11 June 2002

Contents

Chapter 1 – Introduction

Chapter 2 – Competition issues

Chapter 3 – Intervention by Oftel

Chapter 4 – Infrastructure sharing in rural areas

Chapter 5 – Municipal fibre networks

Chapter 6 – Feedback and comments

Chapter 1 – Introduction

1.1 This guidance note describes Oftel’s current policy on duct and pole sharing. It is being issued in response to the first report of the Broadband Stakeholders Group, which recommended that:

1.2 The Broadband Stakeholders Group (BSG) was established in April 2001, following the publication in February 2001 by the UK government (the ‘Government’) of UK online; the broadband future. The intention was to promote the rollout of broadband services in the UK, with the specific target of developing the most extensive and competitive broadband market in the G7 by 2005. It was recognised that the Government would have to work closely with key players in the public and private sectors in order to achieve this goal, and the BSG was established to facilitate this process. The first report of the BSG was published in November 2001.

1.3 The BSG recognised that one of the principal barriers to the development of an "extensive and competitive broadband market’ is the capital cost of providing network infrastructure, particularly in less densely populated areas. The BSG promoted infrastructure sharing as one means of reducing this cost. Duct and pole sharing is of particular interest, since ducts and poles comprise the basic civil engineering infrastructure for any wireline transmission network, fibre or copper. Duct and pole sharing allows different operators to share this infrastructure, and use it to deploy multiple independent transmission networks. This reduces the capital cost incurred by new operators, whilst still retaining a high degree of independence (hence competition) between the transmission networks of different operators.

1.4 A further benefit provided by duct and pole sharing is that it can reduce the environmental impact of network construction, by minimising the need for roadworks, and reducing the number of poles erected. The importance of these environmental benefits for all utility regulators (Oftel, Ofwat and Ofgem) was recently highlighted at a meeting of the Public Accounts Committee, held on 8 May 2002, to review the Comptroller and Audit General’s Report on Pipes and Wires.

1.5 Oftel recognises these benefits, and has an established policy of encouraging duct and pole sharing by operators wherever this is both practical and consistent with competition law. It has not however intervened more formally to require duct and pole sharing. This policy was described in a statement issued by Oftel in October 1997 (www.oftel.gov.uk/publications/1995_98/competition/dp1097.htm), following a consultation document issued in February 1996 (www.oftel.gov.uk/publications/1995_98/competition/ductpole.htm). The aim of the current guidance note is not to modify this policy, but to summarise the key elements of it, and relate it to more recent market developments.

1.6 Duct and pole sharing raises two key issues for Oftel, both of which are raised in the BSG recommendation. Firstly, infrastructure sharing agreements could potentially breach UK and/or EC Competition law. Under the Competition Act 1998 (the ‘Act’) the Director General of Telecommunications (the ‘Director’) has the power to investigate if there are reasonable grounds for suspecting that an agreement infringes Chapter 1 of the Act ie that it has as its object or effect the prevention, restriction or distortion of competition. The Director has not to date conducted such an investigation against infrastructure sharing agreements, but may have reason to do so in the future. The BSG has asked Oftel to issue clear guidance as to the extent to which infrastructure sharing is permissible without triggering competition concerns. Paragraphs 2.1-2.4 below provide general guidance on this issue. It must however be emphasised that the Director cannot give specific legally binding advice on any agreement in advance of the details being notified to him.

1.7 Secondly, the BSG requests that Oftel work with industry and other relevant parties in the regions to develop infrastructure sharing options. This is consistent with Oftel’s established policy, which is to encourage duct and pole sharing wherever practical, but not to intervene more formally to require it. Note in particular that Oftel does not propose to require BT to make available its infrastructure to other operators, as was done in the case of local loop unbundling. Most operators (new entrants as well as BT) are opposed to any such intervention by Oftel, partially because of the complex technical issues raised, and partially because any such intervention might undermine infrastructure investment by other operators. These issues are discussed in more detail in paragraphs 3.1-3.5 below.

1.8 There are close parallels between duct and pole sharing for fixed networks and mast sharing for mobile networks. In particular, the same competition issues are raised by any form of infrastructure sharing. The main practical difference is that mast sharing is widely accepted by industry, with little need for regulatory intervention, whereas duct and pole sharing is not. Oftel’s policy in relation to mobile infrastructure sharing was summarised in a note for information issued in May 2001.

Chapter 2 – Competition issues

2.1 As set out above, infrastructure sharing agreements may potentially infringe Chapter 1 of the Act. They may also infringe EC Competition law if such agreements have an effect on trade between EU Member States.

2.2 Operators entering into infrastructure sharing agreements need to satisfy themselves that the agreement does not fall foul of general competition law. General guidelines have been published by both the OFT, The Chapter 1 Prohibition, March 1999 (OFT401), and Oftel, The Application of the Competition Act in the Telecommunications Sector, January 2000.

