Contents

Summary

Chapter 1 2000 determination

Chapter 2 Reasons for continuation of price controls in 2000

Chapter 3 Consultation

Annex A Draft direction

Summary

S.1 This document sets out for consultation Oftel’s proposal for renewing the controls in the existing local loop unbundling (LLU) pricing determination (Determination under condition 83.16 of the licence of British Telecommunications PLC relating to the charges for the provision of metallic path facilities and associated internal tie circuits, ‘the 2000 determination’), which came into effect on 31 December 2000.

S.2 The 2000 determination ceases to have effect on 31 March 2002 (except as otherwise directed). In this consultation, Oftel proposes that a direction should be made which would renew the substantive terms of the 2000 determination, subject to further review by the Director. Oftel plans a comprehensive review of existing regulatory provisions, consistent with the requirements of the European directives (currently undergoing the final formal stages of adoption), which are expected to apply from late Spring 2003.

S.3 A draft direction is contained in Annex A.

S.4 Comments are requested by 11 March 2002. Please note that following this consultation period there will not be a further period for comments on responses received.

It is intended that Oftel will make its final decision in relation to the ongoing charges for metallic path facilities (‘MPFs’) and internal tie circuits by the 31 March 2002.

Chapter 1

2000 determination

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

Table 1: Rental and connection charges for MPFs

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

1.2 These charges were set so as to:

1.3 When the charges were determined in December 2000 statement, they were based on estimates of costs provided by BT, as well as (for certain cost elements), an assessment of future unbundled loop volumes. Oftel does not at present have more useful information on costs and other operational data than was available in December 2000. Therefore, the only information available to Oftel which might lead to a materially different charge, if a re-determination were to be carried out now, is that related to estimates of unbundled loop volumes.

1.4 As noted, it was also necessary to make some assumptions on the expected volume of loops that would be unbundled in the first five years following the introduction of the service. Current volumes are lower than was originally expected for the first year. In December 2000, there were expectations that a significant number of co-location facilities would have become active during 2001, but this proved not to be the case. In effect, material commercial activity is only just beginning.

1.5 Oftel therefore considered whether a full re-determination of the charges, in particular to take account of the slow start, was justified. The following chapter sets out the reasoning behind Oftel’s proposal for the continuation of the substantive terms of the 2000 determination.

Chapter 2

Reasons for continuation of price controls in 2000 determination

Volume of loops

2.1 The number of unbundled loops taken to date has been much lower than expected. This has been for a number of reasons, not least of which is the time it has taken operators to order co-location sites and to then make commercial offerings (which was partly influenced by the demand management process – the bow wave – which was in place until February 2001). It therefore does not seem reasonable to try to re-assess the charge for loops when the market did not start up as quickly as was expected when the charges were set. Oftel proposes that the terms of the 2000 determination remain in force until the market develops further.

Prevailing market conditions

2.2 The period since the publication of the existing determination has seen a decline in the funding available to telecommunication operators. This, together with the global financial slowdown, has meant that the number of operators, which have chosen to participate in the initial stages of LLU implementation, has been lower than originally expected. This reduction in the number of operators involved in LLU, together with slow progress in completing co-location facilities, has meant that the initial take up of services has been low. However, the volumes are now starting to increase.

LLU implementation

2.3 The process of LLU implementation is complex. This first year of service has seen the establishment of the regulatory framework required for the delivery of LLU services. Oftel has published a number of measures covering areas including (inter alia) the level of compensation that BT will be required to pay if it fails to meet timescales for the delivery of LLU services, the wholesale charges applicable for the provision of shared access and measures to improve access to BT’s exchanges by operators’ staff and contractors.

2.4 Detailed implementation work has been undertaken over the last 12 months, which has helped to provide a sound basis for operators’ current and future plans. However, this has meant that the LLU framework has been in its development phase for longer than was originally considered, with deployment of LLU facilities only starting to take place in recent months. It is anticipated that the volume of loops ordered will increase over the coming years now that the regulatory framework is more settled.

Initial demand for LLU services

2.5 The initial ‘lag’ in the take up of LLU services has been experienced in other countries where incumbents have been required to allow access to their local loop infrastructure, enabling other operators to provide DSL service to customers. This is in part due to the complexity involved in the process of unbundling and the underestimation by all the parties involved of the time this has needed to complete.

2.6 The general pattern of initially low take up of DSL service in the first year of service (experienced in other countries) can be seen in the graph below. However, after this initial lag, take up has increased significantly in subsequent years.

Figure 1: Take up of DSL connections since launch

2.7 Oftel does not consider that the volume of take up for this first year of service (in the UK) is at all likely to be indicative of what will happen in future years. Volumes are now beginning to increase and it is anticipated that this increase will continue over the coming five year period.

2.8 Accordingly, it is not considered to be appropriate to re-determine the price of MPFs based on the information on the current volume of loops ordered. In effect, on the basis of the delays in provision of co-location noted above, Oftel takes the view that the effective date for the start of the first five year period (referred to in paragraph 1.4) for rollout of unbundled loops should be January 2002. Hence, Oftel proposes that the terms of the 2000 determination remain in force for the time being.

