Direction pursuant to Regulation 6(6) of the Telecommunications (Interconnection) Regulations 1997

WHEREAS

1. The Secretary of the State granted to British Telecommunications on 22 June 1984 a licence (the ‘Licence’) under section 7 of the Telecommunications Act 1984 (the ‘Act’) for the running of the telecommunication systems specified in Annex A to the Licence;

2. By virtue of Section 109 of, and paragraph 20 of Schedule 5 to, the Act, the Licence has effect as if granted to British Telecommunications plc (‘BT’);

3. The Telecommunications (Interconnection) Regulations 1997 (the ‘Regulations’) and Condition 45 of the Licence implement Directive 97/33/EC of the European Parliament and Council on interconnection in telecommunications with regard to ensuring universal service and interoperability through application of the principles of open network provisions (the ‘Directive’);

4. Article 2(1)(a) of the Directive defines interconnection as: "the physical and logical linking of telecommunications networks used by the same or a different organisation in order to allow users of one organisation to communicate with users of the same or another organisation, or to access services provided by another organisation. Services may be provided by the parties involved or other parties who have access to the network.";

5. As a Partial Private Circuit (‘PPC’) is a service consisting of the provision of capacity from a customer’s premises to an operator’s Point of Connection, the operator’s network will be physically and logically linked to BT’s network at the Point of Connection. Consequently a PPC falls within the Directive’s definition of interconnection;

6. A PPC is also a leased line service as it provides transparent transmission capacity between network termination points. Annex 1 of the Directive defines leased line services as "telecommunications facilities which provide for transparent transmission capacity between network termination points, and which do not include on-demand switching (switching functions which the user can control as part of the leased line provision). They may include systems which allow flexible use of the leased line bandwidth, including certain routing and management capabilities.";

7. On 23 December 1997 the Director determined that BT had Significant Market Power in leased lines services;

8. Regulation 6(6) requires the Director General of Telecommunications (the ‘Director’), where there is a dispute concerning interconnection between organisations, to take steps to resolve the dispute;

9. For the reasons set out in the Explanatory Document to this Direction the Director considers that BT is in dispute with operators concerning the issues covered by this Direction;

10. In March 2001 the Director made a Direction setting time limits within which negotiations on interconnection of PPCs should be completed. Paragraph 10 of the Direction stated that if BT and any one of the operators failed to reach agreement then the Director, at the request of either BT or any of the operators, would exercise his powers to resolve a dispute;

11. In August 2001 the operators signed BT’s Standard PPC Handover Agreement (the "PPC Contract");

12. In August 2001 the Director received several requests to determine a dispute (outlined in the Explanatory Document attached to this Direction) pursuant to his powers under the Regulation from: GTS, Fibernet, Global Crossing, NeosCorp, Thus, Worldcom, Energis and Colt (the ‘Operators’);

13. It is clear to the Director, and self-evident from the fact that he has received requests for a determination, that despite the signing of the PPC Contract and the negotiations which took place in the context of the March 2001 Direction, the Operators remain in dispute with BT over a number of issues;

14. Condition 69.1 of BT’s Licence states that the "Licensee shall secure, and shall be able to demonstrate to the satisfaction of the Director, that the charges offered, payable or proposed to be offered or payable by an Operator to the Licensee for each Standard Service provided pursuant to an agreement entered into pursuant to Condition 45 of this Licence are reasonably derived from the costs of providing the Service based on a forward looking incremental cost approach…";

15. Recital 10 of the Directive states that: "…whereas the level of [interconnection] charges should promote productivity and encourage efficient and sustainable market entry, and should not be below a limit calculated by the use of long-run incremental cost and cost allocation and attribution methods based on actual cost causation, nor above a limit set by the stand-alone cost of providing the interconnection in question";

16. The Director considers that the appropriate interpretation of the requirement for prices to be cost-orientated cannot be considered in isolation from the extent of competition for the service in question;

17. If an interconnection service was provided in an effectively competitive market or a market moving towards a competitive market structure, the requirement for cost-orientation as set out by the Directive is any price between the Long Run Incremental Cost (‘LRIC’) floor and Stand Alone Cost (‘SAC’) ceiling, subject to any relevant combinatorial and non-discrimination tests also being satisfied;

18. If by contrast the relevant economic market was not effectively competitive, i.e. not effectively or prospectively competitive, then the Director, without fettering his discretion, and subject to the facts of the particular case, would be minded to interpret the cost-orientation requirement to mean that prices should be set on a LRIC basis with some allowance for common cost recovery;

19. Pursuant to Condition 57 of its Licence BT must not (whether in respect of the charges or other terms or conditions applied or otherwise) show undue preference to, or exercise undue discrimination against, particular persons or persons of any class or description (in any markets) as respects interconnection of any description provided pursuant to Condition 45 and, therefore, this Direction;

20. Chapter 4 and Annex C of the Explanatory Document to this Direction set out the reasons that BT has market power in the relevant markets;

21. Condition 45.5 of the Licence requires BT to comply with the requirements of any directions given pursuant to Regulation 6(6) of the Regulations;

22. The Director has a duty to encourage and secure adequate interconnection in the interests of all users in a way that provides maximum economic efficiency and gives the maximum benefit to end-users;

23. For the reasons given in these recitals and set out in more detail in the Explanatory Document accompanying this Direction, and having considered the representations made in response to the draft of this Direction published on 17 December 2001, and the matters set out in Regulation 6(8) of the Regulations, the Director believes that it is appropriate to make this Direction.

THEREFORE

Pursuant to Regulation 6(6) of the Regulations the Director of Telecommunications makes the following Direction:

1. British Telecommunications plc (the ‘Licensee’) shall amend its Standard PPC Handover Agreement (the ‘PPC Contract’) within 10 working days of the publication of this Direction in accordance with the following:

1.1 The 12 month contractual minimum term placed upon an Operator, for the provision of a Partial Private Circuit (i.e. a circuit provided pursuant to the PPC Contract and in accordance with this Direction) which has been migrated pursuant to the PPC Contract, shall be measured from the date that the original BT Retail Private Circuit (as defined in the PPC Contract) was brought into service. This paragraph 1.1 shall take effect from 1 August 2001.

1.2 The Licensee shall not impose any deadline before which an Operator must inform the Licensee that it requires a BT Retail Private Circuit (which was in situ and being provided to a Schedule 2 Public Operator by the Licensee prior to 1 August 2001) to be migrated to an equivalent Partial Private Circuit status under the PPC Contract. This paragraph 1.2 shall take effect from 1 August 2001.

1.3 The Licensee shall allow a BT Retail Private Circuit, which was in situ and being provided to a Schedule 2 Public Operator by the Licensee prior to 1 August 2001, but which required technical modification after 1 August 2001 in order for it to have an equivalent product available as a Partial Private Circuit under Annex F of the PPC Contract to which it can be migrated, to be considered under the PPC Contract as a Qualifying BT Retail Private Circuit (as defined in the PPC Contract, and with the necessary changes in order to ensure compliance with this Direction).

1.4 The Licensee shall only require an Operator to provide a profile of future Partial Private Circuit capacity ordering intentions over a 12 month period, on a national aggregate basis for the following groupings of bandwidths:

• less than 1 Mbit/s;
• 1 Mbit/s through to 45 Mbit/s; and
• 155 Mbit/s and above.

1.5 Failure by an Operator to provide forecast information shall not be considered to be a breach of an obligation, or breach of the PPC Contract, for the purposes of paragraph 8.3 of the PPC Contract.

