May 2000

Contents

Introduction

BT's proposed pricing structure

Oftel's initial views on BT's proposed pricing structure

Oftel's initial conclusions

Consultation

Introduction

1.    In the November 1999 Statement "Access to Bandwidth: Delivering Competition for the Information Age", Oftel set out a number of high level pricing principles.

• The price of the loop will be cost-oriented and set on the basis of reasonably and necessarily incurred LRIC plus a mark-up to account for costs that are common to the line and other BT services;

• Charges for other necessary inputs, such as internal tie cables, should also be on the basis of reasonably and necessarily incurred LRIC + mark-up;

• The starting charge will be geographically averaged, but BT may request geographically de-averaged prices if this can be shown to be justified by differences in the underlying costs;

• BT should be able to recover the costs associated with setting up co-location facilities and order handling processes, as well as the costs incurred as a result of dealing with operators and maintaining the service; and

• If operators share a co-location area, the charge for co-location should be set on the basis of average cost, and should depend on the amount of space occupied.

2.    The basic pricing principles for unbundled local loops and associated services have now been set out in the new licence condition – Condition 83 ‘Requirement to provide Access Network Facilities’. The following describes how Oftel intends to apply these principles.

3.    Oftel has stated that charges should be based on "reasonably and necessarily incurred" costs. For assets in place, Oftel does not intend to adjust for minor inefficiencies, but would adjust for major inefficiencies if studies showed that BT were significantly less efficient than a properly adjusted comparator group. However, on the basis of the studies that Oftel has commissioned (due to be published shortly), its current assessment is that is that an adjustment for efficiency is unlikely to be required. For assets and systems that are not yet in place, Oftel would expect charges to be set on the basis of efficiently incurred costs.

4.    Oftel expects that unbundled loops will be used primarily to provide broadband services to customers. However, operators are not prohibited from using loops to provide analogue voice alone. There are two potential issues that arise from this.

5.    First - cost recovery: In the Statement, Oftel recognised that if operators were to use loops for analogue telephony, the combination of a single price for lines and a tariff that creates varying degrees of profitability per line, might, in the extreme, lead to BT being unable to recover its costs plus a reasonable return on capital. Clearly this would need to be addressed, but it is an issue relating to voice services per se and not just those delivered via unbundled local loops. If this circumstance seemed likely to arise, Oftel would look at the pricing arrangements for unbundled loops and other voice delivery mechanisms and make adjustments to ensure that BT was able to recover its costs.

6.    Second – consistency: The scenario above represents an extreme circumstance. There is also a continuing need for overall consistency in the approach towards price controlled BT services. In particular Oftel needs to ensure that in pricing unbundled loops and other services that allow the delivery voice, no distortions are created that would give an artificial incentive for operators or service providers to use any particular mechanism. To ensure consistency, Oftel will take account of the effect of any changes to other mechanisms such as indirect access on the use of unbundled loops for voice and would adjust the price to remove any distortions if necessary.

7.    Assessments on both these issues would take place in the context of the Price Control Review. Oftel will also monitor the use of loops and would, if it appeared that its high-level objectives to promote competition in the provision of broadband services were not being met, want to examine why that was the case and address any distortions that were found.

8.    Having decided on the high level pricing principles, the next stage in the process of arriving at final prices for unbundled loops is to look at the detail of how charges should be calculated. This document sets out BT’s detailed proposals for the structure of charges and Oftel’s initial views on these proposals.

9.    It should be noted that the charges appearing in this document are BT’s initial, indicative calculations. As such, they should only be taken as an indication of the likely scale of any charges that will eventually be levied. They should not be taken as representing the exact charges that operators will face when requesting unbundled loops. BT is continuing to refine the figures in order to provide a more robust set of proposed charges by the end of June 2000. In addition, Oftel will want to examine closely any figures that BT produces at this time, particularly in the light of the bottom-up modelling work that is currently taking place to establish the cost of a copper loop and the forthcoming Consultation on BT’s Financial Statements. Barring any major discrepancies, it is intended that BT’s own ‘top down’ information will be used as the starting point, with ‘bottom up’ information being used to ensure that only relevant costs are included within the calculation.

10.    Although Oftel will not be arriving at a view of the reasonableness or otherwise of BT’s proposed charges until more robust information is made available in June, Oftel would still welcome views on whether the scale of the indicative charges seems reasonable or not. Oftel would be particularly interested in any evidence that can be provided to substantiate views expressed in this area.

