Contents

Summary

Chapter 1 – Background

Chapter 2 – Assessment of responses received and conclusions reached

Annex – The direction

S.1 This statement and direction sets out the charges that LLU operators (‘operators’) have to pay for metallic path facilities (loops) and internal tie circuits. This direction takes into account responses received to the consultation document issued on 11 February 2002 (‘the consultation’).

S.2 The existing charge controls are set out in the 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 2000 Determination’), which came into effect on 31 December 2000.

S.3 The 2000 Determination ceases to have effect on 31 March 2002 (except as otherwise directed). In the consultation, Oftel proposed that a direction be made to renew the substantive terms of the 2000 Determination, subject to a further review by the Director. The Director plans such a review in the first half of 2003.

S.4 When the charges were determined in December 2000, they were calculated using estimates of costs provided by BT as well as (for certain cost elements), an assessment of future unbundled loop volumes. There has been an initial lag in the take up of local loop unbundling (‘LLU’) services. This has meant that the number of unbundled loops taken to date has been much lower than expected. This has been due to a number of reasons including the time it has taken to order co-location facilities and the prevailing market conditions. Oftel therefore considered whether a full re-determination of the charges was justified.

S.5 Oftel is of the view that it is not reasonable to re-assess the charges for loops when the market has not developed as quickly as was originally expected when the charges were set. Consequently there is little new information on the actual cost of the loops.

S.6 The Director has therefore directed that:

• Due to a lack of robust cost data, it is not appropriate to reassess the price of MPF and internal tie circuits at present.
• The charges for the provision of MPFs and internal tie circuits set out in the 2000 Determination shall continue to have effect, subject to further review by the Director.

S.7 The charges relating to shared loops set out in the October 2001 document, Local Loop Unbundling: final charges for shared access, are unaffected by this review. They will be reviewed at the same time as the review mentioned in paragraph S.3 above.

Background

1.1 Metallic Path Facilities (‘MPFs’) are the provision of the pair of copper wires that run from a main distribution frame (‘MDF’) at a BT local exchange to the customer’s home or business premises. An internal tie cable is a cable that contains 100 metallic pairs that allow the connection between the unbundled loops and the operators’ equipment. The charges for MPFs and internal tie cables are set out in the 2000 determination. These charges are as follows:

Table 1: Rental and connection charges for MPFs

Table 2: Rental and connection charges for internal tie circuits (cables)

1. This is a per-occasion charge, required to cover the set-up and joint closure costs of jointing the Internal Tie Cables to the External one. This charge is paid only once per order of Internal (2) Tie Cables, as this cost does not vary with the number of Internal Tie Cables that are connected to an External Tie Cable on each occasion.

2. As explained in Annex A paragraph 50 of the 2000 determination - Oftel has decided to separate charges for Internal Tie Cables reflecting the fact that the tie cables provided for physical co-location (Internal (1) Tie Cables) differ from the ones supplied for distant co-location (Internal (2) Tie Cables).

1.2 These charges were set so as to:

1.3 When the charges were determined in the December 2000 statement, they were based on estimates of costs provided by BT, as well as (for certain cost elements), an assessment of future unbundled loop volumes. Due to the unexpectedly low take up of loops, Oftel does not have more useful information on costs and other operational data than was available in December 2000. The Director General believes, therefore, that it would be unreasonable to undertake a re-determination at present.

Chapter 2

Assessment of responses received and conclusions reached

2.1 The consultation invited comments from interested parties. Oftel received responses to the consultation from BT, Bulldog Communications (‘Bulldog’), Thus and 51° . This chapter provides a summary of the views expressed by the respondents, together with Oftel’s conclusions on the issues concerned.

BT comments

Forecast demand

Oftel is continuing to use the assumptions contained within the cost model to set MPF prices, even though they are no longer correct.

2.2 Oftel accepts that the volume of loops ordered in the first year of service is lower than anticipated. Oftel does not consider this volume of loops to be indicative of future years as a result of the delays to the take-off of unbundling. Rather, Oftel considers it appropriate to ‘shift’ its estimate of unbundled loop volumes forward one-year with a consequent move forward by one year of the period for the recovery of BT’s costs. Accordingly, it is too soon to be sure whether or not Oftel’s assumptions are correct.

Cost recovery

An extension of the existing price controls would delay BT’s recovery of the costs, which have been incurred. Alternative methods of cost recovery should be considered.

