Under Condition 9 of the Licence granted to British Telecommunications plc under section 7 of the Telecommunications Act 1984, and under Regulation 6(6) of the Telecommunications (Interconnection) Regulations 1997, the Director makes the following Direction:

Basic services

1. BT shall, within 28 days of the publication of this Direction, offer to enter into an agreement with the Operators (or either of them) (the "ATM Reference Offer") for the provision of ADSL based interconnection services as specified in Schedule 2 (the "Basic Services").

4. The ATM Reference Offer shall:

4.1 include the Service Level Agreement for the Basic Services;

Additional Functionality

16. For the purposes of this Direction:

16.1 the Schedules form part of this Direction;

1. The charges for each of

1.1 an ADSL Enabled EUDP;

1.2 ATM Backhaul; and

1.3 ATM Conveyance

individually and, when so requested by an Operator, taken together, shall be such that no Margin Squeeze arises over an appropriate period of time.

The ADSL based interconnection service shall be composed of:

• an ADSL Enabled EUDP and ATM Backhaul (Service A); and/or
• an ADSL Enabled EUDP, ATM Backhaul and ATM Conveyance (Service B),

as required by the Operator.

ADSL Enabled EUDPs shall be available with the data rates identified in Table 1. The data rates listed in Table 1 are the ATM cell rate, including headers.

ATM Backhaul shall be available with a capacity of 4 Mbit/s and a VBR-nrt class of service.

ATM Conveyance shall be available with a capacity of 4 Mbit/s and a VBR-nrt class of service.

The maximum number of EUDPs that are permitted to share a single VP shall be 32 or 150. The limit applicable in each case shall be selected by an Operator at the time of ordering.

The capacity of the VP shall be changeable upon request without the need for an agreement to provide that VP to be terminated. The minimum capacity available shall be 1 Mbit/s and the unit of change shall be 1 Mbit/s or multiples thereof.

In addition to the VBR-nrt class of service, VBR-rt and CBR shall also be available upon request.

In addition to, or as a replacement of, the existing VP sharing limits (32 and 150) a more flexible VP sharing limits shall be made available. This sharing limit may be a function of the VP capacity and may include provisions for pre-commitments.

Unless otherwise agreed by the Director, the SDSL Service shall include but shall not be limited to:

• A connection between the end user and the DSLAM, to be based on SDSL technology and to be made available at a range of speeds;

• VPs similar to VPs that BT provides for its ADSL based interconnection service. In addition there shall be an option to select by an Operator the VP capacity to be the same as the SDSL EUDP data rate; and

• The ability to establish multiple Virtual Channels (VCs) over a single EUDP. The capacity and class of service for each VC shall be defined by an Operator.

• Ordering and delivery time scales
• Time scales for the testing and hand over of facilities

• Service availability (including performance targets for service downtime)
• Fault handling and repair
• Support service levels, including, where appropriate, back-up availability

Explanatory memorandum

S.1 In this Direction, the Director General ('the Director') sets out his decision to resolve an interconnection dispute referred to him. The dispute relates to interconnection with BT's ATM (Asynchronous Transfer Mode) network which BT uses to deliver, among other things, broadband DSL services such as IPStream. This is the network to which BT's local exchanges, which have been DSL enabled as a result of BT's rollout of DSL, are connected. The dispute was referred to the Director by two operators, Energis and Thus ('the Operators') and concerns the availability of ATM interconnection services and the charges for such services.

S.2 The Operators have requested two new interconnection services. Currently, there are no appropriate interconnection services which operators can purchase from BT which allow them to interconnect with BT's ATM network and so allow them to offer wholesale DSL services for service providers or allow them to offer retail DSL services for end users. The Operators have requested interconnection with BT's ATM switches at two points within BT's ATM network. There are approximately 120 BT ATM switches. The first point of interconnection is at the parent ATM switch. This is the first ATM switch to end users are connected. The second point of interconnection is at a distant ATM switch. This is any other ATM switch in the network. This second interconnection service requires BT to convey the DSL traffic across its ATM network.

S.3 The Director has considered whether BT should be required to provide such new interconnection services and if so at what charge. In line with his obligations under the Interconnection Directive, the Director has conducted a market analysis relating to the two interconnection services. In general terms he has concluded as follows:

• the provision of broadband asymmetric origination (conveyance of ADSL traffic to the first ATM switch) is not effectively competitive;
• the provision of broadband symmetric origination (conveyance of SDSL traffic to the first ATM switch) is not effectively competitive;
• the provision of broadband non trunk conveyance (conveyance between ATM switches which are not collocated with SDH Tier 1 nodes &/or DMSUs) is not effectively competitive; and
• the provision of broadband trunk conveyance (conveyance between ATM switches which are collocated with SDH Tier 1 nodes &/or DMSUs) is prospectively competitive.

S.4 In the light of his market analysis, the Director has concluded that BT should be required to provide both the ADSL interconnection services requested. This includes both a basic form of the services and the services with certain Additional Functionality. He also takes the view that BT should run a trial for a SDSL version of the interconnection services based on the requirements of the Operators. If the Director determines that the trial is successful, he will make a further Direction requiring BT to provide a SDSL service. Reflecting the different degrees of complexity in terms of technical service specification and development, the Director directs that BT shall offer the basic ADSL interconnection services within one month and the Additional Functionality within two months of the publication of the Direction. The SDSL trial will begin within three months of a request by an Operator.

