Statement and Direction issued by the Director General of Telecommunications

15 November 2001

Contents

Also published with this document:

Local Loop Unbundling: Industry Interface Data Standard for Provision and Repair (click to download .pdf file)

Summary

S.1 A group of operators participating in the local loop unbundling process has asked the Director General to decide a dispute between them and BT relating to the level of service BT offers for unbundled access to its local loops. The operators' request raised a number of issues, including:

• the amount of fixed compensation (‘liquidated damages') which BT pays to operators where it fails to perform its contractual commitments;
• the time periods within which BT must provide services;
• the degree of effort BT must use to perform its contractual commitments;
• the way in which any costs of offering fixed compensation should be recovered
• concerns over the availability of an efficient automated ordering system for provisioning and repair of local loops;
• the time when the determined service level commitments come into effect.

S.2 The Director has addressed these issues by requiring BT to amend the terms on which it offers LLU services to operators (the ANF Agreement). A copy of the Direction doing this is attached to this statement.

S.3 A basic principle underlying the Director's Direction is that, where BT provides equivalent or comparable products and services both to itself and to another operator, the terms of supply to the other operator should give BT an incentive to provide those products and services to the same levels of service as those that apply when it supplies itself. However the fact that the requirement to provide fixed compensation acts as an incentive on BT does not mean that that compensation amounts to any form of penalty (and in any event it could not do so). It should compensate the operators for BT's failure to perform to the required service level.

S.4 The standard amount of compensation should also be based on a genuine pre-estimate of an average operator's resulting loss. Both of these principles formed the basis of the Director’s first determination on the ANF Agreement (21 February 2001), and also underpin this Direction. The proposed levels of liquidated damages take into account the fact that an operator, in an appropriate case, may be able to claim for damages over and above the fixed compensation.

S.5 The Director believes that the most appropriate measure of loss is the forecast Average Revenue Per User (ARPU). Oftel has received evidence in confidence from BT and operators as to their forecast ARPUs, and taking this evidence into account, the Director proposes to set a rate of fixed compensation of £10 per working day or part for the unavailability of a loop. This figure will be reviewed regularly – a review no more often than every six months on request by BT or the OLOs or on the DG’s initiative seems appropriate.

S.6 The Director has determined that the appropriate amount of compensation for delay be derived from the number of loops which would have been provided if the facility had been available in accordance with BT's contractual commitments. On the basis of information currently available, Oftel believes that the amount of fixed compensation for unavailability of co-location should be £80 per operator per working day in relation to each exchange. This figure also will be subject to periodic review.

S.7 Where BT is required to provide a service, it must do so in accordance with prescribed service standards or to at least the standard it would apply to itself in equivalent or comparable circumstances: a ‘best endeavours' obligation. Where possible it should offer unqualified time limits for contractual performance. The Direction makes changes to BT's current ANF Agreement to achieve this.

S.8 The operators were also concerned that BT would, if it were required to pay ‘liquidated damages', simply re-charge the full cost back to operators. BT is entitled to charge a cost-oriented price to operators for the LLU services it provides. The issue is, therefore, what is an appropriate cost to be taken into account for these purposes. The Director takes the view that that cost should be limited to the provision which a reasonably efficient contractor providing similar services would charge. On the basis of the information available to it, such a provision, in relation to the price for co-location build offered by BT, should not exceed 1% of that price.

S.9 Operators also expressed concern about the unavailability of an automated system for handling orders for loops and for reporting faults. BT originally intended to begin offering a service to do this on 2 July 2001, but this did not prove possible. BT's revised delivery date is 5 November 2001. BT is subject to binding obligations to offer unbundled access to the local loop under the EC Regulation 2887/2000 (‘the Regulation’). Since 1 January 2001 BT must meet reasonable requests for unbundled access to its local loops and related facilities under transparent, fair and non-discriminatory conditions.

S.10 "Related facilities" means the facilities associated with the provision of unbundled access to the local loops, relevant information technology systems, access to which is necessary for a beneficiary to provide services on a competitive and fair basis. The Regulation makes it clear that, as a minimum, all facilities listed in the Annex to the Regulation must be offered, Item C of the Annex includes information systems for provisioning, ordering, maintenance and repair of unbundled loops and related facilities. For an operator to have to process both orders and faults with BT on a manual basis would be a significant burden to an operator providing significant service volumes on a competitive basis.

S.11 To meet this obligation and anticipated demand, BT started as long ago as the middle of 2000 to develop a system to handle orders. The Director therefore proposed in his draft Direction to require BT to ensure that it can handle orders within the forecast range on an automated basis (for which the interface requirements have already been agreed) from 5 November. If it did not do so, in principle it should compensate the operators for the additional cost of having to deal with the orders manually and fault handling. However, given the current level of orders for unbundled loops, and the fact that BT has already put into operation a version of the OSS which is capable of handling loop orders, the Director does not now think that these provisions should be brought into force immediately. Rather, he will require BT to bring the relevant provisions in the ANF Agreement into effect (on reasonable notice) if he considers that conditions warrant this.

S.12 Oftel has been requested to backdate the effect of the Direction to 30 April 2001 (the date when the February determination required BT to offer reasonable service level commitments). Oftel believes that it is reasonable to do this in relation to the amendments to the timescales within which BT is committed to providing service (Parts II – IV). However, as respects fixed compensation, these shall only apply to orders placed after 30 April and on terms which comply with the Director's directions and determinations.

S.13 More detailed reasons for Oftel's views are given in the remainder of this statement.

Chapter 1

Background

1.1 On 21 February 2001, the Director made a determination of a dispute between a group of operators and BT as to the reasonableness of a number of terms in BT's reference offer for unbundled access to the local loop – an offer known as the ANF (Access Network Facilities) Agreement. In that determination, in addition to determining the issues which were referred to him as the subject of the dispute at that time, the Director also directed BT to include further terms in its reference offer.

1.2 One of the requirements on BT was the obligation (set out in paragraph 2.1.4 of the Annex to that determination) to offer specific timescales and service level commitments for access network facilities as follows:

Initial provision of service

• Delivery and completion timescales
• Testing and handover of facilities

Ongoing service levels

• Fault handling and repair
• Service availability
• Support service levels

1.3 The statement accompanying the February determination made it clear that one of the important principles underlying the determination is to ensure that BT is under the same economic incentives to provide ANF services to third parties as it would be when providing equivalent or comparable services for its own business. However in the first instance, commercial negotiation between BT and the operators is the preferred method of deciding what service levels should be provided and what compensation should be paid for failure to meet those service levels.

1.4 The Director nevertheless determined that BT should include some compensation provisions for failure to meet service levels in its offer published to comply with the ANF Determination. The ANF Determination directed (paragraphs 2.1.6-2.1.7 of the Annex) that:

1.5 The scheme of compensation payments was set out in more detail later in the determination (Annex, 2.3.2-2.3.3):

1.6 On 30 April 2001, BT published a new Part VI to the ANF Agreement which contained its offer for service levels for supplying unbundled access to the local loop and related services and for automatic compensation for failure to perform to those service levels. This Part was not the subject of agreement with the operators at that point and negotiations, particularly as to the level of compensation payable by BT for late performance, continued.

1.7 The levels of compensation offered by BT in its 30 April offer can be summarised as follows:

1.8 On 17 May 2001 the operators' group wrote to Oftel requesting the Director to intervene to set a reasonable level of liquidated damages. The operators maintained that the levels of compensation offered by BT were unreasonable and should be increased. They also said that the method of calculation of the compensation offered by BT was not compliant with the ANF Determination which required compensation levels to be a reasonable pre-estimate of the operator's likely losses rather than the amounts that BT itself could recover from its sub-contractors.

