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

December 2000

Contents

Determination

Annex A

Annex B

Annex C

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

Whereas the Secretary of State granted to British Telecommunications on 22 June 1984 a licence (the "BT licence") under section 7 of the Telecommunications Act 1984 ("the Act") for the running of telecommunications systems specified in that Licence;

Whereas by virtue of section 109 of paragraph 20 of Schedule 5 of the Act the BT licence has effect as if granted to British Telecommunications plc ("BT");

Whereas pursuant to section 7 of the Act, the BT Licence includes certain conditions contained within Schedule 1 to that Licence;

Whereas by a notice dated 27th April 2000 and pursuant to his powers under Section 12 of the Act, the Director General of Telecommunications ("the Director") modified the BT licence with the consent of BT by inserting a new Condition 83 concerning the requirement to provide Access Network Facilities.

Whereas Condition 83 came into force on 8th August 2000 by way of a Determination of the Director made in accordance with Condition 83.27;

Whereas Condition 83.16 provides that

Whereas Condition 83.18 of BT’s licence provides that:

Whereas in a statement dated August 2000 entitled Access to Bandwidth: Conclusions on charging principles and further indicative charges the Director set out detailed conclusions on charging principles he intended to apply in determining the Charges under Condition 83.16.

Whereas the Director has investigated the total costs of the provision of Metallic Path Facilities and Internal Tie Circuits to be charged by BT in accordance with Condition 83.18. Details of the Director’s analysis are contained in the Explanatory Memorandum published with this Determination.

Whereas the Director has consulted upon the matters to which this determination relates with the Licensee and with other persons having a relevant interest. The Director published a Consultation Document on this Determination on 6 November 2000 and sought comments by 4 December 2000, allowing a further two weeks for comments on comments.

Whereas the Director received responses, a summary of which is published with this Determination.. The Director has considered these responses and comments and has also taken these into account in making this determination."

THEREFORE pursuant to Condition 83.16 of the BT licence, the Director makes the following determination;

1. The annual rental, connection and disconnection charges for the provision of a Metallic Path Facility in accordance with Condition 83 shall be as set out in the attached Schedule 1 of this Determination.
2. The annual rental and connection charges for Internal Tie Circuits associated with the provision of a Metallic Path Facility in accordance with Condition 83 shall be as set out in the attached Schedule 2 of this Determination.
3. The charges subject to this determination shall not be varied, except with the consent of the Director General.
4. In this Determination words or expressions used have, except where the context otherwise requires, the same meaning as in the Act or the BT Licence.
5. This Determination shall take effect on 31 December 2000.
6. This Determination shall cease to have effect on 31 March 2002, except as otherwise directed by the Director.

David Albert Edmonds

Director General of Telecommunications

22 December 2000

SCHEDULE 1

Table 1 : Rental and connection charges for MPFs

Notes

1. As explained in explanatory memorandum (Annex A), Oftel has accepted BT’s proposal to have just one rental charge for all types of connections. The figure contained in this table is therefore an average of the five different rental charges determined by Oftel. Annex A contains further details on how this single rental charge was arrived at.
2. In the case of spare pairs or new lines the operator will receive back part of this charge when it hands back this MPF to BT or transfers it to another operator. This compensation payment will depend on number of years for which the Operator has had use of the MPF and the probability of BT re-using it. The formula on the basis of which this compensation is calculated is discussed in the explanatory memorandum (Annex A par 56).
3. The column shows BT’s estimates of how often each type of connection will occur when a line transfer is not possible. These figures are based on estimates supplied by BT and should provide some transparency about the potential costs that could be incurred by operators taking unbundled MPFs.
4. BT treats this charge as an additional cost to be paid for hand-back - disconnection, and reconnection where applicable. It is charged per MPF returned.
5. A detailed explanation of the different kind of intervention necessary to install a new line is included in Annex C.

SCHEDULE 2

Table 2: Rental and connection charges for Internal Tie- Circuits (Cables)

Notes

1. As explained more in detail in the explanatory memorandum (Annex A par 50), Oftel has decided to have to separate charges for Internal Tie Cables reflecting the fact that the tie cables provided for physical co-location (Internal(1) Tie Cables) differ from the ones supplied for distant co-location (Internal(2) Tie Cables).
2. If the operator then hands back the Internal Tie Cable to BT, it will receive back part of this charge. This compensation payment will depend on number of years for which the Operator has had use of the Internal Tie Cable and the probability of BT re-using it. The formula on the basis of which this compensation is calculated is discussed in the explanatory memorandum (Annex A par 56).
3. This is a per-occasion charge, required to cover the set-up and joint closure costs of jointing the Internal Tie Cables to the External one. This charge is paid only once per order of Internal(2) Tie Cables, as this cost does not vary with the number of Internal Tie Cables that are connected to an External Tie Cable on each occasion.

