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Direction relating to a dispute between Cable and Wireless and BT over the provision of overflow capacity for DQ118 traffic – 20 March 2003 |
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Explanatory Memorandum Chapter 1 Summary Chapter 2 Background Chapter 3 History of the dispute Chapter 4 Responses to the draft direction Chapter 5 The Director General’s decision and reasons DIRECTION UNDER REGULATION 6(6) OF THE TELECOMMUNICATIONS (INTERCONNECTION) REGULATIONS 1997 RELATING TO A DISPUTE BETWEEN CABLE AND WIRELESS U.K. ("C&W") AND BRITISH TELECOMMUNICATIONS PLC ("BT") OVER THE PROVISION OF OVERFLOW CAPACITY FOR DQ118 TRAFFIC. 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 telecommunications systems specified in that Licence; (B) By virtue of section 109 of and paragraph 20 of Schedule 5 of the Act the BT licence has effect as if granted to British Telecommunications plc ("BT"); (C) The Secretary of State has granted to Cable and Wireless U.K. (formally Cable and Wireless Communications (Mercury) and Mercury Communications Limited) ("C&W") on 5 December 1991 a licence under Section 7 of the Act for the running of telecommunications systems specified in that licence; (D) On 1 January 1998, the European Parliament and Council Directive 97/33/EC came into force and was implemented in the UK through the Telecommunications (Interconnection) Regulations 1997 (the "Regulations") and conditions in the licences of operators; (E) Regulations 6(6) of the Regulations provides that where there is a dispute concerning interconnection between organisations, the Director General of Telecommunications ("the Director") shall, at the request of either party, take steps to resolve the dispute within six months of the date of the request. The direction which the Director makes to resolve the dispute must represent a fair balance between the legitimate interests of the parties, and must be notified to the parties in accordance with Regulation 8(3). The parties are entitled to a full statement of the reasons on which the direction is based; (F) C&W entered into an interconnection agreement with BT on 1 May 1998; (G) In July 2002 BT agreed that directory enquiry services traffic using the new 118 code ("DQ118 traffic") and carried on BT’s network for termination on C&W’s network could be routed over the interconnection capacity already used for number translation service ("NTS") traffic carried on BT’s network for termination on C&W’s network. However, rather than allow C&W to use the same routing plan as for C&W’s NTS traffic, BT required C&W to submit a separate routing plan for DQ118 traffic. BT refused to provide alternative routing of C&W’s DQ118 traffic from one BT switch that interconnects with C&W’s network to another BT switch that interconnects with C&W’s network ("Overflow"); (H) BT is also seeking to withdraw the provision of overflow for NTS traffic by way of a Contractual Review Notice amending Annex A to BT’s Standard Interconnect Agreement. This is in response to the Director’s Determination of 28 June 2001 to resolve a dispute between BT and a number of other licensed operators regarding a proposal to charge for NTS links (the "NTS Links Determination"). The NTS Links Determination established that the responsibility for interconnection links used for terminating NTS traffic originating or transiting on BT’s network for termination on other operators’ networks should transfer from BT to the terminating operator. BT’s proposed withdrawal of the provision of Overflow for NTS traffic is currently the subject of a separate interconnection dispute between BT and 5 other licensed operators; (I) C&W considers that BT does not have the right to refuse to provide overflow for DQ118 traffic and is therefore in dispute with BT; (J) On 23 August 2002, in accordance with the provisions of Regulation 6(6) of the Regulations, C&W referred this dispute to the Director for determination; (K) The Director has a duty to encourage and secure adequate interconnection in the interests of all users in a way that provides maximum economic efficiency and gives maximum benefit to end-users; (L) The Director has considered, inter alia, the information provided by the parties and the matters set out in Regulation 6(8) of the Regulations. The principle points are summarised in the explanatory memorandum, which accompanies, and is published with, this direction; (M) The Director issued a draft of this direction and the explanatory memorandum that contains the Director’s reasons on 20 January 2002 and responses were invited by 17 February 2003; NOW, THEREFORE: PURSUANT TO REGULATION 6(6) OF THE INTERCONNECTION REGULATIONS, AND HAVING CONSIDERED THE VIEWS OF THE PARTIES AND THOSE MATTERS SET OUT IN REGULATION 6(8) OF THOSE REGULATIONS, THE DIRECTOR MAKES THE FOLLOWING DIRECTION TO RESOLVE THE DISPUTE BETWEEN C&W AND BT: 1.BT shall offer to provide Overflow for DQ118 traffic terminating on C&W’s network within 30 days after receiving a reasonable written request for Overflow from C&W. 2. BT shall not make a separate charge to C&W for the provision of Overflow for DQ118 traffic in addition to the amount BT already charges C&W for the conveyance of DQ118 traffic terminating on C&W’s network. 3. If necessary, BT and C&W shall modify their interconnection agreement to give effect to and implement this direction. 4. Except as otherwise defined in this direction, words or expressions used shall have the same meaning as in the Act, the BT licence or BT’s Standard Interconnect Agreement as appropriate. 5. This direction shall take effect on the date it is published.
