S.1 This statement and direction sets out a requirement on BT to provide cost oriented backhaul services. Local loop unbundling (LLU) backhaul is a wholesale service which provides capacity between an LLU operator’s (LLUO) equipment at a BT local exchange and an LLUO’s point of interconnection with BT’s network. Backhaul is a component of a wholesale DSL service. It is therefore one of the wholesale network inputs needed for the provision of retail broadband services.

S.2 As part of the consultation, Oftel identified markets for backhaul links, which provide capacity from a local exchange to BT’s trunk network, and backhaul trunk, which provides capacity across BT’s trunk network. Backhaul links form two separate markets: links provided by leased lines (LL) and those provided by Local Area Network extension services (LES). Oftel considers that the markets for LL backhaul links and LES backhaul links are not effectively competitive. Oftel has concluded that the backhaul trunk market is prospectively competitive.

S.3 Oftel has considered the state of competition in the relevant retail and wholesale markets and concluded that LLU will not be fully effective in promoting retail broadband competition unless BT provides backhaul at cost orientated prices.

S.4 Oftel has therefore directed that:

• BT shall provide backhaul to LLUOs on reasonable terms, including cost oriented prices and an appropriate service level agreement. BT shall ensure that the pricing for network elements common to PPCs and backhaul are consistent; and
• fixed compensation payments shall be payable where BT fails to meet its obligations under the service level agreement (SLA).

S.5 External Tie Circuits are required to connect a distant co-location site to BT’s main distribution frame (MDF) at a local exchange. Oftel has considered the competitiveness of this market and concluded that BT has market power in the provision of external tie circuits.

S.6 Oftel has therefore directed that BT should:

• reduce the mark-up included in the charges for external tie circuits to a level no more than that for the external tie circuit pull-through service;
• amend the connection charges for tie circuits to remove the cost of additional planning time, in line with the January 2002 publication Statement and Direction on certain of BT’s charges for Local Loop Unbundling distant and physical co-location;
• amend the rental charges for external tie circuits and the external tie circuit pull-through service to reflect only maintenance costs (equal to 7.43% of the capital value of the tie circuit); and
• remove any replacement cost element from the rental charge for external tie circuits.

2.1 Backhaul provides a capacity that conveys telecommunications services delivered by means of a Metallic Path Facility (MPF), from an LLUO’s co-location site, which is connected to a BT MDF, to an LLUO’s point of connection with BT’s network. There are likely to be various types of backhaul depending on the type of co-location employed by the LLUO, and the type and location of the point of interconnection with BT’s network. LLUOs may choose to self-provide backhaul or purchase backhaul from another Annex II operator. However, Oftel considers that LLUOs will require BT to provide backhaul in most cases (due to the high cost of build required for operator provided backhaul).

2.2 Oftel has specified a range of backhaul products in Annex A. The Director has removed the words "Ethernet presented" from the product definition (h), as set out in paragraph 6 of Annex A of the draft Direction, as he thinks it appropriate not to limit this product type to a specific type of protocol, in order to give greater flexibility of delivery. If LLUOs require alternative products, Oftel expects BT to develop these products provided it is technically feasible and there is reasonable demand.

2.3 In the 17 December 2001 consultation on backhaul services, Oftel defined four retail markets for broadband Internet access: business asymmetric, business symmetric, residential asymmetric and residential symmetric. SDSL leased lines are part of a broader market for low bandwidth leased lines. Oftel has also defined three separate wholesale markets for backhaul: backhaul trunk, local loop (LL) backhaul links and LES backhaul links. These LES backhaul links provide a point-to-point connection and are a form of short-haul data service.

2.4 It is necessary for operators wishing to provide LLU services to purchase backhaul from BT in most cases due to the high cost of build required for operator provided backhaul. Oftel has concluded that the markets for broadband Internet access, LL backhaul links and LES backhaul links are not prospectively competitive, while the market for backhaul trunk is prospectively competitive. Moreover, BT’s market power in LL backhaul links and LES backhaul links means that LLU will not be effective in enabling the development of competitive broadband Internet markets. As this market is not competitive, BT has the ability to charge a price higher than would be possible in a competitive market. Therefore, in the absence of cost oriented backhaul, LLUOs will not be able to compete effectively with BT in the provision of retail broadband services. In order to ensure that LLU is fully effective in promoting competition in broadband Internet access, Oftel has directed BT to provide cost oriented backhaul trunk, LL backhaul links and LES backhaul links as described in Annex B.

2.5 To encourage competition in the market for retail broadband services, it is necessary for operators to be able to compete on an equal footing with BT. If operators were placed at a competitive disadvantage due to BT preferring its own business, this would act as an entry deterrent by disincentivising new operators from entering the market and preventing existing operators from competing on equal terms.

2.7 The Director General considers that backhaul falls within the scope of EC Regulation 2887/2000 on unbundled access to the local loop (the EC Regulation) as a related facility within the meaning of Article 2 of the EC Regulation. He also considers that it falls within Directive 97/33/EC of the European Parliament and Council on interconnection in Telecommunications with regard to ensuring universal service and interoperability through the application of the principles of Open Network Provision (‘the ICD’).

2.8 The ICD defines interconnect as "the physical and logical linking of telecommunications networks used by the same or a different organisation in order to allow the 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".

2.9 A telecommunications network is defined as: "transmission systems and, where applicable, switching equipment and other resources which permit the conveyance of signals between defined termination points by wire, by radio, by optical or by other electronic means."

2.10 Trunk, LL and LES backhaul are transmission systems because they permit the conveyance of signals between defined termination points. Consequently, the provision of LLU backhaul falls within the definition of the ICD as two telecommunication networks will be physically and logically linked.

2.11 Under Regulation 6(3) of the Telecommunications (Interconnection) Regulations 1997 (‘the Interconnection Regulations’) (which implements Article 9(3) of the ICD) the Director may, in pursuit of the aims stated in Regulation 6(1) of those Regulations, intervene at any time in order to make a direction specifying issues which must be covered in an interconnection agreement, and to specify conditions that must be observed by one or more parties to such an agreement.

2.12 The aims listed in Regulation 6(1) of the Interconnection Regulations include the need to stimulate a competitive market and the principles of non-discrimination (including equal access) and proportionality. LLU backhaul is needed to allow unbundling of the local loop to be fully effective in enabling competition in broadband services. Effective LLU will help stimulate a competitive market in broadband Internet access. LLU backhaul is also required to ensure that BT is unable to discriminate in the provision of backhaul to itself and other wholesale DSL providers.

2.13 Interconnection for leased lines under Regulation 6(3) of the Interconnection Regulations is provided by BT pursuant to Condition 45.1 of its Licence and as such is a Standard Service (as defined in BT’s Licence). Under Condition 57 of its Licence, BT is prohibited from unduly discriminating or unduly preferring its own business in respect of interconnection. In respect of such services BT is also required to ensure that its charges are cost-orientated (Condition 69.1 of BT’s Licence).

2.14 The Director General’s view is 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. For example, if the provision of the service in question was effectively competitive or moving towards a competitive market structure then Oftel would be likely to interpret the requirement for cost orientation as meaning 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. However, if by contrast the relevant economic market was not competitive (ie not effectively or prospectively competitive), then Oftel would 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, Oftel would generally consider lighter regulation, for example regulation based on the principles of non-discrimination, to be more appropriate.