Annex A - Explanatory Memorandum

Background

1. This memorandum describes how Oftel has determined the charges for unbundled local loops (described as Metallic Path Facilities in Condition 83) and Internal Tie Cables, contained in the above Determination. Additionally it explains why these figures have changed slightly from the ones proposed in the "Consultation and Draft Determination on charges for Metallic Path Facilities and Internal Tie Circuits" published in November 2000.

2. British Telecommunications plc (‘BT’) is required by Condition 83 of the its Licence to supply requesting Operators with Metallic Path Facilities (‘MPFs’), Internal Tie Circuits (‘Internal Tie Cables’), Co-location or External Tie Circuits (‘External Tie Cables’) and all necessary ancillary services.

3. Condition 83 also requires the Director General of Telecommunications (the ‘Director General’) to determine charges for MPFs and Internal Tie Cables. An MPF is a pair of copper wires that runs from a Main Distribution Frame (‘MDF’) at a BT MDF site to the Network Terminating Equipment (‘NTE’) at a customer’s home or business premise. An Internal Tie Cable is a cable that contains 100 of metallic pairs, whose purpose differs depending on the type of co-location an operator is using. In the case of physical or virtual co-location, the Internal Tie Cable (‘Internal(1) Tie Cable’) contains metallic pairs that run between the MDF and a Hand-over Distribution Frame (‘HDF’) in the operator’s co-location space. In the case of distant co-location, the Internal Tie Cable (‘Internal(2) Tie Cable’) contains metallic pairs that run between the MDF and a chamber at the edge of the MDF building (the "joint in cable chamber"). From the joint in cable chamber the connection to the operator’s HDF takes place through an External Tie Cable.

4. This Determination does not set charges for co-location and External Tie Cables, nor the per occasion charges for fault testing and other one-off ancillary services. The Director General expects to determine those charges only in the event of a dispute.

5. These determined charges will take effect on 31 December 2000. It is currently intended that they will remain in force until 31 March 2002, although the Director General retains the right to intervene, where justified, before this date.

6. BT will reflect the determined charges in its revised Reference Offer.

Price Review

7. At the end of this period it is currently intended that Oftel will review these charges and will set new charges to take effect from 1 April 2002, although the Director General may intervene beforehand. After this first review, Oftel currently expects to introduce an RPI-X charge cap. Given the inevitable uncertainty surrounding the charging of a service not yet in place, Oftel does not consider it appropriate to set a charge cap based on the starting determined charges.

EC Regulation on Local Loop Unbundling

8. As stated above, this determination of charges is made under Condition 83 of BT’s licence, which obliges BT to provide unbundled access to the local loop to other operators. This determination therefore only applies to BT’s charges.

9. The EC Regulation on unbundled access to the local loop has now been adopted, and will come into effect on 31 December 2000. The Regulation imposes a number of obligations on "Notified Operators", being those that have been designated as having significant market power in the provision of fixed public telephone networks and services under the relevant EC Directives. In the UK, these obligations fall on BT and Kingston Communications (Hull) plc ("Kingston"). The Regulation will have direct effect in the UK and both operators will be required to comply with their obligations under it.

10. Under the Regulation, BT and Kingston will be required to meet reasonable requests for unbundled access to the local loop and related facilities. Both operators must charge prices for these, set on the basis of cost-orientation. As the determined prices for BT are set on the basis of cost-orientation, in accordance with Condition 83, they are consistent with the requirement of the Regulation.

11. The Regulation gives Oftel a supervisory role to ensure that charges for unbundled access to the local loop foster fair and sustainable competition. The Regulation also gives Oftel the power to impose changes on the Reference Offers and/or to intervene on its own initiative, where justified.

12. Member States are permitted, under the Regulation, to maintain or introduce more detailed provisions, to the extent that they are do not conflict with the provisions of the Regulation. Accordingly, in relation to BT, Oftel currently intends to retain Condition 83 of its licence, subject to modifications to ensure compatibility with the Regulation. Any such amendments will be introduced shortly in accordance with statutory procedure. In the interim, full local loop unbundling will continue to be mandated under Condition 83 of BT’s licence, insofar as it is compatible with the Regulation.

13. In relation to Kingston, local loop unbundling will be mandated under the terms of the Regulation itself which, as noted above, requires Kingston to set charges on the basis of cost-orientation. In the event that Oftel does determine charges, for example in order to resolve a dispute, it would expect to follow the principles set out in Condition 83, in this document and in previous Oftel documents on LLU charges (see paragraph 19).

International Comparison

14. Oftel has been monitoring how the UK charges compare to those found elsewhere in the European Union.

15. Care needs to be taken in international benchmarks to ensure that comparisons are of like with like. Before comparing figures, it is important to ensure that differences do not simply reflect differences in definition or in national circumstances, and that prices expressed in terms of national currencies are converted into a common currency.