2.3 Before entering into infrastructure sharing agreements, operators may under the Act ask the Director for guidance or a decision as to whether a particular agreement infringes the Chapter 1 prohibition. The agreement must have an appreciable effect on competition in order for the Chapter 1 prohibition to apply (see OFT401, paragraph 2.18, for more detailed guidance as to what constitutes an appreciable effect). If guidance is requested, the Director may indicate whether or not the agreement would be likely to infringe the Chapter 1 prohibition and whether or not the agreement would be likely to be granted an exemption if an application for a decision were to be made (see OFT401, section 4, for guidance as to the types of exemption and exemption criteria). If an application for a decision is made, the Director’s decision may indicate that the agreement is either outside the Chapter 1 prohibition, or is prohibited by it, or is exempt. Details of how to apply for guidance/a decision are given in the Oftel Guidelines referred to above.

2.4 Oftel cannot give guidance or decisions in relation to prospective agreements. It is up to the parties concerned to ensure that any agreements do not fall foul of the law. Examples of agreements which might be of concern include agreements between established operators which discriminate against smaller new entrants.

Chapter 3 – Intervention by Oftel

3.1 Oftel encourages duct and pole sharing wherever this is both practical and consistent with competition law. It has not however intervened to require it, although it does have the power to do so under Regulation 10 of the Telecommunications (Interconnection) Regulations 1997. The reason for the current policy of non-intervention is that there are a number of practical problems associated with duct and pole sharing, and little or no demonstrated demand. As a result, most operators (new entrants as well as BT) are opposed to any formal intervention by Oftel:

• Oftel issued a consultation document on duct and pole sharing in February 1996, followed by a formal statement in October 1997. A total of 39 responses were received, including 11 from Public Telecommunications Operators. A substantial majority of the operators who responded stated that although there were some special circumstances where it was appropriate to share duct (discussed in more detail at paragraph 3.4 below), the costs associated with duct and pole sharing would in general outweigh the benefits. Sharing should therefore be a matter for commercial and technical agreement between operators; and
• in July 1998, Oftel initiated an enquiry into BT’s approach to duct and pole sharing, and wrote to 113 Other Licensed Operators requesting information on specific instances where BT had been asked to share and had refused. Sixteen responses were received, of which five noted no concern. The remaining 11 responses provided little information that could be used as a basis for action by Oftel, and the investigation was subsequently closed.

3.2 Practical problems associated with duct and pole sharing include the following:

• Network integrity. A number of operators have noted the difficulty of guaranteeing network integrity when different operators lay fibre in the same duct. There is a danger that fibre belonging to one operator will be damaged during the process of pulling or repairing fibre belonging to another operator;
  
• Health and safety. Concern has been expressed about health and safety issues, particularly associated with pole sharing. Working at height requires the establishment and enforcement of safe working practices, and clear lines of responsibility. This can be difficult when multiple operators are carrying out work on the same poles;
• Definition and availability of spare capacity. It is frequently unclear how much spare capacity is available, particularly in buried duct. Even where capacity is available, this may be required for future expansion (BT’s core duct is planned to fill over 20 years, access duct over five years). Requiring BT to make this duct available to competitors could have the perverse consequence of reducing the amount of forward planning carried out by BT;
• Property rights. An operator wishing to lay duct across private land will have to negotiate with the landowner and pay the appropriate consideration. The landowner may seek to levy an additional charge before allowing new operators to share this duct;
• Applicability of code powers. Operators with Telecommunications Act licences conferring powers under the Telecommunications Code (‘code powers’) are permitted to construct infrastructure on both public and private land and are exempt from certain Town and Country Planning legislation. Operators with code powers who cannot reach agreement with a landowner can apply to the County Court for an order. However, under current legislation this order will only enable them to lay duct for their own use; and
• Rateable value. Ducts used to deploy telecommunications networks are subject to business rates (Valuation for Rating (Plant and Machinery) Regulations 2000). The valuation process is complex, and can lead to apparent inconsistencies in the level of business rates applied to different network operators. In essence this is because the rating valuation of established duct used by a single operator is normally based on a historical valuation, whereas the rating valuation of shared duct is based on the current rent being paid for that duct.

3.3 A further concern expressed by a number of facilities-based operators (new entrants as well as BT) is that intervention by Oftel to require duct and pole sharing could undermine their own investment in network infrastructure. Such investments require a number of years to achieve a satisfactory rate of return, and it is important to maintain a reasonable degree of stability in the regulatory regime during this period. It is particularly important given the current state of the capital markets that Oftel take no action which might be perceived as undermining the business plans of facilities-based operators.