Heather Clayton Director of Investigations A person authorised
under paragraph 8 of Schedule 1 of the Telecommunications Act 1984
Explanatory MemorandumChapter 1Summary1.1 The Director of Telecommunications ('the Director') has issued a Direction in accordance with the provisions of Regulation 6(6) of the Telecommunications (Interconnection) Regulations 1997 ('the Regulations') for the resolution of a dispute between Cable & Wireless U.K. ('C&W') and British Telecommunications plc ('BT'). 1.2 C&W referred this dispute to the Director on 23 August 2002. C&W requested that the Director require BT to provide alternative routing ('overflow') for directory enquiry services traffic using the new 118 code ('DQ118 traffic'), that BT carries on its network for termination on C&W’s network. BT has agreed to carry C&W’s DQ118 traffic on the interconnect capacity between BT’s and C&W’s networks already used to carry C&W’s number translation services ('NTS') traffic. 1.3 Following this referral the Director sought the views of the parties to the dispute and issued a draft direction and explanatory memorandum on 20 January to the industry as a whole for consultation. Comments were received and have been taken into account in making this final direction. 1.4 The details of the submissions made in response to the draft direction, together with the Director’s reasons for making his decision are set out in Chapters 4 & 5. 1.5 In summary, the Director remains of the view that BT should be required to provide alternative routing for DQ118 traffic from one BT switch interconnected with the C&W network to another such switch connection, regardless of the type of interconnection link used to carry the DQ118 traffic. 1.6 Having considered the facts specific to this dispute and the matters set out in Regulation 6(8) of the Regulations, this direction, in the opinion of the Director, represents a fair balance between the interests of the parties in this case, having regard to the Director’s wider duties to promote the development of the telecommunications industry in the UK and to encourage and secure adequate interconnection in the interests of all users in a way that provides maximum economic efficiency and gives the maximum benefit to end users.
Chapter 2BackgroundDescription of DQ118 traffic & overflow 2.1 In September 2001, the Director decided to withdraw the existing national and international directory enquiry (DQ) services codes. These codes, that effectively tied consumers to one provider, were to be replaced with new numbers beginning with 118 and were to be allocated to individual service providers wishing to provide a paid-for national and/or international DQ service. 2.2 The new DQ118 services were launched on 10 December 2002. The existing short numbers used for DQ services (for example 192) will continue to work in parallel until at least the end of August 2003. 2.3 This dispute concerns the provision of a facility for overflow to ensure that DQ118 calls carried on BT’s network for termination on C&W’s network do not fail due to congestion at the designated point of interconnection between BT’s network and C&W’s network. 2.4 Within the context of this dispute, overflow describes the provision of alternative routing, from one BT switch connection with an operator’s network to another BT switch connection with that operator’s network, for traffic that has either originated on BT’s network or originated on a third party network and has been transited via the BT network. Overflow for other traffic types 2.5 Overflow is currently provided for NTS traffic being conveyed from BT’s network to an operator’s network. However, BT is seeking to withdraw the provision of overflow for NTS traffic by way of a Contractual Review Notice amending Annex A to BT’s Standard Interconnect Agreement ('SIA'). This is in response to the Director’s 'Determination of a dispute between BT and a number of operators regarding a proposal to charge for NTS links from January 1 2001' – 28 June 2001 (the 'NTS Links