1.9 During informal discussions with the operators and with BT, it became apparent that, in addition to the amount of liquidated damages, there are other areas relating to quality of service where the operators request the Director General's intervention. In late June and early July 2001, those concerns crystallised as a consequence of meetings between Oftel and operators.

1.10 Having considered the submissions made by the various parties and the SLA drafted by BT, the Director also considers it appropriate to ensure that any SLA provided by BT makes provision for BT to respond to reasonable requests for services from Operators, and provides Operators with facilities which are equivalent to those provided for BT's own services. This is required by Article 3(2) of EC Regulation 2887/2000 and, where necessary the Director General has included a requirement in the Direction to reflect the need for BT to ensure compliance.

1.11 Furthermore, the Director may intervene of his own initiative under the EC Regulation where justified to ensure non-discrimination, fair competition, economic efficiency and maximum benefit for users.

1.12 Accordingly, the Director considers that a requirement that BT meets reasonable requests for enhanced services is necessary for BT to comply with the principle of non-discrimination, and Article 3(2) of the Regulation.

1.13 The operators believe that the February determination has not been complied with as BT has not offered unqualified service level commitments for the services and facilities it is required to provide under the ANF Agreement.

1.14 Further, they argue that references in the Agreement to the level of effort to be undertaken by BT are either completely absent (contrary to the determination) or merely refer to "reasonable endeavours" (contrary to the statement that accompanied the determination). The operators believe that BT should be made to comply with the ‘best endeavours’ standard either under the existing determination or by a further determination.

1.15 The differences between the SLAs drafted by the operators and BT include differences as to the level of fixed compensation.

1.16 The operators therefore approached Oftel in July 2001 to request the Director General to resolve their dispute with BT on the outstanding issues. The areas in dispute were summarised in the consultation document on this statement, published by the Director on 23 August 2001. BT’s initial comments on the points which had been put to it during the negotiations which preceded the request were summarised at paragraph 2.21 of the August document.

1.17 The Director’s findings and conclusions as a result of his consideration of these arguments, and those put to him during the course of his investigation, are set out in the remainder of this Statement and the accompanying Direction.

Chapter 2

Evidence on ARPU and operators' costs

Average revenue per user

2.1 A number of operators and BT have provided Oftel in confidence with details of the revenue per user (ARPU) likely to be received from the provision of DSL services over unbundled local loops. BT argued that ARPU should be based on its own ARPU for each loop of £400. The Director has rejected this argument: BT's ARPU is not relevant to an operator's likely loss. The operators' business plans are based on the plan that an operator's typical customer will have a different spending profile to a BT customer since they will, for the most part, be purchasing broadband services.

Products likely to be offered

2.2 A number of operators confirmed that they intend to offer a bundle of services to the business market (ranging from small firms with a single site up to large enterprises such as public sector organisations). At the initial stage of rollout, none of the companies expressed an intention to offer services to the residential market in the immediate future. If they later do so, this can be reflected in any revision of the ARPU used for the calculation of fixed compensation.

2.3 All of the operators who spoke to Oftel stated that they intended at some point to offer voice telephony (as an optional extra) together with data based services as part of their bundle of services. The products offered would cover a data rate ranging from a downstream speed of approximately 250kb/s up to 3Mb/s (thereby potentially attracting existing users of broadband and various types of leased line services).

Projected number of customers

2.4 Where indications were given concerning the projected average number of customers likely to be secured by operators each month, the figures ranged from six to 32. However, the majority of these anticipated 32 customers would be very small enterprises supplied with a bundle including high speed Internet access together with basic voice service.

2.5 Where indications were given on the total number of customers likely to be connected to each exchange in the first six months of the DSL rollout, the figure ranged from 11 to 48. The number of customers likely to be connected to each exchange per month (based on the number of customers that had connected up to BT's ADSL product over a period of four months) ranged from three to four customers per month (at the most popular exchanges) to one to two customers per exchange (for less popular sites).

Annual average revenue per user

2.6 The operators confirmed that their charge for DSL services would be based on a one off connection fee together with a monthly rental charge. The installation fee ranged from £250 to £1000, while the monthly rental charge ranged from £100 to £1500 (the higher charge would apply to those customers connecting to services with a downstream rate of 2Mb/s or above).

2.7 The estimates of likely ARPU (derived from forecast ongoing income) ranged from approximately £600 (based on a DSL product providing only basic data services) to over £5500 (for a bundle of services which would include voice as well as advanced data transmission services). One operator indicated that they consider that a figure of approximately £3,000 per customer per year (£12 per working day) would represent a reasonable sum for the assessment of liquidated damages. BT argued that the ARPU should be adjusted if the operator can use another solution, such as its own xDSL wholesale product or carrier pre-selection. But CPS is an alternative voice telephony product whereas the operators are at present approaching mainly broadband (high speed internet etc) customers. Where an operator chooses to supply its customer through Option 4, the Director believes that he should be able to do this, and to be able to terminate the ‘option 4’ contract on short notice. However, in this case the operator would not also be entitled to fixed compensation (see paragraph 3.13), although other contractual damages would still be available.

Annual average revenue per MPF

2.8 The quantity of loops required for each individual customer is dependent on a number of factors including the type of services to be provided, the distance from the exchange and the possibility for co-interference from other DSL and radio usage in the area. However, operators confirmed that on average, one loop (MPF) is required for each user. The figures for the average revenue per MPF and ARPU are therefore the same.

Average number of MPFs per exchange

2.9 As part of the co-location ordering process, operators periodically supply BT with an advanced capacity planning forecast. This forecast details the orders the operator wishes to place over the following 12 month period. Using information from operators' forecasts for the next six months (which have not changed substantially since the consultation), it has been possible to calculate the average number of loops requested at each site, by each operator.

Costs of non-availability of Operational Support System (OSS)

2.10 Oftel received information that there were significant extra costs involved in handling orders for loops manually as compared with using an automated system. At the time of the consultation document, and on the basis of the then forecast order rates (which did not appear to Oftel to be unreasonable), the additional cost – primarily in recruiting and retaining staff to do the manual ordering – was between £200,000 and £250,000 over a year for an operator processing approximately 50 orders a week.

2.11 On this basis, the additional level of expenditure amounted to an average extra cost per order placed of approximately £50. This spending would be largely nugatory if an automated system were than made available, since the staff needed are not, in the main, immediately transferable from manual tasks to running an automated system. The figure covers both the direct and indirect costs claimed in the context of shared access.

2.12 However, since the determination request was made, the forecasts for total orders for MPFs from operators as a whole has decreased significantly (in contract to the forcast average number of MPFs per operator). It is, therefore, no longer clear to the Director that the assumptions which were made in the consultation in August still hold true. Furthermore, during the course of the consultation, BT argued that, if it succeeds in provisioning an automated ordering system, them it incurs additional costs in maintaining a manual system for those operators who may decide not to use it. In principle, the Director agrees. He believes that the amount of any compensation payment should be the same whether BT is required to compensate the operators for the additional manual processing costs, or if an operator compensates BT where BT has to process operators’ orders and fault reports manually after the OSS is running properly.

2.13 In the light of these representations and other developments – in particular that, at the LLU operators’ forum on 23 October 2001, BT and interested operators agreed that the pilot of version 1 of the OSS system, due to be implemented by 5 November, had been successfully completed – the Director has decided that it is no longer necessary to require fixed compensation now in the event of non-delivery of the OSS system by BT by that date. It has been delivered. However the system will require ongoing development and it is therefore appropriate, should progress be unreasonably delayed, for the Director to have the power to direct that, in such circumstances a requirement to pay fixed compensation should be included in the ANF Agreement. The Direction has been amended accordingly.

