. The price floors Oftel estimated for BT, as published in the Consultative Document, were based on a methodology which took account of the fact that costs of telecommunications links are not in fact incurred on a pence per minute basis (although they are usually priced in this way). Reflecting the needs identified by Oftel's Task Force, price floors were calculated for unlimited use. These price floors would enable BT to offer schools predictable and reasonable prices for unlimited access to on-line services.
2.6 The Consultative Document noted, however, that a flat-rate charge for unlimited use might cause some difficulty for Internet and other on-line service providers who might be forced to raise their charges to schools as usage of their services increased. This would be more likely if a telecommunications tariff was designed as a flat-rate fee for unlimited use and had no deterrent to prevent schools using these services in an unlimited way. At present Internet service providers rely on pence per minute call charges to ration usage made of the Internet.
2.7 Respondents noted that this might be less of a problem for Internet and other on-line service providers serving general markets as their systems might already be of sufficient scale to cater for any additional use by schools. As additional use by schools would be during the school week it would not coincide with the time (weekend) when general use of the Internet is at its peak. However, any additional use by schools would be more difficult for Internet/on-line service providers specialising in the schools' market to accommodate, and it would be likely that they would have to expand their infrastructure to cater for it. This would result in additional costs which might be passed on to schools.
2.8 Other concerns about unlimited use raised by the industry were that a special tariff for schools could be used outside school hours for purposes unconnected with the school. This might undermine other markets for use of the Internet and other on-line services (eg Internet Cybercafes) which could sustain telecommunications charges at normal commercial rates.
2.9 Educational respondents generally considered that unlimited use would be ideal and that the only advantage of limiting hours of use would be if it resulted in schools having lower call bills. BT's original proposal for three hours' use per day was considered inadequate by most respondents.
2.10 As noted in Chapter 1, BT has revised its original proposal in the light of the Consultative Document and increased the time allowance to 10 hours (between 8am to 6pm) per school day in its August proposal. This should meet schools' needs for use throughout the school day and for use out of hours for homework clubs and similar educational activities.
2.11 There may still be some demand for a tariff which allowed unlimited use amongst schools using ICT intensively. This would allow, for example, schools to download material overnight and to make more extensive use outside school hours. The regulatory framework set out in this Statement would enable BT to offer a price for unlimited use, in addition to one for 10 hours a day, in order to meet this demand.
Lower prices for lower use
2.12 BT's August proposals are expected to meet the needs of the majority of schools, based on the responses to the consultation. However, there may be some schools for which these are not entirely suitable (e.g. small primary schools, in particular those using the Internet for the first time) and BT will, in discussion with the education community, come forward with ideas in the Spring for enhancing the services currently proposed. There was some concern that BT's August proposals at £790pa for ISDN2 or £445pa for PSTN would not be affordable to small primary schools. In addition, it was considered that 10 hours of use per day may not be required by all schools. Oftel's estimated price floors would allow BT to develop lower PSTN and ISDN2 prices for a lower level of use. A low use tariff would have the benefit that Internet and other on-line service providers could also offer lower prices for their services since they would not be exposed to more extensive use by schools.
2.13 Educational representatives stressed the need for flexibility in the design of any prices offering limited hours of use. Where possible, schools should be offered usage limits for a term or a year rather than a fixed number of hours per day so as to give maximum flexibility as to how and when schools use the Internet or other on-line services. The BT price floors for a set number of hours' use per day in Chapter 4, would also apply if BT designed a tariff offering the equivalent number of hours per term or year.
TYPE OF CONNECTION
Bandwidth requirements and demand for leased lines
2.14 Oftel's Education and Public Access Points Task Force had recommended that all schools should have access to a baseline of at least ISDN2 or equivalent in order to enable them to use on-line services effectively. BT's proposal is based on ISDN2 or PSTN dial-up connectivity to the Internet. A number of educational respondents considered that some schools, particularly large secondary schools, needed higher bandwidth connections to use on-line services effectively. The Task Force also recognised that the baseline would need to be reviewed given rapid developments in technology and the increased use of ICT in schools. Some respondents suggested that leased line connections were needed by schools as they would allow inward access to the school's internal network for parents, pupils and teachers off-site. Another benefit of leased lines is that schools can have a Web site permanently available. Oftel's Task Force has agreed that higher bandwidth connections and leased lines are its next priorities. Oftel will undertake work to calculate BT's price floors for leased lines. Oftel considers that the methodology discussed in this Statement for calculating BT's price floors could apply to leased lines and higher bandwidth connections. Oftel hopes that BT and the rest of the telecommunications industry will respond to these needs by developing affordable prices for schools requiring leased lines offering higher bandwidth connections.