Determination'): http://www.oftel.gov.uk/publications/pricing/ntsp0601.htm The NTS Links Determination established that the responsibility for interconnection links used for carrying NTS traffic should transfer from BT to the terminating operator. As a result of this change in 'ownership' of NTS links, BT is proposing to change traffic routing rules and remove the facility for overflow that it historically provided for NTS traffic (i.e. when BT owned the links). This issue is currently the subject of a separate interconnection dispute between BT and five operators, including C&W. 2.6 In contrast, overflow is not currently provided for indirect access ('IA') traffic. Indeed, BT’s SIA expressly excludes the alternative routing of IA traffic from one BT switch connection to another BT switch connection (see paragraph 2.9). Routing principles 2.7 The routing principles for traffic from BT’s network to an operator’s network and vice versa are set out in Paragraph 5.1.1 of Annex A to the SIA. Paragraph 5.1.1 of Annex A sets out a general rule that: "Each Party shall route the other Party’s traffic in accordance with the following routing principles: (a) routing within a Party’s System shall be equivalent to the routing of similar types of traffic for the generality of such Party’s customers including alternative routing where appropriate." 2.8 Paragraph 5.1.2 sets out another general rule that: "The Parties shall develop and apply network management strategies and procedures to maintain customers’ service quality and to protect the Parties’ Systems as are appropriate. Full details of the network management provisions are set out in the Operations and Maintenance Manual. These shall include: (b) establishment of overflow procedures" 2.9 The general rules in paragraph 5.1 are subject to more specific routing rules in paragraph 5.4, which differ according to the traffic type in question. Paragraph 5.4.5.1 (c) for example, states in relation to IA traffic that: "For Indirect Access Calls received at a BT Switch Connection and on the Operator’s written request, BT shall arrange not less than one alternative path to be provided to the Operator System. Routing from the nominated BT Switch Connection to the Operator System shall be limited to Traffic Routes from that BT Switch connection."
Chapter 3History of the dispute3.1 The record of industry discussions relating to the contractual issues surrounding the introduction of DQ118 services demonstrates BT’s intention to apply the same routing rules to DQ118 traffic as apply to IA traffic and other traffic that BT does not ‘own’. BT has made it clear that its intention was that there would be no alternative routing for DQ118 traffic from one BT switch interconnected with the operator’s network to another, i.e. no overflow would be provided. 3.2 In June 2002 BT agreed to C&W’s request that C&W’s DQ118 traffic could be routed on the interconnect capacity that is also used for C&W owned NTS traffic (i.e. the NTS links between BT’s and C&W’s networks). The Director has been provided with correspondence from both parties demonstrating that there were a number of discussions between the parties relating to the routing plans that were to be submitted for C&W’s DQ118 traffic. 3.3 Correspondence from July 2002 shows that C&W considered that overflow should be provided for DQ118 traffic, although BT had already sent 118 product descriptions to C&W which contained routing rules stating that there would be no overflow for DQ118 traffic. A meeting was subsequently held between C&W and BT to discuss DQ118 routing rules in which BT agreed to consider whether overflow should be provided for C&W’s DQ118 traffic. BT confirmed to C&W via an email dated 12 August 2002 that overflow for DQ118 traffic was not available. 3.4 In August 2002 C&W submitted DQ118 routing plans to BT which provided for overflow. Following communications between BT and C&W, C&W re-submitted a revised routing plan on 20 August 2002, which did not provide for overflow. On 23 August 2002 C&W referred this dispute to the Director for determination.