Provision of costs of fixed compensation

2.14 The information currently available to Oftel suggests that normal practice in the building industry – equivalent to the services BT is providing for the purposes of supplying co-location – is varied. For a straightforward build on a vacant site it has been suggested that a contractor would make no provision for the cost of liquidated damages at all, since they are unlikely to be payable. For more complex operations (for example, city centre work), a prudent contractor would include an element of cost to cover his potential liability. Many of the exchanges where BT will be carrying out work will be in city centres and are highly likely to be relatively complex – although fairly modest in scale.

2.15 Having considered the issues, Oftel proposes to approach the issue as follows. Oftel currently believes, on the basis of available evidence, that a contractor might normally take the view that liquidated damages would be payable in about one in ten jobs. On the basis that damages are capped in this Direction and in the contract between BT and the Contractor (see paragraph 3.44) the maximum liquidated damages will be approximately £3,300 (or in the region of 10% of the cost of co-location to an operator). Hence, Oftel believes that the average cost per operator of funding the liquidated damages proposed should not exceed 1% of the cost of providing the facility.

2.16 BT has asked for the criteria which the Director will use for setting the ARPU to be set out in the Direction. Given the relative newness of the market, the Director does not have a clear idea at present of how local loop unbundling will progress. He cannot therefore set out all the criteria he should use in this Direction. What is said above gives the clearest possible indication of the type of approach he will take.

2.17 BT also argued that, in the event of non-availability of unbundled access to the local loop, where an operator’s customers have been supplied with DSL based services purchased on a wholesale basis from BT by the operator and resold, the amount of compensation should be reduced. The Director’s findings on this issue are described at paragraph 3.13.

Compensation

Principles for calculating fixed compensation

3.1 The dispute reference, BT's service level offer and subsequent comments reveal a difference of approach in deciding how to calculate the level of liquidated damages. As a first step, therefore, the Director must decide how to approach the issue of calculating the level of fixed compensation.

The starting point

3.2 The starting point is the Director's February ANF Determination on certain of the terms of the ANF Agreement. That determination required the level of fixed compensation to be a reasonable one made by reference to a genuine pre-estimate of an operator's loss of revenue. There are two elements of this proposition which are important. Firstly, the loss of revenue must be that of an average operator using LLU. Evidence of BT's own ARPU is unlikely to be directly comparable to the losses incurred by operators offering or planning to offer broadband services of different types or to certain categories of end-users (eg SMEs) over unbundled local loops.

3.3 Secondly, the level of fixed compensation must be related to loss of revenue to the operator, not to the cost to BT of performing the contract nor the price charged by BT to the operator for the services to be supplied. This follows necessarily from the principle set out in the explanatory statement to the February ANF Determination. The fixed compensation should represent the loss suffered by the operator. For breach of contract, that loss is the amount that would have been earned (ie revenue) if the contract had been properly performed.

3.4 But, additionally, the incentives on BT to perform in providing unbundled access to the local loop must be the same as the incentives would be on it to perform when supplying equivalent products for its own business. That is, where it is late in providing service (either to itself or to others) the cost to BT should be the revenue from end users lost as a result of that delay. Although the relationship between the price charged by BT to the operators for the service and the fixed compensation arising from delay in providing it is relevant to the Director's consideration as to the reasonableness of any compensation regime, it cannot be the overriding consideration.

3.5 It follows from this that the relevant starting point for the calculation of the level of fixed compensation is the average revenue per user of an average operator providing (or planning to provide) services over unbundled local loops. Operators with higher than average revenues would not be fully compensated for their losses by such a level of fixed compensation, but would have a right to bring a claim for actual loss if it was substantially greater.

3.6 The Director has also taken into account in setting the amounts the fact that, in addition to fixed compensation, an operator will be able to claim general damages where it has suffered significant additional loss. It is therefore misleading to characterise the fixed payments as "liquidated damages" as that term is normally used, since the "fixed compensation" required under this Direction is in effect only a payment on account where the actual loss to the operator from BT's breach of contract proves to be greater.

3.7. There are two further general factors raised by BT and the operators' group which the Director believes need to be addressed separately.

Subcontracting

3.8 First, BT argued that because it has sub-contracted the majority of the work involved in providing unbundled access to the local loop it would be unreasonable for the Director to impose liquidated damages levels substantially above those provided for in BT's contracts with its sub-contractors.

3.9 The Director's view is that this argument should be rejected. The obligation, initially under Condition 83 of BT's PTO licence and now reinforced by EC Regulation 2887/2000, to provide unbundled access to the local loop is imposed on BT, not on its sub-contractors. It is therefore for BT to decide how best to organise its business to ensure that it satisfies those legal requirements: the fact that it has decided to do so by sub-contracting to third parties does not alter the application of those requirements to BT itself.

3.10 The Director has however taken into account the relationship between the fixed compensation regime required as between BT and operators and what he understands to be the current situation as between BT and its own sub-contractors. That is, each sub-contractor being liable up to an amount equivalent to 10% of the cost of his contract. As a result of this and other considerations the Director has placed a cap on the total liquidated damages payable (see below at paragraphs3.39 ff). Moreover the February determination made it clear that the obligation on BT to pay liquidated damages is subject to the force majeure (Act of God) clause in the ANF Agreement, so that events which are outside BT's (or its sub-contractors') reasonable control will not trigger the payment of fixed compensation.

Cancellations, set off and double counting

3.11 The operators argued first that they should be able to recover an element of liquidated damages in respect of customers who cancel altogether in the event of BT's failure to perform its obligations. Second, they said that they should not be required to set off against the amount of liquidated damages any cost savings to them arising from not having to supply the customer.

3.12 On loss arising from cancellations, the February ANF determination provided that BT's obligation to pay fixed compensation is without prejudice to any further cause of action an operator might have against BT for breach of contract under the ANF Agreement. On this basis the Director takes the view that it is not appropriate for the level of fixed compensation to take into account the possibility that customers might cancel their contracts with operators completely. If this were to happen, operators with a good claim would be in a position to produce correspondence with the customer in relation to the matter which could form the basis of any claim for additional damages.

3.13 BT also argues that fixed compensation should not be payable in the event that BT is late where an operator’s customer has been ‘moved’ onto a DSL service supplied by BT on a wholesale basis and resold to the customer by the operator on a temporary basis. BT said that this would amount to a form of double-counting. The Director believes that in principle, an adjustment should be made to take account of the fact the operator is not totally deprived of revenue. Operators who cannot provide their own DSL services to their customers due to BT’s delay in providing Access Network Facilities are able to choose between two options. Firstly they can claim fixed compensation (subject to the caps provided for in the Direction – see paragraph 3.42). Secondly, where BT’s service is available they can purchase BT’s wholesale DSL service and reselling it to their customer. In either case, the operator’s ability to sue under normal contractual principles for any additional demonstrable loss is preserved.

3.14 However, BT currently offers its wholesale xDSL contract with a minimum initial 12 month contract period. This period is likely to dissuade operators from using the xDSL wholesale option to provide service to their customers as a temporary solution. The Director does not here take a view on the overall reasonableness of BT’s minimum period. But if the sole reason for an operator and his customer purchasing BT’s xDSL service is BT’s delay in performing its obligations under the ANF Agreement, the Director takes the view that this 12 month period is too long in such circumstances. Accordingly, he has directed BT to permit operators to terminate their xDSL contracts on one month’s notice in such circumstances.