2.9 Oftel is currently planning a comprehensive review of current regulatory obligations, in line with the requirements of the new European directives, the provisions of which are expected to apply from late Spring 2003.

Cost recovery

2.10 BT has expressed the view that Oftel should re-determine the charges based on a revised volume forecast, as it claims that otherwise it would be difficult for BT to recover the system set-up costs it incurred to provide LLU services. Oftel believes that this concern is unfounded. Of course, BT should be permitted to recover all reasonably and necessarily incurred costs, including system set-up costs. However, Oftel believes that, at such an early stage, and given current market conditions, there is considerable uncertainty over the number of loops that will be unbundled in the next five years. Therefore, Oftel considers that there is no present justification for altering the forecast number of loops at the end of the first five years of effective commercial service which was made at the time the MPF charges were originally determined. It would moreover be self-defeating to adopt a pessimistic target. This would risk raising the charges to a level which priced the service out of the market; thereby ensuring that BT’s system set up costs could never be recovered. Accordingly, Oftel proposes to extend the terms set out in the 2000 determination.

2.11 Oftel intends to monitor closely the development of this market and review this issue of the system set-up cost recovery when a more meaningful forecast can be arrived at. This will not harm BT’s ability to recover the reasonably and necessarily incurred system set-up costs as the 2000 determination includes a provision for the recovery of these costs in the event that loop volumes are smaller than anticipated – the period over which the costs are recovered can be revised. If, at the review point, BT does not appear to have a reasonable prospect of recovering its system set-up costs within an appropriate time period (on the basis of the charges currently determined), Oftel will consider whether a revision of the recovery period or some alternative recovery mechanism would be more appropriate.

2.12 Accordingly, Oftel current proposal to extend the terms of the 2000 determination does not affect BT’s ability to recover these costs in due course.

Chapter 3

Consultation

Arrangements for making and viewing representations

3.1 The Director General’s proposed decision is being made available to interested parties, together with the Director General’s reasons, so that they may have a reasonable opportunity to make representations. Having considered any such representations, the Director General will, if appropriate, make the Direction and will notify interested parties of that Direction and his reasons for making it.

3.2 The closing date for submitting representations is 11 March 2002.

3.3 Where possible, comments should be made in writing and sent by e-mail to elizabeth.wilks-wood@oftel.gov.uk. However, copies may also be posted or faxed to the address below. If any stakeholders are unable to respond in one of these ways, they should discuss alternatives with:

Elizabeth Wilks-Wood
Oftel
50 Ludgate Hill
London
EC4M 7JJ

tel: 020 7634 8922
fax: 020 7634 8949

e-mail: elizabeth.wilks-wood@oftel.gov.uk

Further copies of this document

3.4 Paper copies of this document and more accessible formats such as large print, Braille, disc and audio cassette can be made available on request. Please contact Oftel’s Research and Information Unit by phoning 020 7634 8761 or by sending an e-mail to infocent@oftel.gov.uk.

Publication of representations made by stakeholders

3.5 On this occasion, Oftel is not inviting stakeholders to comment on the representations made by others. However, in the interests of transparency, all representations will be published, except where respondents indicate that a response, or part of it, is confidential. Respondents are therefore asked to separate out any confidential material into a confidential annex, which is clearly identified as containing confidential material. Oftel will take steps to protect the confidentiality of all such material from the moment that it is received at Oftel’s offices. However, in the interests of transparency, respondents should avoid applying confidential markings wherever possible.

3.6 Non confidential representations can be viewed on Oftel’s website in the Publications section under Responses to Oftel consultations. They can also be viewed at Oftel’s Research and Information Unit. Appointments must be made in advance by phoning 020 7634 8761 or sending an e-mail to infocent@oftel.gov.uk.

Annex A

Draft direction

DRAFT

Prices for metallic path facilities

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

RECITALS

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

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

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

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

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

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

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

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

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

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

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

DIRECTION

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

1. Paragraphs 1 and 2 of, and the Schedules to, the 2000 Direction relating to the changes for the provision of Metallic Path Facilities and associated Internal Tie Circuits shall continue to have effect in accordance with this Direction.

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

2.1 such changes are agreed between BT and the operator or operators in question; or

2.2 the Director otherwise consents.

3. Nothing in this Direction shall be interpreted as disapplying any other legal rule or obligation to which BT may be subject.

4. For the purposes of this Direction;

4.1 words or expressions defined in the recitals shall have the meanings given to them there;

4.2 except where paragraph 4.1 requires a different interpretation;

4.2.1 words and phrases used in the Act or in the BT Licence shall have the meanings given to them there; and

4.2.2 paragraph 4 of the BT Licence shall, with the necessary changes, apply to this Direction as it applies to the BT Licence.

5. This Direction shall continue in force until revoked by the Director. 

Jim Niblett

Director of Broadband and International

[date]

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