A dedicated schools' network
2.15 Some respondents suggested that the creation of a dedicated schools' network, or extranet, using Internet technology and principles, and allowing access to the worldwide Internet, might have a number of advantages. This could use the dial-up ISDN2 links from schools, to connect to a dedicated network which could provide access to a range of different services and content provided by different companies. Oftel considers this approach might have merit and will explore it further with its Education and Public Access Points Task Force.
TYPE OF SERVICES
2.16 The Consultative Document invited responses on whether schools needed other on-line services in addition to those available on the Internet. Many respondents noted that the range of services available on the Internet is growing rapidly and discrete on-line services are increasingly migrating to it. However, there are some on-line services and applications which some schools are already using, and which others will want to use, which are not available on the Internet today and for which the Internet is not currently the ideal medium.
2.17 Amongst the educational community there was some agreement that Internet access should be accorded the highest priority as it was the most immediate need and the most widely used on-line application by schools. However, virtually all educational respondents suggested that low cost predictable telecommunications prices were still needed for access to other-line services. It was suggested that affordable telecoms prices were needed to cover access to the following services:-
2.19 For example, in principle Oftel considers that the service incremental price floor methodology could be applied to call charges associated with video conferencing not provided over the Internet. However, different price floors from those in Chapter 4 would apply and further work is necessary to determine how video services could be integrated with the existing proposals.
2.20 Oftel confirms that the price floor methodology in this Statement applies to BT's costs for usage of the network between the school and the point at which the on-line/Internet service provider connects with the telecommunications network. It does not apply to the Internet/ on-line service providers' costs. The reason for this distinction is that it would be difficult to distinguish use of an Internet/on-line service provider's assets by schools' and non-schools' traffic.
2.21 The price floor methodology set out in this Statement does not apply to normal telephony use by schools.
TYPE OF CUSTOMERS
2.22 In the Consultative Document Oftel proposed that any special pricing arrangements based on the regulatory framework set out in that document should be restricted to schools, as defined in statute. A clear definition of which groups of customers are eligible is important for three reasons:
2.24 From the educational community there were calls to extend the eligibility for any special tariff to other educational users. Suggestions for other eligible classes of customers included:-
CONCLUSION
2.26 The regulatory framework set out in this Statement will permit BT to offer schools affordable and predictable prices for:
RULES FOR BT'S PRICES
3.2 In order for the Director General not to regard prices BT proposed for schools as a class of customer as unduly discriminatory or anti-competitive, normal competition rules and the following criteria would apply:
(a) They were only available to institutions falling within the agreed class of customer definition (see Chapter 2).
(b) The prices were at or above BT's geographically averaged long-run service incremental costs for use of the relevant segments of the network.
(c) The prices for the different elements of the network used should be geographically averaged across the UK. This means that rural schools do not pay higher rates than schools in urban areas which might be closer to a BT exchange. However, the price paid by schools could vary depending on the elements of the telecommunications network used. For example, if schools used a local Internet service provider they could only pay for the costs of transporting the call locally, whereas if schools used a service provider which involved a long-distance call, and therefore used more network elements, they could pay the additional costs of this.
(d) The prices would be available to all schools where service is practicable (see Chapter 5).
(e) Other licence conditions would continue to apply. The condition under which BT is prohibited from engaging in undue discrimination is particularly relevant. The proposed tariffs for schools are clearly preferential compared to tariffs for services for the same application to comparable customers, but the Director is of the view that this is not "undue" discrimination for the purposes of Condition 17 of BT's licence, having regard to the social objectives of the tariff (which are consistent with the Director's general duties under the Act) and the lack of any adverse effect on competition in the market for these and related services. However, the operation of the tariff would otherwise be subject to the rule against undue discrimination, including the circumstances where BT might offer these tariffs in conjunction with other tariffs or in conjunction with other parts of its business.
(f) Schools must be permitted to use any special prices to access any Internet/on-line service provider on any operators' network.
PRE-NOTIFICATION OF INDEPENDENT SERVICE PROVIDERS AND OTHER INTERESTED PARTIES
3.3 BT has indicated in its response that it plans to introduce new prices for schools in Spring Term 1998. Under BT's Guidelines for the Pre-notification of New Services, BT is required to give interested parties (service providers and equipment manufacturers) sufficient notice of new services. Oftel would expect BT to follow these Guidelines in respect of any tariffs for schools.
INTERCONNECTION ARRANGEMENTS
3.4 The Consultative Document discussed two different options for the recovery of the terminating operators' costs - a special interconnect rate for schools, or no interconnect payments, with the terminating operators' costs recovered through the Internet service provider charges. It is clear that there could be a variety of arrangements by which the costs of various parties could be recovered. There was no clear consensus from the consultation on which arrangements were preferred. Oftel does not expect to be prescriptive about which arrangements operators should adopt. It does not expect to get involved in setting interconnection rates. The rules that Oftel will apply are that BT's prices must be above the price floors taking into account any interconnection payments it may make, and the application of the rule that those well established operators subject to the rule, should not show undue discrimination.