S.5 The Director has also considered what is the appropriate charging methodology relating to the ADSL interconnection services.

S.6 He has decided that BT should set its interconnection charges on a non-discriminatory (retail minus) basis. This is because the Director believes that, while the key relevant markets are not effectively competitive, there is at present a great deal of uncertainty as to future market developments. There are a number of other access technologies either operational now or planned, such as LLU operators, line sharing operators, cable, 3G, satellite and fixed wireless access, which may develop and become further alternatives to BT's DSL services. In these circumstances the Director has concluded that cost based price regulation would not be appropriate as it would be very likely to deter the potential development of effective competition. Instead the Director directs a regime of non-discriminatory (retail minus) price regulation which should prevent anti-competitive behaviour while not deterring either further investment in DSL or other access technologies.

S.7 If the Director was to mandate an SDSL service, following a successful trial, his current view is that he would require there to be a close relationship with the charges for corresponding private partial circuits.

S.8 The Director also requires BT to offer service level agreements for the ADSL services including compensation payments in the event that BT fails to meet the service levels specified.

S.9 The Director believes that his Direction represents a fair resolution of the dispute which was referred to him.

1.1 In this Direction the Director General of Telecommunications ('the Director') sets out his decision to resolve an interconnection dispute relating to interconnection with BT's ATM network.

1.2 This dispute arose out of an earlier dispute and direction made by the Director. On 6 March 2001, the Director issued a direction ('the First Direction') under Condition 9 of the BT licence and Regulations 6(3) and 6(4) of the Interconnection Regulations 1997 (SI 1997/2931) ('the Regulations') in connection with a dispute between Energis and Thus (together 'the Operators') and BT. The First Direction required BT to enter into negotiations with the Operators to secure adequate interconnection with BT's xDSL products at the ATM level of BT's network. It required BT to conclude negotiations with the Operators for ATM level interconnection within six weeks of the date on which it was issued.

1.3 The parties agreed an extension to the six-week deadline set by the Director, but on 3 May 2001, Energis wrote to the Director to report that the parties had been unable to negotiate an agreement for all the elements of the required product. Energis asked the Director to determine the outstanding items of dispute. Thus submitted a similar request on 11 May 2001. On 18 May 2001, BT wrote to the Director to confirm that the parties were unable to agree on certain elements of the product requested by the Operators.

1.4 On 1 June 2001, the Director wrote to the parties to request clarification of the outstanding items of dispute. Upon receiving their responses by 15 June 2001, the Director considered that the dispute had been referred to him, and, pursuant to his duty under Regulation 6(6) of the Regulations, has now taken steps to determine the dispute.

1.5 The parties reached agreement on the technical characteristics and pricing of the ATM In-Span Handover product. However, the parties were unable to negotiate all the elements of the service requested, and the Operators subsequently referred the following outstanding items of dispute to the Director for determination:

a) the pricing methodology of the end user data paths and virtual paths;

b) a number of technical characteristics of the end user data paths and the virtual paths (VPs);

c) the provision of service level agreements and service level guarantees; and

d) particular terms and conditions.

1.6 To understand the nature of the Operators' request, it is necessary to understand the architecture of the network that BT uses to deliver its xDSL products. Figure 1 below explains the network structure in the form of a diagram. The DSLAMs currently employed by BT use the ATM protocol. BT therefore uses an ATM network to consolidate and route the traffic from individual DSLAMs. This ATM network consists of a number of interconnected ATM switches and the DSLAMs are connected to these switches using a backhaul link. Because there are more DSLAMs than ATM switches each switch will become the focal point for several DSLAMs. With this architecture BT can route individual end user traffic through the ATM network for subsequent delivery to a service provider (SP) or onward conveyance, eg its IP network.

1.7 Currently, all of the wholesale xDSL products supplied by BT are only available as an 'end-to-end' solution. That is, BT provides the xDSL access connection, the core network conveyance and the connection between BT's network and the SP or OLO. This means that there is limited scope for OLOs to use their own networks and therefore compete with BT. To overcome this situation the Operators sought to interconnect with BT's network so that they could substitute with their own network where possible, for the conveyance of their end user customers' traffic.

Description of the Operators' request

1.8 The Operators have requested interconnection at the ATM switches in BT's ATM network. A schematic of the interconnection arrangement requested by the Operators is shown in Figure 2.

1.9 During their negotiations with BT and as part of their referral of the dispute to the Director, the Operators have maintained the position that they have requested interconnection with BT's network in order to achieve xDSL access rather than interconnection with BT's existing wholesale DSL products. The Director understands that BT nevertheless took the view during the negotiations that the Operators were requesting interconnection with its DSL wholesale products DataStream Home and DataStream Office ('the DataStream Product'). An understanding of the DataStream Product is relevant to this Direction, and a detailed description is therefore attached at Annex A. The Annex describes the structure of the end user data paths and virtual paths available with the DataStream Product. A summary is provided at Table 1 below for convenience.