2.3 Oftel accepts that BT has incurred significant costs in the development of LLU, in particular its operational support system (‘OSS’) and understands BT’s concern about the recovery of these charges. The issue of alternative methods of cost recovery was dealt with as part of the August 2000 document, ‘Access to bandwidth: conclusions on charging principles and further indicative charges’. There, (at paragraph 3.33) it states that reasonable set up costs should be recovered from the connection charge on individual loops. The length of time over which the charge can be made should be varied, to ensure that costs are fully recovered (rather than to vary charges over time to ensure full recovery takes place after exactly five years, as BT suggests).

2.4 Oftel considers that there is no present justification for altering the forecast number of loops at the end of the first five years of effective commercial service which was made at the time the MPF charges were originally determined. Oftel acknowledges that there have been revised forecasts from the players currently active that indicate a reduction in the likely number of unbundled loops. However, Oftel needs to ensure that a longer-term view is taken. It would be self-defeating to adopt a pessimistic target. This would risk raising the charges to a level, which priced the service out of the market; thereby ensuring that BT’s system set up costs could never be recovered from LLU services. The Director General intends to closely monitor the development of this market and will review the issue of the recovery of these costs at the next determination of MPF and internal tie cable charges.

BT considers that it would be reasonable to extend the existing charges for 1 year

2.5 A comprehensive review of regulatory provisions is planned for the first half of 2003. This timescale is in accordance with the new European Directives, which were adopted on 14 February 2002. This proposed timescale is broadly consistent with BT’s suggestion.

Regulatory action has created market uncertainty

Statements on alternative developments (i.e. PPCs and ATM interconnection) has made it difficult for operators to understand the addressable market and most efficient way to enter the market

2.6 Oftel’s regulatory strategy aims to strike the right balance between too little and too much regulation, ensuring that consumer needs for services are met in the short term whilst delivering a framework that is conducive to the development of competition at all levels of the broadband supply chain.

2.7 LLU is one of a number of options for operators wishing to offer services over unbundled loops. Oftel is keen to ensure that the terms of supply and costing of these alternative options are also reasonable. It is the commercial decision of operators whether they wish to fund roll out of a particular service. The statements on ATM and PPCs were issued as the result of operator requests for additional broadband interconnection services. Oftel does not consider that these measures increase regulatory uncertainty. Rather, they provide operators with increased options to provide broadband services to a wider audience of end-users.

The complexity of a number of processes and amount of investment required has increased as a result of the number of directions that have been introduced

2.8 The measures that have been introduced have sought to help reduce operators’ installation costs and clarify the reasonableness of BT’s terms for the provision of LLU facilities. Oftel considers the measures that have been introduced to be proportionate and in accordance with Condition 83 and EU Regulation 2887/2000 on unbundled access to the local loop. Where measures have required additional processes to be introduced, appropriate mechanisms for BT’s cost recovery have also been considered.

Certain costs have changed

Certain costs have changed since the 2000 Determination (e.g. labour and certain network costs have increased).

2.9 When the charges were determined in December 2000 statement, they were based on estimates of costs provided by BT, as well as (for certain cost elements), an assessment of future unbundled loop volumes. Oftel accepts that the costs involved in the provision of MPFs and internal tie cables may have changed since December 2000 (when the prices were originally set). However, it is not considered to be appropriate to revise these elements in isolation (see also paragraphs 2.11 and 2.13). Rather it is more appropriate to reconsider the charges as a whole, when more robust cost data is available and a balanced assessment of all changes – increases and decreases – can be made. When the market has developed further, all cost elements will be considered and, where necessary, adjustments will be made.

Start date

Oftel does not have the power to amend the start date as the EU Regulation mandates that LLU should be offered from 1 January 2001.

2.10 Oftel is not proposing to revise the start date for the requirement to offer LLU and indeed, since that date has passed and BT has made an offer, could not do so. Rather, the Director has reassessed, in the light of delays in the unbundling process, the appropriate date for the start of his 5 year forecast of local loop volumes from which is derived the period for cost recovery of LLU. This is consistent with the provisions of the EU Regulation. The EU Regulation does not lay down what the appropriate period for cost recovery must be.

Rate of return

If Oftel states that the start date should be 2002, the first year for cost recovery should also be amended to that date (ROCE would remain at 14.5% until 31 December 2002)

2.11 The arguments set out in paragraph 2.9 above apply here also.

Operators’ comments

2.12Thus supported Oftel’s view that it is not reasonable to try to re-assess the charge for loops when the market has not started up as quickly as was expected when the charges were originally set. They also agreed that the existing price controls should continue in force for the time being.