RING FENCING
3.5 It is important that traffic from schools to service providers offering on-line services for educational purposes can be identified and ring-fenced in a robust way. This is necessary for the purposes of charging special rates for this traffic and to ensure that special tariffs for schools are not used by other customers.
3.6 In the Consultative Document Oftel suggested that this might be achieved by use of a special number range such as 0820. Oftel has reviewed the responses to the consultation on the various options available and concluded that there are a number of ways in which schools' traffic could be effectively identified including CLI and a special numbering code. Oftel is in discussion with network operators to ensure a practical and robust method of identifying schools' traffic eligible for special tariff packages is put in place in a timely way.
4.2 These price floors apply to BT's costs of providing schools with access to any Internet/on-line service provider which involves use of the relevant segments of the network that have been costed. Other educational services and applications which schools might want to use would have different price floors if they involved use of different elements of the telecommunications network.
Oftel'S PROPOSALS IN THE CONSULTATIVE DOCUMENT
4.3 Oftel's proposed approach to setting and estimating floors for BT's
prices for schools accessing on-line services set out in the Consultative
Document involved:-
The need to set price floors
4.4 Some respondents from the education sector and from non-telecommunications industries suggested that BT should be able to price below any floors, and even offer service to schools free of charge. This was suggested because of the commercial advantages it was considered BT would gain from offering free or low priced service.
4.5 Oftel's view, which was shared by all telecommunications companies responding, is that floors are necessary for BT's prices because of BT's dominance to ensure that BT's prices do not exclude competitors, so as to give schools choice of which telecommunications provider they use.
The use of service incremental cost approach to setting price floors
4.6 There was general agreement in principle to using a service incremental cost approach although there was some concern about the elements of costs which had been excluded. As discussed in Chapter 2, it was emphasised that the use of such an approach reinforced the need for effective ring-fencing of any tariff to schools' use because the costs of establishing the network would not be recovered from prices set on this basis.
The level of the price floors and the elements of cost excluded
4.7 Many telecommunications operators, including BT, considered that Oftel's estimated price floors were too low because additional elements should have been included. BT suggested that the price floors should be recalibrated to include an allowance for:
4.10 Oftel considers that the majority of incremental assets required to offer this service will be available for re-deployment (ie not sunk) should demand for this service change. In consequence, Oftel believes that the risks associated with these assets will be no different from those of similar assets generally deployed in the BT network. Oftel does not therefore see a need currently to use shorter asset lives (or otherwise account for potentially stranded assets) when calculating the price floors for this service.
4.11 The treatment of transit costs is considered separately in paragraphs 4.19 to 4.22 below.
4.12 BT has indicated to Oftel that its costs of number translation for this service will be relatively small, since BT does not expect the service to be implemented as a first generation number translation service (ie the service will not make use of the Digital Derived Services Network (DDSN)).
4.13 The estimate of incremental retail costs included within the revised price floors includes an allowance for the costs of billing and risk of bad debt and fraud.
4.14 A query was raised about changes to the price floors over time. Oftel's estimates are based on today's information. Oftel could revisit BT's price floors if BT's costs changed materially over time.
Price floors of other operators
4.15 Several operators suggested that their cost base was above the price floors estimated for BT and that they would be unable to compete if BT priced at this level. Some respondents suggested that the price floors should be calculated to reflect the costs and usage of their network. Oftel takes the view that the purpose of the price floors is to ensure that BT does not price below its costs so as to exclude efficient competitors. Therefore, it does not intend to set price floors for BT based on other operators' costs, where these are higher, as that could protect inefficient competition and be to the detriment of schools in terms of the prices BT is able to charge.
A capacity charging approach
4.16 Many operators agreed that the use of a capacity based charging method for assessing BT's costs was appropriate for the purposes of developing flat-rate prices for schools. There was concern that there was no agreed industry methodology for capacity based charging and that greater transparency was needed in the derivation of the price floors. However, given the need to develop a suitable regulatory framework for BT's prices quickly so that schools are able to benefit within a reasonable timescale, Oftel takes the view that it would not be practical to develop a more generally applicable industry agreed methodology. Experience of long-run incremental network cost work suggests that such an approach could take a considerable time. Oftel would, however, be willing to provide more details of its methodology for calculating BT's price floors on request.
Definition of the originating and terminating segments
4.17 A number of respondents suggested that in defining the originating and terminating segments, Oftel should take account of different circumstances when different elements of the network are used. Oftel had based the estimated price floors on a typical arrangement for simplicity. However, in the light of respondents' comments Oftel now considers that it may be appropriate to develop price floors to take account of different circumstances in order to establish the correct pricing signals.