2.15 The Director General believes that his view on cost-orientation is consistent with the approach taken by the ICD, Recital 10 of which states that:

2.16 The Director General expects BT to set prices in consultation with interested operators within this framework and expects that the price for backhaul link and trunk should be priced on the same basis as PPC terminating segments. Backhaul is a similar product to PPCs and therefore consistency of approach is needed. Oftel's market definitions have reflected the close links between backhaul and PPC products and Oftel considers trunk backhaul and PPC trunk segments to be in the same market. Leased line backhaul links and PPC terminating segments are also defined as being in the same market. The effect of paragraph 4 of the Direction is to ensure that BT's charges for LLU backhaul are consistent with its charges for the elements which are common to PPCs. The Director is currently in the process of resolving a dispute concerning BT's pricing of PPCs. If in resolving that dispute the Director requires BT to alter its prices, paragraph 4 of the Direction will require BT to ensure that its LLU backhaul charges are consistent with the new PPC charges, at that time.

2.17 The interaction of Conditions 45 and 69 of BT’s Licence requires that charges for Standard Services are reasonably derived from the cost of providing the service, based on a forward looking incremental cost approach (except to the extent that the Director considers it appropriate to apply another cost standard). In the event of a dispute, the Director will consider the appropriate cost standard in assessing what would be a cost-orientated price.

2.18 The ICD requires BT to adhere to the principle of non-discrimination with regard to interconnection offered to others. BT must apply similar conditions in similar circumstances to interconnecting organisations providing similar services. In addition BT must provide interconnection facilities and information to others under the same conditions and of the same quality as it provides for its own services, or those of its subsidiaries or partners. As operators rely on BT for the provision of backhaul in the majority of cases, it is necessary that they have a degree of certainty regarding the level of service that BT will deliver. If BT fails to deliver an appropriate level of service to operators, this will detrimentally affect the service that operators are able to offer to consumers. This may act as a disincentive to consumers from taking service from LLU operators. It is important, in order to stimulate a competitive market, that LLUOs can effectively compete with BT. In order to do this they must have guarantees that LLU backhaul will be provided on reasonable terms, including terms for provisioning and repair. BT must, therefore, ensure that the service level agreement (SLA) relating to the supply of LLU backhaul does not, in any way, put an LLUO at a competitive disadvantage.

2.19 It is, therefore, appropriate that the SLA relating to the supply of LLU backhaul includes provision for the payment of fixed compensation, to be payable by BT where it fails to fulfil its obligations under the SLA.

2.20 In October 2001, Oftel completed an investigation into distant and physical co-location charges. The investigation concluded that BT was over-recovering certain costs for distant co-location. On the 18 January 2002, the Oftel Statement and direction on certain of BT’s charges for Local Loop Unbundling distant and physical co-location, (‘the 2002 Statement’) was published. This set out the pricing principles that Oftel expected BT to use when setting charges for both BT and operator provided external tie circuits. The statement stopped short of directing the prices that BT should set for BT provided tie circuits, as important issues relating to the competitiveness of the market for these circuits were under review in the consultation on backhaul services.

2.21 The consultation on backhaul services has concluded that BT has market power in the provision of external tie circuits.

2.22 Article 4(2) of the EC Regulation gives the Director the power where justified to impose changes on the reference offer for unbundled access to the local loop and related facilities. Article 4(3) of the Regulation permits the Director to intervene on his own initiative where justified in order to ensure non-discrimination, fair competition, economic efficiency and maximum benefit for users.

2.23 Cost orientated prices for BT provided external tie circuits are required to ensure competitive prices for external tie circuits, as operator self provide is unlikely to constrain BT’s prices to competitive levels. Cost orientated external tie circuits will stimulate competitive wholesale DSL services, as external tie circuits are required for LLUOs who utilise distant co-location to provide wholesale DSL services.

2.24 The 2002 Statement considered several issues relating to BT’s rental and connection charges for BT provided external tie circuits and the BT pull-through service for OLO provided external tie circuits. The Statement concluded that:

a) BT should not recover the cost of additional site visits caused by LLUO planning mistakes through the connection charges for external tie circuits or the tie circuit pull-through service. Instead, Oftel was of the view that BT should introduce a per-occasion, hourly call-out charge whenever LLUOs’ planning mistakes resulted in BT having to perform extra work;

b) BT should not include a replacement cost element in the rental charges for external tie circuits and tie circuit pull-through service, which should only comprise the costs of maintaining the external tie circuits; and

c) BT should reduce the rental charges for BT provided external tie circuits and for the tie circuit pull-through service to reflect only maintenance costs (equal to 7.43% of the capital value of the external tie circuit). The capital value of the tie circuit is to be calculated by subtracting any mark-up and bad debt provision from the connection charge for the tie circuit.

2.25 As Oftel was still consulting on the competitiveness of the market for external tie circuits in the Backhaul consultation, it was not considered appropriate for Oftel to direct in the 2002 Statement on many of the conclusions in paragraph 2.24, above. The Statement did make clear, however, that Oftel would direct on these issues once the competitiveness of external tie circuits had been decided.

2.26 Given the conclusions of paragraphs 2.21 to 2.23 above and the conclusions of the 2002 Statement, Oftel has concluded that BT should:

a)remove the cost of additional site visits from the connection charges for BT provided external tie circuits;

2.27 The capital cost of an external tie circuit can be calculated by adding together the costs of the store items and labour required to provide that tie circuit. No overheads or mark-ups should be included in the capital cost. Oftel has calculated the capital cost by removing the mark-up, which contains cost elements for bad debt provision and wholesale selling, from the connection charge.

2.28 BT has argued that the capital cost of duct should be included in the capital cost of external tie circuits when calculating the rental charge for external tie circuits. The purpose of the tie circuit rental charge is to allow BT to recover the ongoing costs it incurs in maintaining the tie circuit. Oftel recognises that there may also be costs associated with maintaining duct, but does not believe that it is appropriate for BT to recover these costs through the external tie circuit rental charge.

2.29 The cost of installing duct is charged for on a bespoke basis, separately from the cost of installing an external tie circuit. Oftel therefore believes that if BT wishes to recover its costs of maintaining duct, it should introduce a separate charge. This charge should be cost oriented and take into account factors such as the likelihood of damage to the cable and who any duct is shared with.

2.30 In the 2002 Statement, Oftel advised that it would be seeking a written assessment from BT of the costs and benefits of bringing the co-location project in-house. BT provided this information on 18 April 2002.

2.31 After analysis of BT’s response, Oftel is satisfied that, given current LLU volumes, it is not unreasonable for BT to use external project management. BT currently outsources its own building project work to third parties and, as a result, no longer employs the specialists necessary to handle the LLU project management in-house. Given the current volumes for LLU build, Oftel is satisfied that it is reasonably cost effective for BT to use third parties when they are required, than to employ a specialist in-house team itself on a full-time basis.

3.1 The consultation invited comments from interested parties on a number of issues. Oftel received responses to the consultation from 186K, Alcatel, BT, Bulldog Communications, Cable and Wireless, Easynet, Fibernet, Kingston Communications, NIACT, Thus, VNL and WACT.

3.2 This part of Chapter 3 provides a summary of the views expressed by the respondents in reply to the questions asked as part of the consultation. BT chose not to respond to the specific questions asked as part of the consultation, but instead provided comments on the consultation document as a whole. The issues raised by BT in response to the consultation are detailed later in this chapter.

3.3 Generally respondents recognised that there were close links between PPCs and backhaul. However, Easynet stated that leased lines would not be effective for the provision of backhaul as the key element of backhaul is the connection between MDFs and the LLUO’s own point of presence and that PPCs may not always be the most effective method for such a connection. Other issues were raised (ie requesting the aggregation of backhaul links and permitting LLUOs to specify the configuration of links) and these are addressed later in this chapter.

3.4 Respondents agreed that BT should provide interconnection at all layers of both the SDH and MSH networks. For Oftel’s view on this issue, please see paragraph 3.33 below.