16. Having corrected for different definitions and for the effect of exchange rates by using a purchasing power parity conversion rate, the result is that charges in the UK are close to those in other Member States. For example the monthly rental for an unbundled loop is 14 Euro (£8.50) in Austria, 15 Euro (£9) in Germany and 16 Euro in Italy and the Netherlands (£9.70), whereas in the UK it is 16 Euro (£10). As for the connection charge for a line transfer, it is 167 Euro (£102) in the Netherlands, 125 Euro (£76.50) in Italy, 123 Euro (£75) in Austria and 112 Euro (£66) in Germany and 145 Euro (£88) in the UK.

17. To the best of Oftel’s knowledge, only in the UK and Austria can new entrants require the installation of a completely new MPF, if there are no loops available to reach a given end customer.

Oftel’s charging principles

18. The charges contained in this Determination are cost-oriented and are based on indicative charges produced by BT in line with the high level charging principles contained in Condition 83 and the more detailed charging principles set by Oftel in August 2000 (Access to Bandwidth: Conclusions on charging principles and further indicative charges) and on a thorough assessment of the underpinning financial and technical information, and of comments received in response to the November 2000 consultation.

19. Condition 83 states that the charges for MPFs and Internal Tie Cables should be set so as to:

1. permit recovery of an appropriate attribution of common costs;
2. permit the recovery of long run incremental costs reasonably and necessarily incurred by BT in or as a result of the provision of these services; and
3. include a reasonable return on capital employed.

20. The more detailed pricing principles were presented in the May 2000 Consultation Document "Access to Bandwidth: indicative charges and pricing principles" and finalised in the August 2000 Statement "Access to Bandwidth: Conclusions on charging principles and further indicative charges". The November 2000 Consultation Document included some additional provisos on how these principles should be employed.

21. These principles are as follows:

• A capitalised charge for existing drop wire costs should not be included in the rental charge for existing MPFs (line transfer scenario). The reason for not allowing the recovery of this cost is that drop wire costs have already been fully recovered by BT as a result of its policy of expensing these costs and an allowance for it is included in the price control.
• In the case of "new lines" and "spare pairs", where the drop wire is new, the cost incurred for its installation when a new MPF has to be provided or a spare pair activated should be added to the connection charge. This recovery is allowed on the basis that BT has proposed a system for compensating the operator when the line in question is transferred back to BT or to another Operator. The formula proposed by BT to determine the size of these compensation payments was presented in the August 2000 Statement, discussed in the November 2000 Consultation Document and is further described below in paragraph 56.
• All costs and savings derived from the capital improvement programme should be included in the cost basis for the charges. Furthermore, these costs and savings should be included only subject to the evidence that the CCA valuation of BT’s network reflects the quality of the network before the capital improvement programme, to avoid double counting.
• The cost of upgrading lines where pair gain equipment is in use should be averaged over all existing MPFs and included in the rental charge. Pair gain equipment is the equipment which allows two customers to receive basic telephony services over just one pair. This equipment does not allow the provision of DSL services and therefore, where in use, needs to be removed and a new, additional, line needs to be installed. The recovery of this cost is subject to BT’s providing adequate evidence that it is installing new lines and is not simply transferring the pair gain equipment.
• The cost of substituting non-compatible NTEs, adjusted to take into account the cost savings derived by BT from the installation of this new equipment, should be averaged over all existing MPFs and included in the rental charge. NTE refers to the equipment located within the customer’s premises to which additional telecommunication devices can be attached. In about 30% of line transfers an NTE upgrade will be required, as the existing NTEs do not allow the provision of DSL services over the MPF.
• Reasonable system set-up costs should be included in the connection charge for MPFs. The length of time over which these can be recovered should be varied to ensure that costs are not over or under recovered.
• The appropriate increment to be used in calculating annual rental charges for MPFs should include all existing MPFs.
• Operators should be charged for disconnection if an MPF is returned to BT within 48 hours of being unbundled or if it is returned after 48 hours, but the customer is not taking any service from BT. Whereas, if the MPF reverts to BT after 48 hours and the customer takes services from BT over it, then BT should incur the disconnection cost. When the MPF is being transferred between operators, the disconnection cost should be borne by the operator who is gaining the customer.
• The general maintenance charge should be included in the MPF rental charge.
• BT should pay a rebate to Operators if they return an Internal Tie Cable within its economic life of 15 years. The rebate should depend on the economic life of the asset and on the probability of BT being able to re-use the Internal Tie Cable. Oftel considers that the formula could also be used to determine the level of the transfer charge by two other Operators when transferring an Internal Tie Cable.

Difference between the final charges and the charges Oftel proposed in November 2000

22. The charges set by Oftel in this Determination have changed slightly from the indicative ones published in November 2000. Table 3 and Table 4 below compare the final charges with the ones proposed in November 2000.