Originating segment
4.18 Some telecommunications operators questioned whether the price floors for the originating segment were disproportionately high compared with the price floors for the terminating segment. This reflected some confusion as to whether the call origination segment covered line rental costs and usage costs. Both of these costs are included in the call origination price floors.
Transit segment
4.19 BT considered that the originating segment should include a higher allowance for DMSUs and that the price floor should be increased to reflect this based on the fact that, in a significant number of cases, BT hands over calls to the terminating operator at the second DMSU. Some terminating operators also had concerns about the costing where BT hands over calls at the second DMSU. In respect of these calls, terminating operators would face lower costs than those operators interconnecting with BT at the first DMSU. BT, rather than the terminating operator, would be providing conveyance between the first and second DMSU. Where BT conveys calls to a regionally based operator and hands over calls at the second DMSU, BT is performing a transit conveyance function as well as an originating operator's function.
4.20 Oftel recognises the validity of this point and proposes that a "transit" segment should be identified separately and a price floor estimated for BT when performing this function. This transit function could be provided by other operators hence the need to set a price floor for BT's charges. Ideally, BT's prices to schools would be deaveraged, depending on whether or not the transit segment was used. This would depend on the point at which the terminating operator connected with BT's network (ie at the first or second DMSU) and the location of the school. Oftel will need to take account of the practical issues associated with the implementation of this approach. It would consider whether the benefits of ensuring that costs are more accurately reflected in prices outweighs any practical difficulties.
4.21 The transit segment is defined as BT's conveyance costs from the first DMSU to the second DMSU and the costs of the second DMSU (see Figure 4.1). In the Consultative Document this was included in BT's price floors for call termination. It has now been removed and a separate price floor has been identified.
4.22 The segments identified above relate to BT's position in supplying end to end service or as an originating operator handing over to another terminating operator. Where BT is the terminating operator receiving calls from another originating operator, BT's call terminating segment will include an additional DMSU.
Terminating segment
4.23 Oftel's calculations of price floors for the terminating segment were based on the assumption that the Internet/on-line service provider is connected to BT's network at the concentrator. It was suggested by some respondents that the price floors for call termination should take into account different methods of connection between the Internet/on-line service provider and the network operator. Oftel's price floors do not cover the costs of private circuits used by the Internet/on-line service provider connecting to BT's network. Oftel considers that it would be inappropriate to set price floors for these private circuits on the basis of service incremental cost since these will carry both schools' and non-schools' traffic.
Price floors for limited use
4.24 A number of respondents suggested that the methodology for estimating price floors for limited use required further development. Oftel has reviewed its approach and established a revised methodology for calculating the price floors for limited use. This methodology is based on the principle that capacity installed for schools' access to Internet/on-line services can be used for other purposes when it is not required for schools' use. To establish the extent to which the costs of capacity can be shared with other users requires a considerable amount of empirical data which are not available. Oftel has therefore adopted a simple approach, based on identifying the number of hours in the day during which the capacity could be usefully redeployed (ie when there is no existing spare capacity for other users) and dividing the total capacity costs by this number of hours. The price floor for any given number of hours can be calculated from this hourly rate. The details of this calculation are in Annex C.
4.25 The relevant result of this approach, in relation to BT's August proposal, is that the price floor for use between 8am and 6pm (a 10 hour period) would be the costs of rental plus 70% of the cost of unlimited usage.
BT'S AUGUST PROPOSAL
4.26 BT's August proposal is based on schools accessing an Internet service provider for 10 hours per school day between 8am to 6pm. BT's proposed prices are in Table 4.2.
Table 4.2 BT's August
proposal
| PSTN | ISDN2 | |
| Connection | £100 | no charge |
| Origination segment for rental and usage for 10 hours per school day from 8am to 6pm | £300pa | £500pa |
| Termination segment for 10 hours' use per school day from 8am to 6pm | £145pa | £290pa |
4.27 The next section sets out Oftel's revised price floor estimates for BT which have been recalculated to include the additional elements of cost discussed above, to identify the transit element separately, and using the revised methodology for limited use discussed above. It also assesses BT's prices set out in its August proposal against these revised price floors.
REVISED PRICE FLOORS
Price floors for BT as the originating operator
4.28 Revised price floors for BT as the originating operator taking account of the network elements costed in Figure 4.3 are shown in Table 4.4. For the originating segment, BT's prices should allow for the recovery of connection costs unless there is a separate connection charge. It would be acceptable for these costs to be amortised and recovered over a period. If ISDN2 connection costs of £168 were amortised over 5 years at a discount rate of 12.5%, the effective price floor for origination would be increased by £46 per annum. If PSTN costs were amortised over 5 years at a discount rate of 12.5% the price floor for origination would be increased by £23 per annum. It can be seen from Table 4.4 that BT's proposed prices contained in its August proposal for call origination are above the price floors.
