Contents

Summary

Chapter 1 Background to co-location

Chapter 2 Physical co-location

Chapter 3 Distant co-location

Chapter 4 Issues on which Oftel proposes to direct

Annex A Draft Direction on BT’s charges for LLU facilities

Annex B List of exchange sites examined as part of Oftel’s investigations.

Annex C Bottom up physical co-location options.

Summary

S.1 This statement sets out Oftel’s conclusions from three investigations it has conducted. These investigations have examined BT’s charges to Local Loop Unbundling Operators (LLUOs) for physical co-location and distant location which form part of BT’s provision of facilities for Local Loop Unbundling (LLU) in the UK. Given the extensive nature of these investigations and industry interest in LLU Oftel believes that it is important to set out its findings in detail.

S.2 This statement also begins a public consultation on a draft direction on certain elements of BT’s charges for physical and distant co-location and BT’s charge for the provision of Metallic Path Facilities Line Characteristics (MPFLCs). The draft direction is included at Annex A. Oftel invites comments on the issues on which Oftel proposes to direct and the draft Direction. The deadline for responses is Thursday 15 November 2001. Please note that following this consultation period there will not be a further period for comments on responses received.

S.3 Oftel’s three investigations looked at different aspects of BT’s co-location charges:

BT’s charges for LLU physical co-location build (CW/00380/01/01)

S.4 This investigation focussed on whether BT’s charges for construction of physical co-location facilities within BT exchanges are cost oriented as required under the European Regulation on LLU (EC 2887/2000) ‘the Regulation’. ‘Exchange’ is the generic term applied to any main distribution frame (MDF) site - local concentrator (exchange) buildings where the copper cables from customer premises terminate and cross connection to other apparatus can be made.

S.5 The investigation used the agreed industry specifications for shared physical co-location space (co-location hostels and mini-hostels). Oftel examined BT’s charges against the proposed work at a sample of exchanges to ensure that the charges were genuinely cost oriented within the parameters of those hostel specifications.

S.6 Oftel also examined whether BT’s charge for provision of MPFLCs is cost oriented as required under the terms of the Regulation.

BT’s charges for LLU distant location services (CW/00393/03/01)

S.7 This investigation focussed on whether BT’s published charges for facilities to connect distantly located DSL equipment to BT’s Main Distribution Frame (MDF) were cost oriented as required under the terms of the EC Regulation on LLU.

BT’s LLU Mini-hostel specification (CW/00436/03/01)

S.8 Oftel investigated whether BT was providing mini-hostel physical co-location rooms to a ‘least cost’ design given LLUOs’ stated requirements. Oftel aimed to test the design assumptions for mini hostels and to develop its own bottom-up cost model looking outside the existing hostel specifications and BT’s existing LLU project management arrangements for the cheapest co-location options for LLUOs. The cost models developed by Oftel’s external consultants’ Inter Connect Communications (ICC) have been used principally to help identify particular cost drivers in current co-location options thereby allowing Oftel to draw conclusions on ways in which such costs could be reduced.

S.9 All three investigations have run in parallel and therefore there has been some overlap in the work undertaken. By looking at BT’s costs for physical co-location Oftel has gained valuable information which has enabled testing of the design assumptions for hostels and development of the ‘bottom-up’ cost model.

S.10 These investigations have been carried out using the powers under Article 4 paragraphs 2 (a) and (b) of the Regulation’ which state that Oftel shall have the power to:

S.11 Oftel has investigated whether BT’s charges for physical co-location and distant location facilities and the provision of MPFLCs are in compliance with Article 3, paragraph 3 of the Regulation which states that, "notified LLUOs shall charge prices for unbundled access to the local loop and related facilities set on the basis of cost-orientation". For the purposes of the Regulation co-location services, both distant and physical are regarded as related facilities. Oftel has also investigated these issues under the terms of Condition 83.17 of BT’s licence which states that the Director has the power to determine charges for LLU facilities.

S.12 Oftel used external consultants ICC to conduct a substantial amount of this work. Oftel accepts ICC’s view on the costs BT incurs in providing LLU facilities and has relied on this work in reaching conclusions. The terms of reference for ICC’s work followed the description of Oftel’s investigations as detailed in paragraphs S.4 to S.9. ICC largely used cost figures derived from BT’s detailed cost estimates of work undertaken in providing physical and distant location. These cost estimates were then tested by ICC against its own understanding of reasonable costs of items such as construction/cabling/air conditioning etc. and were backed up by site visits and discussions with BT and its contractors. However, it should be noted that this statement and draft direction reflects Oftel’s own views and conclusions following these investigations.

S.13 Oftel also used external consultants, Analysys to conduct a study benchmarking costs of co-location in other countries where unbundling is being made available. A copy of the study by Analysys is available on request from Oftel’s Research & Intelligence Unit.

Investigation conclusions

S.14 This statement gives details of Oftel’s findings in all three investigations and identifies a number of important conclusions. The most significant of these are:

a. given the existing specifications for physical co-location hostels and mini-hostels Oftel believes that in general (subject to the issues raised below) BT’s charges for preparing such co-location space are reasonable and cost oriented in line with the terms of the Regulation.

b. Oftel believes that there are more economical ways to deliver physical co-location than are currently offered by BT, notably through the provision of co-mingling and the proposed charges current requirements for escorted or segregated access to co-location space. In detail:

1. Oftel has proposed that in order to allow greater flexibility in the design and location of physical co-location space LLUOs’ approved staff should be allowed un-escorted, non-segregated access to its co-location space. This would give LLUO staff equivalent access control arrangements to BT’s own authorised contractors at BT exchanges. This issue is being addressed as part of a separate public consultation which runs until 7 November 2001. Oftel’s consultation document on this issue can be found at www.oftel.gov.uk/publication/local_loop/escac1001.htm;
2. Oftel considers that co-mingling could offer the lowest start up costs of physical co-location options. Oftel has recently completed a consultation on a requirement for BT to provide co-mingling. The final direction on this issue can be found at www.oftel.gov.uk/publication/local_loop/comi1001.htm;

c. Oftel does not believe that BT should charge LLUOs for site clearance of space in its exchanges set aside for physical co-location and at the same time charge them ongoing market rental for that space. Oftel’s final statement and direction on this issue can be found at www.oftel.gov.uk/publication/local_loop/clear1001.htm;

d. Oftel’s investigation showed that BT was over-recovering its costs for distant location services. In conjunction with ICC, BT reassessed its costs resulting in substantial reductions in its prices for these services from 6 August 2001. Revised current prices for distant location services can be found in the LLU section of BT’s carrier price list at www.btinterconnect.com;

e. Oftel believes that a significant amount of the costs of co-location are generated by BT outsourcing responsibility for co-location build rather than internally resourcing the project. Such arrangements may have been appropriate when early forecasts for co-location services from LLUOs indicated high demand. However, now that demand has significantly reduced BT could resource co-location build internally to create a more efficient and cost-effective build programme. Oftel therefore requests that BT re-assess its resourcing of the LLU project and give consideration to this suggestion particularly in relation to the provisioning of co-mingling. Oftel will seek from BT a full written assessment of the costs/benefits of bringing the co-location build project in house no later than three months from the date of publication of this document.

f. BT’s currently charges a higher mark up on BT provided external tie cables than it charges on the LLUO provided external tie cable pull through service. BT believes that because LLUOs can provide external tie cables themselves BT’s provision of such cables is competitive and therefore BT is entitled to charge a higher mark. Oftel believes that this issue has a strong read across to questions of BT’s pricing for LLU backhaul facilities where LLUOs also have the option of purchasing BT’s service or self providing. In these circumstance this issue is considered as part of Oftel’s work on LLU backhaul services, which Oftel is due to publish a consultation document on shortly.

Consultation and draft Direction

S.15 There are some issues (detailed in Chapter 4) covered in Oftel’s investigations where it is believed that BT’s charges are not consistent with the terms of the Regulation and the principle of cost orientation. Under the terms of Article 4. Paragraph 2 (a) of the Regulation the Director has the power to, " impose changes on the reference offer for unbundled access to the local loop and related facilities, including prices, where such changes are justified". In addition under the terms of Condition 83.17 of BT’s licence the Director has the power to determine the charges for LLU facilities. Therefore Oftel has issued a draft direction (at Annex A). There will be a period of consultation on this draft direction which will run until Thursday 15 November 2001.

S.16 Before a final direction is made, further analysis of BT’s financial data will be made and comments received on this consultation will be taken into account. As a result, the terms of the direction, when confirmed, may vary from the draft direction attached at Annex A.

S.17 The draft direction contains the following proposals which are discussed in more detail in Chapter 4:

a. BT’s charges for escorted access to exchange sites include doubling the charge for any unplanned work to cover the replacement of an engineer/technician called away to carry out an escorted visit. This concept is known as ‘backfill’. Oftel does not accept that it is reasonable and cost oriented for BT to backfill its charges for unplanned visits and proposes that BT should only be permitted to charge a premium of 50% above the planned escorted access charge for such unplanned visits.

b. BT currently charges LLUOs £5.37 for provision of Metallic Path Facilities Line Characteristics. This service supplies from existing BT records the characteristics of individual loops in order to provide information for an LLUO which would assist them in deciding whether that particular loop is capable of carrying that LLUO’s broadband services. One of the factors on which BT based this figure is its own estimate of expected loop volumes. Oftel considers that for consistency it should apply the forecast used by Oftel in the December 2000 determination of prices for fully unbundled loops and internal tie cables and the June 2000 draft determination on prices for shared access when setting prices for provision of MPFLCs. Oftel has recalculated this price based on its understanding of BT’s pricing methodology. Oftel proposes that BT should reduce its price for the provision of MPFLCs to £4.22.

c. Oftel does not accept BT’s contention that it should add an additional 16 hours of ‘in life’ management costs for dealing with LLUO planning mistakes into the connection charge for BT provided external tie cables. Oftel proposes that such costs should be recovered on a ‘per occasion’ basis from LLUOs using the current BT rate of £38 per hour and therefore that the fixed connection charge for BT provided external tie cables should be reduced. For the 100 pair cable @ 100metres the charge should be reduced from £3522.00 to £2914.00. For the 500 pair cable @ 100metres the charge should be reduced from £4965.00 to £4357.

d. BT currently charges LLUOs an annual rental charge for external tie cables which is 17.6% of the connection charge. This is divided up into 10.9% for maintenance and 6.7% as a replacement cost. Oftel does not agree that BT should include a replacement cost in its rental charge as BT has already recovered the full cost of the external tie cable through the connection charge. Oftel proposes that BT’s external tie cable rental charge should only contains a cost oriented charge for maintenance.

Chapter 1

Background to LLU co-location

1.1 Local Loop Unbundling (LLU) is the process where the makes its local network (the copper cables that run from customers premises to the telephone exchange) available to other companies. LLUOs are then able to upgrade individual lines using DSL technology to offer services such as always on high speed Internet access, direct to the customer.

Co-location options

1.2 LLUOs can decide how they connect their equipment to BT’s network in order to gain access to the local loop. LLUOs’ equipment can either be located within BT’s exchange building (physical co-location) or outside (distant co-location).

physical space within BT’s exchange site

1.3 BT currently offers LLUOs two options for physical co-location within its exchanges. The location of an LLUO’s equipment in a site can either be within a hostel, a separate room that is built to a standard design to house a number of LLUOs, or in a bespoke arrangement. The basic unit of capacity of a hostel is the "equipment bay". In the standard hostel arrangement the unit of space is a three rack bay which has an area of 10m². This area is segregated from BT’s. If an LLUO does not wish to be located within a hostel (eg it has non-standard requirements) it has the option of requesting a bespoke arrangement.

1.4 Oftel has recently directed that BT should offer LLUOs another form of physical co-location known as ‘co-mingling’. Co-mingling allows LLUOs to site their equipment in any part of a BT exchange where BT could, or does, house its own equipment, without a permanent barrier such as walled separation. Oftel’s direction on this issue can be found at www.oftel.gov.uk/publications/local_loop/comi1001.htm.

distant Co-Location

1.5 The LLUO houses its equipment outside of BT’s building and uses a tie cable to connect to the MDF. The remote site can be a building or a ‘green cabinet’ on the side of a road. An LLUO can choose to connect its remote site to the MDF in the BT exchange using two different services:

1. BT provides an external tie cable to connect the MDF to remotely located LLUO equipment;
2. LLUOs provide their own external tie cable. BT pulls it through into the exchange and connects it to the MDF.