3.15 As to whether BT should be permitted to set off any cost savings against the fixed compensation payments, the level is set by reference to a reasonable pre-estimate of an average operators' lost revenue. Many of the costs which will have been incurred in advance of any delays by BT will be irrecoverable by the operators and the extent to which any costs can be recovered is likely to vary considerably from case to case. Accordingly, the Director has decided that there be no right for BT to set off an operator’s reasonable costs against fixed compensation. However this does not mean that such a right could not be claimed by BT in the event of an action by an operator for further damages above the liquidated level.

3.16 BT however raised a slightly different, but related point. If liquidated damages are to be based on the ARPU of an efficient operator, then (BT argued) that ARPU should be reduced by the amount of revenue from the customer which the operator could reasonably have recovered by offering alternative services. The correct approach would be only to take into account an efficient operator's unavoidable loss of ARPU. But the Director does not believe that it is possible to devise an "average avoidable revenue loss" as would be required by this approach. Instead, the fact that not all revenues will necessarily be irrecoverable has been considered as part of the overall assessment of the appropriate level of fixed compensation.

3.16 BT also raised the fair point that Operators should be not able to claim fixed compensation twice in respect of a delay which causes more than one element of a project to miss a deadline. Therefore, the Director General has provided that where a delay would cause compensation to be paid under more than one separate provision for compensation, and the days during which the delay takes place are the same only one set of fixed compensation is payable.

Fixed compensation for loop unavailability

3.17 The ARPUs supplied by operators varied considerably from £500 to over £5,000 depending on the business model of the operator in question – in particular the customer sector to be served and the technology to be used. Setting the amount of liquidated damages for unavailability of each loop, on the basis that a standard figure is to be applied to all operators, has to represent a reasonable figure derived from a range of evidence made available to Oftel on a confidential basis by operators.

3.18 On this basis, the Director intends to set an initial level of liquidated damages for each loop of £10 per Working Day (as that term is defined in the ANF Agreement) or part thereof. This amounts to an annual revenue of £2,500 on the basis that there are approximately 250 Working Days a year. The Director believes this level is justified on the basis that a number of operators are planning to commence their services with offerings aimed at the small business market (possibly moving to residential customers in the medium term). He therefore expects that ARPUs will therefore be greater than those derived solely from residential customers. He also understands that a number of operators may be planning to use SDSL technologies over local loops, which permit a wider range of services to be delivered to the customer than the ADSL technology currently in use (by BT amongst others). This too would imply that revenues are initially likely to be above the average ARPU on a long term basis. However, an ARPU above this level could not be justified as a basis for liquidated damages applied across the field. In particular, as mentioned above, an efficient operator should be able to take steps to reduce the loss of revenue in the event that BT fails to perform.

3.19 In fixing the anticipated revenue the Director has noted that the operator will not be paying rent for the MPF (about £2.35 a week).

3.20 Operators would not be entitled to fixed compensation above the amount based on ARPU. For example one-off connection fees would not be recoverable by way of liquidated damages, particularly since their receipt is likely to be deferred – operators will be able to charge them when the service can be provided. In any event, operators can claim for damages above the fixed rate if they have suffered losses above that amount.

3.21 Since the ARPUs of operators are currently only prospective, the figure for fixed compensation will need to be revised at regular intervals, but no more often than every six months. The levels of fixed compensation have been calculated on the basis that initially the large majority of users will be small businesses with bigger spends than residential customers. If DSL-based technologies supplied by operators penetrate the residential segment to a greater extent than expected this will affect the calculation.

3.22 BT has also argued that its annual rental for a loop does not include in its cost stack an element for payment of liquidated damages. But BT should not be able to recover compensation paid out resulting from its own inefficiency. Given the likely level of fixed compensation payments, the £122 annual rental is already likely to be sufficient to cover them.

Fixed compensation for late delivery of related facilities

3.23 The Director has decided that fixed compensation for late delivery of related facilities should be related to the number of loops that that are affected by late delivery. An operator's loss is its loss of revenue from customers supplied late (or not at all). This gives BT the same incentive to prioritise its build and repair effort on the most serious problems (that is, those which affect the most end-users) as it has to get its own customers supplied. The method of ensuring this is as follows (for each type of service currently supplied).

Co-location (including co-mingling)

3.24 Where BT fails to deliver co-location within contractual timescales, the principle must be that BT should pay fixed compensation to operators who would otherwise have been able to place firm contractual commitments for MPFs (unbundled loops) at that site. The liquidated damages would be payable at the rate of £10 per working day multiplied by the number of loops for which firm orders would have been made but for the late delivery of the co-location facilities.

3.25 Oftel recognises that, given that operators cannot order loops before the co-location facility is ready for use, a proxy for the number of loops that would have been ordered if BT had been able to deliver to contractual timescales will be needed.

3.26 In discussion, operators generally suggested that their average provisioning of loops at any exchange would proceed at the rate of about a loop a week per operator per exchange (although again there were considerable variations). BT's liability to pay fixed compensation should be subject to a time limitation (see paragraph 3.44 ff). The liability will run for two months, after which alternative remedies would be available to the operators. On the basis that, by that time, an average operator would have installed eight loops at any exchange, the rate payable by BT for delay should be set at £80 per working day, or £400 per week.

3.27 It might be argued that BT should only pay for the number of loops that would have been installed during the period of delay. For example, for a two week delay, BT would pay £50 for the first week, when a single loop was not installed, plus £100 for the second week, when two loops would not be available. But this would not be an accurate pre-estimate of an operator’s loss. It is unlikely that an operator will be able to ‘catch up' much, if any, ground lost as a result of BT's delay, rather its build programme will simply be pushed back by the time of the delay. Effectively, this means that, in weeks beyond the end of the two month period, the operator would be earning less revenue than it planned for, and to an increasing extent.

3.28 These rates appear to bear a reasonable relationship to the amounts BT is able to recover from its own sub-contractors. The Director understands that BT is entitled to claim up to 10% of the sub-contract value where it’s sub-contractor causes a delay in any co-location provision. Clearly this amount can vary widely depending on the type of sub-contractor who causes the delay and the time for which it continues. However, even for relatively modest sub-contracts, the amount which might be payable to BT could be significant. For larger sites BT's ability to recover greater liquidated damages for larger contracts might mean that it is entitled to recover more from its sub-contractors than the lower amount of liquidated damages recoverable in respect of sites where only one operator wishes to co-locate.

3.29 As mentioned above, BT is not required to pay fixed compensation where the ‘force majeure' clause in the ANF Agreement applies. That clause was amended slightly as a result of the February ANF Determination so that industrial action by BT employees only amounted to an act of force majeure where BT had taken reasonable steps to settle the dispute. The clause should be amended further for the purposes of this Direction, to make it plain that inactivity or omission by a sub-contractor does not amount to an event of force majeure. For the reasons given in paragraph 3.8, BT should not be able to avoid its legal obligations merely because it decides to sub-contract all or part of their performance to a third party. Accordingly, this direction amends the force majeure clause so that any action by a BT sub-contractor will only be an event of force majeure if BT can show that the sub-contractor was himself subject to an Act of God. If a sub-contractor fails to perform his contractual obligations to BT for a reason other than force majeure, BT will not be entitled to rely on that failure as itself amounting to force majeure.

Tie circuits and distant location and backhaul circuits

3.30 BT suggested that, for tie circuits, the relevant measure for compensation should be that derived from the number of local loops connected to the affected tie circuit. BT's argument is in principle sound. But it does not follow that, simply because the contract value of the work to be done is less, the scale of liquidated damages for a failure to deliver should be correspondingly reduced as BT also argued. Distant location is, from BT's point of view, the provision of an external tie circuit (or facilities for one to be installed) either to a street cabinet or other distant location. From the operator's point of view, it is simply another way of obtaining the same services as would otherwise be obtained by internal co-location.