Table
4.4 Price floors for BT as the originating operator
| PSTN | ISDN2 | |
| Connection:
one-off charge recovered over a period(1) |
£ 81
£ 23 per annum |
£168
£ 46 per annum |
| Unlimited use | £250 per annum | £446 per annum |
| 1 hour use per day | £110 per annum | £166 per annum |
| 2 hours use per day | £125 per annum | £197 per annum |
| 3 hours use per day | £141 per annum | £228 per annum |
| 4 hours use per day | £156 per annum | £259 per annum |
| 10 hours use per day from 8am-6pm | £203 per annum | £352 per annum |
Price floors for BT as the transit operator
4.29 Price floors for BT as the transit operator taking account of the network elements costed in Figure 4.5 are shown in Table 4.6. BT's prices in its August proposal are based on the floors in the Consultative Document and did not include a separately identifiable transit segment. The costs of transit were included in BT's prices for call termination.
Table
4.6 Price floors for BT as the transit operator
| PSTN (per annum) | ISDN2 (per annum) | |
| Unlimited use | £76 | £151 |
| 1 hour use per day | £ 8 | £ 15 |
| 2 hours use per day | £15 | £ 30 |
| 3 hours use per day | £23 | £ 45 |
| 4 hours use per day | £30 | £ 61 |
| 10 hours use per day from 8am to 6pm | £53 | £106 |
Price floors for BT as the terminating operator
4.30 Price floors for BT as the terminating operator taking account of the network elements costed in Figure 4.7 are shown in Table 4.8. BT's prices for call termination includes the transit segment discussed above. It can be seen from Tables 4.6 and 4.8 that BT's proposed prices for call termination in its August proposal are above the floors for transit and call termination combined.
Table
4.8 Price floors for BT as the terminating operator
| PSTN (per annum) | ISDN2 (per annum) | |
| Unlimited use | £91 | £182 |
| 1 hour use per day | £ 9 | £18 |
| 2 hours use per day | £18 | £36 |
| 3 hours use per day | £27 | £55 |
| 4 hours use per day | £36 | £73 |
| 10 hours use per day from 8am to 6pm | £64 | £127 |
Summary of BT's price floors
4.31 Table 4.9 shows the combined price floors when BT is performing call origination, transit and call termination, ie offering a BT end to end service to schools for access to an Internet/on-line service provider. For the purposes of this calculation it is assumed that 100% of this traffic involves the transit segment. However, it would be acceptable for BT to price below these floors if it could demonstrate to Oftel that a lower percentage of traffic from schools to Internet/on-line service providers involved use of the transit segment.
Table 4.9
Price floors where BT is the originating, transit and terminating operator
| PSTN (per annum) | ISDN2 (per annum) | |
| Unlimited use | £417 | £779 |
| 1 hour use per day | £127 | £199 |
| 2 hours use per day | £158 | £263 |
| 3 hours use per day | £191 | £328 |
| 4 hours use per day | £222 | £393 |
| 10 hours use per day 8am to 6pm | £100 connection
£320 p.a. |
£631 p.a.(1) |
CONCLUSION
4.32 BT's prices in its August proposal are above the floors Oftel has estimated and so Oftel would not consider BT pricing at that level as unduly discriminatory or otherwise anti-competitive for the purpose of its Licence.
CURRENT SITUATION
5.2 All schools will be able to take advantage of BT's proposal to access the Internet and on-line services using the PSTN. In addition schools in cabled areas can take advantage of the cable industry's offer which provides PSTN and ISDN or equivalent access to the Internet.
5.3 BT estimate that it is currently able to provide around 95% of secondary schools and around 90% of all primary schools with ISDN2. A rolling programme of exchange modernisation is currently in hand to give all BT's exchanges - with the exception of UXD5 exchanges - full ISDN2 capability.
5.4 For technical reasons ISDN2 cannot be provided to some schools located a long way from exchanges. BT is investigating ways of extending ISDN2 or equivalent capability to these schools.
5.5 That leaves around 340 (1% of schools) connected to UXD5 exchanges which do not support ISDN2. Of these schools, BT estimate that around 325 are primary schools and around 15 are secondary schools.
UNIVERSAL AVAILABILITY
5.6 The Government is concerned to ensure that there are no schools unable to gain the sort of high speed digital access that ISDN2 allows. Increasingly competition will ensure that schools have a choice of forms of access. However, BT has stated that, subject to there being no unreasonable bar on its use of alternative technologies, it will ensure that by the end of the year 2000 there will be no school in the UK unable, if it wishes, to reach the Internet using high speed digital access provided by BT. This will be in addition to the range of high speed digital services offered by other telecoms companies to schools.
