Statement
issued by the Director General of Telecommunications 
18 October 2001
Contents
Chapter
2 – Summary of responses to the consultation
Chapter
3 - Oftel’s views on the responses received
Annex
– The Direction
Summary
S.1 This statement
and Direction establishes how BT should set the charges that LLU operators
(‘LLUOs’) have to pay for site clearance and asbestos removal necessary
for the preparation of physical co-location space. The Direction takes
into account responses received to the consultation document issued
on 27 June 2001.
S.2 At present,
BT charges LLUOs the cost of preparation of physical co-location space
(which includes a one off charge for clearing the site to be occupied
by LLUOs) in addition to a rental charge (known as a room licence
fee) for the space occupied. Oftel’s pricing principles require BT’s
rental charge to be the lower of the non-discriminatory rate or market
rent. BT’s current room licence fee charge to LLUOs is equivalent
to a market level rent for light industrial property in the area of
the exchange.
S.3 On the detailed
price estimates for co-location space sent to LLU operators (co-location
room offers) BT has specific headings for ‘clearance of accommodation’,
‘asbestos removal’ and ‘asbestos consultants fees’. Oftel may still
consider some costs to be site clearance and asbestos removal costs
even if they are not listed under those headings in co-location room
offers. Oftel would normally consider the works as defined in BT’s
hostel and mini-hostel specifications (available on the BT LLU website
– www.btinterconnect.com)
to be preparation works specifically undertaken to allow operators
to co-locate their DSL equipment. Oftel would normally consider works
that fall outside of the hostel and mini-hostel specifications as
site clearance and asbestos removal costs.
S.4 Oftel has
concluded that, as BT charges a market based rental in its room licence
fee, it recovers any site clearance and asbestos removal costs through
that rent on the same basis as any other commercial landlord. By charging
both site clearance fee and a market rent to LLUOs, Oftel believes
that BT is over recovering the cost of site clearance and as such
is not complying with the terms of EC Regulation 2887/2000 on unbundled
access to the local loop (‘the Regulation’). The Regulation provides
in Article 3 (3) that "notified LLUOs shall charge prices for
unbundled access to the local loop and related facilities set on the
basis of cost orientation."
S.5 Oftel does
recognise that, in circumstances where the site clearance costs exceed
the expected rental income that will be paid for the site, BT should
be able to charge for clearance costs over and above that expected
rental income. Otherwise, BT will bear the cost of preparing co-location
space for LLUOs in such cases. The expected rental income is the net
present value of the rental received in the period for which the space
is expected to be let.
S.6 Oftel is of
the view that BT should not be separately charging for site clearance
in addition to charging a non discriminatory or market rent unless
the clearance costs exceed the net present value of the first four
years expected rental income, calculated from the date a specific
contract between BT and the LLU operator for co-location facilities
at the exchange site in question is signed.
S.7 Oftel has
directed that:
- BT should only
charge the lower of a market based or non-discriminatory rent for
physical co-location space at a specific exchange site. In raising
such a rental charge BT must not also raise separate, one off charges
for site clearance and asbestos removal unless those clearance and
removal costs exceed the net present value of the first 4 years
net rental income at that individual site;
- if BT’s costs
of site clearance and asbestos removal at a specific exchange site
exceed the net present value of the first four years net rental
income at that site BT may raise a one off charge to LLU Operators
co-locating at that site for the difference between expected rental
income and the cost of site clearance in addition to charging the
lower of a market based or non-discriminatory rent; and
- as stated in
the consultation document, Oftel will apply the terms of the direction,
including any price changes, with effect from 17 January 2001, that
being the date that our investigation into charges for physical
co-location was opened. The terms of the direction are intended
to apply to any ‘Co-location Room Offer’ (PCR3) issued by BT to
individual operators and any charges which BT has sought to apply
to operators for preparation and construction of physical co-location
facilities on or after 17 January 2001.
Chapter 1
– Background
1.1 As part of
the LLU process, BT has to undertake work to make space in its MDF
sites ready for LLUOs to site their equipment (physical co-location
space). This equipment is necessary for LLUOs to offer high bandwidth
services directly to consumers over BT’s local network. BT is entitled
to recover its costs from LLUOs for the work that it undertakes. From
the cost estimates that Oftel has examined it appears that BT is intending
to charge LLUOs for site clearance and asbestos removal as part of
this work. Site clearance may involve removing existing structures
from a co-location space and re-providing them elsewhere. Some of
the cost estimates Oftel has seen include cost items for ‘clearance
of accommodation’ ‘asbestos removal’ and ‘asbestos consultant’s fees’.