Chapter 2

Physical co-location

History of Oftel’s investigations

2.1 Oftel, with the assistance of ICC, has been investigating BT’s charges for physical co-location since early January 2001. The focus of this investigation has changed substantially since it was opened, due to a reduction in demand for co-location space and the impact this has had on co-location designs and processes.

2.2 Initially, Oftel’s investigation focussed on large scale hostels designed to a relatively high specification in terms of facilities such as electronic security, air conditioning and environmental monitoring systems. Such designs had initially been acceptable to industry because the substantial numbers of LLUOs who indicated that they wanted to share space in exchanges meant that charges for co-location space per LLUO appeared to be relatively low. The specification of the hostel product can be found on BT’s LLU website at www.btinterconnect.com .

2.3 From the beginning of 2001 onwards demand for co-location space fell away significantly, meaning that charges for co-location space were being shared amongst a smaller pool of LLUOs thereby increasing their individual costs. LLUOs’ withdrawal from sites created a vicious circle of escalating individual costs.

2.4 In response to these changes BT and industry discussed ways in which co-location hostels could be designed for a smaller number of LLUOs with a lower level of specification and cost. This led to the development of the ‘mini-hostel’ concept which had a reduced specification and was applied to all exchanges with 1-4 LLUOs requesting shared co-location space. The specification of the mini-hostel product can be found on BT’s LLU website at www.btinterconnect.com .

2.5 This change to the priorities for site build meant that the focus of Oftel’s investigation changed to concentrate on mini-hostel designs for smaller numbers of LLUOs.

2.6 At the same time it was decided that Oftel would also investigate whether BT was designing physical co-location space to a ‘least cost’ specification by examining the design assumptions of the mini-hostel. In order to assist this work Oftel asked ICC to develop a bottom-up cost model looking outside the existing hostel specifications and BT’s existing LLU project management arrangements for the cheapest co-location options for LLUOs.

2.7 Oftel’s major findings are set out below. These are drawn from the work ICC conducted from January 2001 onwards. However, given the current low demand for co-location space this report largely concentrates on issues surrounding the provision of smaller scale ‘mini-hostels’ as well as the overall nature of BT’s LLU co-location project. A summary of the various physical co-location options developed by ICC as part of their work on a bottom-up cost model is also set out (see Annex C).

2.8 In conducting these investigations ICC and Oftel took a sample of exchanges which represented a selection of co-location hostels in terms of geography, estimated price and planned occupancy rate. A list of the exchange sites examined is found at Annex B.

Findings of physical co-location investigations

Overall assessment

2.9 Oftel believes that BT could offer physical co-location on a more flexible and cost effective basis than it does currently if co-mingling and un-escorted, non-segregated access were available to LLUOs. However, given the existing specifications for physical co-location hostels and mini-hostels Oftel found that in general BT’s charges for preparing such co-location space are reasonable and cost oriented. These costs include:

• Construction of fire retarding walls for hostels
• Installation of electronic access control, specifically BT’s OBASS system
• Installation of environmental monitoring system, specifically BT’s PEMP system
• Construction of the metal racking to house equipment
• Use of dust screens
• Installation of anti-static flooring
• Provision of air conditioning/venting

2.10 When conducting its investigation Oftel did examine a number of exchanges where LLUOs had expressed concern that BT’s overall design of co-location hostels had been poor and had led to inflated costs. Following site visits to hostels ICC could not find evidence of BT or its sub-contractors designing hostels in order to deliberately inflate costs.

2.11 At one exchange examined by ICC additional costs were incurred due to mistakes in the design process. This mistake was corrected. This example indicates that it is possible that in individual circumstances co-location designs could be improved. Oftel would encourage LLUOs which are concerned with individual designs of co-location rooms (bespoke or hostel) to discuss those issues directly with BT and if necessary arrange site visits in order to resolve any potential problem. Oftel would expect BT to be receptive to requests by an LLUO to discuss the designs for individual co-location spaces or visit the relevant exchanges and would be concerned if BT refused to engage in such discussions.

2.12 Despite Oftel’s overall conclusion that in general BT’s charges for physical co-location space are cost oriented there are a number of issues relating to the cost of provision of physical co-location and the overall organisation of BT’s LLU programme which require more detailed explanation. These are discussed below and in Chapter 4.

Site clearance

2.13 Oftel has recently issued a statement and direction on site clearance. This can be found at www.oftel.gov.uk/publications/local_loop/clear1001.htm. A summary of this issue is as follows:

2.14 Currently when BT charges LLUOs for preparation of physical co-location space in its exchanges it includes a one off charge for clearing the site to be occupied by LLUOs in addition to rental for the space occupied by LLUOs. Oftel believes that BT should not charge LLUOs for site clearance and asbestos removal costs while charging them the lower of a non-discriminatory or market level rental for the space occupied. By currently charging both a site clearance fee and a market level rent to LLUOs, Oftel believes that BT is over recovering the cost of site clearance. As such it is not complying with the terms of the Regulation.

2.15 The Director General has therefore 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 four years net rental income at that individual site.

Access control

Costs under existing arrangements

2.16 Under BT’s current arrangements for security access to the LLUO’s co-location space it may install an electronic card reader on entrances to the hostel. These card readers will be an extension of BT’s own electronic security access system (OBASS) for the entire exchange. There was some concern that the charge to LLUOs for installing an OBASS reader and lock was excessive and not in line with the specific costs for installing readers relating only to the security of the co-location hostel. However, ICC in discussion with BT and the manufacturers of the OBASS equipment has confirmed that LLUOs are only being charged for card readers and their installation relating to the co-location hostel and that those charges are cost oriented.