3.4 Despite the lack of support for duct and pole sharing in general, there are three specific areas where there is a consensus about the desirability of sharing:

• Duct sharing at pinch points. BT has previously stated that it is willing to consider voluntary, and reciprocal, arrangements for operators to provide access to ‘pinch-point’ capacity (eg river crossings). Since 1998, 13 requests have been made to BT, of which five have been successful, and one is still outstanding. There is currently no evidence that BT has acted unreasonably in refusing the remaining seven requests, and Oftel therefore sees no reason to intervene at present;
• Duct sharing for on-site access. Several operators have noted the importance of sharing duct for on-site access. BT has previously stated that it is willing to share such duct on much the same terms as other pinch-point capacity. In January 1996, BT initiated trials of leasing arrangements under which another PTO may make use of surplus duct on customers’ premises. The terms of the trials were set out in chapter two of the Oftel statement issued in 1997. The trials have however been unsuccessful, and Oftel understands that this is due to limited demand for the service. Oftel is unaware of any complaints relating to the conduct of this trial, and therefore sees no reason to intervene; and
• Trench sharing. Trench sharing takes place when operators share the costs of digging new trenches, but then lay their own duct in those trenches. It is widely seen as having many of the benefits of duct sharing without the practical complications. Trench sharing is a well-established commercial practice, and Oftel has in the past seen no reason to intervene. The Government recently commenced trials of lane rental in two selected areas (Camden and Middlesbrough), which are expected to run for two years from March 2002. Lane rental legislation permits Highway Authorities to levy a daily charge for access to the highway and therefore provides a further incentive to share trenching costs. It does so however by increasing the overall cost of network deployment, and there is therefore a concern that it could have an adverse impact on competition.

3.5 There currently appears to be no basis for Oftel to change its policy on duct and pole sharing. Oftel will continue to encourage duct and pole sharing wherever this is both practical and consistent with competition law. It does not however propose to intervene to require duct and pole sharing, on the basis that there is little demonstrated demand from operators for such an intervention, and that any formal intervention would present substantial practical difficulties.

Chapter 4 – Infrastructure sharing in rural areas

4.1 Most of the discussion of infrastructure sharing over the last few years has focussed on duct sharing for metropolitan fibre networks. There has been little or no demand from new entrants for access to BT’s duct and fibre in more rural areas. It is however in these rural areas where the case for intervention by Oftel is strongest, since it is in these areas that BT is clearly dominant, owning essentially all the duct and pole infrastructure.

4.2 Intervening to require duct and pole sharing may not however be the most effective means of promoting the deployment of competing rural broadband networks. Duct and pole sharing is just one of a number of ways in which different operators can share the same network infrastructure. It is the most basic form of infrastructure sharing, retaining a high degree of independence between the transmission networks of different operators. At a rather higher level, capacity sharing is also possible via shared access to a common transmission medium (eg local loop unbundling, dark fibre). At a higher level still, capacity sharing can be provided through the provision of wholesale transmission services (eg partial private circuits, wholesale DSL). Moving up this hierarchy, the practical difficulties associated with capacity sharing reduce, but the potential for operators to provide differentiated and innovative services also reduces.

4.3 A key issue for Oftel is understanding where within this hierarchy it is appropriate to intervene. This has been a particularly difficult issue in the case of DSL, where LLU and wholesale DSL services essentially compete with one another. An important point is that the appropriate level of intervention depends strongly on the subscriber density, due to the economies of scale associated with the provision of any network infrastructure. High-level capacity sharing (eg wholesale transmission services) tends to be less subject to economies of scale than low-level infrastructure sharing. It is for this reason that local loop unbundling is unlikely to be an effective means of promoting rural broadband. Very similar arguments apply to duct and pole sharing in rural areas.

4.4 Before intervening to mandate duct and pole sharing for rural fibre networks, it is therefore important to understand the status and desirability of other competing products, such as the availability of dark fibre, wholesale Ethernet transmission services, or wholesale leased lines (partial private circuits). These require less infrastructure investment than duct and pole sharing, are less subject to economies of scale, and so are potentially more appropriate for rural environments. Oftel welcomes comment on this issue.

Chapter 5 – Municipal fibre networks

5.1 An interesting recent development is the emergence of municipal fibre networks, where the basic infrastructure (duct and dark fibre) is constructed by a local consortium, and capacity is then leased to operators or end users. Public funding may be provided to help cover the initial construction costs, typically associated with public sector demand aggregation. A number of such projects are under development internationally, typically driven by a local authority, utility company or university.

5.2 Oftel is aware of interest in municipal fibre networks within the UK, as a means of promoting the deployment of broadband infrastructure. These projects are of particular interest where they extend broadband coverage beyond that provided by commercial operators. However, where this is not the case, there is an obvious concern that these initiatives should not be used as a means for providing a public subsidy to new operators, or undermining the investment made by existing operators. Oftel is keen to work with individual local initiatives, providing whatever advice and support is possible. Oftel cannot however advise as to whether a particular project complies with European rules on state aid.

Chapter 6 – Feedback and comments

6.1 There is no formal consultation process associated with this guidance note. Oftel does however welcome feedback from interested parties. Where possible, comments should be made in writing and sent by e-mail to steve.unger@oftel.gov.uk. Copies may also be posted or faxed to the address below.

Dr Stephen Unger
Oftel
50 Ludgate Hill
London
EC4M 7JJ

tel: 020 7634 8879
fax: 020 7634 8893

6.2 Oftel will publish on its website copies of all non-confidential responses to this guidance note. Respondents are therefore asked to separate out any confidential material into a confidential annex which is clearly identified as containing confidential material. Oftel will take steps to protect the confidentiality of all such material from the moment that it is received at Oftel’s offices. However, in the interests of transparency, respondents should avoid applying confidential markings wherever possible.