Chapter 4Responses to the Draft DirectionBT 4.1 BT suggested that the Director’s proposal effectively supports the transfer of costs from C&W as the terminating operator to BT as the originating operator and that the direction undermines the principle of traffic ownership by reducing C&W’s incentive to adequately dimension links. 4.2 BT argued that it should not be obliged to provide an overflow facility without recovering the additional switching costs. Further, BT argued that it should be able to recover costs for the work involved in establishing mechanisms to ensure that overflow was being used appropriately by operators. BT’s Regulatory obligations 4.3 BT stated that it is not refusing to offer interconnection or abusing a position of market power in failing to provide overflow for DQ118 traffic. BT expressed its commitment to ensure that operator owned traffic continues to flow in emergency situations. However, in BT’s view, the supply of overflow for a terminating operator’s traffic is a "value add" supplementary facility over and above basic conveyance services. Relevant Market(s) and the position of the parties to the dispute 4.4 BT accepted the Director’s assessment of the relevant markets in this dispute. However, BT argued that as a DQ118 call originator, it would not be in position to materially affect the ability of terminating operators to terminate DQ118 traffic as these operators are already in a position to solve any capacity problems. Ownership of traffic 4.5 BT argued that it currently provides terminating operators with the same multiple routing as it provides for its own traffic. In BT’s view, providing overflow from one BT switch connection to an alternative BT switch connection would, in effect, mean BT was providing a routing path for an element of the end-to-end call path that is in the operator’s network. 4.6 BT agreed with the Director’s view that the incentives to correctly dimension links are different depending on who has responsibility for the traffic. However, BT argued that the provision of overflow should equally be governed by such responsibility. Recovery of costs 4.7 BT noted the Director’s view that BT should be able to recover the costs of providing overflow for DQ118 traffic. BT argued that there are two categories of cost to be considered; the additional routing costs and the associated costs of monitoring and managing the use of overflow. 4.8 With regards to managing overflow, BT argued that this might require BT to take such actions as suspension of overflow, further monitoring, re-routing and perhaps re-instalment of the service. In BT’s view it is in the interests of consumers that operators bear the costs of under-provided capacity on interconnection links carrying DQ118 traffic. 4.9 BT broadly agreed that, providing operators are prevented from exploiting overflow, the likelihood of a material under recovery of costs due to overflow is probably not material enough to warrant adjustment to the Network Charge Controls ('NCC'). 4.10 However, BT was concerned that the Director’s arguments regarding cost recovery did not consider the effect operators’ inefficient routings would have on the principles underpinning the NCC. BT argued that although the costs of providing overflow may be built into the NCC when overflow is BT caused and controlled, the NCC provides incentive for BT to route efficiently. In BT’s view, if operators cause inefficient routing BT will not recover its costs through the NCC. 4.11 BT did not agree with the Director’s view that DQ volumes are expected to increase and that this might lead to BT over-recovering its conveyance costs. BT argued that DQ118 calls are not incremental to volume estimates in the NCC and that, even if increased demand was to occur, this would not necessarily translate into an over-recovery of cost. 4.12 To summarise, BT considered that properly controlled and monitored overflow, enforced on a strong contractual basis, may well prevent the abuse of overflow routing and may minimise any extra inefficiency (and cost) generated within its network. Dimensioning of interconnect capacity 4.13 In its submissions in relation to the separate dispute on NTS overflow (see paragraph 2.5), BT asserted that operators fully intend to run routes 'hot', i.e. to provide insufficient capacity on a particular link to cope with normal peaks in demand. In BT’s view, the draft direction allows operators to exploit overflow until such time as any penalty action may be implemented by BT for a breach of operators’ obligations under the SIA to fully provide the links. BT argued that it would be preferable to avoid a breach of contract by only providing the overflow routing at the time of need on an ad hoc basis in accordance with the Operations and Maintenance provisions, rather than automatically. 4.14 BT argued that it is the OLOs’ responsibility to provide alternative routing for the elements of their networks by providing a second route out of the BT switch connection into the OLO network. BT considers that directing BT to provide overflow may give a commercial advantage to terminating operator’s own DQ118 products and hosted DQ118 products. Such a competitive advantage, in BT’s view, would be achieved by directing BT to provide the alternative routing for an element of the end-to-end call path that should be provided within other operators’ networks. 