Chapter 1 Summary and amendments to the direction in relation to physical and distant co-location costs

Chapter 2 Assessment of responses received to the consultation and conclusion reached

Annex A Direction in relation to physical and distant co-location costs

Annex B Background

Annex C Glossary

Chapter 1

Summary and amendments to the direction in relation to physical and distant co-location costs

1.1 This Statement and Direction concerns certain charges that BT levies for physical and distant co-location.

1.2 Local Loop Unbundling (LLU) is the process whereby the incumbent operator makes its local network (the copper cables that run from customers premises to the telephone exchange) available to other Annex II operators. LLU Operators (LLUOs) are then able to upgrade individual lines using DSL technology to offer services such as always on high speed Internet access, directly to end users.

1.3 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). Further details on the forms of co-location can be found at Annex B. In this Statement, an exchange is the generic term applied to any main distribution frame (MDF) site.

1.4 Having considered the comments received during the period of this consultation, the Director General has reached the following conclusions:

a) It is unreasonable, in the event of requests for unplanned escorted access to exchange sites, for BT to impose a 100% premium on top of the planned escorted access charge. BT should only be permitted to charge a premium of 50% above the planned escorted access charge to cover the additional costs it incurs when access is not planned and to provide LLUOs with the appropriate incentive to plan visits.

b) BT should reduce the charge for the provision of MPF line characteristics (MPFLC) from £5.37 to £2.60. This reduction is the result of using the appropriate loop volume forecast in the calculation of the charge to guarantee consistency with other LLU charges.

c) The rental charge for operator provided external tie cable pull through should be amended so that it only includes an accurate estimate of the costs incurred by BT in maintaining the external tie cables. During the course of this consultation, BT has accepted that it should not recover the cost of replacing these external tie cables through rental charges and intends to adjust its charges accordingly.

d) The rental charge for BT provided external tie cables should also be amended so that it only includes an accurate estimate of the costs incurred by BT in maintaining the external tie cables. BT should not recover the costs of replacing external tie cables through the rental charge for such cables.

e) BT should not recover the costs it may incur as a result of LLUOs’ planning mistakes through the connection charge for BT provided external tie cables. BT should recover such costs on a per occasion basis through an hourly charge and should amend its charges to reflect this.

1.5 In this Statement and Direction, Oftel has set out the pricing principles that it expects BT to use as regards setting charges for both BT and OLO provided external tie cables. It has, however, stopped short of directing the prices that BT should set for BT provided tie cables as important issues relating to the competitiveness of the market for these cables is still under review in Oftel’s consultation on backhaul services (http://www.oftel.gov.uk/publications/broadband/llu/back1201.htm). The consultation on backhaul services will determine whether the provision of external tie cables is competitive and hence whether BT will be permitted to include a profit margin in its charges for BT provided external tie cables. Until this has been decided, a cost oriented charge cannot be set.

1.6 On this basis, Oftel has directed at Annex A on points (a)-(c) in paragraph 1.7 but will specify cost oriented connection and rental charges, points (d) and (e), for BT provided external tie cables in any Direction that will follow the backhaul consultation.

1.7 In a letter to BT of 28 March 2001, Oftel made clear that it was likely to backdate to the start of the investigations any changes that it made to BT’s physical and distant co-location charges. This letter was copied to those operators who made representations on the pricing issues. As such, the price changes contained in the Direction in Annex A will be backdated to 17 January 2001 for those charges relating to physical co-location and to 8 March 2001 for charges relating to distant co-location as these were the dates when the investigations began.

Chapter 2

Assessment of responses received to the consultation and conclusions reached

Background to the consultation

2.1 The consultation arose from investigations conducted by Oftel into BT’s charges to LLUOs for physical and distant co-location, which form part of BT’s provision of facilities for LLU in the UK. Oftel used external consultants ICC to conduct a substantial amount of this work. Oftel accepts ICC’s view on the costs BT is likely to incur in providing LLU facilities and has relied on this work in reaching conclusions. It should be noted, however, that this Statement and Direction reflects Oftel’s own views and conclusions following these investigations.

2.2 On 18 October 2001, Oftel published a Statement and draft Direction on BT’s charges for Local Loop Unbundling distant and physical co-location, for comment. The document set out Oftel’s findings in the investigations and sought comments on its preliminary conclusions about 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).

