Local loop unbundling: final charges for shared access

18 October 2001

Contents

The Direction

Explanatory memorandum

Annex A How a reported fault is processed and charged for

Annex B Responses to consultation

Annex C Automatic testing

The Direction

Direction imposing changes on BT’s reference offer in relation to prices for shared access to the local loop in accordance with Article 4(2)(a) and Article 4(3) of the EC Regulation No 2887/2000

WHEREAS

A) 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 the telecommunication systems specified in Annex A to the BT Licence;

B) By virtue of Section 109 of and paragraph 20 of Schedule 5 to the Act, the BT Licence has effect as if granted to British Telecommunication plc ("BT");

C) On 18th December 2000 the European Parliament and the Council adopted a regulation on unbundled access to the local loop (EC/2887/2000) (the "EC Regulation");

D) 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, on terms set out in 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") which, for the purpose of this direction, includes the relevant parts of BT’s price list;

E) Article 3(3) of the EC Regulation provides that notified operators shall charge prices for unbundled access to the local loop and related facilities set on the basis of cost-orientation;

F) Article 4(1) of the EC Regulation provides that the national regulatory authority in each member state (which in the United Kingdom is the Director General of Telecommunications - the "Director") shall ensure that charging for unbundled access to the local loop fosters fair and sustainable competition;

G) Article 4(2) of the EC Regulation gives the national regulatory authority in each member state (which in the United Kingdom is the Director) the power to impose changes (including prices) where justified on the reference offer for unbundled access to the local loop and related facilities;

H) BT has published and updated its ANF Agreement in accordance with Article 3(1) of the EC Regulation which, inter alia, specifies the following prices for shared access to the local loop as follows:

• Annual rental per loop £74
• Connection charge per loop £142
• Disconnection charge per loop £50
• Right when tested (RWT) charge £39
• Conversion charge per loop no charge specified

I) The Director has reviewed the prices for shared access to the local loop as set out in the ANF Agreement. He has also reviewed more recent proposals to increase those published prices. He has concluded, so as to ensure cost orientated prices, that he is justified to intervene to impose changes to BT’s published prices in the ANF Agreement for shared access in order to ensure fair competition, economic efficiency and maximum benefit for end users. The reasons for the Director’s decision are set out in the explanatory memorandum which accompanies, and is published with, this direction;

J) The Director intends to keep the prices for shared access under review and may from time to time, where justified, impose further changes on BT’s ANF Agreement;

K) The Director has consulted upon the matters to which this direction relates with BT and other persons having a relevant interest. The Director published a consultation document on 27 June 2001 seeking comments by 25 July 2001, allowing a further two weeks for comments on comments. The Director received responses and comments on comments which he has taken into account in making this direction;

THEREFORE

Pursuant to Article 4(2)(a) and Article 4(3) of Regulation (EC) 2887/2000, the Director General of Telecommunications makes the following Direction:

1.BT shall not offer prices in its reference offer for shared access to the local loop which exceed the following:

• Annual rental charge £53
• Connection charge per loop £117
• Disconnection charge per loop £36
• Right when tested (RWT) charge £29
• Conversion charge per loop £0

3. The terms defined or described in the recitals to this direction shall have the meaning so defined or described. All other words or expressions used in this direction shall have the same meaning as in the EC Regulation as appropriate.

4. BT shall, within 14 days of the date of publication of this direction, amend the ANF Agreement so that it gives effect to this direction.

David Albert Edmonds

Director General of Telecommunications

16 October 2001

Explanatory memorandum

Background

1.1 British Telecommunications plc (BT) is required by the EC Regulation No.2887/2000 on unbundled access to the local loop (‘the Regulation’) to meet reasonable requests from interconnecting operators (‘operators’) for unbundled access to its local loops (which includes both full and shared access) and related facilities at cost-orientated prices.

1.2 A local loop is a pair of metallic wires that runs from the Network Terminating Equipment (NTE) at an end user’s premises to the Main Distribution Frame (MDF) within the local serving MDF site. BT has to ‘unbundle’ these loops ie it has to allow competing operators access to either the full frequency spectrum of these loops or the non-voice band frequency spectrum. In the latter case, also referred to as shared access, the competing operator supplies high-speed data services over the non-voice frequencies (high frequency channel), while BT continues to provide voice services over the remaining frequencies (low frequency channel).

1.3 The Regulation requires Oftel to ensure that charging for unbundled access to the local loop is cost-oriented and gives Oftel the power to impose changes to BT’s reference offer for unbundled access to the local loop (including prices) where it considers that these changes are justified. Moreover, the Regulation gives Oftel the power to intervene, on its own initiative, in order to ensure that there is non-discrimination, fair competition, economic efficiency and maximum benefit for end users in the provision of unbundled access to the local loop. On the basis of these powers Oftel examined BT’s reference offer of 29 December 2000 (‘BT’s Reference Offer’) and its latest versions (which did not differ as far as charges for shared access are concerned), and the charges proposed by BT to Oftel in March 2001. It was Oftel’s initial view that the charges therein contained did not accurately reflect the costs incurred by BT in offering shared access to its local loop. Therefore, in June 2001 Oftel proposed draft changes to these charges (‘draft charges’) in the Consultation on draft Determination imposing changes on the reference offer of BT in relation to prices for shared access to the local loop in accordance with article 4(2) (a) of the EC Regulation no 2887/2000 (hereafter referred to as the ‘June 2001 draft Determination’). After an appropriate consultation, Oftel has now determined the final changes to BT’s charges (‘final charges’). This Direction sets out these final charges and requires BT to change the prices in its reference offer in accordance with them (see Table 1 below).

1.4 This memorandum describes how Oftel has determined the changes to the charges proposed by BT for shared access to the local loop, contained in the above direction. Additionally it explains why these figures have overall changed slightly from the ones proposed in the June 2001 draft Determination (www.oftel.gov.uk/publications/local_loop/shacprice0601.htm).