4.15 BT stated that it currently dimensions interconnect routes according to the TC4 fully provided (0.008 Grade of Service ('GoS')) dimensioning standard. This dimensioning policy ensures that two-way traffic obtains a target GoS and is routed economically across the BT network. Furthermore, BT stated that as the traffic level of a BT route grows towards 90 per cent of the critical traffic value as defined by the TC4 dimensioning standard, BT takes steps to increase the route capacity in order to maintain the fully provided dimensioning of the route. It is BT’s view that the interconnect routes that the operator controls must also have the same forward planning and be dimensioned to the same standard in order to maintain the relevant end-to-end service. 4.16 BT suggested that paragraph 5.26 of the draft direction contradicts an earlier statement that interconnect routes should be fully provided. In BT’s view, paragraph 5.26 suggests that the interconnect route may be run as high usage until it is deemed economically viable by the operator to consider increasing capacity on the interconnect route. BT stated that its network-wide routing policy is to use fully provided routes rather than high usage routes. The dimensioning of these routes is based on an assumption of random traffic distribution. 4.17 According to BT, permitting large high usage interconnect routes would result in significant levels of non-random overflow traffic, increasing blocking on BT’s core network routes which could then potentially impact on the GoS of all operators’ traffic (including BT’s) carried on those routes. BT stated that the size of operator high usage routes has been restricted by paragraph 5.3.3 of Annex A of BT’s SIA. In BT’s view, in the environment of large volumes of high usage overflow impacting on a network, an operator would either have to invest in additional capacity or to accept a lower GoS for its traffic at critical thresholds. 4.18 BT argued that for operators it is cheaper to provide high usage links than fully provided links, but for BT (as operator of the overflow network) the dimensioning of the overflow is more expensive (per erlang) over high usage routes than over fully provided routes. 4.19 In BT’s view any provision of DQ118 overflow should be subject to:
4.20 BT expected that the Director should specify within the final direction the policy requirements to which operators must adhere under their obligation to fully provide interconnect routes. BT set out a number of specific requirements it would like to see attached to the provision of overflow. Cable & Wireless 4.21 C&W was pleased with the draft direction and supported the conclusion that BT should be obliged to provide overflow for DQ118 traffic. In C&W’s view this will promote competition in the downstream market for the termination of DQ118 calls. C&W did not agree with BT’s argument that DQ118 traffic is owned by the terminating operator in the same way as other operators own Indirect Access traffic. 4.22 C&W understood BT’s concern that some operators might be tempted to under provision capacity and that this would result in BT incurring additional costs. However, C&W pointed out that C&W and BT already have procedures in place to monitor traffic levels and ordering processes to upgrade routes. Energis 4.23 Energis welcomed the Director’s decision to require BT to provide overflow for DQ118 traffic terminating on C&W’s network. In response to BT’s argument that no overflow is (or should be) provided for existing 'operator owned' traffic types (such as indirect access) Energis argued that callers dialling a DQ118 number have selected a service and are unlikely to have any consideration of the network(s) conveying their call. In this respect, DQ118 traffic is similar to services obtained via NTS number ranges. Callers using indirect access (or Carrier Pre-Selection) have selected an alternative network to convey a call and are much more likely to select another network should a call attempt fail. 4.24 Energis agreed that BT is able to provision its own traffic routes as high usage, particularly where demand is unpredictable. In Energis’ view this gives BT’s downstream activities an unfair advantage over other operators and service providers. 4.25 Energis expressed support for the Director’s proposal that BT and other operators must be able to agree how to monitor use of overflow routes to ensure that the facility is not abused. However, in Energis’ view if BT’s forecasting and ordering processes for interconnect capacity were more flexible, much of the difficulty surrounding the issue of overflow could be alleviated. Other operators 4.26 Other comments were received on a confidential basis. With regards to BT’s arguments that it cannot effectively control the use of overflow, it was suggested that prior to the NTS links reversal determination (see paragraph 2.5) BT itself made no attempt to control overflow on other operators’ networks.