2.3 Oftel received three responses to its consultation and draft Direction, from BT, Bulldog Communications Ltd (Bulldog) and Fibernet. The principal points made in these responses and any changes made to the original proposed Direction are discussed in paragraphs 2.4 to 2.62 below.

BT’s LLU project management

Original proposal

2.4 Oftel took the view that it may be more efficient and cost-effective for BT to resource its co-location build programme in-house rather than through outside contractors. BT’s decision to out-source its project management was taken at a time when there was significant demand for physical co-location. This is no longer the case and Oftel proposed to seek a written assessment from BT of the costs and benefits of bringing the co-location project in-house

Responses

2.5 BT has disputed Oftel’s authority to require it to perform this work in-house, arguing that it is for BT to decide how it complies with its obligations under its Licence and EC Regulation 2887/2000, particularly when there is a service level agreement (SLA) offering fixed compensation in the form of liquidated damages. BT has argued that it is not a construction company and that as it lacks the specialist building trades in-house, it is necessary to use outside contractors.

2.6 Both Bulldog and Fibernet expressed the view that BT should move its project management for co-location in-house. Both operators raised concerns that the contracts between BT and its contractors do not contain any cost reduction incentives.

Oftel’s conclusions

2.7 Oftel recognises that it is a matter for BT to decide how it complies with its Licence and EC Regulation obligations, providing that it chooses a cost effective way of doing so. Oftel is concerned that BT’s use of external consultants and contractors may no longer be the most economically efficient means of managing the delivery of co-location. Article 4(3) of EC Regulation 2887/2000 allows Oftel to intervene in order to ensure economic efficiency. Oftel therefore requested that BT provide a written assessment of the costs and benefits of performing its project management in-house.

2.8 In its response to this consultation, BT rejected Oftel’s request that it provide a full written assessment of the costs and benefits of bringing the co-location project in-house. Oftel will therefore seek this information using its formal information gathering powers, in a separate letter to BT.

External tie cable charges: planning time

Original proposals

2.9 Oftel proposed that BT should recover any additional management costs it may incur in the provision of its own external tie cables as a result of LLUO planning mistakes through a per occasion charge rather than through an average uplift in the connection charge. As a result, it was originally proposed that the connection charge for external tie cables should be reduced.

Responses

2.10 BT has argued that when it set the connection charge for external tie cables, it based its assessment of the costs on the assumption that a single site survey would be sufficient. Its experience to date has however shown that, on average, an additional 16 hours work is necessary as return visits to the site are required due to planning mistakes made by LLUOs. BT has claimed that if Oftel’s proposals as regards charging for LLUO planning mistakes were adopted, any job requiring additional work would have to be cancelled and re-ordered from scratch.

2.11 Bulldog has expressed support for Oftel’s proposals, suggesting that a requirement to charge separately for additional time spent in provisioning tie cables will encourage both BT and the LLUOs to spend more time avoiding problems. Bulldog has also requested that Oftel review the charges for both internal and external tie cables in the light of the introduction of in-curtilage (this is where an LLUO sites its equipment on BT’s MDF site, though not in the actual MDF building, eg in a cabinet on a BT exchange car park). Bulldog is of the view that tie cables for these forms of co-location will be substantially shorter and their provisioning simpler than for distant or physical co-location and that, as a result, the costs of these cables will be lower.

2.12 Fibernet has also supported Oftel’s proposals that any LLUO planning mistakes should be paid for on a per occasion basis rather than in an up-front charge included in the connection charge quoted to LLUOs. Fibernet has also raised a concern that the latest connection and rental charges for BT provided external tie cables, which became effective on 29 November 2001, are not consistent with Oftel’s draft Direction.

Oftel’s conclusions

2.13 Oftel recognises that the original connection charge for external tie cables was based on the assumption of one site visit being necessary and that additional site visits may be required if planning mistakes are made by LLUOs. Oftel does not accept, however, that the costs of these additional visits should be recovered through the connection charge for the external tie cables. Instead, Oftel is of the view that BT should levy a per occasion, hourly call-out charge whenever LLUOs’ planning mistakes result in BT having to perform extra work. This will ensure that LLUOs are only paying for costs they have originated and encourage them to improve their processes and planning, while allowing BT to recover the full costs that it incurs as a result of these mistakes. Oftel rejects BT’s claims that these proposals will require BT to cancel and re-order connections where the additional charge is applicable. BT will merely need to introduce an additional charge that will apply where additional site visits are necessary.