2. The Licensee shall within nine weeks of the publication of this Direction offer to provide, within a reasonable period of an Operator’s written request, handover in a footway jointing chamber for Partial Private Circuits at a reasonable point nominated by the Operator. The footway jointing chamber shall be located in the same Licensee local serving exchange area as the BT Serving Node (as defined in the PPC Contract) to which the Partial Private Circuits being handed over are connected.

3. The Licensee shall within six weeks of the publication of this Direction offer to provide, within a reasonable period of an Operator’s written request, a Partial Private Circuit which is dual pathed and diversely routed from a third party customer’s premises to an Operator’s single Point of Connection.

4. For the purposes of this Direction a "PSTN/PPC Product" is:

A Point of Connection at which an Operator connects to Partial Private Circuits such that the Point of Connection can also be used for interconnecting Fixed Public Telephone Network Standard Services. Where such a Point of Connection is provided the Licensee shall provide Fixed Public Telephone Network Standard Services to the Operator at the Point of Connection.

4.1 The Licensee shall prioritise its work in such a manner as to ensure, that if the Director makes a Direction in accordance with paragraph 4.6, its Operation Support System (‘OSS’) is able to support the PSTN/PPC Product and that it is able to provide the PSTN/PPC Product within the time frame set out in paragraph 4.7.

4.2 Within 6 weeks of the publication of this Direction the Licensee shall complete and provide to the Director a feasibility study on the product and processes necessary to provide the PSTN/PPC Product. When conducting this study the Licensee shall have the utmost regard to the Operators’ requirements. The outputs of this feasibility study shall, in particular, include:

• identification of OSS changes;
• network design solution;
• process design solution;
• impact on the Licensee’s resources;
• time scales for implementation of the PSTN/PPC Product;
• time scales for delivery of the PSTN/PPC Product;
• specification of the PSTN/PPC Product;
• indicative costs of the PSTN/PPC Product; and
• indicative prices of the PSTN/PPC Product.

4.3 The Licensee shall also provide the outputs of the feasibility study (except for information the Director considers to be confidential) to the Operators within 6 weeks of the publication of this Direction.

4.4 After receiving the feasibility study the Director shall set: the level of penalty to be incurred by an Operator should it fail to meet its forecasted requirements for the PSTN/PPC Product (‘the Forecast Penalty’); and the level of demand required for there to be evidence that reasonable demand exists, or is likely to exist, for the PSTN/PPC Product (‘the Volume Threshold’).

4.5 The Licensee shall, for a period of four weeks following the setting of the Forecast Penalty and the Volume Threshold by the Director, enter into agreements for the supply of the PSTN/PPC Product, for a minimum of one year, with those Operators requesting such agreements. Such agreements shall be conditional on the Director making a Direction in accordance with paragraph 4.6 and shall incorporate the Forecast Penalty as determined by the Director in accordance with paragraph 4.4.

4.6 Following the conclusion of the four week period set out in paragraph 4.5, the Director shall determine by way of a Direction, whether there is, or is likely to be,

reasonable demand for the PSTN/PPC Product. In making such a determination, the Director shall, in particular, take into consideration:

• the level of the Licensee’s development costs of the PSTN/PPC Product and the extent to which the conditional agreements entered into with the Licensee by the Operators for the provision of the PSTN/PPC Product will, or are likely to, ensure that these costs are recovered;
• the time it will take the Licensee to recover its development costs of the PSTN/PPC Product; and
• the likely level of demand.

4.7 If the Director makes a Direction in accordance with paragraph 4.6 the Licensee shall, within 24 weeks, of the Direction, offer to provide the PSTN/PPC Product, within a reasonable period of an Operator’s written request.

4.8 Within the same time limits as outlined in paragraph 4.7, the Licensee shall also offer to provide an Operator, Customer Sited Handover (as defined by the PPC Contract), In-Span Handover (as defined by the PPC Contract), and handover pursuant to paragraph 2 of this Direction, from the Point of Connection in such a way that an Operator can be provided with Partial Private Circuits and Fixed Public Telephone Network Standard Services over a common bearer.

4.9 This paragraph 4 shall only apply to those channels used for interconnecting Fixed Public Telephone Network Standard Services which have been brought into service on, or after, the date on which the PSTN/PPC Product is first offered by the Licensee.

5. The services outlined in this Direction shall all be provided by the Licensee to an Operator at cost-orientated prices and on non-discriminatory terms.

6. Except as otherwise defined in this Direction:

6.1 Paragraph 4 of the BT licence shall, with the necessary changes, apply to this Direction as it applies to the BT Licence; and

6.2 Terms defined in the BT Licence or in the recitals hereto shall have the same meanings for the purpose of this Direction.

7. Unless otherwise stated, this Direction shall enter into force on the date of its publication.

Chris Kenny
Director of Compliance

12 June 2002

A person duly authorised by the Director General under paragraph 8 of Schedule 1 to the Telecommunications Act 1984

Explanatory Document to a Direction pursuant to Regulation 6(6) of the Telecommunications (Interconnection) Regulations 1997

Summary

S.1 This Explanatory Document accompanies the PPC Phase 1 Direction ("the Direction) published on 14 June 2002 in relation to disputes between British Telecommunications plc ("BT") and the following Operators: GTS, Fibernet, Global Crossing, NeosCorp, Thus and WorldCom ("G6" Operators), Energis and Colt in relation to the provision of Partial Private Circuits ("PPCs").

S.2 Following the Consultation on the draft Direction issued on 17 December 2001 and after carefully considering the responses made by all interested parties, the Director General has decided to confirm the Direction subject to amendments as described in this document.

S.3 The Director has considered the requests for determination submitted by the Operators and has decided to adopt a two-phase approach to the determinations. The Director decided that the issues referred by the various Operators should be split into two phases according to how quickly they might be resolved. This Direction and Explanatory Document completes phase 1.

S.4 Following the launch of PPCs on 1 August 2001, approximately 66% of eligible retail private circuits have now migrated to PPCs. Operators have been able to utilise PPC components to deliver competing retail services to end users. The level of savings to Operators from using PPCs depends on the utilisation of equipment and the level of infrastructure in place. The Director understands that the introduction of PPCs has enabled Operators to make savings of around 30% compared to the corresponding retail private circuits.

S.5 The Director believes that the proposals contained in this Direction will enable Operators to migrate more retail circuits to PPCs and should also enable Operators to increase their take up of PPCs. This will ultimately flow through to end users in the form of lower prices, an increased choice of competitors to BT’s retail services and greater service availability.

S.6 This summary sets out the Director’s views on his legal approach, market analysis and his conclusions to resolve the disputes referred to him.

Legal approach

S.7 BT has claimed that some of the issues on which the Director is making a Direction are not in dispute. In absence of a dispute, BT has claimed that the Director will need to show ‘exceptional circumstances’ to intervene on his own initiative where he is amending the negotiated PPC agreement or the Schedule of Agreement (SOA).

S.8 In response, the Director does not accept BT’s arguments that he is making a Direction on issues which are not in dispute. The Director considers it self-evident from the fact that he has received requests for determination that, despite the signing of the PPC Contract and the negotiations which took place in the context of the March 2001 Direction, the Operators remain in dispute with BT. To put it simply, there are products and services which the Operators wish BT to provide and which BT is not providing. Additionally there are products and services that BT is providing, but not in the way the Operators require. There is therefore a dispute.

S.9 In line with normal procedure, the Director has considered the whole of the agreement when making this determination. The Director has given due regard to the direct effect that one term or condition of the agreement may have on other terms and conditions. The Director will not start to unpick the negotiations in any attempt to take into consideration areas where one party has conceded ground in one area to gain ground on a different issue.