Table 3: Oftel’s rental and connection charges for MPFs –

Determined charges and charges proposed in November 2000 (in brackets)

Type of connection	Annual rental per MPF	Connection charge per MPF	Disconnection charge per MPF
Line Transfer	£122 (£118)	£88 (£95)	£29 (£29)
Spare Pair	£122 (£110)	£265 (£262)	£10 (£10)
New line (minor network intervention)	£122 (£110)	£409 (£406)	£10 (£10)
New line  (major network intervention)	£122 (£110)	£583 (£579)	£10 (£10)
New line  (small network build <50 man hours)	£122 (£110)	£1948 (£1945)	£10 (£10)

 

Table 4: Oftel’s rental and connection charges for Internal Tie-Cables –

Determined charges and charges proposed in November 2000

Type of connection	Annual rental per 100 pair cable	Connection charge per 100 pair cable	Jointing cost charge
Final Charges
Internal(1) Tie Cable	£21	£863
Internal(2) Tie Cable	£21	£674	£142
November proposal
	£21	£1433

Charges for MPFs

23. The changes made to the charges for MPFs are due to the following factors:

1. Averaging of Rental Charges across all types of connections
2. Correction of Errors
3. Cost of Upgrading NTEs
4. Wholesale costs and Overheads
5. Capital Improvement Programme
6. Manual testing
7. ADSL fault rate
8. Rating issue

Averaging of Rental Charges across all types of connections

24. The rental charge for MPFs has been averaged across all types of connection, on the basis of the expected frequency with which each of them will occur. The average has been obtained by applying a weight of 80% to the charge for the line transfer case and a weight of 20% to the common charge for all other provision scenarios, which correspond to the expected frequency of these connections. This has resulted in a small decrease in the MPF rental charge for a line transfer and a small increase in the rental charge for the other scenarios. The rental charges have been averaged to simplify the administration of the MPF rental contract.

Correction of BT’s Computational Errors

25. At the time of the publication of the November 2000 Consultation Document, Oftel was waiting for the results of a reconciliation of the costs used to calculate the charges to BT’s financial statements. Once completed, this reconciliation has revealed that an understatement of the rental charge for the MPF of around £6.00 in the charges proposed in November 2000 had been made.

26. Some further errors in the calculation of the LRIC costs have also been discovered by BT since the publication of the Consultation Document. These errors, due to the exclusion of some cost items which should have been included in the LRIC increment, resulted in the understatement of LRIC cost basis on which the MPF rental charges were calculated. There were also a smaller number of items which were included in the LRIC increment and should have been excluded. The net impact of these errors was to understate the LRIC plus mark-up of the MPF rental charges by approximately £3.00.

27. Oftel has verified the evidence provided by BT in support of these recalculations and has accepted the corrections. The collective effect of correcting these two sets of errors has resulted in an increase of the MPF rental charges of approximately £9.00.

Cost of Upgrading NTEs

28. NTE refers to the equipment located within the customer’s premises to which telecommunications terminal equipment , such as telephones, faxes and modems, can be attached. In about 30% of line transfers an NTE upgrade will be required, as the existing NTEs do not allow the provision of DSL services over the MPF.

29. BT is proposing to install a new kind of NTE, the NTE2000, where the NTE needs to be upgraded. The cost of an NTE2000 is approximately £10 higher than the cost of an NTE5, which has been the current NTE used by BT until now, and which would also allow the provision of DSL. The rationale for rolling out this more expensive kind of NTE is that it will bring a number of benefits to consumers and Operators.

30. In November 2000, Oftel stated that it was minded to allow BT to recover the cost of installing NTE2000, but only if also the cost savings thus enjoyed by BT were reflected in the charges for MPFs. At that time BT had not provided any evidence on the impact of the NTE2000 on its cost base and, therefore, in the charges proposed by Oftel in November 2000 allowed BT to recover only the cost of an NTE5 over a period of 15 years.

31. BT has now provided information on the expected cost savings accruing to BT from the installation of the NTE2000, together with information on the benefits that would be enjoyed by the Operators taking unbundled loops. This information shows that the principal effects of deploying the NTE2000 are:

• improved accuracy in the identification of faults occurring between the line and the NTE - both BT and the Operators taking unbundled loops will incur reduced fault diagnosis costs;
• easier faceplate upgrading - Operators taking unbundled loops will benefit from a decrease in the costs of upgrading the NTEs’ faceplates, as customers will be able to self-install them; and
• better customer service - from reduced fault repair time and more choice in terms of the telecommunications terminal equipment that end users can employ.

32. The cost savings enjoyed by BT over the life of an NTE2000 from reduced fault diagnosis costs are approximately equal to £5.00. The economic life of an NTE2000 has been set at 10 years, reflecting the increased risk of failure due to the presence of electronic components in both the front and back plates.

33. Oftel has allowed BT to recover the cost of the NTE2000, less the expected cost savings, which is approximately £6 per each line that needs upgrading. In the case of a line transfer this cost is recovered through the rental and is spread over the economic life of an NTE2000. The effect of having allowed BT to recover the net cost of the NTE2000, which is more expensive and has a shorter economic life than an NTE5, has led to an increase of less than £1 in the MPF rental charge for a line transfer.