Technical provisos

1.5 The final charges herein discussed are based on a specific technical configuration, where the splitter is installed and maintained by the sharing operator in its co-location space. This is the arrangement identified in the December 2000 statement Access to bandwidth: shared access to the local loop (hereafter referred to as the ‘December 2000 Statement on shared access’) as Option (2) and is the arrangement on which BT’s Reference Offer is based. In this arrangement the sharing Operator provides the splitter both at the MDF site and at the end user’s premises. Further details on Option (2) can be found in the December 2000 Statement on shared access.

1.6 It is intended that these charges will apply to all shared loops provided under Option (2) (see above), regardless of the type of splitter installation employed. To date, the installation used by BT, for its wholesale ADSL products, has employed an engineer installed central splitter that is positioned near the NTE. The data associated with this installation has been used to assess the expected costs of providing shared access. However, there are several possible end user installations that can be adopted for shared lines (eg distributed splitters). Currently it is not known which type of installation sharing operators may use and in what volumes. Given this lack of information, Oftel considers that the final charges presented in this direction should apply to all shared loops notwithstanding the form of splitter installation. However, Oftel will review, in due course, the impact of alternative methods of installation on the costs of providing shared access.

1.7 These charges do not include the cost of repositioning the NTE within the end user’s premises. If there is a requirement to reposition the NTE, BT’s standard price list will apply.

1.8 This direction does not set charges for Internal Tie Cables, which are necessary to connect the loop between BT’s MDF and the sharing Operator’s equipment. Oftel set charges for Internal Tie Cables in December 2000 (Determination under condition 83.16 of BT’s licence relating to the charges for the provision of metallic path facilities and associated internal tie circuits, hereafter referred to as the ‘December 2000 price determination’). These charges, which are already reflected in BT’s Reference offer, will also apply to the Internal Tie Cables needed to provide shared access.

1.9 These final charges should be reflected in BT’s Reference Offer 14 days after the publication date of this Direction.

Fault testing

1.10 The charges have been set on the basis that BT is responsible for the repair and maintenance of the metallic loop (ie from the MDF up to the NTE within the end user’s premises) and that BT employs a manual procedure to test line for faults. Further details on fault testing costs and procedures can be found in paragraphs 1.27 – 1.48 and in Annex A and B below, as well as in Annex B of the June 2001 draft Determination.

1.11 Table 1 below contains the final and the draft charges as well as the charges proposed by BT in its Reference Offer and its March 2001 proposal to Oftel. As was discussed at length in the June 2001 draft Determination, a large part of the costs included in the rental charge are related to fault testing. This is because whenever a fault is reported to BT, the test has to be performed manually and it is expected that the number of faults reported on shared lines will be high (on the basis of evidence from BT’s ADSL service).

1.12 To highlight the impact that this manual testing solution has on the on-going costs of shared access, Oftel has split the rental charge into two elements. The first one, the ‘basic element’, reflects all the costs that are not related to faults ie wholesale costs and overheads (excluding those related to faults) and upgrade of NTEs and of lines with pair gain equipment. The second one, the ‘fault related element', includes fault handling, fault testing and fault repair costs and the contribution to the customer guarantee scheme. As explained more in detail below (see paragraphs 1.27 – 1.34), the latter part has decreased from what BT proposed in March 2001 and what Oftel proposed in the June 2001 draft Determination. However, it is likely to decrease further if BT were to introduce some form of automatic test access. This split is meant only for presentational purposes.

1.13 Currently, BT adopts an automatic testing solution for its ADSL service. This has required investments to acquire suitable equipment and to alter BT’s operational support systems. To adopt a similar solution operators would have to invest in testing equipment and in changes to operational support systems. Currently no operator has expressed interest in making this investment and introducing this or any other automatic testing solutions. BT’s solution and other potential automatic testing arrangements, together with their advantages and disadvantages for the sharing operators, have been discussed in detail in Annex B to the June 2001 draft Determination.

1.14 Oftel is concerned about the high cost of testing lines determined by the manual procedure currently in place. Oftel has encouraged industry to consider alternative shared access arrangements and test access solutions and would welcome further discussions on this issue within the industry LLU technical and commercial working groups. Annex C below discusses further the issue of automatic testing.

Table 1: BT and Oftel’s proposed charges for shared access to the local loop

Notes:

*Please note charges revised on 24 October 2001. Charges stated at time of publication (18 October 2001) were £13.9 (basic element) and £38.1 (fault related element).

1 This part of the total charge includes all the costs that are not related to faults: upgrade of NTEs and lines with pair gain equipment and wholesale and overheads (excluding those related to faults).

2 This part of the total charge includes fault handling, fault testing and fault repair costs and the contribution to the customer guarantee scheme.

3 This charge has to be paid for hand-back – disconnection when a shared loop is returned to BT within 48 hours of being unbundled or when the shared loop is returned after 48 hours and the customer is not taking any broadband service from BT. When the shared loop reverts to BT after 48 hours and the customer takes broadband services from BT over it, then BT should incur the disconnection cost. When the shared loop is transferred between operators, the disconnection charge should be borne by the operator who is gaining the customer.

4 When a customer with a shared loop decides to cease its BT’s voice service and the sharing operator decides to keep the loop, the line is then considered to be a fully unbundled one and the sharing operator charged accordingly.

5 This charge will be levied on a per occasion basis, whenever a sharing operator reports a suspected fault to BT which, after appropriate investigations, results to be right when tested (‘RWT’).

6 The charges contained in this direction are a variation to the charges in BT’s reference offer. In considering the variation of charges Oftel has also considered the charges most recently proposed by BT to Oftel in March 2001.

7 BT published its reference offer for full and shared access to its local loop on 29 December 2000. It revised it a number of times afterwards, but the charges for shared access have remained unchanged. Therefore Oftel in this direction always refers back to the December 2000 Reference Offer.

8 With the current technical arrangement the sharing operator receives the whole local loop and then uses its splitter to separate the frequency into two channels and hands the low frequency one back to BT. Therefore, in BT’s Reference Offer the annual rental for a shared loop is presented as the rental for a fully unbundled loop minus a buy-back charge (that BT pays to get back the low frequency channel of the loop).