11.    Further stages for the determination of starting charges are:

12. Oftel will review regularly the price set for unbundled loops. The first review will be 12 months following the introduction of services. Thereafter there will either be an annual determination of charges or an on-going control – for example the RPI-X form of price control

13.    This consultation document looks at proposed charges for all items. However, it is important to recognise that Oftel will be determining some charges up-front, while other charges will only be determined in the event of a dispute. The purpose of including those items that fall into this second category in this Consultation Document is that Oftel wishes to provide transparency as to the view it would be likely to take in the event of the need to determine charges.

14.    BT is required to offer the following items to operators:

• Metallic path facility (relevant charges will include the price of loop, system set-up and on-going charge for order handling)
• Internal tie cables
• Co-location facilities (rental, set-up and maintenance) or external tie cables
• Any other ancillary services to these products

15.    Oftel’s approach to the determination of charges for these items is that determination of charges should only be made prior to a dispute if:

• The item being charged for is not competitively supplied; and

• Determination is practical, in that charges are not bespoke or subject to significant variation due to geographic location.

16.    This rationale has led to the position outlined in the licence condition, namely that only the charge for metallic path facilities and internal tie cables should be determined prior to any dispute. For the remaining charges, the licence condition states that:

"The licence shall provide Access Network Facilities …..at a charge or charges to be agreed between the parties and in default of agreement to be Determined by the director."

17.    The licence condition also places controls on BT’s charges through prohibiting BT showing undue preference or exercising undue discrimination. In assessing whether either of these practices were taking place, Oftel would need to come to a judgement about the service that should be used as the comparator to unbundled loops. The licence condition states that:

"24. The Licensee shall not (whether in respect of the charges or other terms or conditions applies or otherwise) show undue preference to, or exercise undue discrimination against, particular persons or persons of any class or description as respects to the matters to which this condition relates.

25.The Licensee may be deemed to have shown such undue preference or to have exercised such undue discrimination if it unfairly favours to a material extent a business carried on by it in relation to the doing of any of the things mentioned in paragraph 24 so as to place at a significant competitive disadvantage persons competing with that business in a Relevant Market."

18.   The rationale for Oftel’s decision not to determine up-front the charges for other items is that:

• Oftel considers that external tie cables could potentially be competitively provided.

• Taking as a starting point that co-location set-up and maintenance charges are bespoke, Oftel considers that it would be impractical to determine these charges in all cases prior to a dispute.

• Rental may vary widely from exchange to exchange, so Oftel again considers that it would be impractical to determine these charges in all cases prior to a dispute.

19.    This is not to say that Oftel is of the view that the charge for these items could not be determined in the event of a dispute. In such an event Oftel retains the right to determine the exact principles that should be followed in setting the charges, or the particular charges themselves, or the way in which charges are structured.

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BT’s Proposed Charging Structure

20.    BT has presented Oftel with an initial structure of costs and some initial figures for those costs. BT has proposed that its analysis of the costs , as set out in this document, should be taken as indicative of its proposals for the structure of prices.

Price of the loop – existing and spare pairs

21.    BT has proposed that charges should reflect five broad categories of loop provision, and that there should be three charging elements for each of these categories. This proposed structure of charges is shown in Table 1.

Table 1: BT’s proposed structure of charges and indicative costs for the metallic path facility

Scenario / Type of connection	Annual Rental £ per line	Connection cost £ per connection	Disconnection/Reconnection cost £ per line
Line transfer -with new NTE	115	130 190	20
Spare pair -line met from stock -requiring additional work	105	230 385	10
New line - minor network intervention	105	585	10
New line - major network intervention	105	775	10
New line -small network build <50 man hours	105	1,185	10

22.    Most, but not all, of the costs used to arrive at these figures reflect the allowable return on capital of 14.5%. This figure derived from the current average return on charge-controlled network services, and has been adopted to ensure that the charge for loops is consistent with that levied on other mechanisms for delivering voice. In subsequent years, again consistent with the approach towards network services, the allowable return on capital will be reduced on the basis of a glide path that will bring the allowable return down to the target rate of return for network services at the end of the 4-year period to end-June 2005.

23.    If charges were to reflect the format shown in Table 1, an operator taking over an unbundled loop would be required to pay an annual rental charge and a connection charge for the line. The connection charge would reflect the costs of the line test, MDF jumpering and order handling. An operator ceasing to require an unbundled loop would be charged for the cost of disconnecting and reconnecting the line to BT.