1.10 The Director is of the view, having considered the various aspects of the requests made by the Operators, that whilst the interconnection services requested share many characteristics with the DataStream Product, the services requested by the Operators are not equivalent to any of BT's existing wholesale DSL products (IPStream, DataStream and VideoStream) and therefore constitute a request for new interconnection services to be provided by BT.

1.11 The Director is also of the view that the Operators have requested two points of interconnection with BT's ATM network (both involving interconnection at an ATM switch) as follows:

a) Interconnection with xDSL functionality at the parent switch; and

b) Interconnection with xDSL functionality at another ATM switch, after core ATM network conveyance.

1.12 The first of these services would allow the Operators to interconnect and collect traffic at the first ATM switch. Traffic from the various end user data paths is multiplexed (concentrated) by the DSLAM, and then conveyed to the ATM network in a single, high capacity channel (this is called 'backhaul'). The individual end user data paths contained in this high capacity channel can only be separated again at an ATM switch. This enables the signals originating at the end user data path to be switched for onwards transmission. Therefore, with BT's current network architecture the first point after the DSLAM at which the individual end user data paths can be separated out is at the first ATM switch (for the purposes of this explanatory memorandum, this is defined as the 'Parent Switch').

1.13 Under this first service, none of the Operators' traffic would traverse BT's ATM network. It therefore follows that if one of the Operators wanted to access all of BT's xDSL enabled area by using this service, it would need to interconnect with every ATM switch that has a DSLAM connected to it (this is likely to be every switch in the network). Alternatively, the Operator could decide to offer services in selected geographical regions and only interconnect with the relevant Parent Switches.

1.14 The second service requested would allow the Operators to interconnect with any ATM switch, and collect traffic from both the DSLAMs that are parented by that switch and also traffic that has been conveyed across BT's core ATM network from other ATM switches. Accordingly, this interconnection service includes the same elements as described above but with an additional element of core ATM network conveyance to another ATM switch ('the Distant Switch').

1.15 Figure 3 below illustrates the two services and where the point of connection between BT and the Operators would be positioned.

1.16 The Director is of the view that the two interconnection services requested by the Operators can be broken down into the following three elements:

Element (a): the End User Data Path from the end user, over the local loop and the DSLAM (EUDP);

Element (c): conveyance over BT's ATM network from the Parent Switch to the Distant Switch (ATM Conveyance).

1.17 The Operators have asked the Director to determine a price for each of elements (a), (b) and (c).

1.18 The Operators have requested that both interconnection services have certain characteristics. These characteristics include all those offered by BT's Datastream Product. But they also include the following additional functionalities: a SDSL EUDP at speeds up to and including 2 Mbits; an ability to scale upwards and downwards the capacity of the virtual path providing the ATM Backhaul and ATM Conveyance; the removal of a limit on the maximum number of EUDPs per virtual path; and additional ATM class of service categories, namely constant bit rate (CBR) and variable bit rate real time (VBR-rt). For the purposes of this Explanatory Memorandum the term 'Requested Interconnection Services' refers to the two interconnection services described above, with the services characteristics of Datastream plus the additional features set out above.

1.19 The interconnection services would employ an ATM In-Span Handover product at either the Parent Switch or at the Distant Switch. The Director understands that the handover product is identical regardless of which ATM switch it is employed at. Neither the technical characteristics nor the pricing of the ATM In Span Handover product has been referred to the Director for determination. It appears to the Director that the product agreed by BT and the Operators is likely to have the same or substantially the same technical characteristics as the product outlined in BT's STIN 388 (ATM In-Span Handover of DSL Delivered Service, published in July 2001).

1.20 The Director is of the view that the same In-Span Handover product could be used to hand over traffic conveyed by both of the Requested Interconnection Services. For example, if it is assumed that Energis installed the In-Span Handover product at an ATM switch in Swindon, Energis would be able to use it to collect traffic backhauled from the DSLAMs parented by that switch and be able to use it to collect traffic that has traversed the core ATM network from an ATM switch in Bristol. There would be no need for Energis to purchase two In-Span Handover products .

1.21 The Director's powers to require an operator to provide an alternative or enhanced interconnection service are governed by the terms of the Regulations and the Interconnection Directive 97/33/EC ('the Directive'). 'Interconnection' is defined in the Directive as:

1.22 The Director's view is that, whilst it follows from this definition that he cannot require BT to build a new network solely for the purpose of interconnection with third party operators, where a network is in existence, he is not limited to requiring interconnection merely for the conveyance of traffic in a manner comparable to that which BT uses the network for its own purposes. Such a limitation would tend to stifle innovation in service offerings from competing operators.

1.23 The Directive permits the Director to require such measures as he considers necessary in order to meet the objectives set out in it. The preamble to the Directive includes among its objectives the provision of fair, proportionate and non-discriminatory conditions for interconnection and interoperability in order to foster the development of open and competitive markets.

1.24 Further, under Article 9 of the Directive, the Director has a duty to:

1.25 In meeting this duty, the Director must have regard to the need to ensure satisfactory end-to-end communication for users, to stimulate a competitive market and principles of non-discrimination and proportionality. Article 9(5) further provides that, in the event of a dispute concerning interconnection, the Director is obliged to reach a decision that represents a fair balance between the legitimate interests of both parties. In meeting this obligation, the Director must take a number of factors into account, including inter alia:

• the interests of end users;
• the nature of the request in relation to the resources available to meet it;
• the desirability of stimulating innovative market offerings;
• the relative market positions of the parties; and
• the promotion of competition.