2.14 Oftel does not, at present, propose to review the charges for in-curtilage internal and external tie cables, as requested by Bulldog. It is too early to assess whether, as Bulldog claims, the cost of tie cables will be lower for in-curtilage as currently there is insufficient information available about cable lengths and costs of provisioning for these services. It should be noted, however, that BT has recently introduced charges for in-curtilage external tie cables and that these charges are below those for existing external tie cables.

2.15 Oftel is aware that the charges for the connection and rental of BT provided external tie cables, that came into effect on 29 November, are not consistent with those proposed in Oftel’s draft Direction. These charges were introduced by BT to take account of the fact that it discovered that it was over-charging for a number of stores items. There is no requirement on BT to alter its charges until Oftel has issued a final Direction as to what those charges should be. Oftel believes that BT should further reduce its charges by removing the cost of the 16 hours additional time from the connection charge for BT provided external tie cables. If BT wishes to recover the additional costs, it should introduce a cost oriented hourly rate charge.

External tie cable charges: replacement and maintenance costs

Original position

2.16 BT’s current annual rental charges for BT provided external tie cables are £518 for 100 pair cables and £772 for 500 pair cables, which amounts to 17.6% of the connection charge. This comprises 10.9% for maintenance and 6.7% for replacing the cable after its estimated physical life of 15 years. Oftel proposed that the rental charge should be no more than 10.9% of the connection charge. BT should remove the replacement cost element from the rental charge for both BT and operator provided external tie cables, and include only the maintenance costs.

Responses

2.17 BT has accepted that it should not include a replacement cable charge for operator provided external tie cable in the pull through charges and intends to adjust its charges accordingly. However, BT has argued that it does not need to justify a cost-oriented charge for the provision of its own external tie cables as this is a competitive activity and, as such, it has no obligation to justify such a charge. Without prejudice to this, BT argues that the replacement charge element of its external tie cables are reasonable and cost oriented. BT has also claimed that the removal of a replacement element from the rental charge for external tie cables would necessitate amendments to the ANF Agreement to make clear that BT would not be responsible for maintenance after the 15-year estimated life of the asset. BT has claimed that it would also be necessary to remove the need for it to make fixed compensation payments under the SLA, where cable repair is delayed by an operator deciding whether or not to repair or replace a cable.

2.18 Fibernet has argued that BT should not be seeking to recover replacement costs in the rental charge and has also sought clarification as to whether Oftel’s proposals as regards BT provided tie cables will also apply to operator provided tie cables.

Oftel’s conclusions on replacement costs

2.19 Oftel is considering the issue of whether the provisioning of external tie cables is a competitive activity in its consultation on backhaul services (http://www.oftel.gov.uk/publications/broadband/llu/back1201.htm). The issue under consideration here, however, is one of costs incurred. BT has accepted changes to its charges for operator provided external tie cables during Oftel’s investigation on the basis that BT’s original charges were not cost oriented. Oftel remains of the view that by including a replacement charge for BT provided external tie cables, the charge is not cost oriented.

2.20 Oftel has therefore concluded that BT should not include a replacement cost element in the rental charge for external tie cables and that the rental charge should only comprise the costs of maintaining the external tie cable. Oftel believes that it is inappropriate to recover the costs of replacing external tie cables through the ongoing rental charge and is of the view that the replacement of tie cables should be charged for on a per occasion basis, when a new cable is required (ie via a new connection charge when a cable needs replacing). The BT provided external tie cable rental charge should also be amended, therefore, to remove the replacement cost element.

Oftel’s conclusions on maintenance costs

2.21 In addition to replacement costs, the rental charge for BT and OLO provided external tie cables is also made up of maintenance costs. As part of this consultation, Oftel has examined how these maintenance costs are calculated by BT. BT has explained that, given the lack of data currently available on the maintenance costs of external tie cables, it uses copper pairs as a proxy for external tie cables when assessing these costs. BT has argued that maintenance costs depend on the size of the cable and, as such, costs differ between 100 pair and 500 pair tie cables. BT has estimated these costs for external tie cables by calculating the ratio of the annual maintenance expenditure on copper loops to the mean asset value of copper loops. This ratio is expressed as a percentage. Until detailed information on attribution and valuation methods for maintenance costs and asset values becomes available, Oftel will continue to use BT's figures for copper pairs as a proxy when calculating maintenance costs and the rental charge.