Market Analysis

S.10 Following the consultation on the National Leased Lines Effective Competition Review (August 2000), and after considering carefully the responses made by all interested parties, the Director’s current views on the market analysis are set out below.

S.11 The Director still considers that retail leased lines constitute a separate market from other data services. However, he now believes that it is appropriate to identify two separate retail markets which vary by bandwidth. The Director considers that there is a chain of substitution between retail leased lines of different bandwidths, but that this chain appears to break between 2Mbit/s and 34Mbit/s. Accordingly he has defined two separate retail markets:

• a market for retail leased lines up to and including 2Mbit/s; and
• a market for retail leased lines above 2Mbit/s.

S.12 The Director still considers that it would not be appropriate to define narrower geographic markets and proposes to define separate national markets for low and high bandwidth retail leased lines. However, he recognises that some areas of these markets are characterised by varying degrees of competitive pressure and any analysis or policy intervention should take this into account.

S.13 At the wholesale level, the Director still considers it appropriate to define separate markets for terminating and trunk segments. However, he now believes that there are two separate terminating segment markets. The three wholesale markets as defined by the Director are:

• a market for terminating segments up to and including 2Mbit/s (low bandwidth);
• a market for terminating segments above 2Mbit/s (high bandwidth); and
• a market for trunk segments.

S.14 The Director still considers that it is appropriate to define separate national markets for low bandwidth terminating segments, high bandwidth terminating segments and trunk segments. However, he recognises that some areas of these markets are characterised by varying degrees of competitive pressure and any analysis or policy intervention should take this into account.

S.15 The Director considers that BT has market power in the retail markets for high and low bandwidth leased lines and market power in the wholesale markets for low and high bandwidth terminating segments. The Director considers that these markets are not effectively competitive and that effective competition is not yet in prospect. After considering further information submitted by BT after the consultation period, the Director still considers the market for trunk segments to be prospectively competitive.

S.16 As stated in the March 2001 PPC Direction, the Director’s interpretation of cost oriented pricing is that the requirement for prices to be cost oriented cannot be considered in isolation from the extent of competition for the service in question. For example, where the relevant market is not effectively competitive and effective competition is not in prospect, the Director will be inclined to interpret the cost orientation requirement to mean that prices should be set on a LRIC basis with some allowance for common cost recovery. On the other hand, if it appears that market power is not likely to persist, such that effective competition is in prospect, the Director would generally consider lighter regulation, for example regulation based solely on the principles of non-discrimination, to be more appropriate.

Summary of the Director General’s conclusions

Conclusion 1: Six month sunset clause

S.17 The Director confirms that the imposition of a sunset clause for the migration of retail circuits owned by Annex II Operators prior to 1 August 2001 is unnecessary and accordingly he requires BT to remove the six month sunset clause from its PPC Contract. BT shall amend the PPC contract within ten working days of the publication date of the Direction and it will be effective from 1 August 2001.

S.18 The Director considers that the position in respect of retail circuits which existed prior to 1 August 2001 and that came to be owned by an Annex II operator only after 1 August 2001, is linked to phase 2 issues. Accordingly, he has deferred this element of the sunset clause dispute to be considered in the phase 2 Direction.

S.19 Please refer to paragraphs 5.10 to 5.19 of the Explanatory Document for a full discussion of the Director’s views and Annex E for additional comments made by interested parties during the consultation period.

Conclusion 2: 12 month minimum term contract

S.20 The Director General requires BT to amend the PPC contract to make clear that the minimum contract term for migrated circuits will apply from the date when the original retail circuit was bought into service. BT is required to amend the PPC contract within ten working days from the publication date of the final phase 1 Direction and the contract clause will be effective from 1 August 2001.

S.21 Following confirmation from respondents to the consultation, The Director General believes that the 12 month minimum contract for PPCs is not subject to a dispute and therefore in the absence of a dispute he will not be considering the imposition of a minimum term contract further in the phase 2 Direction.

S.22 Please refer to paragraphs 5.28 to 5.38 of the Explanatory Document for a full discussion of the Director’s views and Annex E for additional comments made by interested parties during the consultation period.

Conclusion 3: Technical and paper migrations

S.23 The Director General requires BT to migrate any retail circuits to PPCs provided the retail circuits were brought into service before 1 August 2001. This includes retail circuits requiring technical modifications that may be carried out after 1 August 2001. BT is required to amend its PPC contract to reflect this within ten working days of the publication date of the Phase 1 Direction and the amended contract shall be effective from 1 August 2001.

S.24 Please refer to paragraphs 5.44 to 5.54 of the Explanatory Document for a full discussion of the Director’s views and Annex E for additional comments made by interested parties during the consultation period.

Conclusion 4: ISH Extension

S.25 The Director General requires BT to provide an ISH extension product as specified in paragraph 2 of the Direction. BT must offer this on a non-discriminatory basis and on cost oriented terms. BT should offer to provide this product within nine weeks of the publication date of the Final phase 1 Direction.

S.26 Please refer to paragraphs 5.69 to 5.92 of the Explanatory Document for a full discussion of the Director’s views and Annex E for additional comments made by interested parties during the consultation period.

Conclusion 5: PPC Variant of Genus Product

S.27 The Director requires BT to provide the Genus variant 1 PPC as specified in paragraph 3 of the Direction. This should be provided by BT on cost oriented and non-discriminatory terms and conditions within six weeks of the publication date of the Direction. In April 2002, the Director General submitted a technical study proposal to the Network Interoperability Consultative Committee (NICC) in order to investigate the technical requirements of a Genus PPC. The Director, considers that BT should provide a Genus PPC and has requested the NICC to provide an implementation report by 1 September 2002. The Director will then decide the appropriate timescales for the deployment of such a solution by BT.

S.28 Please refer to paragraphs 5.109 to 5.115 of the Explanatory Document for a full discussion of the Director’s views and Annex E for comments made by interested parties during the consultation period.

Conclusion 6: STM-1 Point of Handover for ISH and CSH products

S.29 The Director has decided to defer the decision on SMT-1 ISH and CSH handover to Phase 2 Direction due to close links with cost and charging issues and in particular alternative PPC pricing structures that the Director is currently considering. He has explained the links further in paragraph 2.8

S.30 Please refer to paragraph 5.116 of the Explanatory Document for the Director’s proposals.

S.31 The Director requires BT to be in the position, within 20 weeks to commence the mixing of PSTN interconnects over PPC infrastructure onto its Operational Support System planning cycle. The Director considers it reasonable to require BT to commence a feasibility study and provide the outputs as detailed in paragraph 5.149 to the Director within six weeks of the date of this Direction. At the same time BT will have to have the utmost regard to the Operators' requirements in order to identify an appropriate solution design. In order to demonstrate Operator’s commitment to this product, the Director will provide an opportunity for interested Operators to submit binding forecasts. He will resolve all cost recovery issues associated with mixing new and existing PSTN interconnects over PPC infrastructure in the Phase 2 Determination.

S.32 Furthermore the Director acknowledges BT’s comments that mixing existing PSTN interconnect over PPC infrastructure raises similar issues to those described by BT as obstacles to mixing new PSTN over PPCs. He expects that BT will therefore resolve the technical and planning issues surrounding the mixing of existing PSTN interconnects and the Director will take this into account when setting out his views in the Phase 2 Direction.

S.33 Please refer to paragraphs 5.125 to 5.160 of the Explanatory Document for a full discussion of the Director’s views and Annex E for comments made by interested parties during the consultation period.

