Contents

Direction – relating to the provision of a Flat Rate Internet Access Call Origination product ("FRIACO")

Consolidated Direction – a consolidated version of the Direction of 26 May 2000, the Direction made on 13 February 2001 and published on 15 February 2001, and the Direction published on 15 May 2002

Explanatory Document

Summary

Chapter 1 – Background

Chapter 2 – Oftel’s objectives and approach

Chapter 3 – Equivalent payment terms for metered and unmetered interconnect

Chapter 4 – Charging for Intelligent Network services

Chapter 5 – Voluntary conversion of capacity units counting towards an operator’s rearrangement commitment

Chapter 6 – Circumstances in which the Director considers BT should invest in additional capacity for metered traffic during FRIACO Stage 1

Chapter 7 – Rearrangement of traffic in order to maintain the supply of ST FRIACO

Chapter 8 – The period to which an operator’s request for ST FRIACO relates, and the period to be used for assessment of spare capacity

Annex A – Summary of responses to consultation

Annex B – Glossary of terms and acronyms

Direction relating to the provision of a Flat Rate Internet Access Call Origination product ("FRIACO")

Direction under Condition 45.2 of the Public Telecommunications Licence granted to British Telecommunications plc and under Regulation 6(6) of the Telecommunications (Interconnection) Regulations 1997 amending Directions made by the Director General of Telecommunications on 26 May 2000 and 13 February 2001 under Regulation 6(6) of the Telecommunications (Interconnection) Regulations 1997

Published on 15 May 2002

WHEREAS

Introduction

1. The Secretary of State granted to British Telecommunications on 22 June 1984 a licence ("the BT Licence") under section 7 of the Telecommunications Act 1984 ("the Act") for the running of the telecommunication systems specified in Annex A to that licence;

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

3. The Secretary of State granted to MFS Communications Limited on 24 September 1993 and to WorldCom International Inc. on 31 March 1994 licences under Section 7 of the Act for the running of telecommunications systems as specified in those licences;

4. Both MFS Communications Limited and WorldCom International Inc. are now part of WorldCom;

5. WorldCom entered into a Standard Interconnect Agreement with BT on 20 February 1997, as subsequently amended;

6. The Standard Interconnect Agreement covers interconnection services BT offers other operators;

7. Worldcom requested BT, on 17 September 1999, to supply it with an interconnection service which provides for flat rate (unmetered) Internet call origination not included in the Standard Interconnect Agreement;

8. BT refused Worldcom’s request for the proposed service on 15 December 1999;

9. On 24 December 1999 Worldcom referred this dispute to the Director General of Telecommunications ("the Director") for a Direction that the request for the service was reasonable and should be included in an interconnection agreement with BT and for a Direction in relation to the Point of Connection and charge for the service;

10. Condition 45.1 of the BT Licence requires BT to offer to enter into an agreement with an operator to connect that operator’s telecommunications system to the BT telecommunications system through Points of Connection of sufficient number and capacity so as to conveniently meet all reasonable demand. BT is also required under the same paragraph to provide such other telecommunications services as are reasonably required to enable BT to fulfil this obligation;

11. A Direction made under Condition 45.2 of the BT Licence operates as an exercise by the Director of the power of direction conferred by Regulation 6 of the Regulations. The Director may also make a Direction to resolve any interconnection dispute under Regulation 6(6) of the Regulations. The Regulations were made to implement in the United Kingdom Directive 97/33/EC of the European Parliament and Council on interconnection in telecommunications with regard to ensuring universal service and interoperability through application of the principles of open network provisions ("the Directive");

The first and second Directions

12. After a period of consultation the Director issued a Direction under Condition 45.2 of the BT Licence and Regulation 6(6) of the Telecommunication (Interconnection) Regulations 1997 (the "Regulations") on 26 May 2000 (the "First Direction") concerning the provision of a Flat Rate Internet Access Call Origination ("FRIACO") product as described in the recitals to the First Direction;

13. The First Direction was amended by a Direction made by the Director on 13 February 2001 and published on 15 February 2001;