Chapter 5 The Director’s proposed decision and reasons5.1 Having duly considered the representations made by the parties, responses to the draft direction and the matters set out in Regulation 6(8) of the Telecommunication (Interconnection) Regulations 1997, the Director concludes that BT should be obliged to provide overflow for DQ118 traffic. 5.2 In reaching this view, the Director has considered the arguments submitted by BT in response to the draft direction. However, the Director is still of the opinion that C&W’s request for overflow for DQ118 traffic is a reasonable request given the nature of the service requested, BT’s ability to provide such a service and the adverse effect on competition of BT failing to provide an overflow service. 5.3 The Director’s decision represents a fair balance between the interests of the parties to the dispute, taking into account the regulatory constraints on the parties, the relative market position of the parties, the promotion of competition and the interests of end users. The Director has taken into account all relevant facts as presented to him by the parties. BT’s regulatory obligations 5.4 Pursuant to Regulation 4(1) of the Regulations, BT has been determined as having Significant Market Power ('SMP'), inter alia, in the market for fixed public telephone networks and services. BT is obliged to offer to interconnect in this market with all other operators who fall within Schedule 2 of the Regulations and who have made a reasonable request for such interconnection. 5.5 The Director notes BT’s statement that it is not refusing to offer interconnection or abusing a position of market power, but does not agree with BT’s assertion that overflow should be viewed as a supplementary facility over and above basic conveyance services. Relevant market(s) and the position of the parties to the dispute 5.6 C&W is in dispute with BT concerning overflow for DQ118 traffic from the BT network to the C&W network that has either originated on the BT network or has transited the BT network from another operator’s network for termination on the C&W network. BT’s relationship with C&W in terms of this dispute is as an originator of DQ118 traffic, as a transit operator of DQ118 traffic originating on another operator’s network and as the provider of interconnection services between BT’s and C&W’s networks. For the purposes of the current network charge controls imposed on BT (see the February 2001 Network Charge Control Statement: http://www.oftel.gov.uk/publications/pricing/pcr0101.htm), call origination and interconnection specific services have been designated as being non-competitive, i.e. they are services in which there is little or no competition. Inter-tandem transit services, on the other hand, have been designated as being prospectively competitive services, i.e. they are not currently fully competitive, but are expected to become more competitive over the lifetime of the network charge controls. 5.7 C&W also competes with BT in the newly liberalised market for the provision of DQ118 termination services. 5.8 C&W requested that BT provide overflow for DQ118 traffic in order to secure robustness in call completion of DQ118 traffic terminating on C&W’s network. BT argued that it should not be required to offer this service because:
Ownership of traffic 5.9 In the draft direction the Director recognised that the incentives to correctly dimension links between BT’s network and an operator’s network are different depending upon who has responsibility for the traffic type and interconnection capacity used to carry that traffic. 5.10 In response to the draft Direction BT submitted further arguments regarding ownership of traffic and stated that BT currently provides terminating operators with the same availability of multiple routing through the BT network as it provides for itself. However, a BT DQ118 call does not leave the BT network and so has the availability of multiple routings end-to-end. If BT does not provide overflow, then one reasonable possibility for an alternative routing is denied for a DQ118 call terminating on another operator’s network. Therefore, whilst recognising BT’s concerns, it is still the Director’s view that overflow should be provided for DQ118 traffic regardless of the ‘ownership’ of this traffic type. 5.11 The Director stated in the draft direction that it is possible for BT and the industry to develop and agree mechanisms that will ensure that DQ118 overflow is used appropriately and that operator links are correctly dimensioned on a fully provided basis (if this is not in fact already specifically required for relevant links under the terms of the SIA). The Director notes that BT stated in its response to the draft direction that BT would not expect to have to begin negotiations with operators over the method of monitoring the use of overflow. BT also made a statement that BT would not expect to negotiate with operators regarding the action that BT may take or the timescales within which any such action might be taken. 5.12 Respondents to the draft direction, C&W and Energis, supported the position that BT should be able to ensure that the use of overflow is not exploited by operators and the Director believes that the specifics of any such monitoring process should be subject to agreement. It would not be appropriate for the Director to impose changes to the SIA on the basis of specific proposals put forward by BT in response to the draft direction that operators have not had previous sight of or reasonable chance to consider. However, the Director believes that it is certainly reasonable for BT to adopt proportionate measures to monitor the use of overflow and for it to withdraw the overflow service where there is evidence that an operator is failing to fully provide its links as is reasonably required. Recovery of costs 5.13 In the draft Direction the Director considered whether obliging BT to provide overflow for DQ118 traffic would result in BT incurring additional network costs that it would not be able to recover. The Director stated that, in his view, BT should be able to recover the costs of providing overflow for DQ118 traffic. 