Conclusion 8: Application of Retrospective Charges

S.34 It is the Director’s present intention, that, to the extent that any charges set in the Final phase 2 Direction differ from those already charged by BT, the new level of charges should be operative from 1 August 2001. Such retrospection would be incorporated into the Final phase 2 Direction.

S.35 Please refer to paragraphs 5.169 to 5.172 of the Explanatory Document for a full discussion of the Director’s views.

Conclusion 9: Forecasting Requirements

S.36 In the draft Phase 1 document the Director asked BT to amend the PPC contract as the clauses relating to SLAs were unclear. In the absence of further clarification from BT, the Director requires BT to amend the forecasting requirements as originally clarified by BT and detailed in paragraphs 1.4 and 1.5 within ten working days of the date of this Direction.

S.37 The Director continues to believe that in the absence of forecasts, all terms and conditions in the Service Level Agreements (SLAs), which are not related to provisioning timescales, should apply.

S.38 Please refer to paragraphs 5.180 to 5.196 of the Explanatory Document for a full discussion of the Director’s views and Annex E for additional comments made by interested parties during the consultation period.

Conclusion 10: Infrastructure Sharing – mixing retail circuits and PPCs

S.39 The Director requires further information on this issue in order to determine whether mixing retail and PPCs on PPC infrastructure is reasonable. Therefore, he has decided to consider this issue further and to determine it in the phase 2 Direction.

S.40 Please refer to paragraphs 5.197 of the Explanatory Document for a full discussion of the Director’s views..

Conclusion 11: A and B end Shifts

S.41 BT formally notified A and B end shifts on 3 December 2001. At the time of publication of the draft phase 1 Direction, the Director did not have sufficient time to confirm whether this notification resolved the dispute. He therefore asked respondents during the consultation period, to clarify whether this dispute is now resolved. Respondents have raised a number of concerns with the range of services covered in the 3 December notification. The Director believes that concerns remain in relation to the PPC charges for A and B end Shifts in comparison to the corresponding retail charges and has decided to investigate these pricing issues further in Phase 2.

S.42 Please refer to paragraphs 5.198 of the Explanatory Document for a full discussion of the Director’s views and Annex E for additional comments made by interested parties during the consultation period.

Conclusion 12: PPC Variant of 1Mbit/s circuit

S.43 BT has now provided the 1Mbit/s PPC variant product. The Director therefore considers this dispute to be resolved.

S.44 Please refer to paragraph 5.202 of the Explanatory Document for a full discussion of the Director’s views.

Conclusion 13: PPC Variants of LAN Extension Services (LES) and Vision circuits

S.45 The Director has discussed the issues surrounding LES PPCs with both BT and Energis and has accepted that both parties are willing to enter into negotiations on the supply of and technical details of LES PPCs. In light of these circumstances, he has asked both BT and Energis to enter negotiations to agree commercial and technical terms for the provision of LES PPCs.

S.46 The Director will await the outcome of the LES negotiations before taking a final view on the resolution of the Vision PPC dispute.

S.47 Please refer to paragraph 5.209 and 5210 of the Explanatory Document for a full discussion of the Director’s views.

Chapter 1

Background to the Direction

1.1 This chapter sets out the background to the PPC Dispute and the Direction of 14 June 2002.

Consultation document and statement on national leased lines

1.2 In the August 2000 Consultation Document on National Leased Lines (see note 1), the Director considered the state of competition in both the relevant retail and wholesale markets for National leased lines. The Director stated at that time that:

• the market for retail leased lines was not effectively competitive;
• the market for wholesale trunk segments (provision of capacity within an Operators trunk network) was prospectively competitive;
• the market for wholesale terminating segments (provision of capacity from a customers premises to an Operators trunk network) was not and would not become effectively competitive in the near future; and
• the market for retail leased lines would not become effectively competitive until the lack of effective competition in the market for wholesale terminating segments was addressed.

1.3 In order to address the lack of competition in the market the Director set out his proposals to promote effective competition in retail leased lines in the Consultation Document.

1.4 In the December 2000 Statement on National Leased Lines (see note 2), the Director set out a Legal Framework in respect of National Leased Lines. He concluded that PPCs are interconnection services within the scope of the Interconnection Directive 97/33/EC ("the ICD"). Therefore BT has an obligation to negotiate the provision of PPCs.

1.5 The Director also set out his response to a request from Energis (subsequently supported by nine other Operators) to issue a direction under the ICD relating to the provision of PPCs. The request asked the Director to set time limits within which BT must conclude negotiations on the interconnection of PPCs. The request was similar to one of the options discussed in the August 2000 Consultation Document. Accordingly the Director decided that it was appropriate to co-ordinate his Leased Lines policy review with this request.

1.6 A draft Direction was set out in Annex C of the December 2000 Statement on National Leased Lines to enable BT and the Operators to negotiate the provision of PPCs. The Director stated that these negotiations would take place within the framework of the ICD. This places obligations on BT and purchasers to negotiate the supply of appropriate services. It also requires BT’s prices to be cost oriented and the terms of supply to be non-discriminatory.

Final Direction on PPCs and outcome of negotiations

1.7 On 29 March 2001, the Director published a Final Direction pursuant to the ICD. The Direction ("the PPC Direction") required BT to offer to enter into an agreement with Energis, MCI WorldCom, Cable and Wireless, Thus, Fibernet, Global Crossing, GTS (Ireland), COLT, NEOSCorp and MLL Telecommunications to provide PPCs on terms and conditions to be negotiated between BT and each of the Operators within the framework laid down by the ICD.

1.8 The PPC Direction required BT to agree the provisioning of PPCs within eight weeks of its publication date. Thereafter, BT was to have a further six weeks to implement the outcome of the negotiations. If BT and the Operators failed to agree on the terms and conditions (including price) of these products, then either party could refer a dispute to the Director to resolve.

1.9 After intensive and extended negotiations between BT and the named Operators, BT launched its PPC portfolio on 1 August 2001. The appropriate Network Charge Control Notice which was issued on the 27 July 2001 can be accessed on the following BT Website - www.btinterconnect.com.

1.10 On 1 August 2001, the same day as the PPC launch, Energis Communications Ltd referred a dispute to the Director in respect of BT’s PPC offering. Similarly the G6 Operators referred a dispute to the Director on 2 August 2001 and on 24 September 2001 Colt Telecommunications submitted a separate referral to the Director. Each party identified areas where it believed it was in dispute with BT with regard to BT’s PPC offer. See Annex A for a list of issues referred to the Director for resolution.

Notes

1 National Leased Lines: Effective Competition Review and Policy Options – August 2000

2 National Leased Lines: Statement and draft direction issued by the Director General of Telecommunications -December 2000

Chapter 2

Oftel's objectives and approach

2.1 This chapter sets out the Director’s objectives and approach to resolving the dispute between BT and a number of OLOs: namely, Energis, G6 Operators and Colt.

Oftel’s objectives

2.2 In approaching the issues involved, the Director has been guided by the overall goal of the best deal for the consumer in terms of choice, quality and value for money.

2.3 The Director’s proposals will encourage the take up of PPCs and allow greater competition in retail leased lines. This should give consumers a choice of more suppliers, greater variety of product offerings and lower prices for leased lines.

Oftel’s approach

2.4 The Director has considered the requests for determination submitted by the Operators and has decided to adopt a two-phase approach to the determinations. He decided that the issues referred by Energis, Colt and G6 Operators should be split into two phases according to how quickly they might be resolved. This Direction and explanatory document concludes Phase 1. In the second phase the Director will aim to resolve the more complex issues such as pricing and service level agreements. The Director will evaluate the success of his two-Phase approach once he has resolved all Phase 2 issues.