2.22 However, Oftel considers that since all capital costs are included in the connection charge, no duct depreciation should be included in the annual maintenance expenditure that feeds into the maintenance ratio calculation. Oftel therefore estimates that the appropriate maintenance ratio would be 7.43%, rather than the 10.9% currently calculated by BT. Currently BT applies this 10.9% to the connection charge in order to derive the rental charge. However, Oftel is of the view that the maintenance ratio of 7.43% should be applied to the mean capital employed of an external tie cable, rather than to the connection charge. The mean capital employed can be calculated by removing any mark-up and bad debt provision from the connection charge.

2.23 Oftel has therefore concluded that, in addition to removing the replacement cost element from the rental charge for external tie cables, BT should also recalculate the rental charge for both BT and OLO provided external tie cables. This will result in BT only recovering the appropriately estimated costs of maintaining the tie cable (as set out in paragraph 2.22, above).

2.24 Oftel rejects BT’s arguments that it should not be responsible for maintaining an external tie cable after its estimated 15-year life. BT recovers the cost of maintaining external tie cables through the rental charge and should therefore guarantee the maintenance of that cable while the rental charge is being paid. When a new external tie cable is required, BT will then charge a new connection charge to cover the costs of replacing the cable. If any delay in repair is due to the LLUO, BT will not be liable for fixed compensation payments under the SLA as the circumstances will be outside of its control (as is explained in Oftel’s Statement and Direction Local loop unbundling: service level commitments and compensation).

MPF line characteristics

Original proposals

2.25 Oftel originally proposed that BT should amend the charge it levies for providing the characteristics of individual loops (this information is used by LLUOs to decide whether a loop is capable of carrying the broadband services they are seeking to provide).

2.26 Some of the costs that BT incurs in providing line characteristic information are dependent on the volume of requests that it receives for unbundled loops. BT based its charge for the line characteristics provision on its estimates of expected unbundled loop volumes. Oftel did not consider this approach to be appropriate and proposed that, to ensure consistency with other LLU charges, BT should apply the forecast that Oftel used in its December 2000 Determination of prices for fully unbundled loops and internal tie cables. Having recalculated the charge on its understanding of BT’s pricing methodology and of the different volume forecasts, Oftel proposed that BT should reduce its charge to £4.22.

Responses

2.27 BT accepts that, due to an error in its calculations, the cost of the provision of line characteristics should be reduced from £5.37 to £5.11 and asserts that the remaining difference between its charge and that proposed by Oftel is caused by differing assumptions on forecast volumes. BT has claimed that by forcing it to use the forecast from the December 2000 and October 2001 Determinations, Oftel is failing to take account of new information to enable a more accurate cost-oriented charge and is preventing BT from recovering its reasonably and necessarily incurred costs.

2.28 During the consultation, BT has also argued that its calculations were based on an assumption of more than 80% of unbundled loops being ‘line transfers’ and 20% being ‘new provides’. However, BT now argues that data on the loops unbundled so far shows that this is not the case and that almost all MPF orders have been for new provides. This has an impact on the costs incurred by BT as the test for new provides needs to be performed manually, rather than through BT’s OSS system as is the case for line transfers. As a result of this, BT claims that the charge for providing MPF line characteristics should be increased to reflect these higher costs.

2.29 The £5.37 charge includes a 7% mark-up, which reflects the average wholesale selling costs that BT incurs on its wholesale services. BT is now arguing that it should also be allowed to include an additional 5% profit margin to compensate for the lack of any return on capital employed and a provision for bad debt.

2.30 Bulldog has welcomed Oftel’s proposals to reduce the charge for providing MPF line characteristics but believes that the reduction should be greater than is proposed. Bulldog argues that BT uses highly automated systems to obtain and provide the information on the line characteristics and that these systems should be largely depreciated by now.

2.31 Bulldog also argues that the incremental load on these systems from LLUOs should be negligible when compared to BT’s own use. Bulldog has estimated that the charge for line characteristics provision should be in the region of £1.78 per order and that, under EC Regulation 2887/2000, BT should be charging itself the same amount for the information as it charges LLUOs. Bulldog has requested that Oftel re-evaluate BT’s proposed charges on the basis of the shared nature of the databases and the actual level of effort required to retrieve data.

Oftel’s conclusions

2.32 Oftel has now concluded that, for consistency with the other LLU charges set by Oftel, BT should use the forecast volumes contained in Oftel’s October 2001 Determination of charges for shared access. Moreover, Oftel considers that the relevant volumes BT should employ are not those expected in the first year of LLU (as proposed in the draft), but the average volume expected in the first five years. Oftel believes that this approach guarantees that the charge is forward looking while, at the same time, allowing BT, on average, to recover the costs incurred in performing this test.