AT&T
BT
Cable and Wireless Communications
Energis
General Cable
Kingston Communications
TeleWest Communications
NTL
Norweb Communications
Scottish Telecom
Torch
Worldcom
Internet service providers
AOL Bertelsmann On-Line
Dialnet
Edex Internet Ltd
ISPA
Research Machines plc
U-NET Ltd
UUNET
Other industry
AGW Consultancy
BBC Education
British Educational Suppliers' Association
Education Network
Elysium Ltd
Geoconference Limited
IBM
Netscape
NetChannel and Mediation Technology (with support from Xemplar Education and Acorn Group)
Reuters
Telecom Sciences Corporation Ltd (TSC)
Local education authorities
Aberdeen City Council
Royal County of Berkshire
Birmingham City Council
Blaenau Gwent County Borough Council
Cardiff City Council
Cheshire County Council
Cornwall County Council
London Borough of Croydon
Cumbria County Council on behalf of the Society of Education Officers
Derby City
Devon County Council
Dumfries and Galloway Council
Essex County Council
London Borough of Hackney
Kirkless Metropolitan Council
Kent County Council
Manchester City Council
Norfolk County Council
North Eastern Education and Library Board
Nottinghamshire County Council
London Borough of Redbridge
Redcar and Cleveland Borough Council
Rotherham Metropolitan Borough Council
Shetland Island Council
Solihull Metropolitan Borough Council
South Gloucestershire Council
Staffordshire County Council
Surrey County Council
Telford and Wreken Council
Wandsworth Borough Council
Warwickshire County Council
Wiltshire County Council
Wrexham County Borough
Educational Bodies
Association for Information Technology in Teacher Education
Catholic Education Service
European Primary Schools Association
The Free Church Federal Council - Education Committee
Funding Agency for Schools
Girls' School Association
The Headmasters' and Headmistresses Conference
Lancashire Area West Training and Enterprise Council
National Association of Advisers for Computers in Education (NAACE)
National Council for Educational Technology (NCET)
National Management Information Systems Project Team
National Union of Teachers
Northumberland TEC (NTEC)
Professional Association of Teachers (PAT)
TN Carr HMI (Scottish Office)
S M Roberston HMI Leader of Superhighways Task Force - Scottish Office Education and Industry Department
Technology Colleges Trust
School Curriculum and Assessment Authority (SCAA)
Wales Information Society Project - Education and Training Work Group
Schools
Felsted School
Litherland High School
Long Eaton Community School
Monk Seaton Community High School
Ysgol Gyfun Ystalyfera
Universities
University of Exeter (School of Education)
Kings College London (School of Education)
Advisory Committees on Telecommunications
Northern Ireland Advisory Committee on Telecommunications
Scottish Advisory Committee on Telecommunications
Welsh Advisory Committee on Telecommunications
Telecommunications Advisory Committees
Clacton and District, Colchester and District and Harwich and Manningtree
East Suffolk
Gloucester and District (no comments)
High Wycombe
Ipswich and District
Norwich and District
Nottinghamshire area
North Lancashire and South Cumbria
Purbeck and East Dorset
Scarborough and District
Shropshire
Other respondents
Consumers' Association
Dr Gerald Macdonald
National Museums of Scotland
Office of Science and Technology - Access and Creativity Task Group of the Creative Media Subgroup of the ITEC Foresight Panel
Elwyn Rees
Rural Development Commission
Scottish Museums Council
Telecommunications Managers Association (TMA)
B.2 This study has estimated the average cost to BT of providing:
B.4 The ISDN2/PSTN service provided by BT to schools is assumed to consist
of:
B.8 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.
B.9 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.
B.10 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.
THE NETWORK ELEMENTS INCLUDED (AND EXCLUDED)
ISDN2 service to schools within reach of a digital local concentrator
B.11 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.
B.12 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 |
ISDN2 service to schools within reach of a UXD5 local switch
B.13 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.
B.14 In this case, the network elements that are included and excluded from the long run service incremental cost are shown in Table 2.
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
Civil Works |
| Host concentrator | Multiplexer facing port
Processor Local facing port Common components |
|
| 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 |
PSTN service to schools
B.15 The network elements used to deliver a PSTN service to schools are assumed to be as in Figure 3.
B.16 In this case, the network elements that are included and excluded from the long run service incremental cost are shown in Table 3.
TABLE 3
| Network Element | Included | Excluded |
| Customer connection | NTE
Final drop |
|
| Local loop | Cable
Civil Works |
|
| Host or remote concentrator | PSTN 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 |
B.17 The network elements used by BT to transport PSTN/ISDN calls from an originating tandem switch (DMSU/DJSU) to a terminating tandem switch (DMSU/DJSU) are assumed to be as in Figure 4.
B.18 In this case, the network elements that are included and excluded from the long run service incremental cost of call transit are shown in Table 4.