3.31 It follows that the same principles should apply to distant location (external tie cables) as to internal co-location. Therefore, the Director has decided that the liquidated damages for tie cables and, therefore, distant location should be £10 per working day or part multiplied by the number of local loops which would be connected (directly or indirectly) to that tie cable but for the delay or fault. Where there are as yet no (or few) local loops connected to a tie cable, Oftel believes that the operator should be able to claim on the basis that it would have had a minimum of eight loops connected to that tie cable for the same reasons as set out in paragraph 3.26. The only exception to this would be for the ‘jumper' between the incoming and outgoing sides of the main distribution frame, which is treated as if it is a continuation of the (single) local loop to which it is connected.

3.32 The Director recognises that this measure of compensation may not by itself be sufficient to compensate fully an operator having incurred significant build costs at a large distant location facility. However, a further amount to address this situation is not thought necessary because the revenues of an average operator have been used to determine this measure of fixed compensation and also operators affected retain the ability to bring an action for recovery of the excess losses caused to them in the usual way.

3.33 BT's liability to pay fixed compensation should only apply to facilities it has itself supplied. Where an operator provides its own external tie cables, for example, BT is not liable to pay fixed compensation for the unavailability of local loops due to a fault in that tie cable. BT’s responsibility is up to the "Point of Handover", which may be outside BT’s building, an exception to this should be where the fault in the operator provided cable occurs on BT premises and BT fails to permit the operator reasonable entry to repair it.

3.34 The Director intends to publish in the near future a consultation on the provision by BT of backhaul circuits from an MDF site (or a point of handover near it) to the nearest appropriate point of connection with the LLU operator’s system. That consultation will consider the issue of what (if any) service level commitments and compensation should be offered.

Fixed compensation for late offers

3.35 Operators have also raised concerns that BT is regularly failing to meet contractual timescales for providing firm offers for co-location. BT's current ANF Agreement contains contractual provisions which require it to provide an offer for co-location within a certain time of the operator requesting co-location, after which the operator has a specified period to accept the offer. Thus there are two distinct phases to the co-location ordering process: the design/administrative phase and the build phase. Delay in either of these phases is likely to cause the operators loss, but for different reasons.

3.36 The immediate consequences of delay in the administrative phase are likely to be less than for delay in build. Where BT has yet to make an offer, the Director would not expect a reasonable operator to have carried out more than planning and a pre-marketing exercise for services carried over DSL enabled local loops in the area covered by the exchange. He would certainly not expect them to have taken contractually binding orders from its customers. Therefore, the whole of the efficient operator's ARPU is not the relevant measure for any fixed compensation for this purpose. On the other hand, once an operator has accepted a firm offer by BT to build co-location facilities at a particular exchange site, it is reasonable for it to start taking firm orders from customers. Therefore, fixed compensation for delay from this point should be based on the whole of an average operator's ARPU.

3.37 The Director nevertheless believes that fixed compensation should be payable by BT for failure to provide a firm offer in time. The operators will suffer from the uncertainty of not knowing to which exchanges they can plan to go so that they can properly promote their services to customers in those areas. Operators may also have incurred expenditure on the basis that they are able to roll out to exchanges in the order put forward in the forecasts they are required to submit (and which BT will have had the opportunity to consider). Accordingly, the Director has directed a scheme of compensation which permits operators to recover fixed compensation for this loss also.

3.38 The operators suggested that their losses for late delivery of an offer could conveniently and reasonably be compensated in the form of a rebate on the fees for surveys which would otherwise have been payable. Given the likely wide variety of losses which an operator might suffer by reason of late delivery of an offer, the Director believes that this approach offers a useful proxy for a pre-estimate of loss for calculating fixed compensation for this purpose.

3.39 The Director assumes that an operator will suffer the greater part of its loss from any delay, however short. For example, operators' sub-contracts relating to works may need renegotiating. It is therefore appropriate that the fixed compensation be ‘front loaded'. Accordingly, Oftel proposes that, where an offer is not made within the period stipulated in the ANF Agreement the requesting operator shall be entitled to withhold 10% of the payment for the site survey requested. Where the delay persists, for each working day of delay beyond the second, the operator shall be entitled to deduct a further 1% of the survey fee.

3.40 Where BT is late both in making an offer, and subsequently is also late in providing co-location at the same exchange site, the Director finds that any fixed compensation which the operator has received as a result of the delayed offer should count towards the total amount of fixed compensation (see below) arising from BT's failures at that exchange since the overall loss of revenue to the operator will be the same. However, BT should not be allowed to offset compensation paid to an operator in relation to one exchange against the caps for that operator at any other exchange. The fixed compensation in the latter case relate to losses of revenue from two different customer groups and, hence, there is no element of double counting of the operator's lost revenue as there would be in the first case.

3.41 The operator's request also suggested that an overall time limit be set for delivery of co-location starting from the date a survey has been requested. The operators suggested that this time period should be 75 working days for the provision of distant location and 100 working days for physical co-location. For the reasons given in paragraph 3.36 and 4.4, the Director does not believe that calculating compensation on this basis is appropriate. However, in order to provide some incentive to BT to meet an overall timescale, the Direction provides that, where BT has had to pay fixed compensation in respect of a delay at the offer stage, but it nevertheless manages to provide co-location within those overall timescales, that fixed compensation should be refunded to BT by the operator.

Other issues – liability caps, missed appointments and trials

3.42 The offer made by BT (and the operators' determination request) raised three further matters. First, BT capped its obligation to pay fixed compensation to a maximum of £500 per MPF – ie local loop. The period to which this maximum relates is not specified. The question therefore arises whether a cap on fixed compensation should be included in the Direction. Second, the operators' request included a requirement that BT should pay an additional one-off sum where its engineers are required to attend customer premises to configure the customer connection for DSL purposes but fail to do so. It was suggested that this amount be £17.

3.43 On the issue of capping BT's liability for fixed compensation, Oftel believes that this might send a perverse signal to BT to the effect that, whilst a short delay is unacceptable, longer delays will be tolerated. This is clearly not intended. However, as mentioned above, any level of fixed compensation must be reasonable. The Director will not prescribe a scale of compensation, almost without limit, which could be seen as penal.

3.44 On this basis, the Director has decided that, if any continuous delay in delivering either an offer, co-location (of any kind) or any other facility required under the EC Regulation (including local loops), continues for more than two months (42 working days) from the time when the liability to pay fixed compensation first arose, BT's obligation to pay fixed compensation should cease at that point. This would mean that its total exposure to fixed compensation would be limited to £420 per loop or £3,360 per operator per exchange. The rebate on survey fees would similarly be capped at a maximum of 50% of the cost of the survey (10% for the first two working days delay and up to 40% for the remaining period of delay).

3.45 However, so that operators are sufficiently protected against prolonged failure to perform by BT, they should have the right to terminate the contract for the delayed facility, on the basis that BT is in repudiatory breach, immediately on notice at the end of the two month period, without having to wait further for BT to try and remedy the breach. Their right to take action against BT for any losses caused as a result of the breach would be preserved and operators would be entitled to retain any compensation already payable by BT (subject to those damages being taken into account in any final award should legal action be commenced).

3.46 As an alternative to terminating the ANF Agreement with respect to a co-location facility, or other works or services BT is obliged to provide which is delayed, the Director gives operators the option of taking over the contract management from BT and finishing the job themselves. BT continues to be liable for the additional costs incurred. The Direction also requires that, if it is not possible for the operator to reach a satisfactory agreement with the existing contractor, the operator should have the ability to seek quotations for the completion of outstanding works from contractors on the list of BT approved contractors which BT would be required to make available.