14. Issues remain from the original dispute which need to be resolved;

Equivalent payment terms for metered and unmetered interconnect

15. The Director believes it is important to clarify that the derivation of both DLE FRIACO and ST FRIACO charges implicitly assumes equivalent payment terms for metered and unmetered interconnection. This is because the cost information used in calculating charges for FRIACO included costs of working capital, which reflected the payment terms for metered interconnection services. The terms for the payment of the FRIACO charge should, therefore, be equivalent to those for metered interconnection;

16. Pursuant to Condition 45.8(b) of BT’s Licence, in considering whether a term or condition (including a charge) is reasonable, the Director may take into account, inter alia, the effective date of the term or condition and the period during which such term or condition may already have been in effect. The Director may conclude that a reasonable charge is one which is offered or agreed, as the case may be, on terms that it take effect in agreements or amendments made under paragraph 45.1 from the date of a complaint or the date on which the term was first offered by the Licensee or accepted by a Schedule 2 Public Operator or from any other date which is considered by the Director to be appropriate in the circumstances;

Charging for Intelligent Network services

17. Under the terms of the First Direction published on 26 May 2000, the Director confirmed in paragraph 4.3 that BT was permitted to impose reasonable charges on an Operator for the costs associated with Intelligent Network services;

18. It was the Director’s intention that BT’s ability to impose reasonable charges on an Operator for the costs associated with Intelligent Network services, should apply equally to Single Tandem FRIACO;

Voluntary conversion of Capacity Units counting towards an Operator’s Rearrangement Commitment

19. In order to create additional capacity for Single Tandem FRIACO an Operator should be allowed to convert capacity it is using for metered wholesale Internet Traffic at a Tandem Switch, where such metered wholesale Internet Traffic is paid for by the End-user at an unmetered rate;

20. Such conversion shall be carried out only with the agreement of the Operator and shall be included in the Rearrangement Commitment. Paragraphs 18, 19 and 21 of the First Direction, as amended, only apply to rearrangements and not conversion;

The period to be used for assessment of spare capacity

21. The assessment of capacity is important because an apparent absence of capacity will mean that Single Tandem FRIACO cannot be supplied without rearrangement. Rearrangements require longer lead times before supply can be provisioned, and in addition, rearrangements will not be possible in every case;

22. The setting of a period which coincides with the lifting of BT’s ability to require traffic to be rearranged (i.e. 31 January 2003) over which BT is able to assess whether there is sufficient spare capacity at a Tandem Switch for Single Tandem FRIACO to be supplied without rearrangement, for the reasons set out in the explanatory document to this Direction, represents a fair balance between the legitimate interests of all parties;

Rearrangement of traffic in order to maintain the supply of Single Tandem FRIACO

23. It is possible for BT, having commenced the supply of Single Tandem FRIACO to an Operator at a particular Tandem Switch, to be faced subsequently with a situation where there is insufficient capacity to meet new demands for metered traffic;

24. BT should, therefore, be allowed to carry out rearrangements in order to meet its obligations to continue the supply of Single Tandem FRIACO and supply new requests for metered interconnection, where it would not be required to invest in additional tandem capacity;

25. The Director is not seeking to amend the cap on the total amount of rearrangement that a Single Tandem FRIACO operator can be requested to carry out and the Rearrangement Commitment will remain at two times the Single Tandem FRIACO capacity supplied by BT to an Operator. Therefore, the rearrangements carried out in these circumstances will count towards the rearranging operator’s Rearrangement Commitment;

26. Only the Messages of Operators which are being supplied with Single Tandem FRIACO by BT should be re-arranged;

Draft Direction and consultation

27. For the reasons given in these recitals and set out in more detail in the explanatory document accompanying this Direction, and having considered the representations made in response to the draft of this Direction published on 28 January 2002, and the matters set out in Regulation 6(8) of the Regulations, the Director believes that it is appropriate to make this Direction.

THEREFORE

Pursuant to Condition 45.2 of the BT Licence and Regulation 6(6) of the Regulations the Director General of Telecommunications makes the following Direction:

1. The Direction made by the Director on 26 May 2000, as amended by the Direction made on 13 February 2001 and published on 15 February 2001, is amended in accordance with paragraphs 2 to 11 of this Direction.