2.5 Table 1 below identifies the issues that the Director has considered within the Phase 1 Direction.

Table 1 – Phase 1 issues

2.6 Table 2 below identifies the issues that the Director will aim to resolve in Phase 2. A brief description of these issues is contained in Annex B. Phase 2 includes some issues that were only partially resolved in the Phase 1 Direction. Those elements that have not been resolved in the phase 1 Direction have been deferred to the Phase 2 Direction. The Director will conduct a separate consultation on the Phase 2 Draft Direction with a view to resolving those issues as soon as practically possible.

2.7 During the consultation period, G6 Operators advised the Director, that BT did not make available a PPC variant of its retail Assured Separation and Diversity product and that this was referred to the Director as part of the G6 request for Determination. The Director can confirm that Assured Separation and Diversity was referred to him as part of the original dispute and will therefore resolve this particular issue in Phase 2.

2.8 The Director has been considering an alternative PPC charging structure as part of his Phase 2 investigation. He is considering whether PPC charges should be calculated on a service basis – ie on a similar basis to the current structure of the prices for retail leased lines - as opposed to the current capacity-based PPC charging structure. It has become apparent to the Director that, if he changes the PPC charging structure to reflect a service based approach, Operators may no longer require the STM-1 ISH and CSH products described in the draft Phase 1 Document. Therefore, in view of the close links with the Phase 2 investigation the Director believes he cannot take a decision on the STM-1 ISH and CSH issues in isolation from the decision on the charging structure. He has, therefore, decided to defer his decision on STM-1 ISH and CSH products to Phase 2.

2.9 Due to close links with the investigation on the level and structure of the charges, the Director will also defer the cost recovery issues related to the mixing of new PSTN with PPC to Phase 2.

Table 2 – Phase 2 issues

Chapter 3

Legal framework

Background

3.1 The Director stated in the December 2000 Statement on National Leased Lines that PPCs are interconnection services covered by the ICD (see note 3). Consequently, Annex II ICD Operators have certain rights and obligations to negotiate interconnection for PPCs. Operators such as BT (see note 4), designated as having Significant Market Power ("SMP") for the purposes of the ICD, have additional obligations. For example they must supply interconnection services on non-discriminatory terms and conditions and at cost oriented prices. The ICD has been implemented in the UK by the Telecommunications (Interconnection) Regulations 1997 (the "Regulations") (see note 5).

3.2 In March 2001 the Director made a Direction ("the PPC Direction") setting time limits within which negotiations on interconnection of PPCs should be completed. Paragraph 10 of the PPC Direction stated that if BT and any one of the Operators failed to reach agreement then the Director, at the request of either BT or any of the Operators, would exercise his powers to resolve a dispute.

3.3 In June 2001 the Operators and BT signed a Schedule of Agreement ("SOA") which set out the main issues which were part of the negotiations. In August 2001 the Operators signed BT’s Standard PPC Handover Agreement (the "PPC Contract").

The Director’s powers

3.4 In August 2001 the Director received several requests (outlined in Annex A) from the Operators for him to resolve disputes between themselves and BT. It is clear to the Director and self-evident from the fact that he has received requests for determination, that despite the signing of the PPC Contract and the negotiations which took place in the context of the March 2001 Direction, the Operators remain in dispute with BT over a number of issues. To put it simply, there are products and services which the Operators wish BT to provide and which BT is not providing. Additionally there are products and services which BT is providing, but not in the way the Operators require. There is, therefore, a dispute.

3.5 As there is a dispute, and the Director has been asked to determine it, he is using his powers under Regulation 6(6) of the Regulations (which implements Article 9(5) of the ICD).

Interpretation of Articles 9(3) and 9(5) of the EC Interconnection Directive

3.6 As stated above, where there is a dispute Article 9(5) applies. For the reasons set out below the powers in Article 9(5) are separate and additional to the powers contained in Article 9(3).

3.7 Article 9(5) of the ICD (which is implemented by Regulation 6(6) of the Regulations) states that:

• the user interest,
• regulatory obligations or constraints imposed on any of the parties,
• the desirability of stimulating innovative market offerings, and of providing users with a wide range of telecommunications services at a national and at a Community level,
• the availability of technically and commercially viable alternatives to the interconnection requested,
• the desirability of ensuring equal access arrangements,
• the need to maintain the integrity of the public telecommunications network and the interoperability of services,
• the nature of the request in relation to the resources available to meet the request,
• the relative market positions of the parties,
• the public interest (e.g. the protection of the environment),
• the promotion of competition,
• the need to maintain a universal service."

3.8 Article 9(3) of the ICD (which is implemented by Regulation 6(3) of the Regulations) states that:

3.9 The powers for intervention under Article 9(3) of the ICD are additional, and separate, to the obligation and powers contained in Article 9(5) of the ICD to resolve disputes. Articles 9(3) and 9(5) clearly apply in different circumstances. Article 9(3) applies to situations where the Director is intervening pursuant to the aims stated in Article 9(1). Article 9(5) applies where the Director has been asked to resolve a dispute. The interpretation that the powers in these two Articles are to be viewed separately is confirmed by the fact that the factors to be considered by the Director differ depending on which power is being used. Article 9(3) powers are to be carried out pursuant to Article 9(1), whereas Article 9(5) powers are exercised taking into consideration the factors listed in that paragraph.

3.10 Consequently, where parties to an agreement are in dispute over the terms of that agreement Article 9(5) and Regulation 6(6) apply. Therefore, as Article 9(3) and Regulation 6(3) do not apply there is no need to show in this instance that this is an exceptional case or that there are exceptional circumstances in order for the Director to make a direction that changes be made to interconnection agreements already concluded.

The negotiation process

3.11 In determining this dispute the Director has, in line with normal procedure, taken into account the impact of his decisions on the agreement as a whole. He has considered the issues raised in the PPC Contract, giving due regard to the direct effect one term or condition of the agreement has on other terms and conditions. The Director’s duty is to resolve the dispute in conformity with Article 9(5) and therefore he has not started to unpick the negotiations which led to the PPC Contract, nor has he taken into consideration areas where one party may have conceded ground in order to gain ground on a different issue.

Two phase approach to resolving the disputes

3.12 For the reasons set out in paragraph 2.4 above in order to resolve the issues referred to the Director in an efficient and expeditious manner, he has decided to adopt a two-phase approach.

3.13 The Director believes that he cannot determine linked issues in isolation. Consequently, elements of some phase 1 issues have been deferred to phase 2 for example see paragraph 5.11 below on the Sunset clause.

BT’s request for a review of its SMP designation

3.14 On 9 October 2001, BT submitted a request to the Director to determine that BT does not have SMP in high bandwidth leased lines for the purposes of the Leased Lines Directive (see note 7). The Director believes that the issues contained in BT’s submission are closely related to issues discussed in this Explanatory Document. The Director will respond to BT’s request for the lifting of its SMP designation in light of the outcome of the resolution of these disputes.

BT’s comments on legal and regulatory framework

3.15 BT, in its response to the draft Phase 1 Direction, made detailed comments on the Legal and Regulatory framework related in particular to the Director General’s powers to resolve interconnection disputes. The Director has summarised and responded to BT’s main comments below.

3.16 BT states that the Director must take into account the matters set out at regulations 6(1) and 6(8) of the Telecommunications Interconnection Regulations 1997 (the Regulations). BT argues that the Draft Direction gives no indication that these matters have been considered and taken into account in formulating the proposals set out in the draft Phase 1 Document.