1.26 These obligations are implemented in the UK by inter alia Regulations 2 and 6 of the Regulations.

1.27 The Director published a draft Direction on 21 December 2001 for consultation. The Director has considered the responses made to the draft Direction. Annex F sets out a summary of these responses and his comments.

2.1 In order for the Director to determine whether it is reasonable for BT to provide the Requested Interconnection Services, the Director believes that it is appropriate to undertake a market analysis of the services. The purpose of this analysis is to determine to what extent BT has market power in the provision of the services since it is unlikely to be appropriate to require the provision of an interconnection service unless BT has market power. The assessment of market power and its persistence is also relevant to the issue of how to price the interconnection services as explained in Chapter 4. This Chapter sets out a brief summary of the market analysis. The full analysis is set out in Annex E.

2.2 For the purpose of this analysis it is helpful to distinguish between three vertical levels of services and markets:

• retail;
• wholesale; and
• input and interconnection.

2.3 Retail services are supplied to end users. For example, the provision of broadband Internet access is a retail service. 'Wholesale' services refers to end-to-end network services between the service provider and the end user. BT's IPStream services are examples of wholesale services. Input or Interconnection services are provided by one operator to another and relate to defined elements of an end-to-end service. The Requested Interconnection Services are such services. The interconnection or input purchaser will typically provide for itself the remaining network elements and compete in wholesale and perhaps also retail markets. A greater degree of competition in wholesale markets contributes to the development of services and the maximisation of benefit to end users in the retail markets.

2.4 In order to assess whether BT has market power in the provision of the Requested Interconnection Services, the Director has defined what he believes to be the appropriate relevant markets. He has defined markets at both the retail level and the input or interconnection level.

2.5 While as explained above this Direction relates to the Operators' request for interconnection services, the Director believes that it is appropriate to consider the relevant retail markets for the services which could be provided using the Requested Interconnection Services. This is because the demand for these interconnection services is a derived demand. That is to say the level of the demand for the Requested Interconnection Services depends on the demand for the outputs produced using those services which are the relevant retail services. This is an important consideration because when assessing the market power in the upstream input or interconnection markets it is necessary to decide whether demand-side substitution by consumers in the relevant retail market provides a constraint on the supplier of the upstream input or interconnection service.

2.6 For example, consider the situation where there are two retail services which are supplied using different inputs such that one retail service uses the DSL interconnection services which are the subject of this Direction and the other uses different inputs (for example non-telecommunications input or a regulated PSTN input). If the two retail services are sufficiently close demand-side substitutes to compete in the same retail market, each provides a competitive constraint on the pricing of the other, then this substitution in the retail market will be a relevant consideration in deciding whether the supplier of the DSL interconnection services has market power. It is unlikely that the supplier of such services will be able to raise and maintain prices above the competitive level since this will result in higher related retail prices and, faced with such prices, consumers will switch to the alternative retail service which do not use the DSL interconnection services. In such a situation the substitution in the relevant retail market constrains the pricing behaviour of the supplier of the DSL interconnection services and it is unlikely that such a supplier would be found to have market power.

2.7 The Director has concluded that in relation to this Direction the relevant retail markets are as follows:

• residential broadband asymmetric Internet access;
• business broadband asymmetric Internet access;
• residential broadband symmetric Internet access (although the demand for such services is not yet proven);
• business broadband symmetric Internet access; and
• low bandwidth leased lines (less than and including 2Mbit/s).

These are consistent with the markets defined in related proposals, eg on LLU backhaul (available at http://www.oftel.gov.uk/publications/broadband/llu/back1201.htm).

2.8 In this Direction for a service to be described as broadband it must have two characteristics: it must be 'always-on' as opposed to 'dial-up' and it must bedesigned to allow an end user to receive downstream capacity in excess of 128 kbit/s. However, the exact level of bandwidth may change depending on customer reaction to availability of products at or around this bandwidth. A full explanation of why these retail markets have been identified is set out in Annex E.

2.9 The Director has considered whether demand side substitution in these relevant retail markets would make it unlikely that a sole supplier of the Requested Interconnection Services would have market power. He has concluded that it would not.

2.10 The Director further considers that his conclusions in relation to this Direction would be unaffected whether or not there are separate markets on the demand side as between residential and business customers and between symmetric and asymmetric Internet access.

2.11 In relation to the two relevant markets for asymmetric broadband Internet access the Director has concluded that these markets exclude services which do not depend on broadband inputs. In particular, the Director has concluded that broadband Internet access and dial-up Internet access originating on the PSTN are in separate markets. Accordingly, if a monopoly supplier of the input service raised the charge for its services by a significant amount above the competitive level, this would be reflected in the relevant retail prices. The profitability of the charge increase would not be undermined by consumers switching to other retail services (such as narrowband Internet access). Therefore demand side substitution would not prevent the exercise of market power.