34. The NTE2000 will also be employed when spare pairs are used and new lines are provided. In these scenarios the cost will be recovered through the connection charge. These connection charges have, hence, been altered to account for the appropriate net costs of the NTE2000.

Wholesale costs and Overheads

35. Wholesale costs and overheads make up a significant proportion of both the rental and connection charge for MPFs. BT has provided Oftel with a detailed breakdown of the wholesale costs it incurs when providing MPFs. Oftel has excluded two cost items proposed by BT:

1. development costs; and
2. restructuring costs.

36. Oftel considers that it is only appropriate to include development costs, where there is a direct link between the development undertaken and the unbundled loops, but not if it is simply an apportionment of a share of BT’s total development costs. BT has provided a general description of the development work undertaken, but have not provided sufficient information to demonstrate a direct link between such work and the unbundled loops.

37. Oftel does not consider that it is appropriate for BT to recover the cost of restructuring from the Operators taking unbundled loops, as these are costs that BT is incurring by improving its business processes to operate in a more competitive environment. Moreover, excluding restructuring costs is consistent with the hybrid adjustment that Oftel makes to BT’s regulatory accounts.

38. In November 2000, Oftel proposed to allow BT to recover both the incremental costs (LRIC) and the common costs components of the wholesale costs for both MPFs connection and rental. After further analysis of the cost basis, Oftel has now concluded that in the connection charge in the case of a line transfer, BT should recover only the incremental costs component of the wholesale costs. The rationale behind the exclusion of the common costs component of the wholesale costs from this charge is that these costs have already been recovered through the connection charge paid when the line, now transferred, was installed. Oftel believes that if BT were allowed to include a mark up for common costs when a line is transferred, common costs would be over-recovered. Therefore, the recovery of these common costs would not be consistent with the requirement that charges be cost-oriented and would be inconsistent with Oftel’s high-level pricing principles.

39. Moreover, Oftel expects that the common costs component of the wholesale costs recovered per MPFs for all new connections (i.e. all scenarios apart from a line transfer) will fall in the future, if the total number of new connections BT performs will increase due to LLU. Oftel will, therefore, intends to keep this issue under review.

Capital Improvement Programme

40. BT is undertaking a capital improvement programme to reduce its operating costs. Oftel considers it would be inappropriate to raise charges due to the implementation of a programme that lowers cost. In the August 2000 Statement and in the November 2000 Consultation Document, Oftel stated that it intended to including both the cost of the programme and any savings in operating expenditure that may result from it in the MPF rental charges. The charges proposed in November 2000 included the only the costs of the capital improvement programme, as at the time of the publication of the November 2000 Consultation Documents, BT still had to provide details of the benefits of the programme. Hence, Oftel pointed out that it was still considering the appropriate treatment of this cost.

41. On the basis of the information thereafter received from BT, Oftel has determined not to include the cost of the capital improvement programme in the current charges for MPFs, as these costs will be covered by the savings it will generate. The impact of this decision is to reduce the MPF rental charges by about £3.00. The Director General cannot fetter his discretion in relation to future determinations of charges, however, to be consistent with its pricing principles, Oftel expects to take the net cost savings accruing to BT from this programme into account when setting MPFs charges in the future and to ensure that the accounting data thus employed will include an appropriate adjustment.

Manual testing

42. In November 2000, Oftel noted that it was considering the reasonableness and efficiency of the manual test procedure proposed by BT for unbundled MPFs, the additional repair work caused by performing these tests and the labour rate of the technicians employed by BT to undertake the tests. Since November 2000, BT has revised the procedure and provided Oftel with a new approach. In addition, BT has included in the calculation of the expenses incurred when line-testing, the cost of the necessary equipment.

43. Oftel considers the new procedure to be more effective. However, the costing provided by BT included the supply of testing equipment for approximately 30,000 simultaneous manual tests. Oftel believes that this is in excess of the capacity needed for testing reported faults on MPFs and new connections. Oftel, therefore, has reduced the level of equipment so as to allow capacity for approximately 15,000 simultaneous manual tests.

44. The overall effect has been to increase the rental charges for MPFs by between £1.00-2.00 and the connection charge for spare pairs and new lines by about £7.00 (to account for the one-off test necessary when a new line is supplied).

ADSL fault rate

45. The cost of manual testing depends on the number of faults expected with the employment of DSL technologies. DSL lines are expected to have a higher level of reported faults than PSTN lines, as, on average, the former will be used for a greater number of hours per day and employ more bandwidth. The costs included in the charges proposed in November 2000 were based on data for the fault rate of BT’s ADSL lines. These data showed that 42% more faults were reported on these lines than on PSTN ones. When setting the charges contained in this document, Oftel has asked BT to provide more recent data on ADSL fault rates. These showed a small fall in the additional fault rate from 42% to 38%. This revised fault rate has been employed to arrive to the manual test costs included in these charges.