3.17 Regulation 6(8) requires the Director, when resolving disputes, to take into account various relevant factors. The Director has considered the promotion of competition and the relevant market position of the parties to the dispute. The Director has also considered his duty to secure adequate interconnection in the interest of end users in a way that provides maximum economic efficiency and gives the maximum benefit to end users. In particular, for each of the issues covered by the Direction, he has considered the relevant factors which are noted in the Director’s views in Chapter 5:

• Six month sunset clause (see paragraphs 5.16);
• 12 month minimum term contract (see paragraph 5.30 and 5.31);
• Technical and paper migrations (see paragraph 5.53);
• ISH extension (see paragraph 5.74 and 5.92);
• PPC variant of Genus product (see paragraph 5.110);
• PSTN and PPC mix (see paragraph 5.144);
• Forecasting requirements (see paragraph 5.191).

3.18 BT states that its obligation under Condition 45.1(a) of its Licence is to provide such Points of Connection as are reasonably required to enable an Operator to meet all reasonable demand for conveyance between its system and the Applicable Systems. Subparagraph (b) emphasises the strict test of reasonableness to which BT’s obligations are subject, providing as it does that if the parties cannot agree, BT’s obligation under Condition 45.1(b) is to provide such other services as the Director may determine are ‘reasonably required (but no more than reasonably required)’ to secure the establishment of Points of Connection, and to enable the Operator effectively to provide the Connection Services it proposes to provide. BT’s obligations under Part C of its Licence are thus limited by the concept of reasonableness.

3.19 In addition BT argues that, when exercising his power to resolve disputes under Regulation 6(6) of the Regulations, Regulation 6(8)(b) requires that the Director take into account the regulatory obligations of the parties. The draft Direction appears to make no reference to how the various product enhancements and amendments proposed by the Director, are ‘reasonably required’ for the purposes set out in Condition 45.1 of BT’s Licence. There is no evidence, in fact, that the Director has considered the scope of BT’s regulatory obligations and taken this into account in its decision-making, as required by Regulation 6(8).

3.20 The Director does not accept BT’s comments that he has not identified whether the proposals set out in the draft Phase 1 document are reasonably required. The Director has conducted a market analysis identifying BT’s position in the market in relation to its competitors and whether its proposals will stimulate a competitive market. The Director has also considered BT’s non-discrimination obligations in determining on the issues raised by the Operators, and to what extent BT has incurred costs in providing equivalent retail products.

3.21 BT claims that it has provided vast quantities of information to the Director relating to the matters at issue and that the Director has a general public law duty when exercising his regulatory functions to take into account all relevant material. Given that the Director sought the material to which BT refers, it would clearly be unreasonable for the Director to ignore it in the decision-making process in this case.

3.22 The Director has considered all the information put before him, however it would obviously be impossible for him to make reference to all the information he receives when making a decision. He is required to set out the reasons for making his decision and to publicly consult on his decisions before taking a final view, which he has done.

3.23 BT states that it is implicit in the provisions of the Directive and the Regulations that the Director will impose requirements upon parties only when demand for such requirements actually exists. This is in accordance with the principle inherent in Condition 45.1 of BT’s Licence, under which BT’s obligations are to be limited to those which are ‘reasonably required’ by Operators as discussed above. To impose obligations upon BT in the absence of indicative demand for the relevant requirements, would be obviously disproportionate and contrary to the Director’s duty set out in Regulation 6(6) to resolve disputes in a manner which ‘represents a fair balance between the legitimate interests of both parties’.

3.24 BT is concerned that the Director does not seem to have investigated whether the product offerings and amendments it proposes are in fact the subject of genuine ‘reasonable requirements’, and whether they would actually be utilised by Operators. BT has raised this concern repeatedly during discussions of its proposals, in late 2001. BT notes that there has been very little industry interest in the 1 Mbit/s PPC service launched by BT as required by the Director’s March 2001 Direction. In BT’s view, the Director should not exercise his powers in a manner which requires BT to make speculative investment in products and services for which there is not clear demand.

3.25 BT states that it has concerns in this regard in relation to the proposals that BT should provide STM1, ISH and CSH; ISH Extension Service; Genus type PPCs; Retail/Wholesale infrastructure sharing; and PSTN/PPC mixing.

3.26 The Director has considered the issue of reasonable demand. In assessing reasonable demand in this dispute the Director has taken into consideration the following factors:

• has BT got market power in the relevant market;
• if BT has market power, then the Director will consider whether BT will incur sunk (non-recoverable) costs in the provision of service;
• in assessing the extent of sunk costs, the Director will take into account whether or not BT provides such a service to itself;
• if sunk costs are substantial, then the Director will consider whether there is a reasonable opportunity for BT to recover these costs, if BT was required to provide a particular product or service. In making this assessment, the Director would consider evidence of demand for the service (e.g. independent forecasts of demand). Alternatively, the Director could consider requiring the requesting operator to commit to some level of demand prior to BT providing the service; and
• if there are no sunk costs and BT has market power in the provision of the service, then the Director will require BT to provide the service with indicative evidence of demand.

3.27 In the current dispute the Director has taken into consideration these factors as follows:

• STM-1 ISH and CSH: The Director notes that BT currently deploys SMA-1 equipment for its retail business at the customer premises and has occasionally, on the basis of expediency, installed this type of equipment. Therefore, the Director believes that BT has already incurred sunk costs in providing this equipment;
• ISH extension: The Director believes that the ISH Extension product required by BT is a subset of the CSH product that BT already offers for PPCs. Therefore it follows that BT has already incurred sunk costs in the development of CSH and any additional costs are likely not to be material. Furthermore, Operators have indicated, in their consultation responses, their willingness to submit advance capacity orders for this service;
• PPC variant of Genus product: Given that BT provides a wholesale Genus product to its downstream retail arm, the Director believes that BT should provide a Genus PPC to Operators to ensure non-discrimination. Furthermore, the Director believes Genus variant 1 can be provided using existing processes and systems and therefore BT will not incur significant developmental costs.
• PSTN and PPC mix: The Director believes that BT could incur developmental costs of which a proportion may potentially not be recovered immediately. The Director will provide an opportunity for Operators to demonstrate commitment to purchasing the product. The Director require Operators to submit binding forecasts, once BT has submitted indicative costs and prices to Oftel after an initial feasibility study. Oftel will review the costs submitted by BT at that stage are reasonably incurred and whether the prices are cost oriented. Please refer to paragraphs 5.151 to 5.155 for further details on the Director’s proposals.

3.28 BT states that it has never received a formal request for LAN Extension Service and Vision Circuits and therefore is concerned that that the Director appears to be considering further regulatory action in relation to them. Given that there has never been a formal request, and that BT has never refused to provide them, there can by definition be no ‘dispute’ in relation to them. BT adds that if the Director is to proceed under regulation 6(6) in respect of these issues, the preliminary question is whether the Director has vires to proceed at all.

3.29 The Director has discussed the issues surrounding LES PPCs with both BT and Energis and has become aware that both parties are willing to enter into negotiations on the supply of and technical details of LES PPCs. In light of these circumstances, the Director has asked both BT and Energis to enter negotiations to agree terms, both commercial and technical, for the provision of LES PPCs.

3.30 In relation to the Vision PPC services, the Director will await the outcome of the LES negotiations before taking a final view on the resolution of the Vision PPC dispute.