Impact of BT’s wholesale price reductions

Bulldog and 51° stated that as MPF rental charges include cost components that BT has stated have decreased on basis of their ADSL experience (i.e. fault incidence and fault repair time) this should mean that MPF rental charges should be reduced

2.13 As discussed above, Oftel does not propose to reassess BT’s charges on a piecemeal basis, but will reconsider LLU charges when more complete information on costs of LLU (including the costs of those network elements shared with other services) is available. While it is recognised that there are certain elements of ADSL provision that are similar to LLU, there are also a number of differences (in particular those relating to network costs that do not have an impact on LLU). The issue of a possible reduction of certain cost elements, which are common to both processes, will be considered when the pricing of MPFs and internal tie circuits is reassessed.

Information availability

Bulldog requests greater transparency in loop charges – so that cost allocation can be understood better

2.14 In his Statement on BT's Financial Statements 2002, the Director General commented that, in his opinion, the principles of transparency and cost-orientation were not adequately demonstrated in respect of a number of a number of new services including access network facilities. The Director intends to publish a consultation document soon that addresses his concerns including the transparency of LLU costs.

Annex

Local loop unbundling: prices for metallic path facilities

Direction made under Article 4(2)(a) of Regulation (EC) 2887/2000 on unbundled access to the local loop and under Condition 83.16 of the licence granted to British Telecommunications plc under s. 7 of the Telecommunications Act 1984

RECITALS

1) On 22 June 1984 the Secretary of State granted a licence (the "BT Licence") to British Telecommunications under section 7 of the Telecommunications Act 1984 (the "Act") for the running of the telecommunications system specified in the BT Licence and subject to the conditions attaching to it;

2) Under section 19 of, and paragraph 20 of schedule 5 to, the Act the BT Licence has effect as if granted to British Telecommunications plc ("BT");

3) On 18 December 2000 the European Parliament and the Council adopted a regulation (EC 2887/2000) on unbundled access to the local loop under Article 95 EC Treaty (the "EC Regulation");

4) Article 4(2)(a) of the EC Regulation empowers a national regulatory authority (which, in the United Kingdom, is the Director General of Telecommunications – the "Director") to impose changes on the terms offered by notified national operators (of which BT is one) for providing unbundled access to the local loop. This power extends to the prices charged for such access and for related facilities;

5) Condition 83 (the "Condition") of the BT Licence also requires BT to provide access to its local loops. Such access is described for the purposes of the Condition as a "Metallic Path Facility." Paragraph 16 of the Condition permits the Director to determine the charges for Metallic Path Facilities;

6) On 22 December 2000, the Director made a determination (the "2000 Direction") under Condition 83 paragraph 16 which set the price for Metallic Path Facilities offered by BT;

7) Paragraph 6 of the 2000 Direction provides that it shall cease to have effect on 31 March 2002, except as otherwise directed by the Director;

8) Although progress in providing unbundled access to BT’s local loop has been considerable since the 2000 Direction was made, and the pace of take up is increasing, there is currently insufficient evidence for the Director to assess properly whether the charges set in the 2000 Direction should be changed;

9) Nevertheless, the Director believes that, given the developing nature of the market for Metallic Path Facilities, it is still appropriate for the prices for them to be determined;

10) A draft of this Direction, together with a consultation document, was published on 11 February 2002 and representations invited;

11) The Director has had regard to the representations received and, for the reasons given in these recitals and the explanatory statement accompanying it, makes this Direction;

DIRECTION

The Director General of Telecommunications makes the following Direction under Article 4(2)(a) of Regulation EC 2887/2000 and under Condition 83 paragraph 16 of the licence granted to British Telecommunications plc under s.7 of the Telecommunications Act 1986.

1. Paragraphs 1 and 2 of, and the Schedules to, the 2000 Direction (which relates to the changes for the provision of Metallic Path Facilities and associated Internal Tie Circuits) shall continue to have effect.

2. BT shall not make any charges other than in accordance with paragraph 1 unless either;

4. For the purposes of this Direction;

5. This Direction shall commence immediately on the expiry of the 2000 Direction and shall continue in force until varied or revoked by the Director.

Jim Niblett

Director, Broadband and International Affairs

26 March 2002

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