Rating issues

46. BT is currently liable for rates on its access network, which includes the unbundled local loops. Accordingly the MPF rental charges contained in this document, as well as the ones proposed in November 2000, include these rates.

47. However, it is not yet clear whether BT, or the Operators taking the unbundled loops, will be liable for the payment of these rates in the future. The National Valuation Office, has yet to announce a decision on whether the liability for these rates on an unbundled local loop will remain with BT or will be passed on to the Operator taking the loop. Currently the rental charges for MPFs have been calculated on the basis that BT will be responsible for these rates. However, if this proved not to be the case, Oftel will reconsider the rental charges.

48. Recently BT has announced that it has reached an agreement with the National Valuation Office to reduce BT’s network rates by £100 million per year from 2001. Oftel has, therefore, asked BT to recalculate the MPFs charges on the basis of these reduced rates. The effect has been to reduce the rental charges for MPFs by approximately £2.00.

Charges for Internal Tie Cables

49. After a further analysis of the installation and equipment costs for Internal Tie Cables proposed by BT, Oftel recalculated the connection charges for Internal Tie Cables. The new charges are lower than the £1433 charge proposed in November 2000.

50. The changes made to the charges for Internal Tie Cables are due to the following factors:

1. Differences between Internal Tie Cables provided for physical and distant co-location. and
2. Exclusion of some cost items previously included contained in the connection charges for both Internal Tie Cables

Differences between Internal Tie Cables provided for physical and distant co-location

51 To connect an unbundled MPF to the Hand-over Distribution Frame (HDF) of the Operator which is leasing it, it is necessary to use a Tie Cable. This Tie Cable differs in length depending on whether the HDF is located at the MDF site (i.e. physical co-location) or in distant premises (i.e. distant co-location). Oftel, therefore, considers that it is more appropriate to separate the two cases and to have two separate products (as shown in Figure 1 below):

1. Internal(1) Tie Cable – which is a cable, containing a number of metallic twisted pairs, between the Main Distribution Frame (MDF) and the HDF in a physical co-location space.
2. Internal(2) Tie Cable – which is a cable, containing a number of metallic twisted pairs, between the MDF and the joint with the External Tie Cable in the cable chamber .

Figure 1: The two Internal Tie Cables.

52. The connection charge for the Internal(1) Tie Cable is higher because it reflects the longer length of this cable compared to the Internal(2) Tie Cable.

53. The connection charge for the Internal(2) Tie Cable is composed of two elements:

• a per 100 pair charge; and
• a per-occasion charge, required to cover the set-up and joint closure costs of jointing the Internal Tie Cables to the External one. This charge is paid only once per order of Internal(2) Tie Cables as this cost does not vary with the number of Internal Tie Cables that are connected to an External Tie Cable on each occasion.

Elements contained in the connection charges for both Internal Tie Cables

54 In addition, further reductions in the connection charges have been achieved by the exclusion of some cost items which were already included in the Hostel product or had been double-counted.

Disconnection charge

55. After the end of the consultation period on the November 2000 Consultation Document, BT has proposed the introduction of a disconnection charge for Internal Tie Cables. This charge would cover the cost of recovering these cables. Currently, Oftel considers that a disconnection charge for Internal Tie Cables is not appropriate, as it is not yet clear whether BT will recover a cable every time an Operator returns it or whether another Operator will reuse it. Oftel intends to reconsider the need for an Internal Tie Cable disconnection charge, when further evidence will be available on the number of disconnections of Internal Tie Cables and the level of reuse of these Cables by other Operators.

Additional explanations

Rebate formulae

56. Oftel requested that BT put in place a suitable system for making transfer payments in case it gets one or more of its newly installed MPFs (i.e. spare pairs and new installations scenarios) or Internal Tie Cables back. This rebate allows the OLOs to get back part of the connection charge (equal to the value of the asset they hand back). This formula depends on the economic life of the asset and its re-usability.

57. In November 2000, Oftel outlined a rebate formula proposed by BT and noted that the formula crucially depended on the value of Z: the probability of reuse of the asset by BT. The formula is restated below:

Where:

• R is the amount to be repaid;
• C is the relevant part of connection charge (i.e. the capital value of the asset);
• Y is the number of years between provision of the asset to the Operator and its return to BT rounded up to the next whole year;
• Z is a constant being the proportion of cost reflecting the likely ‘re-usability’ of the asset by BT; and
• W is a constant reflecting the economic life of the asset.

58. Since November 2000, BT has provided Oftel with its estimate of the value of Z for new MPFs and Internal Tie Cables. The Z values have been derived by estimating the probability of reusing the asset over its economic life and then adjusting this figure to estimate the probability of reusing the loop in any one year. This adjustment is required because the probability of BT reusing is not constant over its life, but increases with the number of years is stays idle.

59. For the purpose of the rebate BT has separated the MPF into two components, because the probability of reusing these two components are different:

• the loop - ie the copper twisted pair up to the point of the final drop (the DP); and
• the drop wire - ie the copper twisted pair from the DP to the NTE.