3.31 BT states that the timeframes (pursuant to the terms of the March 2001 Direction), within which industry was required to negotiate the PPC product offering were much shorter than industry would normally allow and advised the Director of this at an early stage. BT adds that during the negotiations the referring Operators recognised that it would be necessary to prioritise the launch of the requested services and enhancements, due to the timeframes imposed. It was recognised at the time of the signing of the Schedule of Agreement that BT was unable to commit to launching at 1 August 2001 all of the products and services requested by the Operators. BT launched the majority of Operators’ requirements within the timeframes agreed, and none of the issues in relation to which negotiations were deferred, had been identified as ‘show-stoppers’ by the referring Operators during negotiations.

3.32 BT does not agree with the Director’s position set out in the draft Direction, which appears to be that because the Director has received requests for determination referring to regulation 6(6), a ‘dispute’ necessarily exists. In BT’s view, there can be no ‘dispute’ in relation to the matters upon which industry deferred negotiations pending launch of the initial product set, since this occurred due to the time constraints previously imposed by the Director. In such

circumstances, BT does not consider it clear that the Director’s regulation 6(6) power to resolve disputes is available to him, and is of the view that the draft Direction as currently drafted may therefore be ultra vires in relation to these issues.

3.33 The Director does not accept BT’s arguments that it was not able to launch all products requested by Operators due to restricted timescales for negotiations as set by the Director. In the December 2000 draft Direction, the Director proposed eight weeks for negotiations and a further four weeks for implementation of the agreement. At that time BT did not raise any issues in relation to the timescales set for negotiations, but it did state that it was concerned with the one-month deadline for implementation of the negotiated outcome and proposed a two month minimum deadline for product implementation. The Director therefore extended the implementation deadline from 4 weeks to 6 weeks. During the negotiations, the Director agreed to extend the deadline further as requested by BT and the Operators to such a time as either BT and Operators reached final agreement or either party referred a dispute to the Director. As stated previously, BT launched PPCs on 1 August 2001 and subsequently disputes were referred to the Director on 2 August 2002. Clearly the majority of Operators felt that they could not continue negotiating with BT on these issues and felt that they were in dispute. Furthermore, BT has not provided any evidence to the Director indicating under which circumstances and timescales it would have provided the products requested by the Operators.

3.34 BT states that it is concerned that the Director’s approach in considering the issues discussed above as part of his draft Direction is inconsistent with his previous policy regarding service/product requirements, which BT has understood to be to encourage Operators to negotiate product requirements with BT in order to explore commercial and technical issues. For the Director to take further regulatory action in relation to requirements which were not able to be progressed in the standard manner due to its own mandated timeframes, is not only unreasonable, but will encourage Operators to circumvent normal commercial negotiations with BT and to seek regulatory intervention at an early stage, rather than as a later step if negotiations have genuinely broken down. BT considers this to be entirely inappropriate and inconsistent with accepted regulatory policy.

3.35 BT has not raised any new issues to those detailed in the consultation document and the Director believes that he has already set out his position in relation to BT’s arguments in paragraph 3.4 above.

3.36 As stated in the consultation document, in August 2001 the Director received several requests from the operators for him to resolve disputes between themselves and BT. It is clear to the Director and self-evident from the fact that he has received requests for determination, that despite the signing of the PPC Contract and the negotiations which took place in the context of the March 2001 Direction, the operators remain in dispute with BT over a number of issues. To put it simply, there are products and services which the operators wish BT to provide and which BT is not providing. Additionally there are products and services which BT is providing, but not in the way the operators require. There is therefore a dispute.

3.37 Furthermore, the Director believes that BT’s market power in terminating segments placed it in a favourable position during negotiations in comparison to other Operators. Operators do not have access to detailed information which can affect their bargaining position. For instance Operators do not have access to BT’s cost information and therefore cannot ascertain whether the charges are cost oriented. Also Operators will not have in-depth knowledge of BT’s network capabilities and limitations, which may enable them to understand BT’s ability to provide certain variations of interconnection products.

3.38 BT believes that the draft Direction does ‘unpick negotiations’ in that it deals with issues in isolation. BT is concerned that the proposals set out in the draft Direction do not recognise the ‘whole of the agreement’ and do not take into account the points previously raised by BT regarding the negotiation process.

3.39 The Director rejects BT’s statement, the Director has examined the whole of the agreement. The Director has decided to defer to Phase 2 cost related issues and issues that have a direct bearing on each other. For example the Director has deferred any issues linked to the cost orientation investigation to Phase 2.

3.40 During the consultation exercise a number of respondents have recommended that the Director take action on a new set of issues. The Director does not believe it is appropriate to use the consultation process as a mechanism to raise new requests for determination. The Director has set out which issues he will consider in his Phase 1 and Phase 2 Determinations and will proceed on that basis.

Notes

3 Directive 97/33/EC of the European Parliament and Council on interconnection in telecommunications with regard to ensuring universal service and interoperability through application of the principles of open network provisions

4 On 23 December 1997 the Director determined that BT had SMP in the markets for fixed public telephone, networks, fixed public telephone services, and leased lines services.

5 Statutory Instrument 1997/2931

6 The aims listed in paragraph 1 of Article 9 are:

- the need to ensure satisfactory end-to-end communications for users,
- the need to stimulate a competitive market,
- the need to ensure the fair and proper development of a harmonised European telecommunication market,
- the need to co-operate with their counterparts in other Member States,
- the need to promote the establishment and development of trans-European networks and services, and the interconnection of national networks and interoperability of services, as well as access to such networks and services
- the principles of non-discrimination (including equal access) and proportionality,
- the need to maintain and develop universal service.

7 Council Directive 92/44/EEC (as amended) on the application of Open Network provision to leased lines.

Chapter 4

Market analysis

4.1 This chapter presents an overview of the Director’s analysis of the relevant markets, together with an assessment of BT’s market power in these markets. A more detailed discussion is contained in Annex C.

Leased line elements

4.2 End to end leased lines consist of two wholesale elements:

• Terminating segments- the connections between a customer's sites and Tier 1 of BT’s SDH network (where an alternative BT network is used then the terminating segment extends up to the nearest node located at the same site as a SDH node); and
• A trunk segment- the inter-Tier 1 node conveyance (again where an alternative BT network is used then the trunk segments relates to conveyance between nodes that are located at the same sites as a Tier 1 SDH node).

4.3 In the interests of brevity, the rest of this chapter uses BT’s SDH network to describe terminating and trunk segments. However the views herein discussed also apply to the equivalent wholesale elements using alternative BT networks (DCCN and MSH networks) to deliver Leased Lines. Annex D contains a detailed description of BT’s networks employed in the provision of leased lines.

4.4 The connection from the customer’s premises to the first serving exchange (or tier) that the customer is directly connected to is also known as the 'local end'. Therefore, where the customer's nearest connection is at the Tier 1 level (circuit B in figure 1), the local end is identical to the terminating segment. By way of comparison, Circuit C in figure1 represents the situation where the customer's nearest connection is at Tier 3; therefore the local end is shorter than the terminating segment.

4.5 A partial private circuit (PPC) may be composed of both a terminating segment and a trunk segment, depending on where the OLO interconnects with BT's SDH network, as illustrated by Circuit A in Figure 1.

Market definition

4.6 The subject of this document is the wholesale PPC product, however, both retail and wholesale markets have been defined, as the definition of the retail market is likely to affect the market analysis in related wholesale markets. In defining the relevant markets the Director has employed his usual approach, which follows that set out in the Office of Fair Trading’s Competition Act guideline on Market Definition (see note 8).

4.7 The Director consulted on the relevant economic markets related to leased lines in his December 2001 Consultation Document. This chapter contains only a summary of these views, more details on the underlying analysis are contained in Annex C.