2.17 It should be noted that under the lower specification, mini-hostel, there is not a specific requirement for the co-location space to be secured using OBASS readers. It was agreed that a lock and key would be acceptable. This gives LLUOs the alternative of a cheaper security mechanism. However, where access to co-location space is via an external door secured by lock and key BT believes that there is a higher risk of compromise to the security of the exchange and therefore internal partitions for the hostel should be strengthened at the LLUOs expense if they are not already sufficiently resilient. The cost of wall strengthening to standard partitioning is not high and this increase in cost is greatly outweighed by the cost reduction from not using OBASS card readers.

Current principles governing access to co-location space

2.18 The principle that BT employs when examining requirements for security at co-location space is that it is preferable to give LLUOs discrete access to their space avoiding any operational areas of the exchange premises. The alternative to discrete access to the co-location space is that LLUO staff are escorted by BT whilst on the exchange premises. BT does not accept that LLUO staff and contractors should be allowed un-escorted access to co-location space using existing security arrangements at an exchange as it believes that this would create a substantial risk to the security and integrity of its telephone network.

Findings from Oftel’s investigations

2.19 From Oftel’s investigations it appears that BT’s charges for access control would be reasonable and cost oriented if the current restrictions on LLUO access to physical co-location space and types of physical co-location available were themselves reasonable. The specification of the mini-hostel has removed the need for the expense of installing electronic card readers at a number of sites.

2.20 However, Oftel believes that there are significant costs for LLUOs resulting from BT’s requirement that LLUO staff must either have discrete access to physical co-location space or be accompanied by BT staff whilst on the exchange premises. Because of these requirements Oftel believes that there have been restrictions placed on the design and planning of physical co-location space which have restricted where co-location space can be provided within an exchange. This in turn potentially increases LLUO costs if the only space available under current restrictions is difficult and expensive to provide with necessary facilities, such as power, cabling and backhaul. In a number of sites that Oftel has inspected as part of its investigations such high levels of costs have been found due to the limited options for locating co-location hostels.

2.21 If LLUOs were permitted to reach their co-location space without BT escort Oftel believes that this would allow greater flexibility and efficiency in use of space and resources in making those co-location facilities available. Permitting un-escorted access would also reduce the on-going cost of ‘co-mingling’.

2.22 Oftel has reached an initial view is that it is not reasonable for BT to require different security arrangements for LLUOs from its own third party contractors which are permitted un-escorted access to exchange sites.

Conclusion

2.23 Therefore it is Oftel’s view that LLUO staff with appropriate security clearance should be allowed un-escorted access to co-location space using existing security arrangements at BT exchanges. In order to take this issue forward Oftel has recently published a consultation document and draft direction on access arrangements for LLUO staff at BT’s exchanges. This can be found at www.oftel.gov.uk/publications/local_loop/escac1001.htm. Oftel’s statement and direction on co-mingling can be found at www.oftel.gov.uk/publications/local_loop/comi1001.htm.

Air conditioning

2.24 Costs of air conditioning units often form a significant element of the cost of construction of co-location space. DSL equipment generates a significant amount of heat compared to conventional exchange equipment and some form of air cooling is often required. Oftel’s investigation has found that the cost to LLUOs of BT’s provision of air conditioning units is not unreasonable and is in line with BT’s own costs. Given the existing specification of the co-location hostel and mini-hostel as discrete partitioned rooms there is always likely to be a need for dedicated air cooling at LLUO’s expense in those rooms.

2.25 However, there are ways in which air conditioning costs can be reduced or eliminated. Advances in DSL equipment technology are resulting in reductions in power consumption and thereby heat generation. These developments are likely to decrease the need for extensive air cooling arrangements in co-location space.

2.26 The reduced level of demand for physical co-location space means that there is likely to be a greater amount of physical space available for remaining LLUOs increasing the likelihood that sufficient air circulation volume could be found for LLUO equipment to mean that air conditioning is not necessary. LLUOs are of course free to order bespoke rooms where they can specify their own requirements for power consumption and heat dissipation potentially reducing or removing requirements for air cooling.

2.27 It should also be noted that the requirement for a discrete co-location room with its own dedicated air conditioning units means that there are high up front costs for purchasing and installing equipment which may not be used to its full capacity. However with co-mingling available an LLUO could share an existing air conditioning provision in BT’s operational area thereby potentially reducing these costs. As mentioned above Oftel has recently directed that BT provide co-mingling to LLUOs upon request.

PEMP provisioning

2.28 Under the terms of the current hostel specification BT will install an electronic system for remote monitoring of the co-location environment for a range of hazards such as gas, smoke, fire and flood. This system is known as PEMP and also serves to remotely calculate LLUO power consumption in the co-location room. The cost of installing a PEMP system for a co-location room is borne by LLUOs. There were some concerns at the cost of provisioning a PEMP system for co-location space though it is clear that it provides a benefit to LLUO’s by warning them of any hazards to their equipment. There was also concern that BT, which already uses PEMP to monitor a number of its exchanges, was intending to install a stand alone PEMP system for LLUOs rather than extending its existing arrangements into the co-location space. This would potentially increase LLUO costs.

2.29 BT has stated that its general rollout of PEMP to its exchanges is mainly to rural locations where exchanges are likely to be unmanned and difficult to access. This means that the majority of exchanges where LLUOs want to co-locate (in urban areas) do not currently have PEMP installed. In sites where there is already a PEMP system, BT asserts that extension of that system into a multi-bay hostel may "compromise BT’s legitimate future needs". In addition, due to the specification of existing PEMP arrangement there may not be capacity to extend it into the hostel. The ability to extend existing PEMP into hostels could only be determined by a site visit by the system manufacturer which increases LLUO costs in another area.

2.30 It is not apparent to Oftel that LLUOs were clearly aware that BT would build a separate PEMP platform for co-location hostels rather than extending existing arrangements where they exist. It does not appear that in all circumstances it would be impossible to extend existing PEMP arrangements and it would appear to be unusual for such a system to be so inflexible that an entirely new set up is required.