3.47 BT has argued that in providing for the Operator to take over the management building works by appointing a sub-contractor from a list of approved BT sub-contractors (Operator Step-In) the Director has exceeded his powers. The Director does not accept this. Under EC Regulation 2887/2000 the Director has power to impose changes on the reference offer where such changes are justified. He may also intervene on his own initiative in order to ensure non-discrimination, fair competition, economic efficiency and maximum benefit for users the right of step in in the event of supplier fault is common in outsourcing contracts.

3.48 The Director considers that it is justified for an operator to manage the building project itself once the compensation period has ended, because the ability to operate a facility will often be of greater benefit to the development of an Operator's business than the possibility of claiming damages. Further, the Director considers that such a right to oversee management of a project is justified in the interests of fair competition, because it assists market entrance and economic efficiency. It provides the possibility of more efficient and speedy completion of a project and maximum benefit for users and, in assisting a speedier access to market, it enhances competition for the benefit of end users. BT's interests continue to be protected. The contractors who will have access to BT premises will be those whom BT has itself previously approved for carrying out such work.

3.49 On the missed appointments provisions, it is necessary to include an extra element in the fixed compensation to take account of missed appointments by engineers (unless this is due to force majeure). Where an engineer misses an appointment so that the loop at customer premises cannot carry DSL-based services, BT (or the operator) incur additional administrative costs in rearranging the appointment with the customer. Therefore the Director has provided in the Direction that a single payment for that missed appointment shall be payable. If BT's engineer has missed the appointment, BT's liability to ongoing fixed compensation would continue to run until the loop has been handed over (or the fault repaired). If an Operator misses an appointment, in addition to the one-off payment to BT to cover the administrative and other costs lost, the ‘clock stops running’ against BT for the purposes of calculating fixed compensation payments until the next appointment is fixed, provided that BT does not unreasonably delay in doing this.

3.50 Finally, on trials, the Director notes that BT is currently running a number of services – for example shared access to local loops – on a trial basis. Current demand for these services may be low and it will be necessary (and is reasonable) for BT to carry out a pilot to get the services into a steady state before a proper commercial launch takes place. BT is unlikely to be able to commit to service levels in relation to such products. If BT cannot offer a service which should be covered by the ANF Agreement on a commercial basis until the service has been tested to ensure that it works properly, the Director takes the view that BT is obliged to offer a trial but not on the full terms of the reference ANF Agreement. Accordingly, where BT has notified operators and the Director that a particular Access Network Facility is on trial (and it is a genuine trial), the provisions of Part VI – in particular the requirement to pay fixed compensation for failure to perform to any service level – may be suspended for the duration of the trial. This depends on an assurance that the trial does not continue for an unreasonable length of time The Director considers that four months will be the maximum in such circumstances and the limit may be less for many products.

3.51 Thirdly, it should be made plain that the fixed compensation is an immediate payment for an operator’s loss. The levels have deliberately been fixed so that where an Operator’s loss caused by BT’s delay or inefficiency is more than fixed compensation, the Operator can still go against BT for the difference.

Chapter 4

Timescales and level of service

4.1 The operators also requested the Director to intervene to require BT to amend some of the other terms of the service level commitment schedules to the ANF agreement (Parts IV and VI of the ANF Agreement). There were two main areas of concern:

1. many of the periods in respect of which liquidated damages were to be payable are too uncertain. Fixed periods should be set running from the time when an operator places an order or reports a fault;
2. the service level commitments depend in large part only on BT exercising reasonable endeavours to meet them. The first ANF determination made it clear that in general the appropriate standard for BT to perform to was at least "best endeavours".

4.2 In addition, the Director considers that BT should make available on request, a higher level of service at a cost-orientated price. This is needed to ensure that the SLA complies with the requirement under Article 3(2) of EC Regulation 2887/2000 that BT meets reasonable requests for unbundled access to local loops and related facilities and provides Operators with facilities equivalent to those provided for its own services. Both Condition 83 and the Regulation also require BT to provide a reasonable level of service. This may be better than the comparable service which BT provides to many of its own customers, or which BT provides to its own businesses.

Period for calculating fixed compensation

4.3 Under the ANF Agreement currently offered by BT, the time period by reference to which fixed compensation is payable is usually the target, estimated or agreed date stipulated in the offer which BT makes to the operator for the provision of the individual facilities in question. The operators point out that BT is able to delay making an offer so that it can reduce the risk of having to pay compensation to an unacceptable extent. Oftel is also aware of the possibility that BT might unjustifiably extend the target dates given in its offers, also with the intention of reducing its liability to payment of liquidated damages.

4.4 To avoid this, the operators suggested that there should be an overall time limit for BT to deliver co-location and distant location facilities. It should be calculated to run from the time the operator makes a firm request for facilities (distant location request or a physical location request as the case may be). The operators proposed 100 days for physical location and 75 days for distant location (outside BT exchanges).

4.5 In the Director’s view it is impossible to reach a reasonable ‘one size fits all' time period for calculating compensation payments which would produce a reasonable outcome in even a majority of cases. This is due to the large number of factors which may affect the progress of provisioning co-location facilities. The ANF Agreement currently provides for binding time limits for the period from a request for a co-location survey by an operator and BT's firm offer, and the Direction provides that fixed compensation is payable in the event that those time limits are breached. The Director has also decided that BT will not be able to lengthen these contractual time limits by amending the ANF Agreement, unless it has first consulted the operators and received no objections.

4.6 However, in order to give BT some incentive to recover time lost where a delay has occurred in the first stages of the process, the Director has decided that, if BT is able to meet an overall timescale of 75 days (for distant location orders) and 100 days (for co-location orders), BT should be entitled to full refund of any compensation payments made to operators in respect of delays at the earlier stage.

4.7 Oftel is also concerned at the possibility that BT may extend the completion dates in its offers without justification so as to avoid as far as possible liability for fixed compensation (or indeed any damages at all for breach of contract). At present:

1. in respect of physical co-location, Oftel understands that the average period specified in an offer for completion of a hostel product is currently 15 weeks (75 working days) from the date of the offer;
2. in respect of distant location, the limited information which Oftel has suggests that BT is meeting its target of 55 working days from the date of offer;
3. in respect of the provision of loops themselves, Part IV of the ANF Agreement commits BT to use reasonable endeavours to provide the facility within 3-5 working days of a confirmed order; and
4. in relation to tie cables, BT will commit itself to provide these within 35 working days of the offer (with a number of exceptions – for example, where internal tie cables have been ordered by an operator at the same time as an offer for physical co-location has been accepted, BT commits to providing the internal tie cables at the same time as the co-location facility is delivered).

4.8 The Director does not wish to see the periods mentioned in the previous paragraph exceeded in the future and, accordingly, has taken a number of measures to ensure transparency in BT's performance in delivering access network facilities promptly.

4.9 BT has included in its latest offer for the ANF Agreement a number of key performance indicators (KPIs) for the delivery of local loops and related facilities. The KPIs are not intended to be contractually binding, but to give an indicator of BT's overall performance. Given the range of technical difficulties of installation at different sites, it would in the Director’s view be both difficult and unfair (both to BT and potentially also to the operators concerned) to link performance against generalised KPIs to the payment of compensation to individual operators.

4.10 However, the Director believes that, so that BT is encouraged to improve its performance, it is appropriate for the Director to require BT to supply to Oftel regular reports on its performance against KPIs and its service level commitments generally. BT has already proposed a number of KPIs in its 17 May offer. Further requirements on BT – in particular to report on average times taken to provide Access Network Facilities from first request by operators – also need to be included in the reporting requirements.