Retail markets

4.8 In the December 2001 consultation document the Director expressed the view that there is national markets for retail leased lines at high and low bandwidths.

• a market for retail leased lines up to and including 2Mbit/s; and
• a market for retail leased lines above 2Mbit/s.

4.9 The Director still considers that retail leased lines constitute a separate market from other data services and that it is appropriate to identify two separate retail markets which vary by bandwidth:

4.10 This is because, on the demand side the Director considers that there is a chain of substitution between retail leased lines of different bandwidths, but that this chain appears to break between 34Mbit/s and 2Mbit/s. As for the supply side, the likelihood of substitution depends on the availability of the relevant wholesale inputs, which implies that supply side substitution at the retail level does not impact on the competitive constraints operating in the wholesale markets (see below on relevant wholesale markets).

4.11 From a geographical point of view, competition constraints in the provision of low bandwidth circuits appear to be similar across the whole of the UK. Hence the Director is of the view that this market covers the whole of the UK.

4.12 As for high bandwidth circuits, it appears that some entry has occurred and that this is mainly concentrated in Central London and a few other metropolitan areas. This evidence may suggest a geographic segmentation of the market for high bandwidth terminating segments into metropolitan and non-metropolitan areas. However, it is unclear whether the extent of competition in each metropolitan area is similar across the whole area. Entry appears to be confined only to limited parts of these metropolitan areas and from evidence on the supply of backhaul to LLU providers, the Director understands that parts of these metropolitan areas still lack alternative suppliers for high bandwidth circuits. Moreover, it would be very difficult to define the boundaries of these metropolitan and non-metropolitan geographic markets, as boundaries between more and less competitive areas are rather blurred and are likely to shift over time. See sections C.44 to C.47 for additional detail.

4.13 Hence the Director considers that at present it would not be appropriate to define separate geographic markets and proposes to define a single national market for high bandwidth retail leased lines. Nevertheless, as discussed above, this market is characterised by varying degrees of competitive pressure and any analysis or policy intervention should take this into account.

BT’s comments on market definition for retail markets and Oftel’s response

4.14 BT was in broad agreement with the Director’s market analysis for retail markets, and in particular with the Director’s decision to define separate markets for low and high bandwidth circuits. BT expressed two major reservations concerning BT’s market analysis, namely (1) the classification of 8Mbit/s leased circuits; and (2) the classification of high bandwidth services of 2.4Gbit/s and above. A summary of BT’s views, together with the Director’s response, is outlined in the text below.

8 Mbit/s circuits

4.15 BT stated that the appropriate treatment for its legacy 8Mbit/s circuits is to either (1) exclude these circuits altogether from leased lines market analysis or (2) include these circuits within the low bandwidth market. BT’s argument for the exclusion of 8Mbit/s circuits is based on the premise that:

• 8Mbit/s circuits are no longer sold by BT; and
• no operator has requested an 8Mbit/s PPC.

4.16 BT justifies the inclusion of 8Mbit/s circuits in the low bandwidth market by stating that, even if the previous two arguments in favour of excluding 8Mbit/s from the market definitions altogether are rejected, "in terms of supply-side characteristics, the 8Mbit/s service has more in common with the low bandwidth market and should be included there".

4.17 The Director disagrees with BT’s suggestion, and maintains that 8Mbit/s circuits should be included within the high bandwidth leased lines market. In response to individual points:

• that 8Mbit/s circuits are no longer sold is of no consequence to this analysis. BT still earns revenue from the product through rental charges (although not connection charges), meaning that the product must be in some economic market; and
• that no operator has requested an 8Mbit/s PPC is not relevant to the definition of a market for retail leased circuits.

4.18 Regarding the third point the Director considers that it is appropriate to include 8Mbit/s circuits within the high bandwidth market. This is supported by examination of the retail price of 8Mbit/s circuits relative to 34 and 2 Mbit/s circuits, and by comparison of the significant extent to which OLOs have invested in 8Mbit/s circuits relative to the comparatively low degree of entry in the low bandwidth market.

4.19 The Director’s analysis indicates that, the impact of excluding 8Mbit/s circuits from the market for high bandwidth terminating segments has a minimal impact on the aggregate market shares of BT in revenue terms.

2.4 Gbit/s circuits

4.20 BT contended that its 2.4Gbit/s circuits form a separate economic market from the market defined for 2Mb/s to 622Mb/s circuits. BT’s argument is based on the premise that:

4.21 these circuits use a separate network to other high bandwidth private circuits;

• these circuits will address "new and emerging requirements" for new services requiring very high bandwidth; and
• the price per bit of 2.4Gb/s circuits is such that multiples of lower bandwidth circuits do not represent a viable substitute.

4.22 The Director disagrees with BT’s suggestion, and maintains that 2.4Gb/s circuits should be included within the high bandwidth leased lines market. In response to the above individual points:

• that 2.4Gb/s circuits use a separate network does not in itself imply that they should be classified within a different economic market, since this does not represent a barrier to demand-side substitution by customers. This is implicitly acknowledged by BT since it has stated that 622Mb/s circuits are in the same economic market as high and low bandwidth circuits despite the fact that it uses a different network; and
• since the provision of 2.4Gb/s circuits is a very new service there is a degree of conjecture in assessing whether multiples of lower bandwidth represent a cost-effective alternative to 2.4Gb/s circuits in terms of functionality provided. However, the Director is currently satisfied that the applications currently served by 2.4Gbit/s circuits can be served in a reasonably cost effective and functional manner by multiples of lower bandwidth circuits.

4.23 The Director intends to monitor the growth of very high bandwidth circuits in order to assess whether such circuits (although not necessarily 2.4Gb/s circuits) will ultimately form a new economic market. However, the available evidence suggests that this is not currently the case.

Wholesale markets

4.24 In his December 2001 Consultation Document the Director identified three wholesale markets: a market for "trunk segments" and two markets for "terminating segments". The Director continues to believe that this distinction is appropriate.

4.25 Therefore the Director considers that there are markets for:

• trunk segments;
• terminating segments up to and including 2 Mbit/s (low bandwidth); and
• terminating segments for above 2 Mbit/s (high bandwidth).

4.26 On the demand side, low and high bandwidth terminating segments appear not to be valid substitutes, because of the expected price and cost difference between these services. There is likely to be a chain of substitution between low bandwidth circuits and between high bandwidth circuits, but this chain appears not to extend between the two. There is a break in the chain between 2Mbit/s and 34Mbit/s circuits. On the supply side, substitution from high to low bandwidth terminating segments is limited by the high sunk costs necessary for an operator to roll out duct and fibre to extend its network to the premises of customers and therefore inclusion of high and low bandwidth terminating segments in the same market is not justified. These sunk costs are lower if an operator is already supplying circuits to the premises and, thus, in these circumstances some supply side substitution may be possible. However, the Director considers that the likelihood that an operator may already be serving the premises is very low. Therefore, the Director believes that supply-side substitution on this basis is so limited that it does not represents an effective constraint and, as such, does not justify the inclusion of high and low bandwidth terminating segments in the same market.

4.27 From a geographic point of view, the Director still considers that it is appropriate to define a national market for trunk segments. The Director also considers it appropriate to define a national market for low bandwidth terminating segments. In addition, the Director has examined the issue of the appropriate geographic boundaries of the market for high bandwidth terminating segments, as there was evidence of a higher level of entry in the central London Zone (CLZ) and some other metropolitan areas. However, it is unclear whether the extent of competition in each metropolitan area is similar across the whole area. Even within metropolitan areas, there are zones with more competition and zones with much less c