Price Review

1.15 The final charges contained in this direction are based on estimates of the costs that BT is likely to incur when providing shared access. The reason for using cost estimates is that, currently, only limited information on the actual costs is available. However, Oftel will reconsider the charges when useful data on the actual costs incurred by BT is available.

1.16 After such a review, which may lead to further changes to BT’s charges, Oftel currently proposes to introduce a RPI – X price cap to ensure that BT is provided with the incentives for cost-efficiency.

Oftel’s charging principles

1.17 The final charges contained in this direction are a variation to the charges included in BT’s Reference Offer. In determining the appropriate variation, Oftel has also considered the charges most recently proposed by BT to Oftel (in March 2001). This direction is made on the basis that neither the charges set out in BT’s Reference Offer nor BT’s more recent proposals accurately reflect the costs incurred by BT. Oftel considers that the imposed changes are justified and that the resulting final charges are cost-oriented.

1.18 The final charges contained in this direction are in line with the charging principles developed by Oftel in the context of full access to the local loop. These principles are contained in Condition 83 of BT’s licence (‘C83’) and in the August 2000 Statement Access to Bandwidth: Conclusion on the charging principles and further indicative charges (hereafter referred to as the ‘August 2000 Statement’). As discussed in Oftel’s December 2000 Statement on shared access and in the June 2001 draft determination, Oftel considers that, due to the similarities between the two services, it is appropriate to apply the charging principles developed for full access to shared access. Oftel believes that those principles are consistent with the requirement of cost orientation contained in the Regulation.

1.19 The high level principles are that charges for unbundled loops should be set so as to:

(i) permit recovery of an appropriate attribution of common costs;

(ii) 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

(iii) include a reasonable return on capital employed.

1.20 In addition to the above mentioned principles, Oftel also employed an additional principle, specific to shared access, which states that the charges for shared loops shall not include any contribution to the recovery of the joint and common costs incurred by BT in the provision of the loops. The rationale behind this principle has been extensively discussed in the December 2000 Statement on shared access and in the June 2001 draft determination. Therefore, the charges for shared access shall reflect only the long run forward-looking incremental costs incurred by BT in providing shared access.

Relationship between shared access charges and charges for BT’s wholesale services

1.21 A number of interested parties have asked for clarification on whether BT’s own wholesale DSL services bear transfer charges equal to the charges that are levied on operators seeking shared access. Some, but not all, elements of the charges for shared access are relevant to BT’s wholesale DSL services. For example, the NTE upgrade is necessary for both BT’s lines on which it offers DSL services and shared access and the upgrading intervention is the same, but the process employed to test lines for faults is not. When the processes are the same, Oftel considers that the transfer charges borne by BT’s wholesale DSL services should reflect the appropriate elements of the charges for shared access. Oftel will refer to these cost elements for the purpose of any current and future investigation into unfair DSL pricing.

Cost information

1.22 The final charges contained in this direction are based on an assessment of the financial and technical information underpinning BT’s Reference Offer and additional information provided to Oftel. The June 2001 draft determination discusses this information at length and explains the cost composition of these charges. Moreover, further information is contained in this document. However, some of the data employed in assessing the likely costs of providing shared access (eg the number of fault reports and the number of actual faults experienced by BT on loops supporting its ADSL service) has not been disclosed in this document nor in the June 2001 draft Determination. BT considers that this information is commercially confidential and, as such, should not be released into the public domain.

International comparison

1.23 Oftel has been monitoring how the UK charges compare to those found elsewhere in the European Union (‘EU’).

1.24 Care needs to be taken in international benchmarking exercises 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. Shared access has been implemented across the European Union with different technical configurations. This has an impact on the nature and level of the cost components and, as such, on the charges.

1.25 It is difficult, if not impossible, to correct for technical differences. It is however possible to correct for the effect of exchange rates by using a purchasing power parity (‘PPP’) conversion rate. Once this correction is made it appears that charges in the UK are close to the EU average.

1.26 Table 2 shows the monthly rental charges for shared loops in some EU countries. The charges are expressed in Euro and UK£ (both PPP corrected exchange rates). It should be noted that in Denmark and Ireland the rental charge does not include the cost of fault testing and repairs. In these countries, the rental charge includes only maintenance costs and sharing operators are required to pay repair costs separately on a per occasion basis.

Difference between the final charges and the draft charges

1.27 The final charges set by Oftel in this direction have changed slightly from the draft ones published in the June 2001 draft determination. The changes between the draft charges and the final charges contained in this direction are due to consideration of the responses to the consultation and further enquiry into a number of matters (as was indicated in the June 2001 draft Determination). The remainder of below explains the changes made to the draft charges.

Table 2: International comparison of monthly rental prices

The rental charge

1.28 The rental charge has to be paid annually for each shared loop. This charge covers the on-going costs incurred by BT to provide shared access to a metallic loop ie to provide access to the higher frequency portion of a loop, under the configuration described as Option (2) (and discussed in detail in the December 2000 Statement). This charge also includes contributions to some of the one-off costs incurred by BT in offering shared access: the cost of providing new loops where pair gain equipment is in use and the cost of replacing non-compatible NTEs. Oftel decided to annualise these costs and include them in the rental because it was concerned that adding them to the connection charge could lead to over-recovery of costs in those cases where a loop reverts to BT and the asset still has a useful life. Further details on this pricing principle are contained in the August 2000 Statement.

Changes to the rental charge

1.29 The final rental charge is over 20% lower than the draft one. The charge has been reduced because of additional information obtained by Oftel as a result of the consultation process and of further analysis of the cost elements. The reduction is due to changes in:

Training costs

1.30 As explained in the June 2001 draft Determination, Oftel considers that BT should be allowed to recover the training costs incurred when training staff how to handle enquiries about shared access. However, Oftel believes that only reasonably incurred training costs should be included in the rental charge. Moreover, Oftel considers that, when BT’s services benefit from this staff training, they should contribute towards the recovery of the relevant costs.