2.31 However, BT believes that making an assessment of whether existing PEMP arrangements can be extended into the LLUO area may involve extra cost. In addition there is no specific PEMP requirement for the mini-hostel or bespoke co-location arrangements. Given that the mini-hostel and bespoke arrangement are the main forms of physical co-location being employed at the current time and that it would be pointless to install a separate PEMP system in a co-mingled environment this issue is unlikely to be significant going forward. Therefore, Oftel does not intend to take further action on this issue. However, Oftel at present considers that if LLUOs request PEMP installation in the co-location space BT should assess all possibilities of extending the existing PEMP arrangements if LLUOs specifically request.

Electricity costs

2.32 Concerns have been raised at the level of BT’s charges to LLUOs for electricity supply to equipment in physical co-location space. BT’s current price is 6.63p per KWH and some LLUOs believe that this is significantly higher than prices they pay for similar supply to their own facilities.

2.33 In response BT has referred to published London Electricity Board business tariffs as a comparison to its LLU electricity charges. BT has also pointed to Ofgem published guidance on maximum resale prices for electricity. These comparisons do indicate that BT’s charges are largely in line with commercially available tariffs. However, BT has not provided clear information on its own input prices for electricity supply to its exchanges. Its only reference to this issue is that "BT, like all large users of power, seeks to minimise its expenditure on this item".

2.34 Oftel has some concerns that BT has not provided accurate information on its own electricity costs. However the overall impact of power charges on the collocating LLUOs is now lower for some operators as equipment rack sizes and power consumption forecasts have been reduced. With a smaller rack size and lower consumption forecast it would appear that even a significant reduction in price for electricity would have a minimal effect on LLUOs costs. The overall impact of a 20% reduction in the current BT unit fee from 6.63 pence per KWH to 5.30 pence per KWH would result in a reduction in the annual running cost per customer of less than £0.60 (assuming 1x1 kw rack supporting 200 customers).

2.35 Oftel does recognise that not all LLUOs will have the same power consumption requirements and that some may be heavier users than others. However, it should also be noted that Oftel’s co-location guidelines do state that LLUOs should be allowed to arrange for their own electricity provision to physical co-location space. Oftel currently has no evidence as to whether LLUOs have requested their own electricity supply or whether they are experiencing any difficulties in attempting to take advantage of this option.

2.36 Therefore, bearing in mind that BT’s LLU electricity prices are currently broadly in line with commercially available tariffs, the limited impact of significant changes in electricity prices in some circumstances on final prices to consumers, and the potential ability of LLUOs to self provide power, Oftel does not intend to pursue this matter further at the present time. However, given industry concern and the early stage of delivery of LLU facilities Oftel will consider reviewing this issue at a later date if LLUOs continue to have concerns and are able to present actual data on the cost of electricity and on the impact of BT’s electricity charges on their costs. Oftel would also like to emphasise that any electricity charge that BT makes to LLUOs must be non-discriminatory and cost oriented.

2.37 In the course of this investigation BT has questioned Oftel’s ability to investigate this matter under Condition 83 and the LLU Regulation. BT does not believe that electricity prices can be considered as an LLU facility. Oftel does not accept that it cannot examine BT’s LLU electricity prices under the terms of Condition 83 and the Regulation. Electricity supply is important to the provisioning of co-location space and therefore of LLU facilities and it is entirely appropriate for Oftel to examine this issue as part of its investigation.

BT’s LLU project management

BT’s current approach

2.38 The original concept of LLU was as a very large and complex project with significant numbers of companies requiring physical co-location space simultaneously and in many locations. Given these parameters BT decided that this required a separate project management and control structure outside of BT’s in house activities. This approach was largely driven by the extremely high forecast demand for co-location space and unbundled loops from LLUOs in the second half of 2000 and remains BT’s current approach to the LLU project.

2.39 BT’s approach falls into different categories. The building work has been let to a separate, competitive, contractor separate from BT’s standard in house contracts. This contractor has overall responsibility for delivery of co-location rooms. The building contractor also has responsibility for the performance of specialist subcontractors who provide such facilities as air conditioning and security arrangements. The charges made by the building contractor reflect the level of risk associated with delivering the hostel on time. BT has also appointed an external contract management company supervising the building contractors to manage the overall project. The results of these actions have been: additional project management fees and potentially higher unit costs for building work as the contract is seen as discrete and separate from standard BT work.

2.40 The perceived complexity of the project, as well as the time critical nature of delivery of co-location rooms has also resulted in a provision for liquidated damages from specialist subcontractors to enforce control and discipline. As a consequence of this, specialist sub contractor charges have been increased. On these enhanced costs the project management fees are being charged with a further percentage on several items being added to cover BT’s cost of sales and bad debt provision.

Oftel’s view

2.41 Such arrangements may have been appropriate when demand for co-location space was high and costs for constructing highly specified co-location hostels were spread amongst a large number of LLUOs. However, as the number of LLUOs seeking co-location space has reduced the cost burden of constructing co-location rooms has fallen harder on remaining individual LLUOs. Current out-sourced arrangements for project management and co-location room preparation add significantly to the costs which are passed on to LLUOs.

2.42 In addition, the number of people, contractors and organisations involved in the co-location costing and planning process has resulted in inconsistencies, errors and delays in processing requests by LLUOs for co-location.

2.43 Overall it appears that the current process is not achieving the most efficient cost effective solution for LLUOs given current levels of demand for LLU facilities.

Conclusion

2.44 Given these circumstances Oftel believes that it may be more efficient and cost-effective if BT’s co-location build programme is resourced in-house. Oftel therefore requests that BT re-assess its resourcing of the LLU project and give consideration to this suggestion particularly in relation to the provisioning of co-mingling. Oftel will seek from BT a full written assessment of the costs/benefits of bringing the co-location build project in house no later than three months from the date of publication of this document.

2.45 Oftel recognises that by moving the LLU project in house project management and build costs may be reduced in one area but that such costs will still have to be incurred through use of BT’s in house resource. However, Oftel believes that moving the LLU project in house should streamline the process of ordering and provisioning co-location space therefore presenting overall cost reductions through efficiency savings and possibly reducing the timescale for delivery of these LLU facilities.