2.12 The Director has considered what are the relevant input and interconnection markets relating to the Requested Interconnection Services. As explained above, the two services can be broken down into three of elements: the EUDP, ATM Backhaul and ATM Conveyance. The EUDP can be broken down into two further sub-elements as it involves an access line which is DSL enabled. A further distinction also needs to be made between ADSL enabled access and SDSL enabled access. The Director has considered the relevant markets relating to all these different elements and has concluded that these are as follows:

• access;
• broadband asymmetric origination (which includes an ADSL EUDP and ATM backhaul);
• broadband symmetric origination (which includes a SDSL EUDP and ATM backhaul);
• low bandwidth (upto and including 2 Mbit/s) PPC terminating segments;
• broadband non trunk conveyance; and
• broadband trunk conveyance.

2.13 A full explanation for these conclusions is set out in Annex E.

2.14 The Director has considered first whether BT has market power in each of the input and interconnection markets set out above and secondly whether, if there is market power, this market power is likely to persist in the future. In the light of this consideration he has considered which of the following three categories of competition should be applied to the relevant markets. The categories are:

• effectively competitive (no market power now or in the future);
• prospectively competitive (market power now but it is likely to erode in the future, (usually within a two to three year time period));
• not effectively competitive (market power now which is likely to persist in the future).

2.16 In relation to the relevant markets the Director has reached the following conclusions:

• the provision of access is not effectively competitive;
• the provision of broadband asymmetric origination is not effectively competitive;
• the provision of broadband symmetric origination is not effectively competitive;
• the provision of low bandwidth PPC terminating segments is not effectively competitive;
• the provision of broadband non trunk conveyance is not effectively competitive; and
• the provision of broadband trunk conveyance is prospectively competitive.

2.17 A full discussion of the reasoning for these conclusions is set out in Annex E.

2.18 The Director has concluded that this market is not effectively competitive as BT has persistent market power in the provision of access via the local loop. This market includes not just the provision of access by means of a copper exchange line but also cable and satellite and fixed wireless technologies.

2.19 The Director believes that while the provision of access by means of satellite and fixed wireless may constitute a viable alternative to access over the local loop at some point in the future as such services are not yet significantly provided commercially and so do not and will not in the short to medium term provide a competitive constraint on BT's behaviour in the provision of access. The Director also believes that cable does not provide a sufficient competitive constraint to make the market either effectively competitive or prospectively competitive. BT's share of the exchange lines remains in excess of 80% and there exist high barriers to entry to the provision of access in the form of the significant sunk costs associated with the investment necessary to enter the market.

2.20 The Director has concluded that BT's market power in access has been extended into market power in asymmetric broadband origination largely in the light of the access providers' broadband enabling rollouts and potential for future rollouts. BT possesses 65% of the UK's gross potential broadband enabled addressable lines. It also possesses 40% of current asymmetric broadband subscribers with the likelihood that this share will rise substantially following BT's significant reductions in its ADSL wholesale charges on 1 April 2002. Indeed, BT has stated its desire to achieve a five-fold increase in its current broadband Internet customer base, to one million customers by Summer 2003. This market is also characterised by significant entry barriers in terms of the sunk investments required to enable access for asymmetric broadband services.

2.21 The Director concludes that BT has persistent market power in both of these interconnection markets and therefore they are not effectively competitive. He has reached this conclusion on the basis of BT's large market share and the high rates of return it achieves in lower bandwidth leased lines together with the significant barriers to entry that characterise these markets. The Director concludes that the only company that has the potential to introduce SDSL in a significant way in the next two to three years is BT.

2.22 The Director concludes that this input market is prospectively competitive due to it being likely to be economic within the next two or three years for OLOs to incur the necessary direct build costs to establish a point of presence at BT 'primary' ATM nodes, given the amount of ATM and other traffic that they can potentially access at such locations. Primary BT ATM nodes are those that are co-located with either a SDH tier 1 node or a DMSU or both.

2.23 The Director concludes that this interconnection market is not effectively competitive due to the high level of entry barriers relating to conveyance where the parent BT ATM switch is not a primary node. In particular, it is unlikely to be economic for OLOs to build out to their ATM equivalent networks to non-primary BT ATM nodes which are characterised by lower traffic volumes than primary nodes.

2.24 The Director concludes from his market analysis that BT has market power in the relevant input and interconnection markets identified. In the absence of interconnection services from BT at appropriate charges, he believes that there is likely to be a restriction or distortion of competition in the wholesale markets for broadband services and so in the related retail markets. This would operate against the interests of consumers of broadband retail services.

2.25 Accordingly, the Director believes that it is appropriate, having considered his duties relating to the determination of interconnection disputes, to require BT to provide the following Basic Services:

• ADSL Broadband Origination (Service A); and
• ADSL Broadband Origination and ATM Conveyance (Service B).

2.26 The question of the provision of SDSL is discussed in Chapter 3.

3.1 As explained in Chapter 2, the Director has directed that BT provide the following interconnection services:

• ADSL Broadband Origination (Service A); and
• ADSL Broadband Origination and ATM Conveyance (Service B)

3.2 In addition to the Basic Services, the Director has directed BT to provide certain technical enhancements to these services.

3.3 Finally, the Director has also directed BT to undertake a trial for a SDSL service.

3.4 Service A and Service B (the 'Basic Services') shall have the technical characteristics described in Annex B. Service A consists of an ADSL enabled EUDP and ATM backhaul and the Operators will access this service by interconnecting with BT's ATM network at the relevant Parent ATM Switch. Service B consists of an ADSL enabled EUDP, ATM backhaul (to the Parent ATM Switch) and ATM conveyance (to a Distant ATM Switch) and the Operators access this service by interconnecting with BT's ATM network at the Distant ATM Switch. Therefore, Service B is the same as Service A plus ATM Conveyance.