1.31 BT claims that two training courses are necessary:

(1) a seven-day course for the dedicated customer call reception team which deals with fault reports, queries and enquiries on shared access services; and

(2) a one hour general briefing for all call reception teams (150,151,152 and 154).

The cost of these two courses was included in the draft charges.

1.32 However, having reviewed the content of the courses and BT’s submissions, Oftel has reached the conclusion that it is reasonable to allow one and a half days, rather than seven days, to sufficiently train the dedicated call reception team and, therefore, this cost has to be adjusted accordingly. Moreover, Oftel considers that BT already offers shared access services (ie retail and wholesale DSL services). As such, BT will also benefit from any training of the dedicated call reception staff and therefore it should bear part of the cost. For this reason the cost has been spread across the total volume of all types of shared lines (ie both those that are and are not unbundled) expected over three years. Only the share relative to unbundled loops should be reflected in the shared access rental charge. This approach is consistent with the one taken by Oftel with regard to the training costs related to the introduction of carrier pre-selection. Further details are contained in the January 2001 Final Determination on costs and charges for permanent carrier pre-selection and in the December 2000 Draft Determination on costs and charges for permanent carrier pre-selection.

1.33 As proposed in the June 2001 draft Determination, the training cost has been calculated on the basis of the opportunity cost for BT of training call centre staff (ie the incremental cost thus incurred), excluding general overhead costs. This cost is being recovered over three years, as this reflects more closely the period over which the training will have value.

Cost of testing lines

1.34 The rental charge includes the estimated cost that BT will incur for performing manual tests on a shared line when faults are reported to it from the end user and the sharing operator. This cost depends on the average number of tests that BT has to perform every year on a shared loop and on the cost of performing a manual test.

1.35 In March 2001, BT provided Oftel with an estimate of the cost BT expected to incur to test fault reports received on shared lines. This estimate was based on fault data BT derived from its ADSL service. In the June 2001 draft Determination, Oftel proposed changes to this element of the charge, based on its analysis of the data provided by BT and of the process BT proposed to follow when dealing with reports of suspected faults.

1.36 As a result of the consultation process, Oftel has made a number of further changes to this cost element. The main changes concern the expected number of reports of suspected faults on the broadband service and on the PSTN service that BT receives.

1.37 In the June 2001 draft Determination, Oftel assumed that all ‘broadband only’ fault reports are received by the sharing operator, as it offers the broadband services, and that a large number of these reports would have been passed on to BT for investigation. However, on the basis of the information collected during the consultation, Oftel has now formed the view that it is reasonable to assume that sharing operators will employ some testing procedures to perform fault diagnosis. There is likely to be a high rate of broadband only fault reports. Hence, given the fact that sharing operators will have direct access to the loop, it is not unreasonable to conclude that automatic testing by the sharing operator is both feasible and likely. Therefore, the final rental charge has been calculated on the basis that sharing operators will only pass BT those faults that they cannot repair themselves ie faults that their tests show to be located in the metallic loop. The number of broadband only faults that it is expected sharing operators will report to BT has been estimated on the basis of BT’s data on its ADSL service.

1.38 As for the number of expected reports of faults affecting the PSTN service (‘PSTN faults’) which BT receives from end users, Oftel now considers that the rate employed in the June 2001 draft Determination is not the appropriate one. The data provided by BT, on which the June 2001 draft Determination is based, relate to the first months of operation of BT’s ADSL service. Oftel believes that a more forward looking approach should be used as the rate of reports of PSTN faults is likely to reduce over time due to a ‘learning by doing’ effect. Oftel has, therefore, reduced this rate, to take this into account. Oftel will review this rate when actual data becomes available.

1.39 It has to be highlighted that, as far as PSTN faults are concerned, the costs included in the rental charge are only those incremental to the provision of shared access.

Early diagnosis of fault reported

1.40 In most cases where BT receives a fault report, it will have to perform a line test to determine whether there is a genuine fault that needs repair or not. However, BT can attempt some form of early diagnosis. Early diagnosis allows BT to identify whether the origin of the fault lies in the customer equipment, in the sharing operator equipment or the network without performing a manual test.

1.41 In the June 2001 draft Determination, Oftel considered that BT would be able to resolve 20% of all fault reports it receives from sharing operators and end users by early diagnosis. However, Oftel now considers that early diagnosis could prove useful only for PSTN fault reports (ie those faults reported directly by end-users). Oftel believes that it will be less likely that BT will be able to resolve broadband only faults by early diagnosis, given that these will have been already tested by the sharing operators. Hence, the final charges have been amended to reflect the belief that early diagnosis will reduce the number of tests necessary for PSTN faults, whereas all broadband only faults passed to BT will require testing.

Engineering cost of performing a line test to investigate a reported fault

1.42 Unless early diagnosis has proved successful, BT will have to perform a line test to determine if there is a genuine fault that needs repair or not. To test a line, it is necessary to gain direct access to it and this means that the splitter has to be bypassed to avoid any distortion that it may cause to the results of the test. With the current technical arrangement, the sharing operator owns and maintains the splitter. Therefore, BT cannot use the same procedures it employs on its own ADSL enabled lines. Instead it needs to manually intervene to gain direct access to the line before a test can be conducted. Therefore, a BT technician needs to be physically present at the relevant exchange when performing a line test.

1.43 Different processes are needed depending on whether the reported fault requires repair activity or turns out to be right when tested (‘RWT’). In the latter case the complete job is performed by a frame technician, whereas, in the former case, a field technician is required to perform the repair and to close the job. This leads to different costs. The two processes are discussed below.

Engineering cost of performing a line test to investigate a reported fault when it results that the line needs to be repaired

1.44 This cost item was discussed at length in the June 2001 draft determination and, at that time, Oftel proposed some changes to the time estimates made by BT:

1.45 Having considered BT’s submissions to Oftel on the issue, Oftel confirms its initial view that the total time to be allowed as necessary to perform a manual line test when the line needs repair is 70 minutes.