5.14 BT originally argued that it was unable to identify when a call has been re-routed (i.e. where overflow has been provided), but that it would incur additional routing costs from the provision of overflow for DQ118 traffic. BT has since argued that there are two categories of cost to be considered, the additional routing costs and the costs of monitoring the use of overflow. 5.15 BT’s conveyance and access charges are regulated through the network charge controls that are fixed periodically by the Director. The controls were last set in 2001, for a four-year period through to 2005. Charges are subject to RPI-X controls where the value of X is set so as to bring forecast basket revenues into line with costs, including the cost of capital, in the final year of the control. The values of X therefore reflect expected cost reductions, which in turn reflect assumptions about future efficiency gains, market volumes, market share and routing factors, among other things. The charges for conveyance services are derived from forecast component cost and volumes, to which forecast routing (usage) factors are applied (for a fuller discussion, see the February 2001 Network Charge Control statement). 5.16 The Director notes that differences between forecast and actual costs, volumes and routing factors will result in BT over or under-recovering its network costs. As the Director understands that BT provided overflow facilities (to itself) when the forecasts were last set (2001), it is to be expected that BT will recover the costs of providing the amount of overflow that was forecast to occur at that time. Therefore, for the conveyance of existing traffic types, it is apparent that a level of cost recovery for overflow is factored into the controls. 5.17 In the draft direction, the Director noted that the introduction of new DQ118 services was not factored into the cost, volume and routing forecasts in the 2001 controls and that:
5.18 BT did not agree with the Director’s views on this point. However, the Director notes that, even if the assumption of higher call volumes did not hold, BT would have to demonstrate that providing overflow would likely result in material cost under-recovery before any adjustment to the NCC would be considered. In practice, this seems unlikely. DQ118 traffic is only likely to represent a small fraction of total traffic on the BT network. 5.19 The Director notes that, broadly speaking, BT agreed that providing operators are prevented from exploiting overflow the forecast for network costs and volumes will not result in a material under-recovery of costs. The Director therefore maintains his view that BT should not make a separate charge to C&W for the provision of overflow for DQ118 traffic in addition to the amount BT already charges C&W for the conveyance of DQ118 traffic terminating on C&W’s network. 5.20 With regards to the monitoring of overflow, the key questions are of materiality and incremental cost, particularly given that it is the Director’s understanding that there are some related monitoring processes already in place between BT and operators. Also, BT has not put forward any estimation of the charges it envisages it may set, and the level of those charges would depend on the type of monitoring it decides to implement. 5.21 It is not the Director’s intention within the scope of this Direction to place an obligation on operators to accept a charge for the monitoring of overflow for DQ118 traffic. However, as noted earlier, it is the Director’s view that BT should seek to agree appropriate monitoring processes with operators in the first instance. If BT sought to impose a charge for monitoring overflow, operators could refer an interconnection dispute to the Director should they consider that the charge was unreasonable or not a justifiable recovery of costs. Correct dimensioning of interconnect capacity 5.22 Under the terms of paragraph 5.3.1 of Annex A to the SIA, interconnection capacity (links) must be fully provided. This ensures that there is sufficient capacity on an interconnection link to carry the operator’s traffic including normal peaks according to traffic forecasts and that overflow is used only as an occasional ‘back-up’ for periods when an interconnection point is congested. 5.23 Following submissions to the Director in relation to the NTS overflow dispute currently being considered, BT has asserted that operators fully intend to run routes on a high usage basis rather than on a fully provided basis. In response to the draft of this Direction BT submitted arguments to explain the impact of high usage routes on a network. 5.24 The Director is aware that high usage interconnection routes are cheaper for operators to provide than fully provided routes. The Director has considered the recovery of cost issues associated with the correct provisioning of routes and the incentives for ensuring that operators dimension links efficiently. 5.25 It is a key foundation of the Director’s decision that operators must fully provide links where overflow is required (except where otherwise agreed). The Director envisages that overflow is used only where there is traffic growth that could not have been reasonably foreseen or there are sudden unexpected peaks. As supported by operator responses to the draft Direction, there is a delay between the identification of capacity problems and the ordering and building of extra capacity, where the use of overflow will be necessary – but this delay must not be unreasonably extended by operators themselves. 