3.5 The Basic Services will only be available in areas that are served by a local exchange that BT has enabled with a DSLAM, as a result of BT's DSL rollout.

3.6 To enhance the basic interconnection services the Operators have requested certain additional features. The requested additional features were as follows:

• scalable virtual paths (VPs);
• removal of the limits for the maximum number of EUDPs that can share a single VP;
• availability of additional ATM class of service categories; and
• SDSL based service.

3.7 The Director considers that the request for the introduction of a SDSL based service raises distinct issues from those relating to the request for the introduction of the additional features. Consequently, the other three features; scalable VPs, removal of EUDP limits and additional ATM classes of service, are addressed in this section and the Director sets out his reasoning for requiring, or not requiring, BT to provide them. This functionality (scalable VPs, removal of EUDP limits and additional ATM classes of service) is described in Annex C (the 'Additional Functionality').

Scaleable virtual paths (VPs)

3.8 Within its DataStream product BT only provides VPs with a capacity of 4 Mbit/s and for this reason BT was only prepared to offer 4 Mbit/s VPs as part of any interconnection service. However, the Operators believe that in order to achieve an efficient rollout of services and to enable the development of differentiated products, they should be allowed to specify the VP capacity and have the ability to request changes to the capacity at a later date (scale).

3.9 Following the consultation on the draft Direction it is clear that the Operators want the ability to specify any VP capacity, in increments of 1 Mbit/s, starting at 1 Mbit/s.

3.10 During the negotiations between BT and the Operators BT suggested that a scalable VP, similar to that requested, may be made available as the DataStream product evolves.

3.11 The Director understands that in the early stages of rollout and on certain products the Operators may require VPs that are less than 4 Mbit/s. In these situations the imposition of being forced to purchase a 4 Mbit/s VP could lead to an inefficient use of the network which would result in increased costs. The Director also understands that in areas of high traffic density it may be more efficient to use a single 'high' capacity VP (say 12 Mbit/s) rather than a number of 'smaller' separate VPs (say 3 ´ 4 Mbit/s). Finally, the Director understands that BT does not restrict itself to using 4 Mbit/s VPs in the provisioning of its own DSL wholesale products other than DataStream.

3.12 Therefore, the absence of alternative VP capacities is likely to result in inefficient use of the network, increased costs and the prevention of operators from competing against BT on equal terms.

3.13 Having taken these factors into account, and in the interests of ensuring equality of access, the development of an open and competitive market and the interests of consumers, the Director is of the view that the Operators' request for scalable VPs is reasonable. The Director has therefore directed BT to offer the Operators the ability to scale their VPs.

3.14 The Operators should be able to scale the capacity of a VP, up or down, in increments of 1 Mbit/s or multiples thereof, and the VP should have a minimum capacity of 1 Mbit/s.

3.15 Within its DataStream product BT has specified the maximum number of EUDPs that can share a single VP. As discussed above only 4 Mbit/s VPs are available within the DataStream product, however BT offers two separate VP products, these are DataStream Office VP – 4 Mbit/s and DataStream Home VP – 4 Mbit/s. The specified maximum number of EUDPs for each of these VP products is 32 and 150 respectively.

3.16 As with the VPs, BT was only prepared to offer the DataStream limits as part of any interconnection service. However, the Operators believe that the imposition of these limits would prevent them from creating certain differentiated products.

3.17 BT originally argued that the limits are necessary to provide an element of control over the utilisation of the network. This is because the DSLAMs have a limited number of end user ports and a fixed size network connection (backhaul). Therefore, if large numbers of end users are channelled into a relatively small VP, the port capacity on the DSLAM may become exhausted while the backhaul connection remains significantly under-utilised. Further, BT claims that the current limits encompass those that BT itself uses for its IPStream 500 product.

3.18 The Director recognises the desirability of maintaining high network utilisation, as this should ultimately benefit consumers. However, he understands that BT has introduced a modified backhaul arrangement, known as sub-tending, since its original argument and that this arrangement can be used to overcome the problem of stranded backhaul capacity. BT's argument is therefore no longer valid.

3.19 In addition, the current limits imposed by BT apply to a 4 Mbit/s fixed capacity VP and given that the Director is directing BT to provide scalable VPs (as explained above) the current limits are incompatible .

3.20 However, notwithstanding these considerations, the Director is aware that it would be difficult for BT to manage an increase in the number of EUDPs that share a single VP if:

• the requested number of EUDP sharing a single VP is high (in the order of 200+); and
• BT had no prior indication that this increase would be required.

3.21 This is because when increasing the number of EUDPs in this way sufficient port capacity on the DSLAM is required and this may mean that it needs to be reserved. If port capacity is not available then it may be necessary to reconfigure of the DSLAMs within the exchange.

3.22 Having taken these factors into account, and in the interests of ensuring, in particular equality of access, the development of an open and competitive market and the interests of consumers, the Director is of the view that the Operators' request to remove the limits is unreasonable. However, the Director recognises that the motivation for this is to give the Operators greater flexibility over how they can contend the VP and the Director considers this a reasonable requirement. Nevertheless, it is vital that BT has the ability to manage its network in an efficient manner.