1.46 The final rental charge reflects these changes.

Engineering cost of performing a line test when the faults results to be RWT

1.47 The cost of this test was discussed at length in the June 2001 draft Determination and Oftel expressed disagreement with the activity based cost approach proposed by BT. Oftel considers the changes it proposed in June 2001 to the calculations are appropriate and that the rental charge should reflect them:

1.48 Having considered BT’s submissions to Oftel on the issue, Oftel currently considers that, as already proposed in the June 2001 draft Determination, the total time to be allowed as necessary to perform a manual line test which turns out to be RWT is 45 minutes.

Handling of fault reports

1.49 Within the draft charges, an element of cost was included which covered the predicted costs incurred by BT’s call centre to handle fault reports on shared lines received from sharing operators and end users. However, Oftel is now aware that BT’s Operational Support System (‘OSS’), which is being modified to support the local loop unbundling products, should allow sharing operators to log fault reports directly on BT’s system, thus bypassing the BT call centre. Therefore, BT’s call centre only has to handle fault reports originating from end users.

1.50 Oftel has taken this into consideration and the final rental charge includes only the cost of the manual handling of fault reports received from end users. In addition, this cost has been recalculated to take into account the reduction to the rate of expected fault reports from end users discussed in paragraphs 1.29 – 1.32 above.

The costs of upgrading non-compatible NTEs

1.51 The network termination equipment (NTE) within an end user’s premises is the unit at which BT’s network terminates and the end user’s begins (extension wiring, phones, faxes, etc). Typically the NTE will be the master phone socket.

1.52 Unbundled loops and DSL deployments, in general, require a phone socket presentation within the end user’s premises. However, not all NTEs provide a phone socket presentation and in these cases, the NTE will need to be changed to one that is compatible with unbundling and DSL deployment before shared access can be provided.

1.53 In the June 2001 draft Determination, Oftel allowed BT to recover the cost of upgrading any non-compatible NTE to NTE2000. The cost of the NTE2000 was corrected to take into consideration the cost savings that BT would have enjoyed because of the enhanced fault detection capabilities of the NTE2000. It was estimated that this would be necessary on 30% of shared lines. This reflected BT’s stated plans at that time and was consistent with the approach taken for fully unbundled loops in the December 2000 price determination.

1.54 BT has recently informed Oftel that it no longer plans to adopt the NTE2000 as the standard NTE. Instead, BT is currently developing possible replacements to the NTE2000, but Oftel understands that no alternatives will be available for deployment until Autumn 2002, at the earliest. Given this uncertainty, Oftel considers that only the cost of an NTE5 should be allowed in those cases where an NTE replacement is required. This cost should be recovered over the expected useful life of the NTE5 (ie 15 years).

1.55 To date, BT has claimed that unbundled loops (shared or full) should be presented at the end users premises on at least an NTE5. BT, therefore, specified that any pre-NTE5 installations would require an NTE upgrade. Since 70% of BT’s local loops are currently terminated using an NTE5, it was assumed that 30% of unbundled loops would require an NTE upgrade and the draft charges were based on this assumption.

1.56 However, Oftel now understands that BT is planning to launch self-install ADSL products. In August 2001, BT published a Suppliers’ Information Note (SIN 346) describing the installation arrangement. The installation arrangement for BT’s self-install products allows BT to use some pre-NTE5 installations. Hence, to ensure non-discrimination, Oftel believes that sharing operators, and indeed operators taking unbundled loops in general, should be given the opportunity to use these compatible pre-NTE5 installations.

1.57 However, BT claims that there are still a number of local loops which terminate on non-compatible NTEs:

1.58 Oftel considers that the lines that feed into PABX are not likely candidates for shared access. Moreover, Home Highway lines terminate on NTEs that are compatible with the provision of DSL services. Therefore, Oftel considers that these two categories of lines should not be included among those that need an NTE upgrade. In addition, Oftel also believes that the other non-standard PSTN lines should be excluded, as BT has not provided sufficient justification for their inclusion.

Bad debt provision

1.59 In the June 2001 draft Determination, Oftel explained that it intended to allow BT to include in the charges for shared access a reasonable provision to cover the risk of customers not honouring their debts (‘bad debt provision’). At that time, Oftel proposed a provision equal to 3% of forecast sales, which was half way between the level of bad debt for retail customers and the level currently experienced for co-location surveys. However, Oftel also mentioned that it was still considering the issue.

1.60 BT claims that the risk of bad debt for the payment for co-location surveys is around 5% and that this should be employed as a proxy for the probability of default on debts for shared access services. Oftel accepts that the data on co-location surveys provides some evidence that expected defaults on debts for shared access services are likely to be above the level experienced in retail services (around 1%), but considers that this data cannot provide an accurate guide to expected bad debt arising from shared access. The data provided by BT refer to existing debts for survey costs, which is not a comparable service, and the firms involved are not necessarily representative of the debtors for shared access services. Therefore, Oftel considers that 5% is not a reasonable level of provision for shared access charges and confirms that it considers 3% to be the most appropriate value for shared access services given the limited information available at the present time.

1.61 Oftel currently believes that the appropriate level of bad debt provision may vary between services and over time. Oftel, therefore, considers that the position taken here does not it in any way set a precedent for appropriate levels of bad debt provision for other services.

Final rental charge

1.62 After the changes discussed above, it is directed that the final rental will include the following costs:

1.63 As proposed in the June 2001 draft Determination, no margin on sales has been allowed in this charge.

Wholesale selling cost and overheads

1.64 This cost category includes all the incremental on-going costs incurred by BT when offering shared access products (such as computers, stationery and fleet costs). Fault handling costs, training costs, the provisions for bad debts and the customer guarantee scheme (‘CGS’) all fall within this category.