3.5 Respondents saw little need for backhaul bandwidth of less than 2 Mbit/s. One respondent requested that backhaul be offered at 2 Mbit/s and above. The majority of respondents agreed that they would be interested in purchasing bandwidth of 34 Mbit/s and above.

3.6 The respondents generally agreed with the retail and wholesale market analysis set out in the backhaul consultation document.

3.7 Respondents agreed with Oftel’s conclusions on this issue.

3.8 Respondents agreed with Oftel’s conclusions.

3.9 Respondents agreed with Oftel’s conclusions. One respondent provided confidential information on the level of new duct build required for LLUOs for self provided and for BT provided external tie circuits. This supported Oftel’s conclusion that where LLUOs self provide external tie circuits, there is a larger amount of new duct required and higher costs involved than would occur if BT provided these circuits.

3.10 Therefore in light of the above, Oftel has concluded that it should direct BT in the manner summarised in S.4 and S.6, above.

Oftel response:

3.11 The Annex to the EC Regulation contains a minimum list of items, which must be included in a reference offer for unbundled access to the local loop. The inclusion of the word "minimum" in both Article 3 and the Annex clearly demonstrates that this list is not exhaustive. Furthermore, if related facilities only covered those items contained in the Annex to the EC Regulation, there would have been no need to define the term "related facilities" in Article 2 of the EC Regulation.

Oftel response:

3.12 The Director General considers that it is not legally appropriate to import a test under EC competition law in order to define the word "necessary" by reference to case law based on a different legal and economic concept concerning essential facility.

Oftel response:

3.13 As stated in Chapter 2, the Director is not using his powers under the EC Regulation.

Oftel response:

3.14 The Director General has justified his power to intervene under the EC Regulation by reference to the market conditions and the fact that the cost analysis finds that backhaul will be a material cost element in the provision of broadband Internet and data services. Both these factors are set out and discussed in Chapter 3 of the consultation document and Chapter 2 of this explanatory memorandum. Nonetheless, for the reasons set out on Chapter 4 of the consultation document and Chapter 2 of this explanatory memorandum, the Director is not intervening pursuant to the EC Regulation, but under the Interconnection Regulations.

Oftel response:

3.15 The information contained in paragraph 3.28 of the consultation document is confidential. This information merely confirms the analysis set out in the proceeding paragraphs, that LLU backhaul represents a significant cost component of providing wholesale DSL services. The analysis on which this conclusion is based is clearly set out in the consultation document and thus allowed ample opportunity for BT and other parties to comment.

Oftel response:

3.16 The legal basis for intervention under the ICD is set out in Chapter 2.

Oftel response:

3.17 The Director General has not confused the definition mentioned in paragraph 4.6 of the consultation document with the definition of a leased line. The definition of a telecommunications network, upon which the statement in paragraph 4.5 is based, is to be found in Article 2(1)(c) of the ICD.

3.18 Furthermore, it should be noted that interconnection, as defined by the ICD, includes the physical and logical linking of telecommunications networks used by the same or a different organisation in order to allow the users of one organisation to communicate with users of the same or another organisation, or to access services provided by another organisation (emphasis added).

Oftel response:

3.19 The EC Regulation (at Article 3) states that notified operators shall meet "reasonable" requests for unbundled access to the local loops and related facilities. Paragraph 4.8 of the consultation document seeks only to clarify Oftel’s interpretation of what a "reasonable" request for backhaul services might be. BT retains the ability to refuse a request on the basis of objective criteria relating to technical feasibility or the need to maintain network integrity. The guidance set out in paragraph 4.8 would in no way prevent BT from refusing to provide backhaul on these grounds.

Oftel response:

3.20 Article 9(3) of the ICD, as implemented by Regulation 6(3) of the Interconnection Regulations, allows the Director General to intervene at any time in order to make a Direction. Where an agreement already exists, and there is no dispute, the Director may only in exceptional circumstances make a direction for changes to be made to an interconnection agreement.

3.21 There is currently no agreement between BT and the OLOs concerning the wholesale provision of LLU backhaul. The Director is, therefore, not proposing any changes to be made to any existing interconnection agreements. Consequently, there is no requirement in this instance to show that this is an exceptional circumstance. The Director can intervene pursuant to the aims stated in Regulation 6(1) of the Interconnection Regulations and as set out in this explanatory memorandum and the Direction (in particular, the need to stimulate a competitive market and the principles of non-discrimination, including equal access, and proportionality).

Oftel response:

3.22 Oftel recognises there is evidence of a higher level of market entry in Central London and possibly other metropolitan areas than elsewhere in the country. However, for the following reasons Oftel does not consider it appropriate to define a separate market for Central London LLU backhaul:

• the boundaries of Central London would be difficult to accurately define, since they are blurred and are subject to change over time; and
• it is not clear that the extent of competition across Central London or other metropolitan areas is similar across the whole area. Notably, some parts of Central London are still not subject to competitive pressures. This is illustrated by a number of LLUOs having reported the existence of sites in Central London at which there are no alternative (to BT) providers of backhaul.

Oftel response:

3.23 Oftel’s initial conclusions (set out in the December 2001 consultation) were based on the information that was available to Oftel at that time. Oftel has since updated its analysis, as outlined in its final version of the Phase 1 Direction to resolve a dispute concerning the provision of Partial Private Circuits, which was published on 14 June 2002, (‘the PPC Phase 1 Direction’). Oftel’s conclusions remain unchanged by the new data.

Oftel response:

3.24 Updated revenue and volume figures, together with an explanation of Oftel’s rationale behind its choice of market share data, are provided in the final version of the PPC Phase 1 Direction.

Oftel response:

3.25 Please see Oftel’s response at paragraph 3.22 above.

Oftel response:

3.26 Oftel recognises that LLUOs retain the ability to supply their own external tie circuits. However, BT has an existing network of duct, whereas other operators will have to dig new duct to self provide new circuits. There will be significant sunk costs for other LLUOs to self provide a tie circuit network equivalent to BT’s, creating barriers to entry in this market. This gives BT market power in the supply of external circuits.

Oftel response:

3.27 LLUOs cannot use distant co-location without an external tie circuit. Whether substitutes exist for external tie circuits will depend on whether viable alternatives to distant co-location are available to LLUOs. A possible alternative is physical co-location. Oftel does not consider that physical co-location is always a viable substitute to distant co-location, as it may have significant disadvantages over distant co-location, for example:

• there may be a lack of space at the physical co-location site; and
• LLUOs will have less control over costs at a physical co-location site.

Therefore, physical co-location and internal tie circuits will not constrain the prices of external tie circuits at distant co-location sites. Accordingly, it would be inappropriate to define internal and external tie circuits as being in the same market.

Oftel response:

3.28 Oftel has not suggested that BT use its existing metallic access network to supply external tie circuits but, rather, the network of duct that the circuits sit in. Given that BT’s access network is not used to provide the external tie circuits, BT’s concerns about the ANFP are unfounded.

Oftel response:

3.29 As outlined at paragraphs 3.12 and 3.13 above, Oftel does not consider that the EC case law concerning essential facility is relevant in this instance.

Oftel response:

3.30 Oftel is surprised at BT’s claim that it does not include a mark-up on external tie circuits. BT has previously provided a spreadsheet to Oftel, which clearly indicates that a mark up is included. Oftel recognises that there is some justification for including a mark-up to cover actual and reasonable costs such as wholesale and bad debt costs, which would not otherwise be recovered. However, there is no justification for including an additional mark-up, which is not related to or intended to recover costs. Consequently, Oftel believes that BT should reduce its mark-up so that it is no higher than that for the tie circuit pull through service.