60. BT has proposed a probability of reuse in any one year of:

• 25% for loops;
• 12% for drop wires;
• 5% for Internal Tie Cables.

61. Oftel considers that the probability of reusing a loop is higher than proposed by BT, due to the possibility of using a loop to connect a number of different potential customers. Therefore, Oftel proposes a Z value for loops of 39%. As for the drop wire, Oftel accepts that the probability of reusing it is limited and accepts BT’s proposed value of 12%.

62. Oftel accepts that little is known about the probability of reusing Internal Tie Cables. However, it is considered that this probability is likely to be higher than the one estimated by BT, due to the fact that new co-locating Operators, or Operators taking up more MPFs, may be able to reuse Internal Tie Cables which are no longer required by other Operators. Therefore, Oftel considers that the Z value for Internal Tie Cable reuse should be 11%.

63. Oftel therefore may reconsider these values at a later date, when more data on the actual reuse of these assets will be available.

Cost of Upgrading Lines with Pair-Gain Equipment

64. If an existing BT customer served via pair gain equipment requests DSL service over an unbundled loop, it is necessary to provide an additional loop to that customer. In November 2000 Oftel proposed to allow BT to recover the costs of removing the pair gain equipment, installing new lines and the necessary NTEs. The recovery was allowed over a period of 15 years, equal to the economic life of the new copper loops thus installed.

65. However, Oftel stated that BT would need to satisfy three conditions for these costs to be included in the determined charges:

1. The CCA valuations used in calculating the MPF cost would have to be based on a network comprising the current level of pair gain equipment (rather than assuming a dedicated pair per customer);
2. BT had demonstrated that it installs new line plant when encountering pair gain equipment and does not simply transfer the equipment to an adjacent pair;
3. BT’s ADSL service has also to be charged for the cost of upgrading lines with pair gain equipment.

66. In their response to the consultation on the November 2000 Consultation Document, BT have outlined how they meet these three conditions. Oftel considers that this response provides a reasonable basis for allowing BT to recover the cost of upgrading lines with pair-gain equipment. Oftel and BT will further discuss how BT can provide satisfactory evidence for condition (b).

67. The costs that are recovered through the charges proposed in this document refer to a network with 4% of total lines connected via pair gain. While the Director General cannot fetter its discretion in relation to future determinations of charges, it is currently expected that future determinations of MPFs charges will be based on a network with a percentage of pair gain equipment no greater than the rate used in this determination.

Return on capital

68. The connection and the rental charges for the MPF are based on an allowable return on capital of 14.5%. This figure is derived from the current average return allowed on BT’s 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 future years, again to maintain consistency with treatment of network services, the allowable return on capital will be reduced on the basis of a glide path. This will bring the allowable return on capital down to the target rate of return for network services, equal to Oftel’s estimate of BT’s cost of capital (currently 12.5%), by June 2005.

Annex B - Responses to Consultation

Consultation background

B1 In November 2000, Oftel published a Consultation Document which set out its proposals for BT’s charges for Metallic Path Facilities and Internal Tie Cables.

List of respondents

B2 Oftel received submissions from the following organizations and individuals (in alphabetical order):

• BT;
• Bulldog;
• MCI Worldcom;
• David Wendon;

Plus one confidential response.

Summary of responses received

B3 On the whole, Oftel’s proposals, as set out in the November 2000 Consultation Document, have been well received, with the majority of respondents welcoming charges proposed and Oftel’s approach in arriving to them.

B4 Key issues raised by respondents comprise:

• Pricing principles – Respondents were satisfied with the detailed pricing principles adopted by Oftel when determining the charges. However, one requested an international benchmarking of MPF charges in 6 months to compare the level in the rest of the EU with the UK price.
• Rental for MPF – Generally the level of the annual rental for an MPF was considered acceptable, apart from one respondent who argued that this charge was lower in Germany and Austria. One the respondents noted that the rental charge for MPFs proposed by Oftel was consistent with the charges estimated by a bottom-up LRIC model of BT’s access network developed by an independent UK consultancy (Analysys).
• Price cap – Oftel’s proposal to introduce an RPI-X cap on the charges from April 2002 was welcomed by the industry.
• Capital improvements programme – All respondents agreed with Oftel’s position that both costs and benefits of this programme should be included in calculations of the charges.
• External Tie Cables – Most respondents requested that Oftel determined the rental and connection charge for this ancillary service.
• Pair gain equipment – Many respondents expressed that they may be paying for an intervention that it is not always needed.
• Return on capital – One respondent questioned the level of the return on capital BT is allowed on the access business.
• Connection charges for MPF – Concerns were expressed that these charges are too high, especially when compared with the retail connection charge for BT’s PSTN loops.
• System set up costs – Respondents agreed that these costs should be levied, but insisted that also BT’s ADSL business division, Ignite, should contribute to it.
• Disconnection charge – Respondents accepted Oftel’s proposal that Operators should be charged for disconnection if an MPF is returned to BT within 48 hours of being unbundled. They should also be charged if the MPF is returned after 48 hours and the customer is not taking any service from BT. More in general, when the MPF is transferred between operators, the disconnection cost should be borne by the operator who is gaining the customer (which could be BT).
• NTE upgrade – Respondents agreed with Oftel’s position that the cost as well as the benefits of rolling out the NTE 2000 should taken into account when determining the charges.