Customer guarantee scheme

1.65 BT currently offers a CGS on all its PSTN lines, under which it assures that a number of conditions will be met in the provision of the PSTN services and it guarantees that compensation will be paid if these are not fulfilled. One of these conditions is that the PSTN service will be restored within a specified time after notification, in the event of a failure. If this target is not met, BT is liable to pay a penalty to the customer for each additional day it takes to restore the PSTN service.

1.66 BT claims that, because of the need to perform manual tests on shared lines, repair times for the PSTN services it offers on these lines will be longer. Hence, it claims that there is an increased chance that BT will not be able to meet its CGS obligation and it will have to make more penalty payments to its PSTN customers on shared lines compared with PSTN customers on non-shared lines. Since these additional refunds are incremental to shared access, BT submits that these should be included in the rental charge.

1.67 Oftel included a contribution towards the additional cost of maintaining the CGS in the draft rental charge, but it has also examined alternative solutions as follows:

1.68 However, Oftel has reached the conclusion that the best solution is the one proposed in the June 2001 draft Determination: BT should offer the same CGS to all its PSTN customers, regardless of whether the loop is shared or not, and the additional cost for achieving this on shared loops should be met by the sharing operators through the rental charge. This solution appears to be the most practical, fair and reasonable. Both solutions (1) and (2) discussed above would penalise BT’s PSTN customers who decide to take up broadband services from an alternative operator (ie to share their line) compared to those who take these services from BT, as the latter would still be covered by the CGS. In addition, solution (2) would complicate the shared access service offering because it would require BT to offer PSTN services on shared lines with different CGS arrangements. This would require significant additional system set up costs which would be recovered through the connection charge paid by the sharing operators.

1.69 As a consequence of Oftel’s decision, BT’s PSTN customers taking DSL services from an alternative operator will enjoy the same terms and conditions as standard PSTN customers or PSTN customers taking ADSL services from BT. Any delay in repairs due to the higher fault rate of shared lines will still be compensated under the CGS. This contribution would become unnecessary if BT were to adopt some form of automatic testing, as this would bring the repair time in line with the standard PSTN service.

Upgrading lines with pair gain equipment

1.70 Where there is a shortage of loops in the access network, BT has used pair gain equipment to meet the demand. Pair gain equipment allows BT to use a single loop to serve two PSTN customers. However, shared access and DSL deployments in general are not compatible with pair gain equipment. Therefore, it will be necessary for BT to provision a new loop to any end users that request a shared loop.

1.71 Oftel considers that BT should average the costs of installing these new lines over all loops and recover it over the assumed life of a copper loop and include it in the rental charge. This approach is consistent with the one taken for fully unbundled loops.

1.72 The costs that are recovered through these charges corresponds to a network in which 4% of all end users are connected using pair gain equipment (where the number of BT’s end users is that prevailing in December 2000). More details on this issue can be found in the December 2000 price determination. While Oftel cannot fetter its discretion in relation to future determinations, it is currently expected that future directions of charges for shared access will be based on a network with a percentage of pair gain equipment no greater than the rate used in this direction.

The connection charge

1.73 The one-off connection charge has to be paid when shared access is granted to a local loop. This charge covers most of the one-off costs incurred by BT to provide shared access to a loop. The one-off costs which are not included in this charge have been annualised and included in the rental (ie upgrade of non-compatible NTEs and of lines with pair gain equipment).

Changes to the connection charge

1.74 This charge has been reduced by 8% as a result of additional information obtained by Oftel during the consultation process and of further analysis on the relevant cost base. The reduction is due to changes in:

Exchange engineering costs

1.75 Every time a shared loop is provisioned:

1.76 Figure 1 and Figure 2 below show the configurations before and after these operations have been performed.

Figure 1: A local loop before unbundling

Figure 2: A shared local loop under the current agreed technical configuration

1.77 This process has been discussed in detail in the June 2001 draft Determination. At that time Oftel proposed to reduce the time estimate made by BT from 95 minutes to 75 minutes. Oftel now is of the view that this time estimate should be reduced to 67.5 minutes.

1.78 Among the changes proposed in the June 2001 draft Determination, there was a reduction to the travelling time taken by a frame technician to get to the relevant exchange where he will install the connection. Oftel included only the travel time of the frame technician to the exchange (15 minutes), as the travel time from the exchange to the following job is included in the cost allocated to the following job. Oftel has now concluded that this travelling time should be reduced to seven and a half minutes. Oftel considers that, given that BT has up to three or five days (depending on whether or not it has to replace the NTE) to install the connection, it has the opportunity to group several installations together when planing the exchange visit. Therefore, Oftel believes that the further reduction in the travelling time is appropriate and will provide an incentive for BT to exploit these economies of scale.

Volumes for system set up costs recovery

1.79 BT has incurred significant set up costs to modify its operational support system (‘OSS’) so that it could offer automated handling of orders and fault reports and other exchanges of information relating to unbundled loops. Some of the changes introduced are specific to the provision of shared access, while others are common to the provision of both full and shared access. In the August 2000 Statement, Oftel accepted BT’s proposal that these set-up costs should be recovered through the connection charge and would be so for the length of time necessary to ensure that BT fully recovers these costs. However, Oftel considered that, if the actual volumes differed from the ones on which the size of the contribution had been set, it would be more appropriate to vary the length of the recovery period rather than the amount of the charge. The final charges, as were the draft ones, are determined on this basis. Moreover, the charges are also based on the additional principle, discussed in the June 2001 draft Determination, that:

1.80 This principle is consistent with the concept of cost causation.

1.81 When it determined the charges for fully unbundled loops, on the basis of the volume forecast provided by BT, Oftel agreed with BT that the OSS costs should be recovered through the connection charge over a period of five years. In setting the draft charges, Oftel used the same forecast for fully unbundled loops employed in December 2000 and BT’s most recent forecast for shared loops (from April 2001). However, during the consultation process Oftel has collected additional information on the expected level of demand for shared loops and this has proved to be higher than BT’s forecast, even in a scenario of moderate take-up. Oftel has, therefore, decided to amend the volume forecast on which the final charges are based to incorporate this data. At the same time, Oftel has decided to moderately reduce the forecast for fully unbundled loops to take into consideration the current changes in market conditions and the reduced interest in LLU. These changes have resulted in a slight reduction of the overall forecast volumes of unbundled loops.