Oftel response:

3.31 As expressed in its January 2002 Statement, Oftel is of the view that BT should not recover the cost of replacing an external tie circuit through the rental charge for that circuit. The rental charge should only cover the cost of maintaining the external tie circuit. Oftel rejects BT’s claim that it should not be obliged to maintain an external tie circuit after a certain point in its life. Given that the rental charge covers the cost of maintaining the external tie circuit, BT should be obliged to maintain the circuit for the period that the rental charge is levied. If the circuit is in need of replacement then a new circuit should be installed and the appropriate charges levied.

Oftel response:

3.32 Oftel understands that this request is based on the desire of operators to ensure resilience. Backhaul links, like PPCs, are available with or without resiliency and so it is already possible for operators to achieve this requirement. Oftel does not consider a direct link between two MDF sites to be compatible with the ICD, as there would be no linking of networks.

Oftel response:

3.33 Oftel agrees with the respondent’s view that permitting operators to interconnect at all layers of BT’s network would enable operators to have a greater degree of flexibility in planning their own network build. This approach would be consistent with the methodology set out in the consultation on PPCs. Accordingly it is Oftel’s view that BT should make wholesale backhaul services available at any point on its network.

Oftel response:

3.34 The Direction accompanying this explanatory memorandum requires BT to provide backhaul circuits and refers to the provision of a ‘transparent transmission capacity’. Oftel has not specified the type of traffic (eg voice) that can be transmitted and as such, this is a commercial decision for the operator concerned.

3.35 In relation to the request for <2Mbit/s services, Oftel has obtained the views of interested parties (see paragraph 3.5 above). Operators stated that in general, they would only be interested in purchasing bandwidth of 2 Mbit/s and above. Oftel considers that it is unlikely that a backhaul service of less than 2 Mbit/s would be required, even were operators to have relatively low volumes of customers at each DSLAM. Therefore, it is not considered appropriate to require BT to provide bandwidth of <2 Mbit/s.

3.36 Operators are able to transmit ATM traffic over backhaul once suitable equipment has been installed. The decision whether or not to install such equipment is the commercial decision of the operator concerned.

Oftel response:

3.37 BT needs to be able to monitor and manage network provided services such as backhaul and can only do this by terminating services on BT provided equipment and using appropriate connection to BT’s network management resources.

Oftel response:

3.38 BT is required to provide backhaul links from co-location sites to a point of connection. With this arrangement it is possible for operators to receive multiple backhaul links over a single point of connection. However, where BT is providing multiple backhaul links it should utilise its network in such a way as to minimise costs and charge the operators accordingly.

Oftel response:

3.39 Oftel understands that it is very unlikely that an MDF would not be on an SDH node. Oftel has imposed a requirement on BT to provide wholesale backhaul services at a cost oriented price. It has not prescribed how BT should deliver these services to operators, whether using SDH or alternative technology. Therefore, the issue of whether or not an SDH node is at an MDF site will not impact on BT’s ability or obligation to provide a backhaul service.

Oftel response:

3.40 Under the Network Information Planning Principles (NIPP) BT is required to publish a description of its network structure to those holding licences under Section 7 of the Telecommunications Act 1984 and those who have formally applied for such a licence. As such, it is not considered to be appropriate to impose a further requirement on BT to provide this information.

Oftel response:

3.41 Oftel’s reasons for limiting its assessment to the provision of broadband services are set out in Annex B.

Oftel response:

3.42 Oftel assessed BT’s market power in the backhaul links and trunk markets for the UK as a whole. Oftel found that the market for backhaul links is not effectively competitive and that the market for backhaul trunk is prospectively competitive.

3.43 Oftel acknowledges that the degree of competition varies by area. However, due to the difficulties of defining boundaries and the fast pace at which boundaries are likely to change, such an approach is rarely practicable. Additionally, in areas where more intense competition is observed, it is not clear that this competition is uniform across the whole of these areas. Oftel has therefore concluded, on the grounds of a lack of evidence and on the grounds of practicability, that a regional split of the backhaul market is not justified.

3.44 The main determinant of competition is the level of expected traffic density. Therefore the degree of competition is more likely to vary by metropolitan and non-metropolitan areas rather than by whether the location is in England or Wales.

Oftel response:

3.45 Oftel does not wish to instruct BT which technology it should use to provide particular services. Oftel has recently directed that BT should trial an SDSL ATM interconnect service if requested to do so.

Oftel response:

3.46 Oftel does not need to take a view on this for the purposes of resolving this issue.

Oftel response:

3.47 On SDSL see 3.45. This is a leased line issue and will not be dealt with under backhaul.

Oftel response:

3.48 Oftel agrees and considers BT to have market power in the supply of external tie circuits and that the market is not effectively competitive.

Oftel response:

3.49 Oftel has analysed BT’s market power and considered options for regulatory intervention on a consistent basis for both ATM interconnection and LLU backhaul. Chapter Four of the ATM interconnection explanatory memorandum explains how Oftel reaches a view on whether retail minus or LRIC plus prices may be appropriate for any regulated product and in particular sets out the reasons why Oftel set charges on a retail minus basis for ATM interconnect.

Oftel response:

3.50 Oftel recognises that backhaul is a similar product to PPC and that consistency of approach is needed. For this reason Oftel issued the LLU backhaul consultation document on the same day as Phase 1 of the PPC draft Direction.

3.51 Oftel’s market definitions reflect the close links between the backhaul and PPC products. Oftel considers trunk backhaul and PPC trunk segments to be in the same market. Leased line backhaul links and PPC terminating segments are defined as being in the same market. In the Phase 1 PPC Direction, Oftel defined two terminating segments markets – low and high bandwidth. This is not inconsistent with Oftel’s single market definition for backhaul links, as these are effectively only available at high bandwidths.

Oftel response:

3.52 Oftel is of the view that where co-location is delivered on time but backhaul is not, then if the LLUO suffers loss as a result of the late delivery of backhaul, it should be able to claim fixed compensation under the SLA.

Oftel response:

3.53 Oftel does not believe that a requirement to provide cost orientated backhaul services would lead to a reduction in the range of retail data services offered by BT. The extent of retail products offered is a commercial decision for BT. Anyone adversely affected by the withdrawal of a BT product would retain the option of approaching Oftel to request that the issue be investigated.

Oftel response:

3.54 Oftel does not consider this issue relevant as the LLU backhaul Direction specifies products whereas BT offers its PPC products following the negotiations pursuant to the PPC Direction in March 2001.

Oftel response:

3.55 Oftel does not consider this measure to be necessary. Once the Direction has been imposed, BT is obliged to comply with it. Anyone who believes that BT has not fully complied with the provisions of the Direction retains the ability to approach Oftel and ask that any alleged non-compliance be investigated.

Oftel response:

3.56 Oftel considers that the pricing of BT Egress should be on a cost oriented basis. BT has confirmed that it considers the current pricing of BT Egress to be compliant with this requirement. As such, it is not considered to be necessary to explicitly include BT Egress in the final backhaul Direction. BT Egress is an LLU product and Oftel expects it to be priced in accordance with the LLU pricing principles. BT claims that it is and Oftel has received no information or assertions to the contrary.

Oftel response:

3.57 Condition 47 of BT’s licence sets out the price notification periods that must be given before any changes in BT’s charges can take effect. Oftel considers that a notice period in excess of the requirements of Condition would not be proportionate or necessary in this instance.

ATM service: data services using Asynchronous Transfer Mode technology, such as BT’s Cellstream service or Energis’s Cellconnect.

Bandwidth: the physical characteristic of a telecommunications system that indicates the speed at which information can be transferred. In analogue systems, it is measured in cycles per second (Hertz) and in digital systems in binary bits per second (bit/s).