However, in these cost estimates BT is also intending to charge LLUOs
a market based rental (room licence fee) for the co-location space.
1.2 Oftel’s August
2000 statement ‘Access to Bandwidth: Conclusions on charging principles
and further indicative pricing’ (www.oftel.gov.uk/publications/local_loop/a2b0800.htm)
states that
BT should not charge for such clearance work but should recover these
costs through charging the lower of the non-discriminatory or the
market rate for the room licence fee. The non-discriminatory rate
is equivalent to the charge that BT’s own ADSL service would face.
This view was reached having taken into consideration BT’s response
to an earlier consultation document (‘Access to Bandwidth: Delivering
Competition for the Information Age’, November 1999).
Chapter
2 – Summary of responses to the consultation
2.1 The consultation
invited comments from interested parties on a number of issues. Oftel
received three responses to the consultation from NIACT, Kingston
Communications (on behalf of Bulldog Communications, Colt Communications,
Cable and Wireless, Kingston Communications and Redstone Communications)
and BT. This Chapter provides a summary of the views expressed by
the respondents.
NIACT’s views
2.2 NIACT stated
that the issues raised in the consultation document were not directly
consumer related. They shared Oftel’s view that the current charging
arrangements appear to constitute an element of overcharging.
Kingston Communications’
(on behalf of Bulldog Communications, Colt Communications, Cable and
Wireless, Kingston Communications and Redstone Communications) views
2.3 These LLUOs
agreed with Oftel’s initial conclusion that BT was over recovering
its costs by charging a room licence fee together with a fee for site
clearance and asbestos removal. They also agreed with Oftel’s view
that BT should charge the lower of a market based or non-discriminatory
rent for physical co-location space.
One off
charge where site clearance or asbestos removal costs exceed four
years net rental income
2.4 The LLUOs
expressed concern with Oftel’s opinion that where BT’s cost of site
clearance and asbestos removal at a specific exchange exceeded the
net present value of the first four years net rental income, BT may
raise a one off charge to LLUOs co-locating at that site for the difference
between the expected rental income and the cost of site clearance.
They consider the four year time period to be too short (and argue
that it would lead to over recovery of site clearance charges) and
suggest that the time be extended to cover the duration of the initial
licence period.
Asbestos
removal
2.5 As BT is obliged
to comply with Health and Safety standards and other Regulations concerning
the control of asbestos, the LLUOs consider that its removal should
not be included in BT’s charges for co-location facilities.
2.6 LLUOs have
further argued that any asbestos hazard should have already been identified
through BT’s previous occupation of the space and that suitable safety
precautions should have been provided. It is not always necessary
to remove asbestos where work can be carried out without having to
disturb it. However, it should have been identified, sealed and labelled
accordingly.
2.7 LLUOs argue
that they expect BT to provide accommodation that is safe and fit
for its purpose and that as such, it is unreasonable to require tenants
to pay for improvements to a landlord’s building.
BT’s views
2.8 As part of
the original consultation, it was noted that Oftel had already been
in correspondence with BT on the issue of site clearance and asbestos
removal. BT raised a number of points on its inclusion of the charges.
In their response to the consultation, a number of these views were
repeated. BT also raised a number of new issues, which are detailed
below.
Supply of
co-location facilities below cost
2.9 Oftel’s determination
would mean that in some cases BT would have to supply co-location
at below cost. This would be contrary to Oftel’s previous guidelines
and Condition 83 that permits BT to recover the cost of providing
facilities and also to earn a reasonable return on capital employed.
2.10 The Regulation
states that prices for unbundled access to the local loop should be
calculated on the basis of cost orientation and that the provider
should be able to recover its costs plus a reasonable return. BT has
confirmed that BT makes no profit from the construction of co-location
facilities.
Return on
capital asset below permitted maximum
2.11 BT’s shareholders
expect it to earn a reasonable return on its capital assets (which
include BT’s buildings). The room licence fee represents the return
on this asset. However, this rate is limited by Oftel’s guidance to
a level which is far below the permitted maximum set out in Oftel’s
determination relating to charges for the provision of metallic path
facilities (December 2000).
2.12 Oftel’s guidelines
require BT to charge a licence fee, which is the lower of a non-discriminatory
charge or a market level rental for the space occupied. This limits
the return BT can make on its property assets to below BT’s normal
permitted rate of return.
Recovering
charges over a period of time
2.13 The EU Communication
COM (2000) 237 (a communication from the Commission on unbundled access
to the local loop which was published on 26 April 2000) states that
the most appropriate way to recover one off provisioning costs is
on the basis of up front fixed charges. The communication further
states that where the costs are to be recovered over a period, it
would be normal to build a risk factor into the calculated charges.