1.82 The forecast volumes employed by Oftel, even after this reduction, differ from the ones proposed by BT. BT claims that the resulting charges are too low and that it will take BT an extremely long period of time to recover all OSS costs. Oftel understands BT’s concern about the recovery of system set-up costs and is still firmly of the view that BT shall recover all reasonably and necessarily incurred system set-up costs. However, it believes that, at such an early stage, and given current market conditions, it is difficult to predict the number of loops that will be unbundled in the next five years. Moreover, Oftel notes that to under-estimate the volume of unbundled loops risks becoming a self-fulfilling prophecy, as it gives rise to a charge which will appear so unattractively high that interest will wither and would paradoxically reduce, to a significant extent, the chance of BT recovering its costs. Therefore, in setting the final charges Oftel has used information from a number of sources rather than relying only on BT’s forecast.

1.83 Oftel considers that the volumes used in calculating the final charges for shared access are broadly consistent with BT’s business plan for the roll-out of DSL services and with the responses received during the June 2001 consultation. Moreover, these volumes ensure consistency between the charges for fully and shared loops.

1.84 Nevertheless, Oftel accepts that it is difficult to accurately forecast volumes at this stage of the development of the LLU market. Therefore, Oftel intends to monitor closely the development of this market and will review the issue of the system set-up cost recovery at the next determination of shared access charges. If at that point BT’s does not 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 an alternative recovery mechanism would be more appropriate.

Final connection charge

1.85 After the changes discussed above, the final connection charge includes the following costs:

1.86 As proposed in the June 2001 draft Determination, no margin on sales has been allowed on this charge.

Carrier pre-selection re-provisioning

1.87 This contribution, which was already included in the draft charges, is the expected cost for BT to re-provision carrier pre-selection (‘CPS’) on unbundled shared lines.

The RWT charge

1.88 The RWT charge is a per occasion charge. It has to be paid when a sharing operator reports a suspected fault on a loop to BT which, after initial testing, is not found (ie it is RWT). The charge covers the costs incurred by BT to investigate the reported fault. A sharing operator may also request BT to undertake further investigations in addition to the standard test. In these cases, the shared operator will be separately charged for the cost of these additional activities.

1.89 RWT refers to the case where, following a reported fault, the line test shows that there is no fault on the metallic local loop. Of course the loop is only one part of the complete system and it is possible that faults could occur elsewhere. However, BT is only responsible for faults located on the metallic local loop. Hence, if a genuine fault is present, but it is not in the metallic local loop (eg it is in the equipment of the sharing operator), it would still be considered as RWT and billed as such. The aim of the per occasion RWT charge is to provide sharing operators with an incentive to check whether the service failure is due to a fault which is under their control and responsibility before reporting it to BT.

1.90 In the June 2001 draft Determination, Oftel stated that, from the data produced by BT, which refer to its ADSL service, a significant proportion of the reported faults turned out to be RWT. On the basis of this data, and the assumption that the sharing operator would have very limited testing capabilities and would pass most fault reports to BT, Oftel estimated that a sharing operator could expect to pay between £15 and £25 per loop per year in RWT charges. However, since, as discussed in paragraph 1.29, Oftel now believes that sharing operators will employ some form of automated testing, this should largely result in only genuine line faults being passed to BT for testing and repairs.

1.91 In addition, Oftel considers that, in line with the principle of cost causation, the RWT charge should include the cost incurred by BT not only in testing, but also in handling, the fault reports that result to be RWT. However, as discussed above (in paragraphs 1.48 – 1.50), Oftel believes that all fault reports BT receives from sharing operators are handled through the automatic OSS. Therefore, no recovery for fault handling costs should be included in the RWT charge.

Final RWT charge

1.92 The final RWT charge, therefore, should include:

1.93 As proposed in the June 2001 draft Determination, no margin on sales has been allowed on this charge.

1.94 Oftel considers that this charge ought also to apply to fully unbundled loops.

The disconnection charge

1.95 The disconnection charge covers the costs incurred by BT when reverting a shared loop to a BT provided PSTN only loop. The disconnection charge applies when sharing operators return a shared loop to BT within 48 hours of being unbundled. The charge also applies if the loop is returned to BT after 48 hours and the customer is not taking any broadband service from BT. However, if the shared loop reverts to BT after 48 hours and the customer takes broadband services from BT over it, then BT should incur the disconnection cost. When the shared loop is transferred between Operators, the disconnection charge should be borne by the operator who is gaining the customer.

Final disconnection charge

1.96 The final disconnection charge, as proposed in the June 2001 draft Determination, includes the following:

1.97 As proposed in the June 2001 draft Determination, no margin on sales has been allowed on this charge.

The conversion charge

1.98 The conversion charge applies when an end user with a shared loop ceases BT’s voice services and the sharing operator retains the previously shared loop. In this situation the sharing operator becomes the sole user of the loop and, therefore, it is deemed that the loop is fully unbundled and it is charged accordingly.

1.99 In the June 2001 draft Determination, Oftel proposed to eliminate this charge on the grounds that the activity necessary for a conversion is equivalent to the activity performed by BT when an end user ceases BT’s telephony service. Therefore, BT does not incur any incremental costs when it converts a loop.

1.100 When a standard PSTN customer cancels the service, BT will normally ‘stop’ the line (ie deactivate the service from a central control) and subsequently may remove the jumper at a later time. When a shared loop is converted into a fully unbundled loop, BT has to perform exactly the same activity, ie deactivate the telephony service with the possible subsequent removal of the jumper.

1.101 As was discussed in the June 2001 draft Determination, Oftel considers it is inappropriate to include any contribution for system set up costs. System set up costs should be recovered only through the connection charge, as stated in the pricing principles (contained in Oftel’s August 2000 Statement). In addition, Oftel believes that BT is already recovering wholesale selling costs and overheads in the connection and rental charges for the PSTN line and that, therefore, no such costs should be included in the conversion charge.