Copper or metallic line: the main transmission medium used in telephony networks to connect a telephone or other apparatus to the local exchange. Copper lines have relatively narrow bandwidth and so have limited ability to carry broadband services such as video unless combined with an enabling technology such as ADSL.

De-averaging: the move from a single averaged tariff or charge to separate ones based on differing geographical areas or types of service.

Digital subscriber line access multiplexer (DSLAM): it is located in the co-location space of an operator at an exchange site. It is composed of a multiplex and the DSL modems necessary to operate DSL services over the loops served by the LLUO from the exchange.

Digital Cross Connection node: A node in BT's Private Circuit network where circuits at 64kbit/s and below can be cross-connected between differing 2Mbit/s tributaries.

Digital Junction Switching Unit (DJSU): a tandem switch used to connect between DLEs in the London area.

DLE (Digital Local Exchange): the telephone exchange to which customers are connected, usually via a concentrator.

DMSU (Digital Main Switching Unit): connects calls between DLEs and also other DMSUs and form the backbone of the trunk network.

Geographically averaged prices: prices established by averaging the costs of network elements across the country so that customers in different areas of the country do not pay different rates.

Incremental costs: the capital and operating costs that arise as a result of the provision of the ‘increment’. In contrast to fully allocated costs, the incremental costs include only those costs that are caused by the provision of the increment.

Internet: a global network of networks, accessed by users with a computer and a modem via a service provider.

Internet Protocol (IP): a set of instructions describing how to address and transfer information across a network. The Internet is a public network consisting of many interconnected IP networks.

Leased line: a permanently connected communications link between two premises dedicated to the customers’ exclusive use. Also known as a private circuit.

Local loop: the access network connection between the customer’s premises and the local PSTN exchange, usually a loop comprised by two copper wires.

Long-run incremental cost (LRIC): the cost avoided through no longer providing the output of a defined increment. For example, the cost of call conveyance is the cost which would be saved in the long run if this service were no longer provided

Mbit/s: Mega (million) bits per second. A measure of the speed of transfer of digital information.

PPC: a generic term used to describe a category of private circuits that terminate at a point of connection between two operators’ networks. It is therefore the provision of transparent transmission capacity between a customer’s premises and a point of connection between the two operators’ networks. It may also be termed a part leased line. It includes terminating segments.

Plesiochronous Digital Hierarchy (PDH): an older method of digital transmission used before SDH which requires each stream to be multiplexed or demultiplexed at each network layer and does not allow for the addition or removal of individual streams from larger assemblies.

Public Switched Telephone Network (PSTN): the complete network of interconnections between telephone subscribers.

RCU (Remote Concentrator Unit): The lowest level of BT's PSTN hierarchy. Customer lines, which are generally copper wires, are concentrated/multiplexed and routed to a DLE.

Synchronous Digital Hierarchy (SDH): a method of digital transmission where transmission streams are packed in such a way to allow simple multiplexing and demultiplexing and the addition or removal of individual streams from larger assemblies.

Symmetric Digital Subscriber Line (SDSL): a technology that allows the use of a metallic line to send a large quantity of data in both directions.

Terminating segment: A terminating segment is capacity between a customer’s premises and an operator’s point of connection at Tier 1 of BT’s SDH network.

Video-on-demand: a programme or film sent independently to a customer in response to his individual request. This contrasts with broadcast television, which is sent simultaneously to all customers able to receive it.

A.1 BT’s SDH network is arranged in three main tiers. The tier structure relates to the capacity of the nodes and interconnecting transmission paths. The network comprises a top layer mesh of around 60 Tier 1 nodes, situated in trunk buildings which usually also accommodate a BT trunk tandem switch (DMSU, DJSU or WAT). Subordinate to the Tier 1 mesh are Tier 2 rings. Tier 2 nodes (around 600 in number) are situated in buildings in towns and cities that usually have either a trunk tandem switch or a DLE. Subordinate to Tier 2 rings are Tier 3 rings. Tier 3 nodes (around 1000 in number) are mainly situated in buildings housing local concentrators. Other serving exchanges for private circuits connect to Tier 3 nodes using Plesiochronous Digital Hierarchy (PDH) transmission.

A.2 However, many Tier 2 rings are physically remote from the Tier 1 mesh, so an intermediate set of rings, known as ‘supersets’, connect the remote Tier 2 rings to the Tier 1 mesh. The Tier 2 nodes that are situated on the supersets are sometimes referred to as Tier 1.5 and these can be considered as an intermediate layer in the hierarchy, where they exist. There are around 100 such nodes.

A.3 BT has an extra tier-less overlay network called the Marconi Synchronous Hierarchy (MSH) network. This is a broadband SDH network that BT uses to switch at 622 Mbit/s. This network carries circuits at 622 Mbit/s to 2.4 Gbit/s. BT has around 120 MSH A nodes and around 700 MSH B nodes. Products (f) and (g) below (see paragraph A.6), which relate to the higher bandwidth backhaul (622Mbit/s to 2.4Gbit/s), connect across BT’s MSH network.

A.4 Customers may be connected to any of the tiers. For example customers could be connected to Tier 2, 1.5 or Tier 1 nodes for the provision of circuits at 2 Mbit/s and above.

A.5 Oftel recognises that LAN extension services (LES) can be used for backhaul instead of an SDH based transmission medium. This service provides a point-to-point fibre connection. There is no use of SDH as the underlying transmission medium. A customer sited handover is proposed for LES, as an In Span Interconnection (ISI) is not considered to be practical at this stage. This is because an ISI handover of LES would involve the Licensee providing a portion of the LES circuit handing over In-Span via a fibre splice. Many LES circuits have end-to-end network management and, thus, it would not be possible to provide suitably managed LES via ISI. There could also be problems with the splicing of different types of fibre. Oftel will consider interconnection issues associated with provision of LES circuits in the forthcoming determination on LES circuits as part of the Phase II PPC determination. LES backhaul links will be limited to a radial distance of less than 25 km due to the nature of the product.

A.6 The Direction in Annex D, below, requires BT to offer to enter into an agreement to provide the following backhaul circuits: the provision of transparent transmission capacity by the Licensee, at all bandwidths between 2 Mbit/s and 155 Mbit/s (inclusive), between a LLUO’s equipment at a Licensee’s MDF site and a point of connection with an LLUO’s Applicable System connected to the nearest appropriate Licensee SDH node to the customer. Such node could be a Tier 3, Tier 2, Tier 1.5 or Tier 1 node;

a) the provision of transparent transmission capacity by the Licensee, at all bandwidths between 2 Mbit/s and 155 Mbit/s (inclusive), between a LLUO’s equipment at a Licensee’s MDF site and a Point of Connection with an LLUO’s Applicable System connected to the nearest appropriate Licensee SDH node to the customer which is superior in the hierarchy to the node defined in (a) above, where such node exists. Such node could be a Tier 2, Tier 1.5 or Tier 1 node;

b) the provision of transparent transmission capacity by the Licensee, at all bandwidths between 2 Mbit/s and 155 Mbit/s (inclusive), between a LLUO’s equipment at a Licensee’s MDF site and a point of connection with an LLUO’s Applicable System connected to the nearest appropriate Licensee SDH node to the customer which is superior in the hierarchy to the node defined in (b) above, where such node exists, and which could be a Tier 1.5 or Tier 1 node;

c) the provision of transparent transmission capacity by the Licensee, at all bandwidths between 2 Mbit/s and 155 Mbit/s (inclusive), between a LLUO’s equipment at a Licensee’s MDF site and a Point of Connection with an LLUO’s Applicable System connected to the nearest appropriate Licensee SDH node to the customer which is superior in the hierarchy to the node defined in (c) above, where such node exists, and which is a Tier 1 node;

d) the provision of transparent transmission capacity by the Licensee, at all bandwidths between 2 Mbit/s and 155 Mbit/s (inclusive), between a LLUO’s equipment at a Licensee’s MDF site and a point of connection with an LLUO’s Applicable System connected to any Licensee SDH Tier 1 node;

e) the provision of transparent transmission capacity by the Licensee, at all bandwidths from 622 Mbit/s to 2.4 Gbit/s (inclusive), between a LLUO’s equipment at a Licensee’s MDF site and a point of connection with an LLUO’s Applicable System connected to the nearest appropriate Licensee MSH node to the customer;

f) the provision of transparent transmission capacity by the Licensee, at all bandwidths from 622 Mbit/s to 2.4 Gbit/s (inclusive), between a LLUO’s equipment at a Licensee’s MDF site and a point of connection with an LLUO’s Applicable System connected to any appropriate Licensee MSH node; and

g) the provision of dedicated transmission capacity by the Licensee, at all bandwidths from 10 to 1000 Mbit/s (inclusive), between a LLUO's equipment at a Licensee’s MDF site and a site within an LLUO's Applicable System connected to an appropriate Licensee node within a distance of 25 radial km.