2.33 Oftel accepts that if the underlying assumptions about the split between take-over orders and new provide orders are found to be incorrect, then the costs that BT is entitled to recover may change. However, Oftel is of the view that until shared access is fully available, it is likely that there will be more new provides than take-overs. Oftel would, however, expect take-overs to increase with shared access and believe that it is too early to determine what the actual situation will be. Therefore, Oftel does not believe that there is currently sufficient evidence available to make a meaningful assessment of this split and has concluded that its forecast volumes should be used.

2.34 Oftel accepts that it is legitimate for BT to include a reasonable provision to cover the risk of bad debt in the charge for providing line characteristics. Oftel considers that this provision should be equal to that included in other LLU charges, which was set at a level of 3% of forecast sales in the October 2001 Determination on charges for shared access. Oftel is also of the view that BT should be allowed to recover wholesale selling costs in this charge. However, Oftel is concerned that the additional 7% mark-up for wholesale selling costs that BT is currently proposing is excessive, given the information provided by BT on the average level of these costs and the fact that it recovers a higher than average level of these costs on other LLU charges. Oftel has therefore concluded that BT may include a total mark-up of 7% in this charge, comprising 4% for wholesale selling costs and 3% as a provision for bad debt.

2.35 Oftel considers that BT should be allowed an appropriate return on capital employed, as it specified in its August 2000 Statement Access to Bandwidth : Conclusions on charging principles and further indicative charges. However, Oftel rejects BT’s claims that it should be entitled to include a 5% mark-up in the charge for providing MPF line characteristics to compensate for the lack of return on capital employed.

2.36 Oftel therefore considers that the charge for providing MPF line characteristics should be reduced to £2.60. This charge has been calculated taking into account the fact that the systems used to obtain information on the line characteristics are used by BT to provide information to itself on the loops employed to provide ADSL and ISDN services.

BT’s costs for the preparation of physical co-location hostels and mini-hostels

Original proposals

2.37 In its Statement of 18 October on the investigations into BT’s physical and distant co-location costs, Oftel concluded that in general, BT’s charges for preparing physical co-location hostels and mini-hostels were reasonable and cost oriented in line with the terms of EC Regulation 2887/2000. Oftel’s investigations showed that BT was over-recovering some of its costs for distant location services and BT has revised its charges for these services.

2.38 Oftel had some concerns about the information on BT’s electricity costs but noted that even if a significant reduction in the charge for electricity was introduced, it would have a minimal effect on LLUOs’ costs. It was estimated that 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). Moreover, BT’s LLU electricity charges are broadly in line with commercially available tariffs. Hence, Oftel had no plans to investigate this issue further at present. It will consider reviewing this issue at a later date if LLUOs continue to have concerns and are able to provide actual data on the impact of BT’s electricity charges on their costs.

Responses

2.39 BT disputes Oftel’s authority to consider its electricity charges. BT notes that its charges are comparable with electricity board standard rates and that the effect of the costs on the total co-location package is minimal.

2.40 Bulldog has raised concerns about BT’s mark-ups and rates of return, arguing that they have unnecessarily increased hostel costs. Bulldog claims that BT charges a 14.5% rate of return on many of the hostel elements and, on the basis of the information in Annex C of Oftel’s draft Determination, an average mark-up of 30%. It questions the validity of allowing BT to charge a rate of return or mark-up on hostel elements, particularly where most of the work is outsourced and it is the LLUOs, not BT, who are contractually liable for the hostel costs. Bulldog claims that this allows for a double recovery of a profit margin on the underlying capital base. Bulldog has also requested that BT be required to make the components and applicability of the mark-ups more visible to LLUOs.

2.41 Bulldog has additionally raised concerns that BT is not meeting the transparency requirements in EC Regulation 2887/2000 as regards cost data. Bulldog believes that increased visibility of costs would allow the needs of LLUOs to be aligned with BT’s ability to deliver co-location on a cost-effective basis. Bulldog has urged Oftel to require BT to provide cost reporting information in a standardised format and to make additional information available on an ad-hoc basis at the request of an LLUO.

2.42 Fibernet has requested that Oftel commissions further work to review all the costs associated with physical and distant co-location, in the light of the anomalies found in Oftel’s investigations. Fibernet is concerned that BT’s charges often appear arbitrary or excessive and that it is not until complaints are made that BT re-visits the charges.