24.    BT has been working on a top-down model to generate information on the CCA LRIC + mark-up rental cost of the loop. The increment used for this modelling work is all metallic paths in BT’s access network. The rationale for this increment is that all existing metallic loops are available to operators who wish to request them as metallic path facilities.

25.    Of the total annual rental charge for existing loops, plant costs, drop wire and the capital improvement programme make up 75% of the indicative charge. The mark-up for common costs accounts for a further 13%, and the remainder of the indicative cost is made up of LLU-specific wholesale costs and overheads. It should be noted that the figures shown in the table exclude the costs of fault reporting and repair (though not routine maintenance). BT has proposed that these items be charged separately to operators on a per occasion basis.

26.    BT has derived the annual rental costs through firstly aggregating the relevant rental costs of all metallic paths. These costs are derived from a combination of relevant rental costs from existing "metallic path only" increments for Access and Private Circuit local ends and producing a basic cost increment for the annual rental. In determining the relevant costs of the metallic path facility BT has removed costs from the underlying increments that are either inappropriate for the service (eg line card or non-metallic path costs) or indicated to be a cost not relating to the service.

27.    BT has then adjusted the base case for known additional costs relevant to LLU. This includes a capitalised charge for the drop wire and a charge for BT’s local loop capital improvement programme. BT currently expenses the cost of drop wires, but for the purposes of this exercise has treated it as being capitalised with a useful economic life of ten years.

28.    BT has informed Oftel that the capital improvement programme addresses replenishment of line stock, refurbishment/replacement of lines that may be fault intolerant to broadband services, replacement of line pressurisation plant and updating of lightning protection. The programme is not national at present, so BT has calculated the charge for this by averaging the cost of the programme over the total number of copper pairs in the areas covered by the programme.

29.    BT has then created a new increment to reflect the combined costs of metallic path facilities. The LRIC costs for the new rental increment are then calculated and the mark-up for common costs is identified. The mark-up represents an appropriate share of all costs that are common to the unbundled metallic path increment and other BT Services and has been distributed on the basis of equal proportional mark-up of the appropriate increments.

30.    For spare pairs and new provide, BT has proposed that the annual rental should not include a capitalised charge for the drop wire, but should still include a charge for the capital improvement programme. The cost of the drop wire would be met within the one-off connection charge. The exclusion of the capitalised cost of the drop wire explains why the annual rental for spare pairs and new provide is lower than the annual rental for existing loops.

31.    Some costs that might be expected to be included in the charge for the loop are excluded from BT’s proposed prices. For example, system set-up costs and the general rental and maintenance associated with use by operators of BT’s MDF, are excluded from this annual rental charge.

32.    In addition, BT has removed fault reporting and repair costs from the annual rental charge. BT has proposed that repair costs be charged for on a per occasion basis. The proposal is that a charge be levied each time that BT is required to repair a line or respond to a reported fault. The cost of routine maintenance of the loop remains in the annual rental charges.

33.    BT has indicated to Oftel that there is an additional scenario that could lead to costs being incurred over and above those contained in the table. This scenario is when the customer has a line provided through use of pair gain equipment. BT has suggested that this cost could be recovered either as a specific charge or averaged into the charge for a line met from stock.

34.       The cost of reconnection is lower for spare pairs and new provide than for existing loops. BT has assumed that all reconnect will require a BT engineer to disconnect the line from the internal or external tie cable. In the case of an existing line, the cost is higher because BT has further assumed that the line will be reconnected to the originating line card.

35.    BT has yet to carry out robust modelling of the wholesale costs and overheads. At the moment these have been estimated by adjusting the retail costs for connection and rentals of all PSTN, ISDN2 and metallic ISDN30 products to reflect the fact that not all costs are relevant to wholesale activities. For example, marketing costs have been excluded because these are not generally associated with wholesale activities. In addition, provision and installation and maintenance have been excluded on the basis that these have already been included in cost calculations relating to drop wire capitalisation.

Price of the loop – new provide

36.    In the draft guidelines for the licence condition, Oftel stated that:

"……….Where a single average price is set, the price determined for the MPF will be based on an average cost of providing the lines described above, ie those existing and spare lines that are suitable or could readily be made to meet the required specification for an MPF. BT would be expected to meet the obligation to supply at the determined price for all lines where costs do not exceed [n]. Additionally, the Director considers it reasonable for BT to supply as MPF lines outside this requirement that may nonetheless be extended or conditioned appropriately, but the additional costs incurred will need to be met by the OLO. Where the costs exceed [n] or more than [n] man hours are required, the Director does not consider that it would in general be reasonable for BT to be required to supply the line as an MPF."