3.23 The Director has therefore decided that it is appropriate to have some reasonable limits on the maximum number of EUDPs that can share a single VP. The Director requires BT to set out, in its terms and conditions, a formula for determining those limits having regard to the Operators' requirements.

3.24 ATM class of service categories are network settings that determine how traffic is carried through an ATM network and accordingly which applications can be supported. Within the DataStream products BT uses the VBR-nrt class of service and for this reason BT was only prepared to offer this class of service as part of any interconnection service. However, the Operators believe that this would prevent them from creating certain differentiated products, they therefore requested that, in addition to VBR-nrt, CBR and VBR-rt classes of service also be made available.

3.25 BT has argued that the introduction of these alternative classes of service would require network planning/management to ensure that existing services are not affected. BT has also pointed out that not all of its deployed DSLAMs are capable of supporting multiple classes of service in both directions.

3.26 There is no question that different classes of service are required in order to offer certain services, particularly real-time services. Indeed BT itself uses CBR, in the downstream direction, for its wholesale VideoStream product.

3.27 BT's argument that the introduction of these classes of service would require network planning/management, is not convincing. BT's ATM network already supports a number of products that use the requested classes of service, so clearly the network has the required capability and furthermore it is the role of a network operator, like BT, to plan and manage networks.

3.28 That said, the Director accepts that not all of BT's enabled sites currently contain a DSLAM that is capable of supporting the requested classes of service. From the information provided by BT, approximately 60% of the enabled sites will currently support the requested classes of service and this is likely to increase as the rollout and take-up continues.

3.29 Having taken the above factors into account, and in the interest of consumers, the Director is of the view that the Operators' request is reasonable. The Director has therefore directed BT to make available the CBR and VBR-rt classes of service at those sites that contain a capable DSLAM.

3.30 In light of the responses to the draft Direction, the Director has decided to extend the time period from 28 days to 56 days (for the purposes of this Direction and Memorandum days means calendar days) during which BT must to make an offer for the Additional Functionality. This is because there are more matters which BT needs to resolve in order to specify the ATM reference offer for the interconnection services which include the Additional Functionality than in the case of the Basic Services. The Direction also now provides a specific period in which BT must provide the Additional Functionality when requested by an Operator. The Director believes this is appropriate to provide all parties with a greater degree of certainty. He has decided that 56 days is an appropriate period from the first request in the case of each of the items of Additional Functionality since BT will have to undertake development work in respect of its systems in order to provide the services. The Director believes that subsequent orders of a particular item of Additional Functionality will not require such a long lead time and therefore he has specified that such a period of time should be reasonable but should not exceed 28 days.

3.31 An illustration of the approach is set out below. If initially an Operator makes a request for VBR-rt but for no other items of the Additional Functionality, then BT shall provide the interconnection service with VBR-rt within 56 days. If subsequently that Operator or another Operator makes a request for VBR rt and also CBR then BT shall provide the interconnection service with VBR-rt within a reasonable period of time not exceeding 28 days and the interconnection service with CBR within 56 days.

3.32 The Operators requested that the interconnection services should not just have an ADSL EUDP but it should be possible to purchase versions of the interconnection services that have a SDSL EUDP.

3.33 BT does not provide any SDSL EUDPs within its xDSL product portfolio. The Director has therefore considered whether it is reasonable to require BT to offer a SDSL service.

3.34 The Director believes that there are two important reasons in favour of mandating an SDSL interconnection service. Moreover, if such a service was to be mandated, it would be appropriate to mandate BT's roll out of the SDSL technology in such a way that interconnecting operators are able to access both uncontended and contended SDSL inputs. The reasons for this are two-fold:

3.35 Firstly, low bandwidth leased lines supplied via the existing PPC technologies of HDSL and fibre also have the potential to be supplied via uncontended SDSL. The Director believes that it is likely in certain circumstances that SDSL will provide a lower cost means than existing technologies to provide low bandwidth PPC terminating segments and as a corollary uncontended symmetric broadband origination as these two inputs overlap. The absence of SDSL interconnection services would therefore prevent OLOs and ultimately consumers from benefiting from the greater productive efficiency that SDSL is likely to yield in the provision of low bandwidth PPC terminating segments.

3.36 The second and more important reason for mandating SDSL is that whereas low bandwidth PPC terminating segments provided via HDSL and fibre allow for uncontended symmetric broadband origination, SDSL allows for the inclusion of contended inputs into the market for symmetric broadband origination.

3.37 The SDSL technology thus allows for both uncontended and contended symmetric broadband services to be provided at the retail level. Contended services could be provided as a lower cost, lower quality alternative to uncontended services. Contended services would be lower quality in the sense that backhaul would be shared between customers rather than being dedicated. This sharing or contention would also lead to cost saving. The availability of SDSL could therefore allow BT, OLOs and SPs to seek innovative uses of contendable symmetric broadband origination to the benefit of consumers. Examples of this may include 'contended retail low bandwidth leased lines'. There may exist a group of consumers who would value such contended symmetric broadband services highly. In the absence of rollout of SDSL technology such customers would be denied these services which would be against their interests.