Principle
of cost causation
2.14 Under the
principle of cost causation, it is appropriate to recover the cost
of site clearance from those who cause the cost to be incurred. As
the Regulation obliges BT to remove old equipment to make space available
to LLUOs, it reasonable to recover these charges from the person requesting
the space. Deducting a one off site clearance cost from the licence
fee means that the return on capital from the licence fee is no longer
reasonable.
Variation
of terms
2.15 Oftel fails
to take account of the fact that charging site clearance as part of
co-location build is BT’s only remaining option (as it is unable to
vary the terms of its lease).
2.16 Internally,
BT charges its projects the cost of removal of old equipment when
new equipment is installed. In a commercial environment, landlords
who were faced with site clearance costs would vary the terms of the
lease to the tenant to ensure that the costs were adequately recovered.
Under the terms of the ANF agreement (the terms and conditions upon
which BT makes available unbundled local loops), BT is unable to offer
varying terms at individual sites.
Duration
of property licence
2.17 As LLUOs
are able to terminate the property licence after one year, it is appropriate
to recover the costs of site clearance ‘up-front’. Where it is appropriate
to offset costs against the licence fee this should be achieved by
means of a ‘rent-free’ period.
Accounting
conventions
2.18 Under accounting
conventions, the cost of asbestos removal needs to be ‘expensed’ (not
capitalised). It is incorrect to argue that asbestos treatment represents
an ‘improvement’.
Ongoing
charge for asbestos removal
2.19 Under the
revised regulations governing asbestos, in certain circumstances it
is not necessary to remove asbestos rather it may be sealed and made
safe. As such, the number of cases where removal will be necessary
is significantly reduced. However, asbestos has been found in some
sites where co-location facilities have been requested.
2.20 BT currently
spreads the cost of asbestos treatment across BT products in proportion
to their use of space. Accordingly, BT proposes an ongoing charge
(which could be added to the licence fee) which would be charged until
the asbestos had been removed from BT’s operational estate or the
operator terminated their property licence.
Rent in
excess of ROCE
2.21 BT would
accept an arrangement where the rent charged was above the reasonable
return on capital employed (‘ROCE’), the excess income from the licence
fee over a four year period could go towards the cost of equipment
removal. BT could charge the full amount for equipment recovery up
front and then allow LLUOs a ‘rent free’ period.
Miscellaneous
2.22 BT has argued
that the term ‘vacant possession’ has not been properly used in the
consultation document.
2.23 BT allocates
costs to its products at a level, which is equivalent to a room licence
fee.
2.24 ‘Net rental
income’ has not been defined in the consultation. BT has also proposed
a number of changes to the definitions set out in the Oftel document.
Chapter
3 – Oftel’s views on the responses received
Kingston Communications’
(on behalf of Bulldog Communications, Colt Communications, Cable and
Wireless, Kingston Communications and Redstone Communications) comments
One off
charge where site clearance costs exceed four years net rental income
3.1 As stated
in the consultation document, an examination of BT’s cost estimates
indicate that in the majority of cases, site clearance costs are recovered
from the room licence fee within the first year. Oftel has taken the
following factors into account in concluding that BT should be able
to charge a one off fee for site clearance where site clearance costs
exceed the net present value for the first four years net rental income:
- the minimum
contractual period is twelve months (that is, an LLUO can give twelve
months notice to leave the MDF site);
- it is a reasonable
probability that the site will be rented for a number of years beyond
this initial period; and
- the property
licence given by BT to LLUOs is of an unlimited duration.
Asbestos
removal
3.2 The key aim
of the Health and Safety Regulations on the Control of Asbestos at
Work, is the reduction of asbestos related disease. The regulations
do not impose an obligation to remove asbestos in all cases of discovery.
BT is obliged to comply with all Health and Safety regulations concerning
the control of asbestos. However, Oftel does not consider that the
obligations imposed under such regulations prohibit BT from recovering
(from the LLUOs) the cost of necessary asbestos removal as part of
the room licence fee.
3.3 BT has to
undertake work in order to make the space ready in its exchanges for
LLUOs that wish to co-locate. BT is entitled to recover its costs
from LLUOs for the work that it does and as such, Oftel does not consider
it to be unreasonable for BT to recover the cost of necessary asbestos
removal, which is required in order to provide co-location facilities.