2.46 Oftel also recognises that by scaling back the BT resource employed on providing co-location to reflect current demand there may be concern that if orders for co-location rooms increase significantly, BT would not have the resource to cope. However, Oftel believes that, as BT’s business as usual co-location ordering process already contains a forward looking forecasting cycle for requests for space at exchange sites, BT would have enough advance notice to cope with an increase in demand.

Bottom up cost models

2.47 The current BT offerings for physical co-location have been the subject of much debate due to cost structure and implementation timescales. Oftel asked ICC to developed a number of "bottom up" cost models for single LLUO, co-location facilities looking outside the existing mini-hostel specification and BT’s existing LLU project management arrangements for the cheapest co-location options for LLUOs. The range of options presented reflects Oftel’s understanding that individual LLUOs have different requirements for co-location facilities.

2.48 ICC has developed cost models for five different options which range from the existing mini-hostel specification to full co-mingling. The five models are as follows:

• Option 1: Full co-mingling
• Option 2: Co-mingling with walls
• Option 3: Mini-hostel with external access
• Option 4: Mini-hostel with external access (heat dissipation <1.4kw)
• Option 5: Basic box

2.49 A cost has been estimate for each of these options which range from £46,000 per LLUO for Option 2 to £29,000 for Option 1. A full breakdown of costs and assumptions for each of these options are shown at Annex C. For reasons of commercial confidentiality Oftel has not been able to provide details of percentage Builder/Project Management/BT mark ups. Any difference between the ‘Cost £k’ column and the ‘Final Cost’ column in the various tables indicates the inclusion of mark ups in the calculations.

2.50 Oftel has drawn the following conclusions from the information in these cost models:

• Full Co-mingling (Option 1) is potentially the cheapest option for LLUOs wishing to co-locate in BT’s exchanges. This assumption is based on the LLU having unrestricted access to their equipment. If BT’s existing air cooling arrangements can be shared with the co-locating LLUO further significant costs could be removed potentially bringing the overall cost to below £20,000;
• if Building and project management fees are reduced by BT bringing this work in house there may be reductions to the overall co-location costs;
• lowering power consumption as shown in Option 4 could help to significantly lower co-location costs by reducing or removing the need for air cooling even if a walled environment is requested;
• LLUOs may wish to consider discussing designs for bespoke co-location rooms where they self provide some facilities such as electricity supply. Oftel understands that existing LLUOs are currently discussing the specification of bespoke rooms with BT. Oftel is encouraged by these discussions and believes that they offer a sensible way for LLUOs to reduce their co-location costs.

2.51 In summary, Oftel believes that these cost models support the conclusions of this statement.

Chapter 3

Findings of distant co-location investigation

Agreed price changes

3.1 BT’s charges for distant co-location tie cable services have been recalculated following discussions between ICC and BT using BT’s standard planning synthetics for time required to complete tasks and stores costs incurred. This has provided a clearly understandable cost base from which the distant location prices have been calculated. This recalculation has resulted in significant price reductions for distant location services. Details of these recalculations can be found in BT’s LLU price list at www.btinterconnect.com .

3.2 Oftel supports the method of recalculation agreed between ICC and BT and believes it has broadly generated prices for distant location services which are reasonable and cost oriented. Despite Oftel’s overall conclusion there are a number of issues relating to the cost of provision of distant co-location which require more detailed explanation (see paragraphs 3.3-3.8). Oftel also proposes to direct on a number of issues relating to distant co-location. Details on these issues are found in paragraphs 4.10 to 4.16.

BT profit margin on BT provided tie cables

3.3 BT has defined the provision of its own LLU external tie cables as ‘competitive’ since it believes that LLUOs have the alternative of providing such facilities themselves and connecting them to the BT MDF using BT’s LLUO provided pull through service. BT therefore believes that it is reasonable for it to charge a higher mark up on BT provided external tie cable than on the LLUO provided pull through service.

3.4 Oftel has not analysed whether there is a distinct market for external tie cables and if so whether any such market is competitive. Initial evidence is that most of the orders for distant location facilities requested the BT provided external tie cable. This information does not indicate whether self provision of such cables is feasible or whether there is any kind of competitive constraint on BT’s prices for its own external tie cables.

3.5 Oftel believes that this issue has a strong read across to questions of BT’s pricing for LLU backhaul facilities where LLUOs also have the option of purchasing BT’s service or self providing.

3.6 In these circumstances Oftel has decided that it will examine the issue of BT’s prices for BT provided external tie cables under the terms of its work on LLU backhaul. Oftel is due to publish a consultation document on these issues shortly.

Stores items

3.7 Oftel has questioned BT’s inclusion of costs for a number of stores items within its charges for external tie cable services.

3.8 BT has accepted that it should not be charging LLUOs for the provision of a duct sealing tool which is re-usable. BT has also stated that it has over-estimated some of the costs of stores items. BT is currently reassessing these costs and will publish price changes shortly.

Chapter 4

Issues on which Oftel proposes to direct

4.1 Oftel’s draft direction on the following issues is found at Annex A

Charges for escorted access

4.2 Aside from issues of whether escorted access is necessary concerns were raised by LLUOs regarding the level of BT’s charges for planned and unplanned escorted access to an exchange site. Following work by ICC, BT has issued a new set of reduced prices. Details of these prices can be found on the BT website at www.btinterconnect.com . These charges are still based on the concept of doubling the charge for any unplanned work to cover the replacement of an engineer/technician called away to carry out an escorted visit. This concept is known as ‘backfill’.

4.3 BT’s view is that it is legitimate to backfill for unplanned escorted access as it is a cost to BT for an engineer to break off from a job in progress. BT also believes that it may fail to comply with its service obligations if it is not allowed to backfill work in progress.

4.4 Oftel does not accept that it is reasonable for BT to include a cost for backfilling in the unplanned escorted access charges. There is only a four-hour notice period for unplanned work and it is unlikely that a replacement engineer could be found in that time. It is more probable that less urgent work would be deferred. Out of hours work would, in all probability, be executed as a "call out" and, if BT had another urgent requirement, a second "call out" would take place.

4.5 Oftel does accept that it is reasonable for LLUOs to be charged a premium for unplanned visits as an incentive for them to ensure that in normal circumstances site visits are planned. Therefore Oftel has proposed that it would be reasonable for this premium to be set at 50% above the rates for planned visits.