TABLE 4
| Network elements | Included | Excluded |
| Tandem-tandem transmission | Electronics | Fibre
Civil works |
| Tandem switch | Tandem facing port
Processor Local facing port Common components |
Call termination by BT
B.19 The network elements used by BT to transport PSTN/ISDN2 calls from a terminating tandem switch (DMSU/DISU) to a service provider point of presence on BT's network are assumed to be as in Figure 5.
B.20 The network elements that are included and excluded from the long run service incremental cost of call termination are shown in Table 5.
TABLE 5
| Network Element | Included | Excluded |
| 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 |
B.21 Note that this service does not include access from the service provider's premises to the BT local concentrator - all costs of service provider access, including all line driven and common costs of the local concentrator, are excluded.
THE CLASSES OF COST INCLUDED (AND EXCLUDED)
B.22 The following classes of cost have been included within the estimates
of the long run service incremental cost:
- motor transport
- computing
- power
- MAI
- D&P
- miscellaneous
B.24 Cost data have been gathered from a number of sources as follows:
- 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.
- BT Financial Statements for the Businesses and Activities 1997.
C.1 Oftel has reviewed its approach to the calculation of price floors for limited use. The revised price floors are set out in Chapter 4. This Annex explains Oftel's methodology.
C.2 Oftel's revised approach is as follows:
(a) Firstly, the hours in an average working day during which capacity is fully or nearly fully utilised (henceforth referred to as "nearly full" hours) are identified.
(b) The usage sensitive costs (ie excluding rental costs in the call origination segment) associated with unlimited use are identified (henceforth referred to as the "usage price floor for unlimited use"). Table 1 identifies the usage sensitive elements of BT's price floors for unlimited use.
(c) A usage price floor is associated with each hour of the day as follows:
- For "nearly full" hours during a working day the usage price floor is set equal to the usage price floor for unlimited use divided by the number of "nearly full" hours in the average day.
- For all other hours the usage price floor is zero.
(d) The usage price floor relevant to a tariff package that limits use to certain hours of the day is calculated as the sum of the usage price floors associated with each hour during which use is permitted.
Table 1 Identification of usage sensitive elements of BT's price
floors for unlimited use.
| Segment | Rental | Usage | Total |
| PSTN | |||
| Origination | £94 | £156 | £250 |
| Transit | 0 | £ 76 | £ 76 |
| Termination | 0 | £ 91 | £ 91 |
| ISDN2 | |||
| Origination | £134 | £312 | £446 |
| Transit | 0 | £151 | £151 |
| Termination | 0 | £182 | £182 |
Use of the service during any "nearly full" hour is likely to require an increase of network capacity (and hence an increase in costs).
Use of the service during any other hour is unlikely to require an increase in network capacity (and hence no increase in costs).
Increased network capacity installed to meet demand in one "nearly full" hour will be available to meet additional demand in all other "nearly full" hours (at no additional cost).
In the worst case, use of the service for a limited number of hours would occur entirely in "nearly full" hours. Therefore, in order to ensure that the prices cover the relevant costs it is necessary to assume for the purposes of estimating price floors for unlimited usage that every hour is a "nearly full" hour.
C.4 Identification of the level of hourly utilisation of the network above which capacity is deemed to be "nearly full" is to some extent a matter of judgement. Oftel's view is that this level of utilisation should not be set so high as to unduly limit the number of "nearly full" hours (at the extreme to a single "nearly full" hour - the busy hour). Prices set on such a basis would need to vary significantly depending upon the exact number of "nearly full" hours that were included or excluded from the period during which use were permitted. Such significant price variations would be likely to lead to significant demand for use during hours of the day identified as being not "nearly full" - additional demand that would increase utilisation of network capacity during those hours, and could make those hours "nearly full" (an example of the "shifting peak" problem).
C.5 Analysis of BT's week day average traffic profile indicates that ten hours might reasonably be identified as being "nearly full", being from 9am to 4pm and 6pm to 9pm. Seven of these ten "nearly full" hours occur in the period 8am to 6pm; the usage price floor for a service that limited use to this period would therefore be 70% of the usage price floor for unlimited use. This is the relevant price floor for BT's August proposal discussed in this Statement which allows schools 10 hours' use from 8am to 6pm per school day.
C.6 The usage price floor relevant to a tariff package that limits the number of hours of use that may be made of the service per day, but not the time of day during which that use may be made, will be calculated as if every hour of use is a "nearly full" hour, up to a maximum of the usage price floor for unlimited use. For example, the usage price floor for a service that limited schools to one hour's use per week day (but did not limit the hours of the day during which that use could be made) would be 10% of the usage price floor for unlimited use. The usage price floor for other levels of limited use would be calculated pro-rata, up to a maximum of the usage price floor for unlimited use. For example, the usage price floor for five hours' usage per day would be 50% (5x10%) of the floor for unlimited use.