37.    BT has now proposed what the values of [n] should be. The increment for the loop includes only those loops that are available from stock (ie existing loops and spare pairs). A separate charge will be levied for new loops that involve:

• Minor network intervention;
• Major network intervention; and
• Small network build.

BT has proposed that new loops will not be supplied if provision requires over 50 man hours of work within the access network.

Internal Tie Cable

38.    BT’s proposal is that all operators be charged for an internal tie cable whether they are co-locating in the exchange building or are distant co-locating. In practice this would mean that the cost of an internal tie circuit is included within the external tie circuit price charged to operators using distant co-location facilities.

39.    BT proposes that there be a connection charge and a rental charge for the internal tie cable. The annual rental charge will be £170 per 100 tie cable. The connection charge will be £4400 per 100 pair tie cable. Both charges assume an average cable length of 100m. The connection charge will cover the costs of:

• Internal tie cabling
• MDF Ironwork capacity
• HDF Ironwork capacity
• MDF block
• HDF block
• Cabling costs (to run and terminate cable ends)

40.    BT proposes that this connection charge will also be used to recover the system set-up costs associated with implementation of the requirement to offer metallic path facilities. BT has proposed that it recover it system set-up costs over five years. BT’s estimated system set-up costs are:

41.    BT has converted this total into a connection charge of £2,509 per 100 pair tie cable by the following process. Firstly, BT has forecast the expected volume of new loops in each of the five years following introduction of the service. BT has then apportioned system set-up costs to each of these years by multiplying the total system set-up costs by the percentage of new loops in the year to the total number of loops. BT has then applied a return on capital to arrive at a total cost over the five years. This cost is then divided by the forecast total number of tie cables to give the system set-up element of the connection charge per cable. This calculation is shown in Table 2. It should be noted that use of the most recent volume forecasts from the industry would lead to a lower figure of around £1,400 per cable.

Table 2: Recovery of Set-up costs via connection charge

Co-location – Licence Fee

42.    BT has proposed that there be two charges under this heading. The first would be a rental charge for the dedicated space being occupied by an OLO co-locating in a BT exchange. The second would be a rental charge for a share of the space required for the MDF. The first of these charges would be made only to operators who are co-locating in the exchange. The second of these charges would be made to all operators.

43.    The charge for dedicated space would depend on the actual space being occupied by an operator. The general charge would relate to the percentage of the MDF capacity being used by an operator. The charge would be calculated by allocating the rental charge for the CCA MDF footprint on the basis of the MDF capacity used by each operator. MDF capacity used is measured in terms of the copper pairs attached to the MDF.

44.    BT has proposed that both of these charges be based on the higher of the light industrial or alternative use market rates. BT has proposed that this licence fee should be set on a building by building basis. However, BT wishes to reserve the right to charge on a regionalised basis. BT has provided Oftel with some indicative charges for the licence fee. These are shown in Table 2. These charges include both elements of the licence fee, but are for space only and do not include such items as power consumption and maintenance.

Table 3: Indicative licence fee rates.

45. BT has proposed that the cost of providing or converting a room for an OLO co-locating in BT’s exchange be recovered through a one-off set up charge. BT would seek to recover these costs from the OLO when the order for a room had been accepted and the quote from the architect had been received. BT proposes that any adjustment to cover under or overpayments by the OLO would either be reimbursed or invoiced within two months of the room being ready for handover.

46.    BT’s view is that costs will vary depending upon location, room size, amount of conversion required, equipment installed, etc. BT has proposed that there should be a charge to cover the cost of providing an OLO specific cable runway, and that this charge would be payable whether or not and OLO chose to co-locate or use external tie cables. BT has provided an estimate of the one-off set up costs, and these are shown in Table 3. Under BT’s charging proposal, the exact charges would depend on the precise requirements of the operator and will vary according to the work required at the specified building.

Table 4: BT’s estimated costs for room build

Ventilation / cooling	£5k-20
Minor Equipment *	£8k-20
Planning	£2k-5
Access control	£5-10
Doors	£2k-5
Flooring & Building	£200-500 per square metre
Cable runway	£10k-25

* The minor equipment would include such items as provision of separate fuse boards, smoke detection equipment, skip hire, asbestos survey, etc.