4.6 There was concern raised by LLUOs that the minimum chargeable call out period for escorted access is four hours. Given the current low level of demand for unbundling facilities there is currently very little actual data on time duration of escorted access visits by LLUOs. Oftel’s view is that a four hour minimum charge with a premium for unplanned visits cannot be proved to be un reasonable. Therefore Oftel does not intend to pursue this issue at the present time. However, as LLU progresses Oftel would encourage BT to re-assess the minimum call out period based on actual data as it becomes available.

MPF line characteristics

4.7 BT currently charges LLUOs £5.37 to provide the characteristics of individual loops in order to provide information for an LLUO which would assist them in making a decision on whether that particular loop is capable of carrying broadband services. This current price was an increase from an original charge to LLUOs of £1 per loop. Concern was raised at this increase in price and Oftel has investigated whether the charge reflects BT’s costs of provision.

4.8 BT has provided ICC with cost details of the databases and procedures used in the provision of MPFLCs. BT’s original price for the provision of MPFLCs was a notional figure based on high levels of forecast unbundled loop volumes. One of the factors on which BT based this figure is its own estimate of expected loop volumes. Oftel considers that, for consistency, BT should apply the forecast which Oftel used in its December 2000 determination of prices for fully unbundled loops and internal tie cables and its June 2000 determination on prices for shared access.

4.9 Oftel has recalculated this price based on its understanding of BT’s pricing methodology. Oftel proposes that BT should reduce its price for the provision of MPFLCs to £4.22.

Additional management costs

4.10 BT currently includes costs for an additional 16 hours "in life" management time into the price of the BT provided external tie cable. This is additional management time which BT believes is required because of LLUO mistakes in planning distant location facilities. This additional cost is not included in the LLUO provided external tie cable pull through service.

4.11 BT has stated that it is justifiable for it to add such costs into the tie cable price. It maintains that for all external tie cable jobs multiple site visits have been necessary due to problems at the LLUO end of the cable. BT has rejected an idea of charging separately for additional work on a per occasion basis stating that there is "no current mechanism for capturing additional man-hours resulting from an LLUO not following the agreed distant Location Request (DLR) procedures." BT has also indicated that it believes that additional management hours spent on external tie cable may actually exceed an average of 16 hours. However, BT has acknowledged that it hopes that there will be improvements in LLUO performance in the future.

4.12 Oftel recognises that there is a genuine need for BT to cover additional labour costs incurred and recognises that a blanket charge has the advantage of simplicity. However, Oftel does not agree that a blanket charge is appropriate going forward, especially bearing in mind that LLUOs will no doubt improve their process and planning as they gain experience in connecting distant tie cables to their remote locations. Oftel believes that a per occasion hourly call-out charge for additional work undertaken by BT is a more appropriate charging mechanism for such work. This would have the benefit of insuring that LLUOs are only paying for costs they have originated and also of incentivising LLUOs to plan distant location efficiently.

4.13 Therefore Oftel has proposed that BT should recalculate its prices for BT provided external tie cables excluding the additional 16 hours in life management costs. Oftel proposes that such costs should be recovered on a ‘per occasion’ basis from LLUOs using the current BT rate of £38 per hour and therefore that the fixed connection charge for BT provided external tie cables should be reduced. For the 100 pair cable @ 100metres the charge should be reduced from £3522.00 to £2914.00. For the 500 pair cable @ 100metres the charge should be reduced from £4965.00 to £4357.

Rental charges

4.14 BT currently charges an annual external tie cable rental charge which is 17.6% of the connection charge. This charge is divided up into 10.9% for maintenance and 6.7% as a cost for replacing the cable after approximately 15 years, which is its estimated physical life. Oftel does not agree that BT should include a replacement cost in its rental charge as BT has already recovered the full cost of the external tie cable through the connection charge.

4.15 This view is consistent with the view taken in Oftel’s December 2000 determination on prices for internal tie cables which excluded such replacement cost from the ongoing rental. Paragraph 3.9 of Oftel’s Consultation and draft determination on loop and internal tie cable prices states that , "the replacement cost of the [internal tie] cable has been removed from the rental to avoid over-recovery, since this cost item was already included in the connection charge." Paragraph 3.10 states that, "Oftel considers that the physical life of an Internal Tie Cable is approximately 15 years and that after that period BT will have to replace that equipment. Therefore, a new connection charge will have to be paid after 15 years of the rental charge adjusted."

4.16 Therefore Oftel has proposed that BT’s external tie cable and OLO provided pull through rental charges should only contain a cost oriented charge for maintenance of the cable and that BT should remove any replacement cost from that charge. Once the physical life of the cable has expired, which Oftel assumes will be after approximately 15 years, BT may charge LLUOs a new connection charge for any replacement equipment.

Next steps and the consultation

Details of consultation

5.1 Please supply your comments on the issues on which Oftel is proposing to direct and the draft Direction. The deadline for responses is Thursday 15 November 2001.

5.2 Oftel believes that this draft Direction is of most relevance to members of industry directly involved in local loop unbundling. This consultation follows similar consultations on issues concerning local loop unbundling. Oftel believes that it is in the interest of stakeholders that the issues on which Oftel proposes to direct should be resolved as quickly as practicable and that interested parties should be able to respond within four weeks. We will of course consider any representations made in response to this document.

5.3 On this occasion, Oftel is not inviting stakeholders to make detailed comments on the responses of others. However, in the interests of transparency, all non-confidential responses will be published.

5.4 Comments should be made in writing and where possible sent by e-mail to john.russell@oftel.gov.uk. However, copies may also be posted or faxed to the address below. If any stakeholders are unable to supply their comments in one of these ways, please use the contact details below to discuss alternatives.

John Russell
Compliance Directorate
Oftel
50 Ludgate Hill
London
EC4M 7JJ

fax: 020 7634 8830
e-mail: john.russell@oftel.gov.uk

5.5 Responses will be published on Oftel’s website in the ‘Publications’ section under ‘Responses to Oftel consultations’ except where respondents indicate that the response, or part of it, is confidential. Respondents are therefore asked to separate out any confidential material into a clearly marked annex. In the interests of transparency, respondents are requested to avoid confidential markings wherever possible. Appointments to view written comments in Oftel’s Research and Information Unit must be made in advance (see contact details below).