3.38 The Director concluded in the draft Direction that BT should be obliged to offer the SDSL versions of Service A and B which were specified by the Director.

3.39 Having taken into consideration the responses to the draft Direction, the Director believes that it is no longer appropriate to specify in detail a SDSL service at this stage. There is a greater degree of uncertainty as to the requirements for such a service and what is technically feasible than the Director had originally believed to be the case.

3.40 Accordingly, the Director has set out (see Annex D) a general description of a SDSL service which BT is required to develop into a detailed product specification in consultation with the Operators. BT is then required to conduct a trial for that service. The trial shall begin working 84 days of an Operators(s) request being made, following the date of publication of the Direction. The Director believes that such a period is necessary to allow BT time to design the trial in consultation with the Operators. The Director has specified this time taking into account the fact that BT has previously defined two of these were interconnection services. He has also taken into account the fact that BT is already in discussion with OLOs regarding the provision of SDSL.

3.41 The Director has specified that the trial should last for between 84 and 112 days unless otherwise agreed by the Director. It is not the Director's normal approach to specify the terms and conditions for a trial and he also believes that it would not be appropriate to do so in this case. This is principally because BT, in consultation with the Operators, are developing the detailed product specification and therefore it, rather than the Director, is in the best position to set the terms and conditions for the trial service.

3.42 The Direction specifies that following the trial the Director will determine, by way of a Direction, whether BT should be required to supply an SDSL service. In deciding whether to direct BT to offer such a service the Director will, in particular, take into consideration whether:

• the provision of the service is technically feasible; and
• the provision of the service will impose an undue burden on BT.

3.43 In assessing whether the provision of the SDSL service imposes an undue burden on BT, the Director will consider in particular whether BT can reasonably expect a fair return on any necessary investments which are associated with the supply of the service at a price the Operators are willing to pay. If the Director makes this further Direction, he will at that stage consider whether he should specify the terms and conditions, including price and SLAs, for the service and also specify an appropriate time period for providing the service. The Director's initial view on the appropriate charging basis for SDSL is set out in Chapter 4.

4.1 The charging arrangements for wholesale or interconnection telecommunications services vary: some are subject to direct regulation of charges, while others are priced according to operators' commercial judgement.

4.2 Where the Director decides to regulate the charges of an interconnection service there are two main approaches he can adopt. One is to set a charge based on cost (usually based on long run incremental cost plus a mark-up to allow the recovery of common costs ('LRIC+')). The other is to set charges according to non-discrimination rules (often referred to as 'retail minus'), which allows other operators to purchase interconnection services and compete effectively against the regulated firm's downstream arm. These approaches are appropriate in different circumstances, as explained below.

4.3 In the Director's view, price regulation under which charges are set equal to a measure of cost (eg LRIC+), is usually appropriate in two sets of circumstances. First, where an operator has persistent market power in the provision of the interconnection services and where the objective of regulation is to move the retail market structure towards effective competition. Second, for services such as call termination in which competitive provision is unlikely to emerge. In a competitive market charges would be cost reflective, so cost based charges replicate the working of a competitive market.

4.4 There are three sets of circumstances in which the Director considers it more appropriate to limit regulation of interconnection charges to the imposition of nondiscrimination rules. This is sometimes described as retail minus pricing of interconnection services (ie where the interconnection charge is equal to the retail price less the costs incurred by the retail activity of the operator's in-house service provider). First, retail minus is appropriate where wholesale or interconnection markets are not yet competitive but where effective competition in these services is in prospect ie, market power exists but is unlikely to persist. In these circumstances, cost-based regulation of charges might be a disproportionate response to the degree of market power being exercised, and could even undermine the move towards competition.

4.5 Second, retail minus is appropriate where risky investments are undertaken in order to provide the relevant services. In such circumstances regulation of charges on a LRIC+ basis would constitute the substitution of a regulator's judgement for an investor's judgement about the circumstances and charges under which the provision of the service is likely to be viable. If the regulator underestimated the risks faced by the firm, the outcome could be the withdrawal of the service in question or at least freezing of further investment. Moreover, future investments in different services could be deterred by the prospect of similar regulation. For a similar reason, in the context of the Network Charge Controls, the Director does not automatically place LRIC+ charge controls on new services because he does not want to impair incentives to innovate. Such an outcome would harm the interests of consumers. Therefore, while the retail minus approach may not drive down interconnection charges as far as an approach based on LRIC+, the incentives and reward provided for current and future investment will lead to greater benefits for consumers in the longer term.

4.6 The third set of circumstances where a retail minus charging approach may be appropriate is where a market, although not effectively competitive, is at a relatively early stage in its development and a significant degree of uncertainty exists as to future market developments. In such circumstances it is likely that LRIC+ regulation of charges will not be appropriate since there is significant risk that, if imposed, it will determine how the market develops rather than that development being determined by the natural evolution of market forces. Such regulation, by setting the charge against which other competitors and forms of competition must compete, runs a risk of deterring such competition from emerging. In such circumstances, regulation using LRIC+ might slow or even prevent the development of effective competition. A retail minus rule would avoid this possibility while ensuring that the efficient downstream competitors can compete with the firm with upstream market power.

4.7 A requirement for retail minus charging would constitute