Oftel considers the key issue to be the way that BT recovers the cost
of asbestos removal. Therefore, Oftel does not agree with LLUO’s contention
that BT should not charge for the removal of asbestos.
BT’s comments
Supply of
co-location facilities below cost
3.4 Oftel believes
that the room licence fee is comparable with market rents for light
industrial use. Recital 11 of the Regulation states that pricing rules
should ensure that the local loop provider is able to cover its appropriate
costs plus a reasonable return. Oftel considers that as the licence
fee already reflects a market based return on capital for building
space and does not agree that BT is being required to supply co-location
facilities at a price below cost. BT is allowed to charge the lower
of the non discriminatory or market rent for space. If BT considers
the existing rate to be too low, they remain free to adjust the level
accordingly.
Return on
capital asset below permitted maximum
3.5 BT has referred
to the return on capital figures set out in Oftel’s December 2000
publication Determination under Condition 83.16 of the licence of
British Telecommunications plc relating to the charges for the provision
of metallic path facilities and associated internal tie circuits (‘the
December determination’). In calculating the connection and rental
charges for metallic path facilities (‘MPF’), Oftel’s figures have
been based on an allowable return of capital of 14.5%. Oftel does
not consider there to be a lack of consistency between the December
determination and the current determination (relating to site clearance
and asbestos removal). The permitted return on capital set out in
the December determination specifically applies to MPF’s and associated
internal tie circuits and not the permissible rate of return that
can be earned on BT’s buildings.
Recovery
of provisioning charges over period of time
3.6 BT is permitted
to charge the lower of the non-discriminatory or market rent for space.
Oftel has not set the price that BT is able to charge, rather it has
stated that the appropriate level is that of market rent (which is
equivalent to the amount that a landlord could recover in a competitive
market). It is anticipated that the landlord in a competitive market
would include an element of uplift or risk factor in the calculation
of rent. As such, Oftel does not consider its direction to be contrary
to the principle of provisioning charge recovery set out in the EU
Communication.
3.7 The EU Communication
that BT refers to only applies to costs which are legitimately raised.
Oftel would argue that this is not the case here, as the site clearance
and asbestos removal costs have already been accounted for as part
of the market rent.
Principle
of cost causation
3.8 Oftel agrees
with the view expressed (concerning the principle of cost causation)
and believes that in most circumstances the market based rental (room
licence fee) will allow BT to cover its costs for site clearance and
asbestos removal. Where the cost of the work would exceed the net
present value of the first four years net rental income, BT is permitted
to raise a one off charge for the difference between the expected
rental income and the cost of site clearance.
Duration
of property licence
3.9 Although certain
terms and conditions of the ANF agreement are fixed, BT is able to
vary the rent at individual sites. An examination of BT’s cost estimate
indicates that in the majority of cases, site clearance costs are
recovered from the room licence fee within the first year. Therefore,
it is likely that BT would recover the cost of such work even where
the licence is terminated after a relatively short time.
3.10 LLUOs who
have invested heavily in rolling out to a particular exchange are
unlikely to give notice to terminate the property licence after one
year. Even if a LLUO chose to terminate its property licence early,
BT would still obtain the benefit of having a cleared site.
3.11 In recognition
of the fact that there may be certain circumstances where the cost
of site clearance is likely to exceed the net present value of the
first four years net rental income, BT is permitted to raise a one
off charge to recover the cost of site clearance.
3.12 Oftel does
not support BT’s view that where it is appropriate to offset costs
against the licence fee, this should be achieved by means of a ‘rent
free’ period. Normal renting arrangements account for pay back through
monthly payments. Oftel considers that the market based rental that
BT charges LLUOs wishing to occupy space, already permits BT to recover
the cost of site clearance and asbestos removal. Therefore, Oftel
would not support BT’s proposal for an up front payment followed by
a rent free period as these costs will already be recovered through
the licence fee.
Accounting
conventions
3.13 From the
consultation document, Oftel’s initial conclusion was that BT is over-recovering
its costs by charging LLUOs a market rent for co-location space together
with one off fees for site clearance and asbestos removal. BT’s accounting
treatment of asbestos removal is not relevant to the consideration
this issue.
Ongoing
charge for asbestos removal
3.14 Oftel agrees
that the cost of asbestos treatment should be recovered over a period
of time. Further, it considers that the existing room licence fee
will in most cases allow BT to cover its costs for asbestos removal
and site clearance. Oftel does not accept that an additional charge
for asbestos removal should be raised.
Rent in
excess of ROCE
3.15 Oftel considers
the room licence fee to be in line with market rents for light industrial
use as such, would not consider it to be appropriate to charge a licence
fee in excess of this rate. Oftel further considers that the existing
fee will allow BT to recover the cost of site clearance in most cases.