2.43 Fibernet has also questioned why the survey costs for distant co-location had changed on three occasions and why there were such large variations between the three charges. Fibernet has requested further information on what the underlying costs of the surveys are and the cause of this variability.

Oftel’s conclusions

2.44 Oftel rejects BT’s argument that it lacks authority to consider electricity charges. Electricity is a necessary element of the LLU co-location product and where BT provides it, it must be on a cost oriented basis. (Oftel’s co-location guidelines state that LLUOs should be allowed to arrange for their own electricity provision to physical co-location space.) Oftel is satisfied that BT’s charges for electricity are broadly in line with commercially available tariffs and does not intend to investigate the issue further at present. It should be noted that even a significant reduction in the charge for electricity would have a minimal effect on LLUOs’ costs.

2.45 Oftel considers that BT should include in its hostel costs the same return on capital that it included in the charges for unbundled loops, as discussed in the December 2000 Determination of charges for fully unbundled loops and internal tie cables and in the October 2001 Determination of charges for shared access. This allowable return on capital has been derived from the average return allowed on BT’s controlled network services and has been adopted to ensure that the charge for LLU services is consistent with that levied on other mechanisms for delivering voice. This return on capital was set at 14.5% in 2000/01 and should be reduced every year on the basis of a glide path (eg 14.3% in 2001/02). This glide path will bring it down to the target rate of return for network services, equal to Oftel’s estimate of BT’s cost of capital (13.5%), by 2005.

2.46 BT is not including an average mark-up of 30% on the hostel elements as is suggested by Bulldog. The 30% difference between the individual hostel element costs and the final costs in Annex C of the draft Determination is the result of the mark-ups added by the builders and the contract management company, as well as by BT. BT has only been permitted to include a 3% bad debt provision and an uplift to cover the cost of sales.

2.47 BT is required to provide information on costs for standard services under Condition 83.17 of its Licence. Oftel is currently agreeing a list of these standard services with BT, which will be published in due course. The Director General’s position is set out in his statement of 19 December 2001, which can be found in BT’s Current Cost Accounts for the Business and Activities for the year ended 31 March 2001.

2.48 Oftel does not consider it necessary at present to commission further work to review all the costs associated with physical and distant co-location, as requested by Fibernet. Oftel has examined BT’s costs as part of this investigation and has intervened where it considered the charges not to be cost oriented.

2.49 Oftel is currently satisfied that BT’s changes to the charges for distant co-location surveys have come about as a result of BT gaining greater experience of the costs involved. BT originally levied a standard charge for both physical and distant co-location surveys, which was based on an average of the cost for the two combined. The charge for distant co-location was reduced when BT decided to charge separately for the two surveys but was later increased when BT’s experience showed that its costs were higher than originally thought.

Unplanned escorted access

Original proposals

2.50 BT’s charges for escorted access are currently based on the concept of doubling the charge for any unplanned work to cover the replacement of an engineer being called away to carry out an escorted visit – a process known as ‘backfilling’.

2.51 Oftel proposed that BT should not backfill for unplanned escorted access as, due to the four-hour notice period, it is unlikely that a replacement engineer could be found in time and that it is more probable that less urgent work would be deferred. Oftel accepted that it was reasonable for LLUOs to be charged a premium for unplanned visits to reflect the greater costs incurred by BT to satisfy such requests and to provide them with an incentive to plan site visits. Oftel proposed that this premium should be set at 50% above the rates for planned visits.

Responses

2.52 BT has suggested that Oftel’s methodology for calculating the costs of providing unplanned escorted access is based on unreasonable assumptions. BT disputes Oftel’s view that BT has staff available ‘on-tap’ who can break off from their current activity to attend an LLUO’s request for escorted access and that BT’s staff are fully occupied on other work at all other times.

2.53 BT believes that operators should pay for the full costs of the disruption that they cause by requesting an unplanned escorted visit. BT argues that its approach is cost based and that Oftel has chosen a completely arbitrary surcharge that it has failed to justify quantitatively.

2.54 Bulldog has raised issue with the charging principles used by BT. Although accepting that BT’s hourly charge rates for escorted access are broadly in line with those charged by the incumbents of other countries, Bulldog is concerned about the minimum charge period of four hours and the 72-hour notice period that BT requires for a visit to be considered planned. Bulldog has used benchmark studies from the US and Canada to suggest that the minimum charge period should be reduced to one hour and that 24 or 48 hours would be a more appropriate notice period.