47.    BT has proposed that the on-going maintenance costs be split into two categories. The first would cover maintenance of the dedicated space occupied by operators co-locating in an exchange building. The second would cover maintenance of the building itself. BT proposes to raise this charge on an annual basis as a charge per copper pair. The charge would be calculated by apportioning the cost of maintaining the building by the percentage of the capacity of the MDF. It is currently BT’s intention that this charge would be building specific, but BT wishes to reserve the right to charge for certain buildings on a regional basis.

48.    Both maintenance charges would cover activities such as general maintenance of the fabric of the building, painting and repair to both external and internal walls including the space occupied by co-locating operators. It would exclude maintenance of equipment installed by co-locating operators.

49.    BT has indicated that the both the specific and general maintenance charges would be in the range £10 to £20 per square metre.

Co-location – Charge for power

50.    BT has proposed that operators should be charged on the basis of their metered use of power. The charge for power proposed is the standard rate charged by the electricity company providing services to BT at the exchange. So the rate will vary from building to building depending on the company used by BT. This rate will apply whether BT is taking power from the electricity company or is using its own systems to provide the electricity. The exception to this rule is that BT proposes to make an additional charge for stand-by power that is used in the event of an emergency.

Co-location - Escorting services

51.    BT has not yet provided indicative figures for this item.

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Oftel’s initial views on BT’s proposed charging structure

Charge for the loop- existing loops and spare pairs

52.    Oftel is concerned that BT is treating recovery of the cost of the drop wire differently under LLU than has been assumed for the current price control. Under the current price control, and in accordance with BT’s accounting policies, the cost of the drop wire is expensed. This means that the cost of any work in this area appears as an expense in the accounts in the year during which the work took place. The price control allows for this approach to recovering drop wire costs. For LLU BT now proposes to go back and work out the result of capitalising and depreciating the drop wire. The additional capital is then added to the plant cost base and is subject to a return on capital employed. The operating costs are also supplemented by a depreciation charge, based on the 10 year asset life of the drop wire.

53.    It could be argued that BT has already recovered the cost of the drop wire for existing loops under the price control, and is proposing to recover it again through a charge for LLU. This would suggest that in order to prevent over-recovery of costs by BT, BT should not be allowed to include this capitalised drop wire cost in the charge for the loop. However, if BT does not include this cost in the charge for the loop two possible problems would result. First, it would lead to different charges for existing and new loops. There would be no charge for drop wire on existing loops, but new loops would pick up this cost. While this would complicate charges, there would be no objection in principle to such a difference if it reflected the different costs to BT of supplying loops in different circumstances. Second, if the cost of drop wire is not included the charge for existing loops would be below cost and this may not appear to present appropriate signals for competing infrastructure provision. However, another way of considering this issue is to recognise that customers should not be charged again for something for which they have already paid. A competitor who attempted to sell a product to a customer which included an element for which the customer had already paid might expect to lose sales to a rival whose charges excluded payments for such elements.

54.    On this analysis Oftel is of the initial view that the complexities that might arise as a result of not allowing BT to make a capitalised charge for drop wire are not significant enough to outweigh concerns about BT over-recovering its costs.

55.    Oftel’s proposal is therefore that BT should not be allowed to recover again the costs of drop wires for existing pairs. However, the costs of providing a new drop wire for spare pairs should be recoverable. Oftel’s view is that the most appropriate mechanism would be to capitalise these costs. One issue that needs to be addressed in this context is what happens when an unbundled loop that is subject to a capitalised drop wire charge is transferred – either to BT or another operator. Oftel suggests that in these circumstances the operator taking over the line should pay to the original local loop unbundling operator a charge for the drop wire based on the depreciated value of the capitalised cost of the drop.

56.    BT has proposed that the annual rental for an unbundled loop should include a contribution toward the cost of BT’s capital improvement programme. Oftel considers it reasonable for the charge for the loop to take account of the improvement work BT is undertaking.

57.    However, Oftel believes there is an issue of how any improvement programme should be reflected in the charge for the loop. In the regulatory accounts, the costs of such improvement programmes are capitalised and reflected in a higher CCA value of the loop. Oftel’s initial view is that this approach should also be taken for unbundled loops. This would aid transparency and would also prevent issues about non-discrimination that could arise if the programme is reflected in different ways for unbundled loops and BT’s ADSL service.