B5 Main points made by BT in its response include:

• Drop wire – BT claimed that this cost should be recovered or the charge for MPFs will not be cost-oriented.
• System set up costs – BT welcomed that Oftel would allow it to keep charging for these costs after 5 years of LLU if they have not been completely recovered.
• Disconnection charge – BT argued on the basis of the principle of cost-causation this charge should always be paid by the Operator, even when the customer goes back to BT’s services, as it has been caused by LLU.
• Pair gain equipment – BT did not agree with Oftel posing the three pre-conditions to allow for the recovery of these costs. However, it claimed it can meet them.
• NTE upgrade– BT claimed that the benefits arising from the deployment of the NTE2000 consist mainly of:

• increased accuracy of fault diagnosis
• flexibility of the device design
• easier faceplate upgrading

Therefore, it argued that these benefits accrue mostly to the Operators taking unbundled loops and that they should not be included in the calculation of the charges for MPFs. Moreover, it stated that these benefits are enjoyed 5 years after roll-out and that the economic life of an NTE2000 is between 2-4 years, hence it proposed to recover these costs over 5 years.

• Capital improvements programme – BT complained that Oftel originally agreed to allow the recovery of these costs. Moreover it claimed that its CCA valuation the network has been independently audited and accepted by Oftel. BT also pointed out that effect of this programme on annual rental of an MPF is £2.71
• Internal Tie Cable – BT expressed concerns about Oftel’s proposal for a "follow on" connection charge or an adjusted rental on the ground that it would generate a considerable administrative burden. Moreover BT claimed that different parts of an Internal Tie Cable have different economic lives and this would clash with the proposed charging structure. Finally, BT argued that the reusability of an Internal Tie Cable is very low and, therefore, there is no justification for introducing a rebate payment.

Annex C - Definitions of line provision options

C1 Minor network intervention can take the form of either ‘cease of an M-side stop’, ‘cease of a D-side stop on the same DP’ or ‘restore a faulty D-side pair’.

C2 ‘Cease an M-side stop’ is defined in the following way. When a line is ‘stopped’, the routing used to provide that line is kept reserved (or tied-up) until the line is officially ‘ceased’. Ceasing the line frees up the copper pair for use in providing another line. The access network is divided into two parts – the Main or Exchange side (M-side or E-side) and the Distribution side (D-side). The demarcation point is the Primary Connection Point (PCP), more commonly known as the ‘green BT cabinet’ seen on street corners. From the PCP back to the exchange is the Main-side, and from the PCP to the customers is the Distribution-side. A ‘stopped’ line is ceased in order to free-up a Main-side pair to allow a complete routing from exchange to customers, a free Distribution-side pair already being available. In order to use this option the line must have been stopped for at least two days.

C3 ‘Cease a D-side stop on the same DP’ is defined in the following way. This is as with ‘cease an M-side stop’, but a ‘stopped’ line is ceased to free up a Distribution-side pair to allow a complete routing from exchange to customer, a free Main-side pair being already available. In order to use this option the line must have been stopped for at least two days.

C4 ‘Restore a faulty D-side pair’ is defined as follows. This involves clearing a fault on an existing Distribution-side pair, so that the D-side can be used to provide a complete routing through to the customer. This solution includes only minor repairs and would specifically exclude repairs where cable lengths are renewed.

C5 Major network intervention can take the form of either ‘pair divert’ or ‘adjacent DP/dropwire divert’. ‘Pair divert’ is defined in the following way. There are currently no spare usable pairs on the Distribution Point (DP) serving the customer. However, there may be unused, but potentially usable, pairs on the cable feeding the DP and re-routing, or re-arranging, pairs can make these ‘usable’ further back towards the exchange. A pair divert is this rearrangement of the network to provide a working pair by entering no more than two underground joints.

C6 ‘Adjacent DP/dropwire divert’ is defined in the following way. Where there are no spare pairs on the designated (nearest to customer) DP it may be possible to serve the customer directly from an adjacent DP. This may also include moving service of an existing customer (currently served from the designated DP) to an adjacent DP, in order to free up a spare pair on the designated DP that can then be used to provide the new service.

C7 The small network build solution involves new cabling, underground jointing and other associated external work totalling no more than 50 direct labour man-hours (or the monetary equivalent). This will not normally require any ductwork but may include short underground (non-ducted) lead-ins to the customer’s premises, or minor repairs. The ‘monetary equivalent’ will include the costs of underground joint boxes, lead-ins, cable, duct and repairs.