4.11 Operators have also complained at the lack of transparency in BT's sub-contracting processes. The Director believes that much of this concern could be alleviated if operators are able to request accurate information from BT – and if BT does not give it promptly, directly from BT's sub-contractors – concerning costs and build timescales. The Director requires BT to permit its sub-contractors to respond directly (if they wish to do so) to reasonable requests for information from the operator for whom the work is ultimately being carried out.

4.12 The operators asked for the option to be able to pay for a higher level of service. BT said this involves the installation of additional equipment; but this is not a reason for refusing to provide this service at all. If BT wishes to recover this cost, BT must show that the prices it charges are cost oriented and non-discriminatory. Article 4.2 of the EC Regulation clearly enables the Director to require BT to offer a higher level of fault handling service, if the operator pays for it.

4.13 Finally under this head, the operators contend that it is unreasonable for BT's obligations to supply unbundled access to the local loop or related facilities (especially fault repairs) to begin only when BT has acknowledged the fault report or other communication. The operators believe that the time period should begin when BT has received the request, to avoid the possibility that BT might delay acknowledgement. The Director agrees with the operators, but with two provisos. Firstly, BT will be entitled not to respond to a request which is not substantially complete – although, in such a case it must promptly inform the operator so that a complete request can be made. Secondly, the period will not begin where BT can show that it has not in fact received the request, despite its having been sent.

Reasonable endeavours

4.14 Operators have also pointed out that BT has not amended Part IV of the ANF Agreement so as to provide for unqualified time periods (or at least for BT to exercise ‘best endeavours' to meet specific timescales) for the delivery of many of the facilities covered by the agreement. It is clear from the statement made with the February ANF Determination that BT's performance obligation under the agreement should normally be unqualified. A lesser requirement on BT to use its best endeavours to supply would only apply where it is not reasonable for BT's obligation to be unqualified.

4.15 It is not sufficient for BT to offer its reasonable endeavours to perform such important contractual obligations as the delivery of loops or co-location facilities in time. For the reasons set out on page 11 of the Statement with the February ANF Determination, the Director takes the view that, as a starting point, BT's obligations to perform should be unqualified. But if they cannot reasonably be unqualified, then BT should use its best endeavours to perform (that is, the same level of effort as it would use if it were providing the service itself). BT continues to have the protection of the force majeure clause against incidents which prevent it from performing and which are outside its reasonable control. This regime gives BT sufficient and reasonable protection whilst allowing the operators sufficient certainty for them to be able to plan effectively and offer an appropriate level of service to their customers. The Direction attached to this consultation makes the amendments to the ANF Agreement needed to achieve this.

4.16 BT also suggests that the term "best endeavours" be defined. The Director had originally suggested this term be left at large, but is persuaded the term can be defined broadly as was suggested by BT. The Direction does this.

Chapter 5

Computerised ordering system for loops

5.1 Operators were concerned that the lack of a computerised system for ordering loops and reporting faults on lines means that they will have to incur costs in arranging their business to process orders manually (using fax, rather than e-mail etc). They have also pointed out that a manual (or, as BT calls it, "tactical") processing system has a number of significant disadvantages:

• it requires different resources from the systems needed to use a computerised system (notably differently skilled staff),;
• the volume of orders which can be handled by a manual system is normally considerably less;
• error rates are significantly increased when using a manual system and it takes longer to correct them;
• monitoring of performance and progress of orders and fault repairs is significantly more difficult.

5.2 Given that ordering from BT in other contexts (for example interconnection and ‘Calls and Access' products) is done on an automated basis, and that BT itself admits that the tactical system is no more than an interim measure, the Director takes the view that it is unreasonable to expect operators to commit significant resources to using in the medium term a BT system which is neither intended nor fit for such use.

5.3 The Director understands that BT normally uses computerised systems for its own internal business purposes and in relation to many other of its wholesale services. BT is clearly obliged to offer LLU Services on a non discriminatory basis. Operators are entitled to the same advanced quality of processing of orders as BT supplies to itself. BT now has a properly functioning computer system available by its stated target date (now 5 November 2001).

5.4 The Director notes that BT has been developing a computer system – in consultation with the operators – which is intended to be capable of functioning with agreed XML and GUI interfaces (copies of the agreed specification are published with the Direction). Although BT originally intended that this system should be available from 2 July 2001, this did not prove possible. However, the Director believes that, given the period now elapsed since development started, it is not unreasonable to expect BT to have produced a properly functioning system promptly.

5.5 BT has been keeping Oftel and the interested operators informed of the progress of BT's development of the OSS system since the determination request was made and since the Director published his consultation. Considerable progress has been made and, at an open meeting of BT interested operators held on 23 October 2001, BT announced (and the relevant operators agreed) that the pilot of the version (version 1) of the system had been completed successfully and that it was now ready for use with both GUI and XML interfaces.

5.6 The OSS system processes orders (and, in due course, fault reports and similar matters) for local loops themselves – other facilities are ordered according to somewhat different procedures. Since the request for the Director to determine service level commitments were made in June 2001, forecasts for the numbers of unbundled loops in the coming months have fallen considerably. BT has, therefore, questioned the assumption that the volume of loops would be such as to necessitate the use of an automated ordering system at present.

5.7 In the light of these developments, the Director has reconsidered the proposal he made in this consultation of 23 August on this Direction. The Direction still requires BT to include in the ANF Agreement offered terms committing it to make available an automated ordering system. However, the Director does not consider it is at present necessary for BT to offer immediate fixed compensation for failure to provide an automated system, and the Direction does not require this.

5.8 Nevertheless, assuming the volume of orders for loops starts to go up, it is necessary for the Director to be able to direct BT to provide computerised ordering (and for BT to amend its ANF Agreement) possibly at relatively short notice. The Agreement therefore should include a reserve requirement on BT to provide an automated support system with the capability needed by the operators. The ANF Agreement should also provide for fixed compensation for the Operators to cover their loss if BT does not do this. Accordingly, the Direction requires BT to include such provision on the Director giving it ten working days notice to do so.

Chapter 6

Other issues

Cost recovery for liquidated damages

6.1 The operators argued that, even if BT was to be required to pay them fixed compensation in the event it failed to meet the contractual standard, BT would simply increase the cost of supplying unbundled access to the local loop and related facilities by including a contingency element to cover the likely cost of BT paying out liquidated damages. Essentially, they claim, the operators collectively would be required to fund the whole of the liquidated damages payments which would probably be made to some but not all of them. They say this would be unreasonable.

6.2 BT is entitled, under Article 3.3 of EC Regulation 2887/2000, to charge a cost-oriented price for access network facilities. In the event of dispute between BT and an operator as to whether or not BT’s charges are cost-oriented, Oftel is required to apply the dispute resolution procedures in the Interconnection Directive (EC 97/33). Recital 10 to that Directive makes it clear that ‘cost-oriented' means a price between the long-run incremental cost (LRIC) and the stand-alone cost of providing the facility in question.

6.3 It might be possible, given that fixed compensation is only payable in the event of a failure by BT to perform its contractual obligations, to take the view that BT should not be entitled to recover any of the cost to it of paying out fixed compensation. However, the Director has decided that this would not reflect what a prudent operator in a competitive market would necessarily do. Recognising that, even in the best run businesses, oversight (not covered by a force majeure clause) might nevertheless occur, a prudent but efficient operator would make some provision for the cost of paying liquidated damages. BT should be allowed to do the same. As against that, BT should not be able to recover its costs of paying out damages which are payable as a result of BT's own systematic inefficiencies.