B.1 This annex presents a detailed discussion of Oftel’s understanding of the retail and wholesale markets relating to LLU backhaul and an assessment of BT's market power in these markets.

B.2 There are two dimensions to the definition of a relevant market: the relevant products to be included in the same market and the geographic extent of the market(s). Oftel's approach to market definition follows that used by UK competition authorities (please note this link will take you to the Office of Fair Trading website) and is in line with those used by European and US competition authorities. Market boundaries are determined by identifying constraints on the price-setting behaviour of firms. There are two main competitive constraints to consider: how far it is possible for customers to substitute other services for those in question (demand-side substitution); and how far suppliers could switch, or increase, production to supply the relevant products or services (supply-side substitution) following a price increase.

B.3 The concept of the 'hypothetical monopolist test' is a useful tool to identify close demand-side and supply-side substitutes. A product is considered to constitute a separate market if a hypothetical monopoly supplier could impose a small but significant, non-transitory price increase without losing sales to such a degree as to make this unprofitable. If such a price rise would be unprofitable, because consumers would switch to other products, or because suppliers of other products would begin to compete with the monopolist, then the market definition should be expanded to include the substitute products. However, the relevant market is not necessarily the smallest that it is possible to define using the hypothetical monopolist test. It may be appropriate to include in the relevant market, a number of products (or areas), in the supply of which competitive conditions are homogeneous.

B.4 Firstly retail markets will be defined and then wholesale markets will be considered in relation to downstream retail markets. This approach is followed, as the definition of a retail market is likely to affect the assessment of whether market power in a related wholesale market exists. For example, the breadth of a retail market may determine whether a provider of wholesale services has market power in the wholesale market.

B.5 The relevant wholesale market will generally be as broad as the relevant retail market. For example, there are two different retail services, one of which is provided using wholesale input A and the other using wholesale input B, perhaps using entirely different technologies. If the two retail services are sufficiently close substitutes to compete in the same retail market the relevant wholesale market will usually include both A and B. So, even if there was a sole supplier of A, say, this might not be sufficient to establish that upstream power existed.

B.6 A complexity is that the same wholesale input might be used in the supply of a range of retail services, which compete in different retail markets. Some of the retail services might compete in markets that only included other retail services provided using similar wholesale services. In such cases, the appropriate wholesale market definition would be relatively narrow.

B.7 Oftel acknowledges that the industry is changing rapidly and accepts that market definition might also change overtime. Whenever possible, likely future developments of the industry are considered in order to assess the magnitude of some of the changes that may occur.

B.8 Oftel considers that the key products available over unbundled local loops are broadband Internet access, leased lines and video on demand (VOD). Internet access, leased lines and VOD are different products with different features and may form part of separate markets ie VOD is not likely to be a substitute for Internet access or vice versa. Hence the market definitions will begin from the premise that these products are part of separate markets. Firstly, broadband Internet access will be considered and then, leased lines and VOD.

B.9 Internet access via DSL enabled copper fibre has three distinguishing features which are not available in practice on PSTN and ISDN Internet access. It is fast (because of higher bandwidth), it is always on (ie no dial up required) and it allows content (eg music clips, video clips) which are not practically available with narrowband access. DSL Internet access differs from leased line or fixed link Internet access in that it is asymmetric and it usually has contended backhaul. For a discussion of the definition of the narrowband Internet access market, see Oftel’s effective competition review of dial-up Internet access, January 2002.

B.10 Oftel research suggests that 89% of residential users of the Internet use dial-up narrowband access (May 2002), while research on SMEs suggest that 55% used dial-up narrowband access (May 2002). When the research information on the SMEs is broken down between small and medium businesses, 56% of small businesses and 31% of medium businesses used dial-up narrowband. The next most popular means of accessing the Internet was ISDN, 54% of medium businesses, 35% of small businesses and only 3% of residential users used ISDN to access the Internet. Leased lines were used to access the Internet by only 11% of medium business, and only 3% of small business. Broadband (DSL/Cable modem) Internet access is used by 9% of small businesses and 17% of medium businesses. This data sums to greater than 100%, as some business customers use more than one means of accessing the Internet. The Oftel research suggests that dial-up narrowband access is currently the most important means of accessing the Internet for residential users and small businesses and an important means of access for medium size businesses.

B.11 A first issue arises when making a distinction between narrowband and broadband products: can they be seen as being part of the same market, or as being separate markets? For the purpose of the market analysis, Oftel defines broadband as always-on Internet access above 128 Kbit/s and narrowband as Internet access at up to and including 128 Kbit/s. Although BT’s ADSL price reductions in April 2002 mean that the price differential between narrowband and broadband access has reduced, Oftel still considers it to be large enough for the two products to be in separate markets. The price of flat rate PSTN dial up narrowband Internet access is about £12-15 per month, whereas the cheapest DSL broadband Internet access is around £20 to £35 per month and the cheapest cable modem broadband Internet services are available for £25 to £35 per month. In addition, the set-up costs for broadband Internet access are considerably higher than for narrowband access. Equipment and connection charges for broadband range from £55-£120, whereas narrowband Internet equipment starts from as little as £15-£20.

B.12 The definition of the market or markets for Internet access may be dependent on whether the starting point is narrow or broadband access (for more information on asymmetric substitutability, please refer to the OFT's Guideline, Market Definition, OFT 403, March 1999). It is possible that broadband access may constrain the prices of narrowband access, but narrowband access may not constrain the price of broadband access. Technological development often results in the introduction of higher quality, technologically more sophisticated products in technology-intensive industries. In such situations, it is reasonable to believe that the price of the lower quality product is increasingly constrained by movements in the price of the higher quality product. This is on the basis that it is likely that sufficient customers will have a willingness to pay for higher quality that is greater than the cost differential. A monopoly supplier of narrowband access may find it unprofitable to raise its prices significantly as consumers would be increasingly encouraged to switch to the high quality high speed product. However, the opposite might not be true as sufficient broadband users are likely to attach a relatively high value to the higher quality product which relates to the specific functionalities that the product has and that cannot be provided by the narrowband product. Hence, from the viewpoint of broadband access, broad and narrowband access may form separate markets.

B.13 It might also be the case that there exist two distinct groups of customers, those with a high willingness to pay for the functionality offered by high-speed Internet access and those with a relatively low willingness to pay. In these circumstances it might be that neither high- nor low-speed products would provide a competitive constraint on the pricing of the other for these groups of customers. High- and low-speed Internet access products could thus form separate economic markets when considering either set of products.