Oftel’s conclusions

2.55 Oftel has concluded that BT’s methodology for calculating the cost of providing unplanned escorted access is not appropriate because it should not adopt a policy of backfilling. Oftel believes that a 50% premium on the cost of providing planned escorted access should be adequate to cover BT’s costs of unescorted access and to provide LLUOs with an incentive to plan site visits. Oftel has no evidence at present to suggest that the 72-hour notice period for work to be considered planned and the four-hour minimum charge period are unreasonable and not cost oriented.

Review of charges

Responses

2.56 Fibernet has suggested that all non-competitive LLU elements should be included within the Network Charge Control regime and sought details of when Oftel would be reviewing charges for external tie cables, given that it was planning to review MPF and internal tie cables charges in March 2002.

Oftel’s conclusions

2.57 Oftel has only just investigated the charges for external tie cables and does not intend to include them in the NCC regime, which would require Oftel to review them again in March 2002. Oftel may review the charges when data on actual costs becomes available through increased usage of LLU services. Oftel will continue to ensure that LLU charges are cost oriented, as is required under the EC Regulation.

Unescorted access to exchanges and co-mingling

Original proposals

2.58 Oftel published a Statement and draft Direction on access to BT’s exchanges for third parties on 10 October 2001. In that document it proposed that an LLUO’s approved staff should be allowed unescorted, non-segregated access to its co-location space. This proposal was echoed in Oftel’s Statement and draft Direction on physical and distant co-location costs.

Responses

2.59 BT has raised concerns that Oftel discussed the issue of non-segregated access in the co-location costs document, arguing that it was inappropriate for it to contain a ‘conclusion’ on the matter when the issue was still the subject of a statutory consultation.

2.60 Bulldog has raised a number of issues regarding co-mingling and the costs involved.

Oftel’s conclusions

2.61 Oftel rejects BT’s claims that it was inappropriate to include its proposals regarding costs for unescorted access in the co-location cost Statement and draft Direction. This consultation has only dealt with the issue of costs and not the principle of whether unescorted access should be required. The Statement and draft Direction emphasised that the issue of unescorted access was the subject of a consultation and in no way pre-judged the outcome of that consultation.

2.62 Oftel has already dealt with the issues raised by Bulldog on co-mingling in its Statement and Direction on the provision of co-location in the form of co-mingling, which was published on 10 October 2001. Oftel does not intend to revisit these issues in this document.

Annex A

Direction in relation to physical and distant co-location costs

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

RECITALS

1. On 22 June 1984, the Secretary of State granted a licence to British Telecommunications (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 and subject to the conditions attached to it;

2. Under section 109 of, and paragraph 20 of schedule 5 to the Act the BT Licence has effect as if granted to British Telecommunications 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 states that BT shall provide Access Network Facilities at a charge agreed between the parties or, if there is no agreement, 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. The reference offer must contain terms addressing the issues set out in the Annex to 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"). For the purposes of this Direction, this includes the relevant parts of BT's Price List;

8. Article 3(3) of the EC Regulation requires BT to make charges set on the basis of cost-orientation for facilities related to unbundled access to the local loop (including space at its exchanges);

9. 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;

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

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 and some related facilities. The course of the Director's investigations and a more detailed description of his findings are contained in the Statement which accompanies this Direction (the "Statement");

13. On 28 March 2001 the Director informed BT that he was investigating these issues and informed BT that it was possible that he would, if he proceeded to make a Direction, backdate the effects of the Direction to the date on which the changes to the BT Price List came into effect. This is in accordance with his practice in interconnection disputes. It is, therefore, appropriate for the changes required to BT's pricing by this Direction to take effect from 17 January 2001;

14. A draft of the Statement and this Direction was published on 18 October 2001 and comments invited;

15. As the Statement makes clear, BT has amended certain of its prices during the course of the investigation following discussion with the Director. In particular, BT significantly reduced the connection and rental charges for external tie cable services and the price of escorted/accompanied access for visits to MDF Sites to ensure that that the prices contained in its Price List are 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;

16. The Director is currently consulting on a proposed Direction relating to the pricing of backhaul circuits for local loop unbundling purposes. These connect the MDF Site to the Operator's system. There is some degree of overlap between the issues dealt with in the backhaul consultation and those raised during this consultation on external tie circuits. Therefore, whilst the Statement contains the Director's conclusions on most of the pricing principles for external tie circuits, it is not at present appropriate for him to direct that BT should change the price for those circuits. This will be done (if appropriate) after the Director has considered the representations made on the relevant issues in response to the consultation on backhaul circuits;