5.26 The Director does not intend to set out the exact methods of measuring the extent to which any overflow facility is being used. If there is clear evidence that operators are running routes ‘hot’ and operators refuse to augment such links within a reasonable period of time then the Director believes that BT should have the ability to withdraw the provision of overflow from those relevant routes and where applicable, operators may also be in breach of obligations under their interconnection agreements with BT. 5.27 The Director considers that a requirement to fully provide routes, if it is to be effective, necessarily implies a certain minimum GoS. Such a defined grade of service is set out in paragraph 5.3.2 of Annex A to the SIA in relation to traffic routes used for the conveyance of traffic for both parties. The Director is aware, however, that it may be that certain interconnect links used to convey DQ118 traffic may not fall under a defined grade of service as set out in the SIA. While the Director does not intend in this direction to specify what GoS requirement should apply to any or all interconnect links that fall outside of a defined GoS for fully provided links under the SIA, he does make clear that the obligation on an operator to fully provide links where overflow is requested can only make sense where fully provided implies a certain minimum GoS. By way of example, the Director considers that it would be reasonable for operators requesting overflow to comply with a GoS requirement for interconnect links carrying DQ118 traffic along the lines currently set out in paragraph 5.3.2 of Annex A to the SIA, consistent with the Director’s proposal in his draft direction resolving a dispute between BT and operators in respect of overflow on NTS links (see paragraph 2.5). It is for BT and operators, however, to agree and define the GoS for the purpose of overflow traffic across relevant interconnection links that is contractually binding where such links currently fall outside of agreed definitions. Promotion of competition 5.28 It appears to the Director that, if BT refused to provide overflow for DQ118 traffic, it would lead to BT’s downstream activities having an unreasonable competitive advantage. This is because:
5.29 In the absence of overflow for DQ118 traffic the Director would expect the cost of interconnection to increase as operators would be forced to adopt an (overly) conservative approach to network design. As noted in the draft direction, C&W was particularly concerned about situations where its network was expanded, as demand on these routes would be uncertain and capacity requirements would be subject to a certain amount of adjustment. The Director therefore considers that forcing operators to invest in higher capacity links where only a small amount of overflow may be required will result in inefficient over-dimensioning of links. 5.30 As most DQ118 calls originate on BT’s network, DQ service providers operating on BT’s terminating network would not require interconnection with other originating operators as frequently as DQ service providers operating on other terminating networks. If BT refuses to provide overflow and the cost of interconnection subsequently increased, operators offering termination services to DQ118 service providers would therefore find themselves at a disadvantage compared to BT when offering equivalent termination services. 5.31 BT noted in its response that it would not expect this decision to have a material impact on competition, as under either scenario (with or without the provision of overflow) there would not be substantial use of overflow. While it is difficult to quantify the impact of this decision on competition, it is clear that under a base case of no overflow, operators will be disadvantaged to some degree by having their costs raised relative to BT as a terminating network, with which they are competing. By requiring BT to provide overflow, with operators fully providing links, BT will not be materially worse off and operators will be able to compete with BT on a more equivalent basis. Economic efficiency and impact on end-users 5.32 In its response to the draft direction, BT noted that the Director had not addressed the effect of the decision on consumers (end-users) or on consumer surplus. The Director considers that the impact of the decision will benefit consumers. If overflow is provided, the costs of interconnection will be lower as described above. BT will incur some additional resource costs from conveying more DQ traffic (than in a ‘no overflow’ case). It is to be expected that total resource costs devoted to providing DQ conveyance services will fall, as the incremental costs of conveying more traffic are likely to be small relative to the costs to the OLOs of building extra capacity. This is due to economies of scale in BT's network, which allow BT to carry more erlangs of traffic at a given grade of service than could an OLO carrying traffic over a single interconnect link. The increasing competitiveness of the markets for DQ services – enhanced by this direction as described above – should ensure that these gains will be passed through to consumers in lower prices, better quality of service or through innovation. Conclusions 5.33 Having duly considered the representations made by C&W and BT in response to this request for a direction, responses to the draft direction and the matters set out in Regulation 6(8) of the Telecommunications (Interconnection) Regulations 1997, the Director concludes that BT should be obliged to provide overflow for DQ118 traffic terminating on C&W’s network. The Director considers that it is reasonable to require BT to comply with this obligation within 30 days after receiving a reasonable written request for overflow from C&W. 5.34 In the Director’s view C&W’s request for overflow for DQ118 traffic is a reasonable request given the nature of the service requested, the ability of BT to provide such a service and the effects of BT failing to provide overflow for DQ118 traffic. 5.35 The Director considers that this direction represents a fair balance between the interests of the parties to the dispute, and takes into account the interests of users, the regulatory constraints on the parties, the relative market position of the parties and the promotion of competition.
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