B.14 Consumers’ valuations of high-speed products may change over time, as the more widespread availability and the lower prices of high-speed access translates into the supply of new products which could not be offered otherwise. The change in valuation implies that if broad and narrowband were part of the same market at present, this may well change. It is likely that in the future consumers’ valuation of high-speed products will be increasingly greater, as awareness and expectations adjust to the more widespread availability of high-quality products. A monopolist who provides high-speed products would then be in an increasingly better position to retain its customers following a non-transitory price increase, since the valuation consumers would attach to high-speed products is likely to exceed the cost differential plus the price increase. In other words, they would become so used to the quality/services that they would need a much larger price differential in order to be induced to switch to low-speed access. This would imply that, when considering high-speed products, the markets for low- and high-speed Internet access would be separate, provided supply-side substitution does not constrain the hypothetical monopolist of high-speed access. Supply side substitution is considered further below.

B.15 A further difference between ISDN and PSTN Internet access and broadband technologies, such as DSL and cable modem, is that ISDN and PSTN are dial-up technologies. Dial-up access is less convenient than always on access in that it requires the user to dial-up whenever access is required. Consumers may therefore be prepared to pay more for always-on services. In this case, the availability of competitive dial-up access may not constrain the prices of always-on access to competitive levels.

B.16 In light of the differences in speed, expected future developments in broadband content and the convenience of always-on connections compared with dial-up access, Oftel considers that the availability of competitive PSTN and ISDN Internet access will not constrain the price of broadband Internet access such as DSL to competitive levels.

B.17 There are a variety of technologies for providing always-on broadband Internet access: DSL, cable modem, leased lines and fixed link access. Fixed links and leased lines provide a dedicated capacity between a customer and an ISP, however fixed links differ from leased lines in that they may be switched and need not provide a capacity when not in use. These differences are likely to result in fixed link having a lower cost compared with an equivalent leased line. Moreover, there are significant differences between DSL and cable modem Internet access and leased line and fixed link Internet access. Leased lines and fixed link Internet access provide symmetric access ie the same capacity upstream as downstream and they also provide uncontended backhaul services ie users do not share backhaul capacity. It is possible to provide symmetric and uncontended Internet access using SDSL (although such a product is not currently available), however leased lines and fixed links cannot be provided as contended and asymmetric access. As set out in the market analysis in Chapter Three of the consultation document, the level of contention in the backhaul element has a significant impact on cost. There may also be significant differences between the cost of the DSL enabled local loop and the cost of leased lines local ends.

B.18 These differences suggest that leased lines and fixed link Internet access will have a significantly higher cost than contended and asymmetric DSL and cable modem Internet access. Therefore the availability of competitive leased line or fixed links access is unlikely to constrain pricing of DSL and cable modem services to competitive levels. The ability of an SDSL provider to provide broadband Internet access market depends on wholesale access to DSL technology. Therefore the potential for substitution from SDSL symmetric access into broadband Internet access will not increase the competitive constraints on a supplier of wholesale DSL services by broadening the retail market for Internet access. These differences between DSL and leased lines/fixed links suggest that there may be more than one broadband Internet access market.

B.19 The analysis has so far proceeded on the basis that there is one broadband Internet access market. However, Oftel considers that a number of broadband Internet access markets can be distinguished: business symmetric, business asymmetric, residential symmetric and residential asymmetric broadband Internet access. The needs and willingness to pay for high bandwidth services of residential and business consumers is likely to be quite different. Business users are likely to have greater need for broadband services and lower contention requirements; some businesses are likely to have a greater need for upstream capacity. This suggests that not only may there be separate business and residential markets for broadband access. There may also be a separate market for symmetric and asymmetric Internet access.

B.20 Residential users are likely to tolerate higher contention ratios and have lower bandwidth demands than business users. Oftel research suggests that SMEs have a significantly higher willingness to pay for broadband services than residential users. In an Oftel survey, small businesses indicated they would be willing to pay £66 per month, while medium businesses indicated they would be willing to pay £108 per month. This compares with the figure of around £20 for residential users. Some residential and business users will require higher upload or more symmetric capacity than other residential or business customers. This is because some business customers are likely to make available information and provide customer services on web sites, while some residential customers may require upload capacity for Internet based video games. Business customers are likely to require more bandwidth and lower contention levels than residential customers, as businesses are likely to have a number of users sharing their Internet access and have a lower tolerance of delays than residential customers. Business users are also likely to require a more tailored level of customer support and a higher level of network reliability. These differences suggest that on the demand side, a hypothetical monopolist of business Internet access may profitably sustain prices above competitive levels for business Internet access. This is because business users would not switch to residential Internet access due to its lower speed and quality of service, even if the price of business Internet access were raised above competitive levels.

B.21 It is also likely that a hypothetical monopolist may be able to sustain the price of symmetric broadband Internet access above competitive levels, even where asymmetric broadband Internet access is competitively provided. This is because customers with high upload requirements would not switch from symmetric to asymmetric access, if the price of symmetric access were raised above competitive levels. Equally, the competitive provision of symmetric broadband Internet access may not constrain a hypothetical monopolist of asymmetric broadband Internet access to pricing at a competitive level due to the higher costs of providing symmetric broadband Internet access.

B.22 A chain of substitution may link the business symmetric market to the residential symmetric Internet access and in turn to the asymmetric business market, which could then be linked, to the residential asymmetric market. However it is unclear to what extent these products are currently available and how they will constrain each other’s prices. Therefore, from the perspective of the demand side, Oftel considers that there are four markets for broadband Internet access.

B.23 On the supply side, there is a question as to whether supply side substitution would constrain the ability of a hypothetical monopolist in these markets to raise prices above competitive levels. At a retail level, there are likely to be barriers for a retail provider of residential Internet access moving into the business market. The different level of service required may make it difficult for a supplier of broadband Internet access to residential customers to substitute rapidly into a market for business users. On the other hand, most ISPs appear to supply both business and residential customers, although a few ISPs appear to focus on one group of customers. The top three ISPs were the same for residential customers as for small and medium business customers. While this evidence may suggest that the differences between business and residential customers are not sufficient to make it difficult for an ISP to serve both groups of customers, it could also mean that most ISPs participate in both markets.

B.24 In any case, supply side substitution from one of these markets into any other of these markets will require access to the wholesale broadband services. However the purpose of this market analysis is to determine whether the breath of the retail market will constrain an operator with market power in the provision of wholesale broadband services. The conclusion is that whether or not symmetric business and residential Internet access, asymmetric business Internet access or residential asymmetric Internet access are in the same or separate markets would not limit the exercise of market power in the related wholesale market.

B.25 Oftel has defined four broadband Internet access markets: asymmetric business and residential broadband Internet access and symmetric business and residential broadband Internet access.

B.26 DSL can provide both Internet access and local ends of leased lines. Oftel expects that SDSL (Symmetric DSL) will be used to provide leased lines at bandwidths of up to approximately 2Mbit/s. However SDSL products are not yet widely available in the retail market.

B.27 Oftel considers that uncontended SDSL and leased lines of equivalent bandwidth provide the same service and therefore should be considered to be in the same market. Oftel considers that it is likely in certain circumstances that SDSL will cost less than leased lines provided by other technologies, although there is insufficient evidence to reach a definitive conclusion. If SDSL is a significantly lower cost technology than other means of providing local ends for leased lines, then this may raise issues for the assessment of market power.

B.28 It is possible that this retail product is constrained by the presence of pay TV, pay-per-view, digital TV and video/DVD rentals, usage of video recorder or a combination of these products. For example, a customer may consider video rentals together with video recording of pay TV programmes to be a potential substitute for video-on-demand products. What is less clear is whether these possible substitutes are sufficient to constrain the prices for VOD to the competitive level.