6.4 The information available to Oftel on this issue is summarised in Chapter 2. On this basis, Oftel believes that a reasonably efficient contractor would normally include a provision of approximately 1% of cost on a co-location offer. Any greater provision is unlikely in Oftel's view to be a reasonable allocation of costs – the operators would in effect be paying for BT's inefficiency (or, possibly, that of its sub-contractors). A price including a greater amount for this provision would not, therefore, be cost-oriented as required by EC Regulation 2887/2000. The Director therefore expects BT to be able to supply information to him on request demonstrating that any provision for this cost element is reasonable.

6.5 Oftel believes that the same principles should apply to BT's sub-contractors, and that any attempt by BT to lay off the risk of paying liquidated damages onto its sub-contractors – who would then simply re-charge the operators – would also be impermissible. This issue is also dealt with at paragraph 6.11 below.

Effective date

6.6 The operators also requested that, given that they claim already to have suffered from BT's failure to perform to reasonable service levels, the fixed compensation provisions in the proposed determination should be backdated to 30 April 2001 (the date by which BT was required to offer an SLA). BT argues that it would be inappropriate to backdate the liquidated damages provisions, since BT has entered into contractual commitments with its sub-contractors in the expectation that the regime would not include liquidated damages on the scale now proposed.

6.7 Oftel believes that it is possible to go a considerable way towards satisfying the concerns of both BT and the operators. Firstly, the Director notes that the requirement to offer a reasonable level of service – that is, a contractual commitment to sensible timescales within which BT has to provide services under the ANF Agreement – applied to BT from 30. He takes the view that the amendments to Parts II – IV of the current offer of an ANF Agreement proposed in the Direction should take effect from 30 April, since there are, in effect, merely details of the reasonable service levels to which BT was already bound.

6.8 Accordingly the Director has decided that both BT's detailed obligations as to service levels apply from 30 April 2001. The obligation to pay fixed compensation (with the exception of the OSS system and products or services legitimately under trial) applies to orders placed after 30 April but only if they are made on terms compliant with the Director's determinations and directions.

Offset onto sub-contractors

6.9 BT has been concerned to ensure that any mismatch between the amount of fixed compensation it may be liable to pay and those it is able to collect from its sub-contractors is kept to a minimum. The Director has no wish or power to intervene to control the contractual relationship between BT and its sub-contractors and, if BT is able to negotiate an increased level of liquidated damages payments from its sub-contractors, that is a matter for it.

6.10 However, The Director would take steps if such re-negotiations led to higher prices being charged to operators as a result of sub-contractors increasing their estimates unreasonably. The Director therefore requires BT to report to it on a regular basis not only as to the time taken to provide unbundled access to the local loop and related facilities but also as to the costs of providing them. The broad categories against which the Direction requires BT to report are set out at paragraph 7 of the Direction.

6.11 The obligation to provide unbundled access to the local loops and related facilities under the EC Regulation are imposed on BT. It must offer to supply such facilities to meet any reasonable request for them. A request does not become unreasonable solely because BT does not at that time have sub-contractors at reasonable rates to carry out the work required to meet the request. BT is bound to supply co-location at a reasonable rate and that means that BT must get the best rates that it can in the market circumstances at the time of the request for doing construction and similar work.

Amendments to ANF offer

6.12 BT has argued that the effect of the February Determination is that it cannot change the ANF Agreement; it would become ‘fossilised’. This is not so. If all operators party to an ANF Agreement with BT are agreed on a change, the Agreement can be changed – even to the extent that it conflicts with what the Director has now directed (or previously determined). The essential point is that BT cannot amend the offer unilaterally without seeking the agreement of other interested operators. But equally, a single operator cannot unreasonably block a change agreed by the majority, since the Director can consent to any reasonable change.

Termination and indemnity in property licence

6.13 The operators are concerned that BT's 17 May offer contains, in its Part III (the property licence), two provisions which appear inconsistent with the principles set out in the statement which accompanied the ANF Determination in February. The first issue relates to the insertion by BT of certain sub-clauses permitting BT to terminate the property licence in circumstances which were not envisaged in the February ANF Determination. They are

• intention by BT to demolish or reconstruct the MDF site where this cannot be done without requiring the operators to move;
• at any time where BT has offered or is willing to provide alternative accommodation on reasonable terms;
• where BT is required by law to operate in the co-location space for its own purposes; and
• where BT closes the site due to technical or operational reasons.

6.14 BT argued that these provisions were not expressly dealt with in the February determination and that it is entitled to propose amendments to its offer at any time which do not conflict with the determination. However, the reasons given in the statement accompanying the February determination (in particular at paragraphs 5.3 and 9.2) are still good. An ability for BT to terminate the licence without sufficient notice in the wide range of circumstances envisaged in the sub-paragraphs cited amounts, in effect, to the property licence only permitting an operator to occupy space on BT's sufferance. This does not permit operators properly to plan, implement and supply services over unbundled local loops with any meaningful degree of certainty over the medium term.

6.15 Where BT wishes to demolish a site to redevelop it for its own use or purposes, the Director believes that the same principles should apply as where a site is to be sold. That is, BT is entitled to give notice (with a full indemnity) on or after signature of a contract with the demolition contractor. If demolition is to be carried out then the earlier of the signature of the demolition contract or the contract for sale of the site would be the relevant date.

6.16 To the extent that an exception is needed to enable BT to terminate the licence to meet legal requirements, it is already adequately covered by the general force majeure clause in the Main Body of the agreement. If BT wishes to repeat in the property licence its right to close a site on short notice where it is required by lawful authority to do so, the Director has no objection to this. However, the wording used must be a contractual reflection in the property licence of the relevant provision of the force majeure clause in the Main Body of the ANF Agreement.

6.17 Where BT wishes to close an MDF Site for its own operational reasons, even where alternative accommodation is available, it should, in the first instance, negotiate with the other operators occupying space at that site to reach agreement as to the terms on which they are to vacate the building. Where such an agreement has been reached, it should be implemented. In the event that agreement cannot be reached, it would be open for BT to request the Director to direct that the property licence(s) of the operators in question be terminated in accordance with the power reserved in paragraph 3.4.1 (g) of the Annex to the February determination.

6.18 The operators suggested that, provided that they had an initial period of five years, during which BT would be required to indemnity them fully if it removed them, they would be able to recover the costs they had sunk in the exchange in question. This would give them a reasonable assurance that investment in co-location facilities is worthwhile. Whilst the Director does not propose an amendment to the ANF Agreement to this effect (as this would be over–prescriptive), he will nevertheless take considerable account of this representation if a dispute is referred to him in the future.

6.19 A related issue concerns the extent of the indemnity offered by BT where it gives less than 12 months notice to require an operator to move from an MDF Site. The indemnity offered by BT (at paragraph 8.4 of the property licence) is limited to the costs of reconfiguring the operator's system in consequence of the proposed move – ie essentially to engineering work. The Director takes the view – as he did at the time of the February determination (see, for example, paragraph 9.2.2 of the accompanying statement) that other costs caused to operators (for example, the internal costs of administering the moves) are capable of being covered by the term ‘full indemnity’. The Director believes that it is reasonable, if BT is to terminate a property licence on shorter notice, for all of the reasonable and verified additional costs of the operator (whether payable to third parties or not) arising solely and directly from the move to be the subject of the indemnity. The Direction so provides.

6.20 BT has requested that paragraph two of the February Determination should be amended so as to allow changes to the ANF Agreement which are agreed by all parties. Operators have also in the past (and in other contexts) similarly argued that flexibility to amend the ANF Agreement may be desirable. Set against this is the need to ensure that any amendments made are indeed agreed by all relevant parties. Accordingly the Director has decided to amend the effect of paragraph two to the February ANF Determination – which would also apply to this Direction – so that any term in any offer (not in any agreement, as in the current text of the February determination) which is inconsistent with any relevant determination or direction is