C.7 The usage price floor relevant to a tariff package that limits both the number of hours of use that may be made of the service each day, and the hours of the day during which that use may be made, will be calculated as if each hour of use is a "nearly full" hour, up to a maximum of the usage price floor for unlimited use within the restricted hours of the day (as described above). For example, the floor for 8 hours' limited use between 8am and 6pm would be equal to 70% of the total unlimited use floor.
Bandwidth - the capacity of a telecoms system to convey information in a given unit of time.
Bottom-up approach (to modelling of costs) - the calculation of costs by identifying and summarising the costs of the items of equipment, manpower and other resources required. Contrasts with top-down approach, which involves removing from a known total the costs which are not relevant to the activity in question.
Call origination - see originating operator.
Call termination - see terminating operator.
Call transit - see transit segment.
Capacity based charging - charging on the basis of the costs of the capacity in the network and switches needed to provide a service.
Concentrator - The part the local exchange which is positioned close to the customers. It is sometimes part of the local exchange, and sometimes located remote from the local exchange.
Dial-up connectivity - Connections made to a data network using the switched network to provide a voiceband or data bearer.
Digital - The representation of information in a binary fashion using two data items, '1' and '0'.
Director General - the Director General of Telecommunications.
DDSN - Digital Derived Services Network. The network used by BT to provide some of its Number Translation services.
DJSU - Digital Junction Switching Unit. Similar to DMSU (see below) but used mainly for connecting calls around major conurbations.
DMSU - Digital Main Switching Unit. A trunk exchange primarily used for connecting long distance calls.
DLE - Digital Local Exchange. The telephone exchange to which customers are directly connected.
Dominant - a firm that is able to act, particularly in setting prices, independently of competitors and customers.
Ducts - the tubes through which cables are laid.
Extranet - A network connecting a group of entities using Internet
protocols, but being separate from the Internet.
First generation number translation service - A number translation service provided from the DDSN.
Geographically averaged prices - prices established by averaging the costs of network elements across the country so that customers in different areas of the country do not pay different rates. However the price paid by schools could vary depending on the elements of the telecommunications network used e.g. schools could pay more for long-distance rather than local calls.
Host/remote concentrator - a concentrator can be remote from the host DLE or co located with it.
ICAS Task Group 19 - Interconnection and Accounting Separation (ICAS) Group set up to develop a methodology for estimating long run incremental costs for telecoms networks.
ICT - information and communications technology.
Interconnection - the connection of separate telecommunications networks.
Internet service provider - a service provider who provides access to Internet services.
Intertandem transmission - transmission between DMSUs.
ISDN - Integrated Services Digital Network. A network based on the existing digital PSTN which provides digital links to customers and end to end digital connectivity between them. ISDN2 provides a maximum bandwidth of 128kbit/s.
LEA - local education authority
Leased lines - a fixed unswitched communication link between two points.
Local loop - The access network connection to a customer, usually a loop comprised by two copper wires.
Long-run service incremental cost - the additional capital and operating costs of providing service on the base of the existing networks and services that are currently provided. Costs calculated on this basis do not include share of the costs of the network elements that already exist and would not need to be expanded in order to provide this service.
Long-run network incremental cost - the capital and operating costs that arise as a result of the provision of a specified increment of capacity. Network incremental costs have been calculated on the "scorched node" assumption i.e. the starting point for the calculation of a network incremental costs is that no network exists.
Numbering Conventions - the rules by which numbers are allocated.
Number translation - a service where a dialled number is translated to another for final delivery e.g. 0800 numbers.
Originating operator - operator on whose network the call originates, ie the operator with the line to the school.
Originating segment - the network segment from the school to the first DMSU.
Price floor - the level which BT must price at or above if its prices are not to be regarded as anti-competitive.
Pricing signals - the information about demand, costs and quality etc contained in relative prices or changes in relative prices.
PSTN - Public Switched Telephone Network. In this document PSTN refers to an ordinary telephone line connection to the Internet/on-line service.
Specified Numbering Scheme - a scheme for the allocation and reallocation of numbers which is specified by the Director General and made available by him for public inspection.
Sunk - costs which are not recoverable if the activity for which they were incurred ceases.
Terminating operator - the operator on whose network the call terminates ie the operator with the connection to the Internet/on-line service provider.
Terminating segment - the network segment from the second DMSU to the concentrator where it is assumed the Internet/on-line service providers interconnects, excluding conveyance between the first DMSU and the second DMSU and the costs of the second DMSU which forms the transit segment.
Transit segment - the network segment from the first DMSU to the second DMSU, including the conveyance costs and the costs of the second DMSU.
UXD5 exchange - a small digital rural exchange used in parts
of Wales and Scotland, which has limited facilities.