1.102 Oftel accepts BT’s claim that it may incur some administrative costs in updating its billing records when a loop is converted from shared to fully unbundled. However, BT has provided no estimate of these costs. Furthermore, total billing costs appear to Oftel to be a very small element of shared access costs. Therefore, given the lack of cost information and the fact that it is unlikely that, in the relatively short term, there will be requests for conversion of loops, Oftel considers that the Reference Offer should not include a charge for converting a shared loop into a fully unbundled one. Oftel intends to revise this charge at the next review of the charges for shared access.

1.103 Therefore, Oftel confirms the proposal made in the June 2001 draft Determination ie that no charge should be made when a shared loop is converted into a fully unbundled one.

Annex A

How a reported fault is processed and charged for

A.1 This Annex discusses in more detail the assumptions employed by Oftel in assessing the likely costs that BT will incur in handling fault reports and in testing and repairing faults. Figure 3 and Figure 4 below show what happens to the faults experienced by the end users from the moment he/she reports them and how the costs that these fault reports generate to BT are recovered.

A.2 As mentioned in paragraph 1.27, in the absence of actual data on faults experienced on shared loops, the rates employed to calculate these charges are based on BT’s ASDL service. BT considers that this data is commercially confidential and, as such, should not be released into the public domain. Therefore, the rates that accompany Figure 3 and Figure 4 shows are letters and percentages rather than actual numbers. This implies that from these figures it is not possible to reconstruct the rate of RWT fault, the rate of fault reports and the other fault rates experienced by BT, but it is possible to understand the calculations employed to arrive to the fault related element of the rental charge.

A.3 The two figures are divided into three boxes. Each describes one of the phases a fault report would go through: fault reporting and handling of these reports, testing of fault reports and charging of RWT faults, and fault repairing.

A.4 Figure 3 explains how a fault that affects the PSTN service, or both the PSTN and the broadband services of an end user is dealt with and who bears the costs of the various activities. For the sake of simplicity, these faults are all referred to as PSTN fault, as they are faults that always affect, at least, the PSTN service.

A.5 The first box shows that the end user who experiences a PSTN fault reports it to BT and that the cost of handling this PSTN fault reports is charged in the rental charge. The second box shows that BT will attempt some early diagnosis of these fault reports. Early diagnosis allows BT to identify whether the origin of the fault lies in the customer equipment or in the sharing operator equipment or network without performing a test. It is expected that BT should be able to resolve 20% of all PSTN fault reports by such means. The remaining 80% will have to be tested. The cost of testing these faults is charged independently from the result of test (RWT or genuine fault). The reason why a PSTN fault report that turns out to be RWT is still included in the rental charge and is not charge per occasion is that the per occasion RWT charge has been introduced to give an incentive to investigate the fault before reporting it to BT. As such, the RWT charge achieves its aim only when it can be charged to a sharing operator. When the fault is directly reported by the end user, a RWT charge would be inappropriate. Therefore, the cost of the tests for faults reported on PSTN services that result as RWT are included in the rental charge.

A.6 The third box shows that BT repairs all the fault reports that have proved to be genuine after testing and the relevant costs are included in the rental charge.

A.7 It has to be highlighted that, as far as PSTN faults are concerned the costs included in the rental charge are only those incremental to the provision of shared access. The costs that BT would have incurred anyway had the loop not been shared are not included in this calculation.

Figure 3: Flowchart of how a fault that affects the PSTN service or both PSTN and broadband (BB) services is processed and charged for

Key
Y= number of suspected PSTN and PSTN + BB faults reported on average by an end user every year on a shared line
B= proportion of faults that result to be genuine after test
A= proportion of faults that result to be RWT after test
B+A= 1

A.8 Figure 4 explains how a faults that affects only the broadband services of an end user is dealt with and who bears the costs of the various activities. These faults will be referred to as ‘broadband only’ faults. The first box shows that the end user reports the broadband only fault he/she experiences on his/her broadband service to the sharing Operator who provides him/her with service. The sharing Operator will test these reports and will pass to BT only those that are on the metallic local loop and are, therefore, under BT’s control and responsibility. The reports of broadband only faults made to BT are handled automatically via the OSS and therefore no fault handling costs are included in the rental. Whereas (as explained above in *) the reports received by end users are dealt with manually and the relevant cost is charged in the rental.

A.9 The second box shows that BT is responsible for investigating all the broadband only fault reports that it receives from sharing Operators and that it tests all of them. Oftel believes that, while early diagnosis will prove useful for faults reported by end user, it will not prove so for faults reported by a sharing Operator, as the Operator will have already tested the fault. The cost of testing broadband only faults is charged in the rental if, from the test, it results that the fault is genuine. Whereas, if the fault turns out to be RWT, the cost of the test is included in the per occasion RWT charge. The rationale is to give the sharing Operator an incentive to carefully investigate the broadband only fault before passing it to BT. It is expected that the number of broadband only faults reported by sharing Operators that result to be RWT will be minimal, because sharing Operators will test the fault reports they receive from end users before passing them to BT. Therefore, they should pass to BT only genuine faults on the metallic loop. The third box shows that BT repairs all the broadband only fault reports that have proved to be genuine after testing and the relevant costs are included in the rental charge.

Figure 4: Flowchart of how a fault that affects only the broadband (BB) service is processed and charged for

Key
X= number of suspected BB only faults reported on average by an end user every year on a shared line
W= fault reports repaired directly by the sharing Operator

Annex B

Responses to consultation

Consultation background

B.1 In June 2001, Oftel published a consultation document, Consultation on draft Determination imposing changes on the reference offer of BT in relation to prices for shared access to the local loop in accordance with article 4(2) (a) of the EC Regulation no 2887/2000, which set out its proposals for changes to BT’s charges for shared access to the local loop.

List of respondents

B.2 Oftel received submissions from the following organisations (in alphabetical order):

B.3 Together with two commen