58.    BT has proposed that fault reporting and repair be charged for on a per occasion basis. BT’s rationale is that it is uncertain of the level of fault reporting and repair activity that will apply to unbundled loops. BT’s view is that the incidence is likely to be related to the use made of the loop and may not be related to existing fault levels. So BT suggests that to the extent that fewer faults occurred on loops offering narrowband rather than broadband services, operators who offer narrowband over a loop would pay less than those offering broadband over a loop. Equally, operators offering one broadband technology over the loop may pay a different amount to operators using a different broadband technology.

59.    Oftel is not aware of any evidence to suggest that the level of faults varies with use of the loop. Oftel has requested that BT provide evidence of this from its ADSL trials and its existing HDSL service, but Oftel has been informed that this information is not currently available in the form requested. Oftel’s main concern with this proposal is it will lead to uncertainty for operators who are taking unbundled local loops. These operators will have no visibility of the cost of repair associated with any given loop. Oftel is also concerned that operators are not in as strong a position as BT to absorb the risk that certain loops may due to their inherent nature rather than any use made of them, require a high level of repair.

60.    As a result of this concern, Oftel believes that the best approach is for BT to include an estimate of the repair costs in the annual rental charge for the loop. Repair costs should be estimated to reflect the requirement to repair the loop to the specification for metallic path facilities. If BT does not have the information necessary to do this for unbundled loops, it should use existing fault information and Oftel would review the charge for the loop once sufficient information was available to assess whether unbundled loops are likely to attract additional repair costs by virtue of their use.

61.    BT had indicated that an additional cost will be incurred where loops are currently served using pair gain equipment. In such circumstances the DACS system would need to be removed before the loop could be unbundled. The likely result of DACS removal is the requirement to provide a new line. There are two ways of dealing with this – to charge on a per occasion basis or to set an average charge for rental of the loop, based on an assumption of how many loops use DACS.

62.    Oftel is of the view that the best approach is to average the expected cost of DACS across all loops. While a separate charge better reflects how the costs arise, an operator requesting a local loop for unbundling will have no visibility of whether the customer is served under DACS and so cannot respond to this price signal. In addition, without visibility of the customers or areas served using DACS, a separate charge would lead to uncertainty for operators taking loops by preventing them from having a clear idea of their cost base.

63.    Oftel believes that this approach should also be adopted for charging when customers have old NTEs. Again, separate charges would provide a better price signal, but operators do not have visibility of whether or not a customer has the correct NTE so cannot respond to this price signal. So BT should have an average price for the loop that assumes a certain number of loops are either supplied using DACS or have an incompatible NTE.

Charge for the loop- new provide

64.    As discussed above, BT has proposed a level of work above which it will charge an additional fee. BT has also proposed three different categories of additional charges and a level of work above which it would not provide new loops. Oftel’s initial view is that BT’s proposals in this are reasonable

Internal tie cable

65.    BT has proposed that the system set-up costs associated with the metallic path facility service be recovered through a connection charge for internal tie cables. System set-up costs need to be recovered on a service that is purchased by all operators taking unbundled loops. The two options are therefore to recover system set-up costs through the annual rental or connection of the loop or through the internal tie cable.

66.    Oftel sees significant disadvantages with BT’s approach. A major impact of recovering system set-up costs on internal tie cables is to bring forward the payment that operators have to make for the system set-up costs. For example, an operator entering the market would have to pay the full £2,509 under BT’s system even if it only had a single loop. Oftel’s view is that instead, operators should pay for set-up costs in proportion to the number of lines they are using. Given the one-off nature of the system set-up costs, it would be appropriate for these costs to be recovered as a one-off payment. This would lead to the conclusion that the system set-up costs should be recovered through the loop connection charge.

Co-location – general

67.    It is Oftel’s understanding that BT has proposed that areas for shared co-location should only be set aside if operators make a joint request for shared co-location space. It is also Oftel’s understanding that other operators have agreed to this system when the service is initially launched, but are requesting that general co-location areas be made available as soon as possible after launch.

68.    Oftel strongly believes that it is reasonable for operators to expect BT to set up general co-location areas without the need for a joint request from the initial launch of unbundling. This is standard practice in other countries where unbundled local loops are available, and Oftel believes it should also be standard practice here. The policy currently being pursued by BT would have the effect of raising the costs of operators taking unbundled local loops. Most operators will be forced to pay for a survey and building work even though many, if not all, of them would not object to having caged or open areas in a general co-location room. This could act as a barrier to entry. It will also limit the flexibility an operator has to expand or contract the space it wishes to occupy.