Internet

5.6 Oftel has a free e-mail based mailing list to help people stay informed about the work that Oftel is doing. Each time an Oftel document is published and placed on Oftel’s website at www.oftel.gov.uk, subscribers to the list receive an e-mail informing them about the document. To register, please go to the ‘What’s New’ section of the website and link to the electronic form.

5.7 Hard copies of this document are available from Oftel’s Research and Information Unit.

Alternative formats

5.8 Copies of this consultation document are available on disk. Accessible formats such as large print, Braille and audio cassette can be made available on request. Please contact the Oftel Research and Information Unit on 020 7634 8761 or by e-mail at infocent@oftel.gov.uk for more information.

Annex A

DRAFT

Co-location services pricing

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 paragraphs 17 and 19 of the public telecommunications licence granted to British Telecommunications plc pursuant to section 7 of the Telecommunications Act 1984

WHEREAS

1. 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 ;
2. 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");
3. 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"), including the provision of Co-location, 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;
4. Paragraph 17 of the Condition provides that BT shall provide access Network Facilities at a charge or charges to be agreed between the parties or, in default of agreement, to be determined by the Director;
5. 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;
6. On 18 December 2000 the European Parliament and the Council adopted a Regulation on unbundled access to the local loop (EC 2887/2000) (the "EC Regulation");
7. 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") which, for the purposes of this Direction, includes the relevant parts of BT's Price List;
8. Article 4(1) of the EC Regulation requires national regulatory authorities in each member State (which in the United Kingdom is the Director General of Telecommunications - the "Director") to ensure that charging for unbundled access to the local loop fosters fair and sustainable competition;
9. Article 4(2) of the EC Regulation gives the national regulatory authority 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 national regulatory authority to intervene on his own initiative where justified in order to ensure non-discrimination, fair competition, economic efficiency and maximum benefit for users;
10. 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;
11. It is appropriate that this Direction be based on the Director's powers under both the EC Regulation and the Condition;
12. The Director has been investigating various issues concerning the prices BT charges for providing certain forms of co-location at MDF Sites. The course of the Director's investigations and a more detailed description of his findings are contained in the Statement dated […] October 2001which accompanied a draft of this Direction (the "Statement");
13. As the Statement makes clear, BT has amended certain of its prices during the course of the investigations following discussion with the Director. In particular, BT significantly reduced the price of escorted/accompanied access for visits to MDF Sites (and also for external tie cable services) following such discussion to ensure that that the prices contained in its Price List were cost oriented. On the information currently available to him, the Director has no reason to disagree that the prices for planned escorted access (described as Accompanied Access in the BT Price List) prevailing as at 1 October 2001 are cost-oriented;
14. However, as a result of the Director's investigations, there are a number of continuing concerns relating to the prices charged by BT for services associated with the provision of Co-location and certain other Access Network Facilities. For the reasons given in these recitals and set out in more detail in the Statement and in the explanatory memorandum accompanying this Direction, and having considered the representations made in response to the draft of this Direction published on […] October 2001, the Director believes that it is necessary to make this Direction;

THEREFORE

Pursuant to Article 4(2)(a) and Article 4(3) of Regulation EC 2887/2000 and Condition 83 paragraphs 17 and 19 of the licence granted to British Telecommunications plc under section 7 of the Telecommunications Act 1984, the Director General of Telecommunications makes the following Direction;

1. BT shall not charge a price for unplanned Escorted Access to any MDF Site which is greater than one and a half times the price shown in the BT Price List from time to time for planned Escorted Access.
2. BT shall offer "MPF line characteristics Provision" for individual Metallic Path Circuits to assess whether they meet the Relevant Specification at a price not exceeding £ 4.22 (four pounds 22p) or such other amount as may be agreed between BT and any Operator or the Director.
3. BT shall reduce the price charged for the connection of External Tie Circuits provided by BT (and shall not charge any Operator a greater amount for the connection, installation or provisioning of External Tie Circuits (the "External Circuit Connection Charge")) to;

1. £ 2,914 (two thousand nine hundred and fourteen pounds) for an External Tie Circuit of up to 100 metres in length connecting up to 100 tie pairs to the MDF; and
2. £ 4,357 (four thousand three hundred and fifty seven pounds) for an External Tie Circuit of up to 100 metres in length connecting up to 500 tie pairs to the MDF;

except by agreement with that Operator or the Director.

4. Any annual rental charge for the supply by BT of External Tie Circuits shall not exceed 10.9% of the External Circuit Connection Charge paid by the Operator in question.
5. For the purposes of this Direction;

1. "Escorted Access" shall have the meaning given to it in the Director's Direction of […] November 2001 and shall (for the avoidance of doubt) include Accompanied Access as described in the BT Price List; and
2. except to the extent any meaning would thereby be inconsistent with a definition in this Direction or the recitals to it;

1. paragraph 4 of the BT licence shall, with the necessary changes, apply to this Direction as it applies to the BT Licence; and
2. terms defined in the EC Regulation and in the BT Licence shall have the same meaning for the purpose of this Direction.

6. This Direction shall come into force 7 days after the date of its publication.

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

Annex B

List of exchange sites examined as part of Oftel’s investigations

BT supplied ICC with all planned costs for:

• three initially proposed co-location sites; Livingstone, Newport (Gwent) and Thornbury (Bow Wave 1)
• two Bow Wave 2 sites: Mayfair and Baynard/Faraday (Bow Wave 2)
• three mini hostel sites: Harrow, Paddington and Shepherds Bush (Bow Wave 2)
• six single hostel sites: Morley, Pudsey, Swinton, Eccles, Walsall and Woolwich (Bow Wave 2)
• one high cost site: Shoreditch

BT also supplied the costs for the provision of External Tie Cables to enable an analysis of the processes and procedures involved.

Annex C

Bottom up physical co-location options*

* All diagrams are schematic only and are not to scale