Where the cost of the work would exceed the net present value of the
first four years net rental income, BT is permitted to raise a one
off charge for the difference between the expected rental income and
the cost of site clearance at that site.
Miscellaneous
3.16 The points
raised by BT have been taken into consideration when drafting the
final direction.
Annex
– The Direction
Site clearance at BT exchanges
Direction
made under Article 4(2)(a) and Article 4(3) of Regulation (EC) 2887/2000
on unbundled access to the local loop and under Condition 83 paragraph
19 of the public telecommunications licence granted to British Telecommunications
plc pursuant to section 7 of the Telecommunications Act 1984
WHEREAS
- The Secretary
of State granted to British Telecommunications on 22 June 1984 a
licence (the "BT Licence") under Section 7 of the Telecommunications
Act 1984 (the "Act") for the running of the telecommunication
systems specified in the BT Licence ;
- By virtue of
Section 109 of and paragraph 20 of Schedule 5 to the Act, the BT
Licence has effect as if granted to British Telecommunication plc
("BT");
- Condition 83
(the "Condition") of the BT Licence obliges BT to make available
access to its local lines to consumers, space in its exchanges,
use of certain circuits and reasonably necessary ancillary services
(together "Access Network Facilities") so that other licensed
operators having interconnection rights under EC Directive 97/33
and the regulations made under it ("OLOs" or "Operators")
can provide telecommunications services (including ADSL services)
over those lines. The process is known as local loop unbundling;
- Paragraph 19
of the Condition requires BT to secure that the offer of an agreement
to provide any of the Access Network Facilities under the Condition
contains only terms and conditions which are reasonable;
- On 18 December
2000 the European Parliament and the Council adopted a regulation
in unbundled access to the local loop (EC 2887/2000) (the "EC
Regulation");
- Article 3(1)
of the EC Regulation requires notified operators (as defined in
the EC Regulation and of which BT is one) to publish from 31 December
2000 and keep updated, a reference offer for unbundled access to
their local loops and related facilities, on terms set out in the
EC Regulation. The reference offer for unbundled access to local
loops run by BT is known as the Access Network Facilities Agreement
("ANF Agreement");
- Article 4(2)
of the EC Regulation gives the national regulatory authority in
each member State (which in the United Kingdom is the Director General
of Telecommunications - the "Director") the power where justified
to impose changes on the reference offer for unbundled access to
the local loop and related facilities;
- It is appropriate
that this Direction be based on the Director's powers under both
the EC Regulation and the Condition;
- Article 3(3)
of the EC Regulation requires BT to make charges for related facilities
to unbundled access to the local loop (including space at its exchanges)
set on the basis of cost-orientation;
- In his statement
of August 2000 "Access to Bandwidth: Conclusions on charging principles
and further indicative pricing" (the "Statement"), the Director
stated that BT is entitled to charge fees for the use of space at
its exchanges equal to the lesser of a market rent for that space
or a non-discriminatory fee that it is charging itself;
- The Statement
also stated that it was then the view of the Director that BT should
not make an additional charge for basic site clearance above any
market based fee;
- By a determination
published on 21 February 2001 in relation to certain of the terms
of the reference offer made by BT for unbundled access to the local
loop (the "ANF Determination"), the Director determined a
dispute between a group of Operators and BT as to, amongst other
terms, the contractual dispute resolution provisions in BT's reference
offer. The ANF Determination required BT to offer to submit most
disputes to an independent expert for a report on the facts, which
report is binding on the parties to the dispute;
- Having considered
the representations made by the complainants, by BT and by others
in response to a consultation document published on 27 June 2001,
and for the reasons given more fully in the explanatory document
accompanying this Direction, the Director remains of the view that
BT should not normally charge an additional fee above the market
based "rental" fee for such site clearance work. Rather, the cost
of site clearance will be recovered through the "rental" fee;
- However, where
such site clearance costs are exceptional in relation to the current
value of the income expected from co-location, the Director nevertheless
considers that BT should be able to recover such costs in addition
to the "rental" fee;
- BT was informed
on 28 March 2001 that Oftel was investigating the reasonableness
of its site clearance charges and that if the Director were to take
formal action relating to these matters hewould be likely to seek
to apply his decision, including any control on BT's prices, with
effect from the date that Oftel's investigation was opened. For
physical co-location charges, Oftel's investigation was opened on
17 January 2001. Accordingly, it is appropriate for this Direction
to take effect from that date;