69.    In Annex D of the Access to Bandwidth statement, Oftel discussed how charges for shared co-location should be set. The conclusion was that charging should be on an average cost basis. This could be done either through a system where the first operator in the room pays the full costs and subsequent operators pay the first operator, or a system where BT adjusts the charge to reflect the number of operators. The second of these options would appear to be the simpler to administer.

Co-location – licence fee

70.    BT has proposed that operators who choose to physically locate in a BT exchange will be charged a licence fee involving a charge for the dedicated co-location space and a charge for rental associated with use of the MDF.

71.    The methods by which BT values its property are contained in the Detailed Valuation Methods (DVM). The area inside BT’s exchange buildings is often much greater than the space required to house BT’s equipment. This is because these buildings were designed to house relatively old equipment. New equipment requires a smaller footprint. To take account of this effect, BT values its buildings on the basis of the current footprint occupied. This means that BT does not receive a return on its investments in unoccupied space. This is justified because this space is not used in providing services to customers. However, if an operator wished to rent space from BT that was currently unoccupied it would seem appropriate for BT to receive a rental based on market rates which reflected the space occupied.

72.    One potential problem with BT’s proposal to charge the market value for rental would be that it would allow it to recover the costs of fully depreciated buildings again. Oftel believes that not allowing BT to charge for either currently unoccupied space or depreciated buildings could provide the wrong signals for investment and could distort competition. However, allowing BT to recover these charges could be discriminatory if BT’s ADSL service is not required to make a payment where the building is fully depreciated. It is Oftel’s view that concern about discrimination between unbundled loops and BT’s ADSL serivce outweighs concerns about providing incorrect signals for investment. BT should therefore set its rental charges to be equal to the lower of the charges paid by its own ADSL service and the properly assessed cost of the space occupied.

73.    BT proposes that the general rental charge for use of the MDF will be included in the licence fee and charged for on a building by building basis. Oftel can see some benefit to this proposal, in that it allows charges to better reflect the underlying costs. However, it would also be possible to include the general rental charge in the annual rental charge for the loop. This would have the advantage of allowing operators greater certainty over their cost base. Including this charge in the annual rental for the loop would also allow Oftel to determine this charge prior to launch of the service.

74.    Oftel is of the view that operators taking unbundled loops should have knowledge of the licence fee before making a decision about co-location. To this end, BT should publish a list of the licence fee charges for each exchange building prior to operators making a decision about co-location. If this were to take place, the uncertainty caused by the general rental charge being included in the licence fee would be alleviated.

Co-location –set-up and on-going costs

75.    BT has proposed that all co-location set-up charges should be treated as bespoke, either because of geographical differences or as a result of allowing operators to choose the features of any co-location area. The bespoke nature of costs, BT argues, prevents it from producing a standard price list for co-location. While Oftel recognises that some costs will vary in this way, it is concerned that the lack of a standard price list will cause uncertainty for operators. In addition, operators will not be in a good position to judge the reasonableness of any charges.

76.    Oftel considers that these concerns could be met in two ways. Firstly, operators could be allowed to either propose their own sub-contractors for the work or could have access to the full documentation associated with the tendering process. Oftel’s view is that it would be impractical for BT to deal with a large number of sub-contractors, but that it would be practical for BT to supply documentation to operators taking unbundled loops. Secondly, BT could produce a standard price list for room build. This may not cover all items, but Oftel believes that it should be possible to produce a standard price list for items such as the cost of caging material or the cost of floor covering.

77.    BT has proposed that an operator choosing to physically locate in a BT exchange will pay both a specific and a general annual maintenance charge. An operator choosing distant co-location will only pay the general annual maintenance charge.

78.    BT argues that a general maintenance charge is required because whether or not an operator is physically co-located, the operator is using the MDF, and the MDF requires a building that must be maintained. Oftel’s initial view is that it is reasonable for BT to charge for maintenance of the size of building that is required for the CCA footprint of the MDF.

79.    However, Oftel feels that there is an issue about how BT recovers this cost. As with the general rental charge BT proposes to include in the licence fee, BT’s proposal has the advantage that charges will better reflect the underlying costs. However, there is again the alternative for including this general maintenance in the annual rental of the loop. This has the benefit of allowing pre-determination of the charge and aids operators to have certainty of costs and increases transparency. As with the general rental charge, the issue of uncertainty could be alleviated if BT were to publish a list prior to launch of the service that includes the general rental charge for each building.