17. Nevertheless, 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 accompanying this Direction, and having considered the representations made in response to the draft of this Direction published on 18 October 2001, the Director believes that it is necessary to make this Direction;

DIRECTION

Under Article 4(2)(a) and Article 4(3) of Regulation EC 2887/2000 and under 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 enable Operators to assess whether they meet the Relevant Specification, at a price not exceeding £ 2.60 (two pounds 60p) or such other amount as may be agreed between BT and the Director or any Operator.

3. Any annual rental charge for the supply by BT of 'operator provided external tie cable pull-through' shall not exceed 7.43% of the capital value of the External Circuit.

4. For the purposes of this Direction;

a) "Escorted Access" shall have the meaning given to it in the Director's Direction of 13 December 2001 and shall include Accompanied Access as described in the BT Price List;

b) the terms defined or described in the recitals to this Direction shall have the meanings given to them there; and

c) except to the extent any meaning would be inconsistent with a definition in this Direction or the recitals to it;

i) paragraph 4 of the BT licence shall, with the necessary changes, apply to this Direction as it applies to the BT Licence; and

ii) terms defined in the EC Regulation and in the BT Licence shall have the same meaning for the purpose of this Direction.

…………………………………..

JIM NIBLETT

Director, Broadband and International Affairs

….. January 2002

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

Annex B

Background

B.1 LLUOs have the option as to 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 co-location

B.2 BT currently offers LLUOs two options for physical co-location within its exchanges:

a) within a hostel, ie a separate room that is built to a standard design and which is shared by a number of LLUOs, or

b) 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 the rest of BT’s building by a permanent barrier. 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.

B.3 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

B.4 With distant co-location, the LLUO houses its equipment outside of BT’s building and uses a tie cable to connect it 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 equipment to the MDF in the BT exchange in two different ways:

a) via a BT provided an external tie cable; or

b) via a self-provided external tie cable, which BT pulls through into the exchange and connects to the MDF.

Annex C

Glossary of terms

Access Network Facilities Agreement (ANF Agreement): The contract which operators need to sign to take LLU facilities.

Access Network Frequency Plan (ANF): A plan that defines the maximum levels of signal that can be injected into the Access Network. All equipment connected to the network must comply with the plan.

ATM: Asynchronous Transfer Mode technology – the internationally agreed basis for broadband.

Broadband: Most people connect to the Internet over a phone line, typically using a modem with a maximum speed of 28.8 or 56 kilobits per second. This ‘narrowband’ communication requires users to wait while a dial up connection is made before they can access the Internet. Broadband services offer significantly faster data rates, enabling the delivery of services such as high speed Internet access and video on demand. Generally defined as a bandwidth of over 2Mbit/s.

Co-location (physical co-location): The ability for other operators to install equipment in BT’s local exchanges in order to supply services over the local loop.

Distant co-location: This is where an operator houses its equipment away from the exchange and uses an external tie cable to connect the exchange with this remote site.

DSL technology: Digital subscriber line technology. A family of technologies generically referred to as DSL, or xDSL, capable of transforming ordinary phone lines (twisted copper pairs) into high speed digital lines, capable of supporting advanced services such as fast internet access and video on demand. ADSL (Asymmetrical Digital Subscriber Line), HDSL (High data rate Digital Subscriber line) and VDSL (Very high data rate Digital Subscriber Line) are all variants of xDSL.

DSLAM: Digital Subscriber Line Access Multiplexer. Located in the co-location space of an Operator at an exchange site. It is composed of a multiplex and the DSL modems necessary to operate DSL services over the loops served by the Operator from the exchange.

Escorted access: Third parties being escorted by BT whilst on BT exchange premises.

HDSL: 'High-speed' or high data rate DSL technology.

Hostel: A room that is built to a standard design to house a number of operators. The basic unit of capacity is the ‘equipment bay’. The standard unit of space in a hostel is a three rack bay which has a footprint of 1.8m x 0.8m and a total area (including circulation space) of 10m².

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

Local loop unbundling (LLU): The process where the incumbent operator makes its local network (the connection between the customer’s premises and the local exchange) available to other companies. The customer is then able to choose another supplier other than the incumbent to provide service.