B.29 Unfortunately, meaningful empirical data on the extent to which consumers view these products as substitutes is not currently available, as VOD products are only currently available in the London area and there is relatively low take-up of them. Whilst the extensive libraries and the watch-when-you-want facilities (amongst others) available via VOD retail products are to some extent distinct from the potential substitutes, it is not clear whether they are sufficiently distinct to create a separate economic market. It is thus not possible to conclude whether BT possesses retail market power in the provision of VOD services. As a corollary of this, it cannot be concluded at this stage whether or not BT’s wholesale market power in the provision of backhaul will raise potential issues of leverage into VOD.

B.30 BT’s ability to exercise market power in the retail markets for broadband Internet access will depend whether the related markets for wholesale services are effectively competitive. BT will not be able to exercise market power in VOD if this product is part of broader markets with alternative wholesale supply. In the provision of low bandwidth leased lines, it is unclear what the implications of any market power BT has in the wholesale DSL markets may have for the provision of SDSL leased lines. While from the perspective of the customer, SDSL and other types of leased lines may provide the same service, it is difficult to draw definitive conclusions as to whether SDSL leased lines have a significantly lower cost structure than other types of leased lines. If SDSL leased lines were lower cost than other leased lines, then market power in wholesale DSL services may raise issues for the provision of SDSL leased lines. If LLU was not fully effective in the absence of cost orientated backhaul, BT may not provide SDSL leased lines or raise prices of SDSL leased lines above competitive levels, if PPCs were a higher cost technology than SDSL leased lines. However, if PPC/leased lines have a similar cost structure as SDSL leased lines, there will be no issue of market power given the availability of cost orientated PPCs.

B.31 The wholesale market analysis will define the relevant wholesale markets and consider the extent of BT’s market power in these markets.

B.32 This section considers wholesale market definitions in light of the conclusions on retail market definitions.

B.33 Oftel considers that there are separate wholesale markets for:

• access, symmetric enabled access and asymmetric enabled access;
• LL backhaul/PPC terminating segments and LES backhaul links;
• backhaul trunk/trunk leased lines;
• external tie circuits; and
• co-location space.

B.34 The wholesale services required to provide broadband Internet access are: access (including the local loop), backhaul including both trunk and link, and co-location space. A wholesale DSL provider may also utilise ATM or IP technology on the core network; however, ATM/IP technology is not required for backhaul. BT’s wholesale DSL service provides all of these services as a combined wholesale DSL service to operators and service providers. As noted above, this product provides a competitive constraint on BT’s ability to exercise market power in the retail market for broadband Internet services. Co-location space is not considered in this paper as it has been separately addressed as part of the LLU process (see Oftel’s investigation of BT's non-participation in the Bow Wave Process, the 'non-discrimination complaint’, July 2001).

B.35 Oftel considers that backhaul can be split into two distinct markets, one market for trunk backhaul (beyond the first Tier 1 in terms of the SDH network, broadly equivalent in PSTN terms to inter-tandem transmission) and one market for link backhaul (from MPF up to the trunk network). This market analysis has strong parallels with the market definitions of wholesale leased lines, where separate markets for trunk and segmenting segments have been defined. A detailed discussion of the separate markets for trunk and terminating segments is set out in the Phase 1 PPC Direction (June 2002). In brief, trunk backhaul and link backhaul are complements rather than substitutes, therefore a hypothetical monopolist of backhaul links will be able to raise prices above competitive levels without demand side switching to backhaul trunk. Supply side substitution from backhaul trunk to backhaul link is also unlikely due to the high sunk costs of building backhaul links. Similarly, Oftel believes that trunk backhaul is part of a separate market as trunk backhaul is not a substitute for backhaul link or access.

B.36 In the Phase 1 PPC Direction, Oftel considered that the trunk market was between SDH Tier 1 nodes. In terms of the MSH network (see Annex A, for a description of the MSH network), the trunk segment will lie within the 120 MSH A nodes. Oftel understands that the MSH A nodes are the nodes which receive high traffic volumes and that MSH A nodes are also ATM nodes. It seems unlikely that OLOs will find it economic to build out to all MSH A nodes, as OLO build out is currently limited to not more than 30 to 40 nodes. Oftel considers that the trunk network will be consistent across both MSH and SDH networks, as OLOs will utilise POCs for both MSH and SDH backhaul traffic. Therefore, Oftel has defined the trunk network for the MSH network in parallel with the definition of the trunk for the SDH network. The definition of trunk for the SDH network is at Tier 1, therefore only MSH nodes that are located coincident to Tier 1 SDH nodes are defined as trunk nodes.

B.37 Oftel considers that backhaul trunk is likely to be in the same market as PPC trunk segments, as customers are likely to consider PPC trunk segments to be reasonable substitutes for trunk backhaul and suppliers of PPC trunk segments are likely to be able to easily enter the market for trunk backhaul. This is because both backhaul trunk and PPC trunk segments involve the provision of dedicated capacity within Tier 1 of BT’s SDH network. On the demand and supply side, PPC trunk segments and backhaul trunk are substitutes for each other. Therefore, a hypothetical monopolist of trunk backhaul is unlikely to be able to sustain a price increase above competitive levels, as customers would switch to PPC trunk segments and suppliers of PPC trunk segments would switch into the provision of trunk backhaul.

B.38 A wholesale leased line terminating segment equates to access and link backhaul. Backhaul link and access are likely to form separate markets for the same reason as backhaul link and trunk form separate markets. The products are demand side complements rather than substitutes. On the supply side, an operator who had built out to the concentrator unit (CU) is likely to face significant costs in extending their network to the customer. Therefore a hypothetical monopolist of access would be able to sustain prices above competitive levels, even if backhaul links were competitively provided.

B.39 Oftel considers that access enabled for broadband services is a separate market from access. Enabling access requires an operator to incur significant sunk costs at each local exchange or concentrator to provide the capacity to provide broadband access. On the demand side, narrowband access will not be a substitute for broadband access, as narrowband access does not have a broadband capacity. On the supply side, the sunk costs of enabling access are likely to deter supply side substitution from narrowband access. Enabled access includes products such as cable modem and DSL access. Oftel considers that there are likely to be separate markets for asymmetric and symmetric enabled access related to the retail markets for asymmetric and symmetric Internet access. On the demand side, asymmetric access will not provide a reasonable substitute for symmetric access. On the supply side, it is unclear whether there would be significant cost barriers to switching from asymmetric to symmetric access or vice versa. On this basis, Oftel defines separate markets in asymmetric and symmetric access. There are no related business and residential markets for enabled access, as there are no relevant distinctions between business and residential enabled access.

B.40 There are two backhaul link products: leased line (LL) backhaul links and LES backhaul links. LL backhaul links are links provided using leased line type circuits on BT’s SDH or MSH network. These circuits are not PPCs, as they do not originate/terminate at a customer site, however they do use the same type of network. LES backhaul links are links provided using LES (LAN (Local Area Network) extension services) circuits to connect an operator’s telecommunication equipment at a co-location site with a point of connection. Oftel considers that LES backhaul links and LL backhaul links are likely to be in separate markets, as a hypothetical monopolist of LL backhaul circuits would be able to raise LL backhaul circuits above competitive levels, even where LES backhaul links were competitively supplied. From a customer perspective, LES and LL links may not be good substitutes, as LES links are limited to distances of less than 25 km and are likely to cost significantly less than LL backhaul links. It is unclear whether suppliers of LL links would switch into the provision of LES links in the case of a price increase above competitive levels by a hypothetical monopolist of LES links, due to the differences in the technologies. Even were supply side substitution to occur, in practice it would be unlikely to provide a competitive constraint on BT, as it is the only operator with the ubiquitous network that could potentiall