80.    One issue that has not been addressed in BT’s proposals is the charge to operators if BT’s construction of co-location facilities leads to BT being required to remove asbestos from the building. One could argue that operators should pay for the cost of removing asbestos because their decision to co-locate has caused the cost of removing the asbestos. However, one could also argue that BT would be the long-term beneficiary of the removal of asbestos from its buildings, since BT will benefit from future use of the asbestos-free area and its removal is likely to increase the value of the buildings. Thus one might assume that it is likely that BT would want to arrange for asbestos disposal at some stage for its own purposes. On this basis Oftel’s view is that BT should meet the cost of removing asbestos.

Co-location - the charge for power

81.    BT’s proposal is that operators in any exchange building pay the standard rate for electricity charged by the electricity company supplying that building. The main issue here is whether there is a significant difference between the standard rate and the rate that either BT is offered or that an operator could obtain if it were to purchase power separately. If there is, BT may be significantly over-recovering power costs. One factor that could prevent over-recovery is that BT has also proposed that this rate apply to BT generated power if BT were to choose to switch away from the electricity company supply for a period of time. It is not clear to Oftel whether this power is more or less expensive to supply than the standard charge. If it is more expensive, and is used for a significant proportion of time, then the standard charge may not lead to over-recovery. While BT was using the electricity company it would be over-recovering, but while BT was using its own power it would be under-recovering.

82.    Oftel is of the view that more investigation is required into this area in order to establish whether BT’s proposal would lead to over-recovery.
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Oftel’s initial conclusions

83.    Oftel has made an initial analysis of the principles underlying BT’s pricing proposals. Oftel is of the view that while BT’s proposals are generally reasonable, they do raise some areas of concern.

Charge for the loop

84.  Oftel is of the initial view that:

• BT’s proposals could lead to it over-recovering the costs of drop wire for existing loops. This should be remedied by removing this charge from the price levied for existing loops. However, BT should be able to recover the cost of new drop wires where these are needed to create spare pairs or new loops. Oftel is of the initial view that BT should include a capitalised charge for drop wire in the annual rental of ‘new’ loops.

• BT should reflect its capital improvement programme through the CCA value of the loop.
  
• BT should include an estimate of the repair costs in the annual rental charge for the loop. If BT does not currently have the information available to do this specifically for unbundled loops, it should include the repair costs allocated to its existing loops. This would be reviewed if more information were to become available.

• BT should deal with DACS and non-compatible NTEs by averaging these costs over all metallic paths and including the cost in the annual rental charge.

Internal tie cable

85.    Oftel’s initial conclusion is that recovery of system set-up costs through an annual charge for internal tie cables is not appropriate. This treatment of system set-up costs will reduce transparency, and will also bring forward the time at which operators contribute to the system set-up costs. Instead, system set-up costs should be recovered through charges for the metallic path facility. This charge should be included in the connection charge for individual loops.

Co-location

86.    Oftel’s initial conclusions on co-location are that:

• It is reasonable for operators to expect BT to set up general co-location areas without the need for a joint request. The charge should be set on the basis of average cost with rental charged only for the space occupied by the operator.

• Oftel considers it reasonable that BT should set its rental charges to be equal to the lower of the charges paid by its own ADSL service or the properly assessed cost of the space occupied.

• The two options for recovery of the general rental charge and the general maintenance charge are to charge separately for these items or to include them in the annual rental charge for the loop. Oftel can see advantages to each option.

• It would be reasonable for operators to expect some transparency about the costs of room build. This could be achieved either by a standard price list or through access to tender documents.

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Consultation

87. Oftel seeks the views of operators, service providers and consumers on the initial views contained in this consultation document by Tuesday ^22nd June 2000. It is intended that a document setting out Oftel’s final views on pricing principles is published in July 2000.

Views and comments should be made in writing and sent to:

Penny Hierons
Economic Adviser
Regulatory Policy Directorate
Oftel
50 Ludgate Hill
London, EC4M 7JJ

Tel: 020 7634 8972
Fax: 020 7634 8848

Alternatively, please email

Written comments will be made publicly available in Oftel’s Research and Intelligence Unit except where respondents indicate that their response, or parts of it, are confidential. Respondents are therefore asked to separate out any confidential material into a confidential annex which is clearly identified as containing confidential material. In the interests of transparency, respondents are asked to avoid confidentiality markings wherever possible. Appointments to view written comments in Oftel’s Research and Intelligence Unit, which must be made in advance, can be arranged by ringing: 020 7634 8761.

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