2. In paragraph 3.4 after the words "(the "DLE Charge")" insert ". Payment by the Operator of such charge shall be equivalent to the Licensee’s payment terms for corresponding metered interconnection services and shall be payable in arrears. Such payment terms shall apply from 26 May 2000. In addition, the Licensee may also offer the Operator alternative payment terms which are not payable in arrears where such terms are equivalent to the Licensee’s payment terms for corresponding metered interconnection services and apply from 26 May 2000".

3. In paragraph 4.3, after the words "provided under paragraph 8" insert the words "and paragraphs 9 and 11. This paragraph applies from 26 May 2000".

4. In paragraph 10 replace the words "to which the request relates" with the words "up to and including 31 January 2003".

5. In paragraph 11 replace the words "to which a request relates" with the words "up to and including 31 January 2003".

6. Insert after paragraph 13:

"13A The Licensee shall at the request of the Operator also convert existing metered wholesale Internet Traffic at the Relevant Tandem Switch to Single Tandem FRIACO where:

13B Where the Operator has converted existing metered wholesale Internet Traffic pursuant to paragraph 13A, any further request for additional metered wholesale Internet Traffic at the Relevant Tandem Switch, which has a Ready for Test Date within six months of such conversion, shall be treated by the Licensee as a request for Single Tandem FRIACO.".

7. In paragraph 16 delete the words "paragraphs 13 and 14" and insert in their place the words "this Direction".

8. After Paragraph 16 insert Paragraph 16A:

"16A The Rearrangement Commitment shall also include Capacity Units which an Operator voluntarily requests the Licensee to convert from metered wholesale Internet Traffic to Single Tandem FRIACO at the same Tandem Switch where such metered wholesale Internet Traffic is paid for by the End-user at an unmetered rate.".

9. In paragraph 17 delete the words "paragraphs 13 and 14" and insert in their place the words "this Direction".

10. In paragraph 23 after the words "shall be reduced proportionately." insert the words "Payment by the Operator of such charge shall be equivalent to the Licensee’s payment terms for corresponding metered interconnection services and shall be payable in arrears. Such payment terms shall apply from 15 February 2001. In addition, the Licensee may also offer the Operator alternative payment terms which are not payable in arrears where such terms are equivalent to the Licensee’s payment terms for corresponding metered interconnection services and apply from 15 February 2001.".

11. After paragraph 28 the following paragraphs are inserted and paragraph 29 shall be re-numbered paragraph 38:

"29 Paragraphs 30 to 36 of this Direction shall apply where:

- no, or insufficient, Capacity Units exist at a Licensee's Tandem Switch where Single Tandem FRIACO is being provided, at any point during 16 weeks from an Operator’s written request for non-Single Tandem FRIACO traffic; and

- adjusted demand at the Tandem Switch is less than the Capacity Units at the Tandem Switch.

For the purpose of this paragraph adjusted demand shall be calculated at the Tandem Switch as equal to the sum of the following:

- metered capacity supplied at the Tandem Switch;

- metered capacity requested by Operators;

- non-Single Tandem FRIACO rearranged to the DLE from the Tandem Switch pursuant to this Direction;

- growth on the routes which have been rearranged from the Tandem Switch to the DLE pursuant to this Direction;

- Single Tandem FRIACO converted at the Tandem Switch from metered wholesale Internet Traffic to Single Tandem FRIACO; and

- growth on the routes which have been converted from metered wholesale Internet Traffic to Single Tandem FRIACO.

30 Where the Licensee is already providing Single Tandem FRIACO traffic to the Operator, and the conditions in paragraph 29 are fulfilled, the Licensee may reasonably rearrange any or all Messages conveyed to or from the Operator’s Applicable System so that such Messages are not switched by the Tandem Switch. The Licensee may not rearrange Messages conveyed using Single Tandem FRIACO.

31 The Licensee shall only be allowed to make rearrangements pursuant to paragraph 30 equal to no more than the number of the Capacity Units equal to the difference between the Capacity Units at the Tandem Switch and the adjusted demand.

32 The Licensee may only take action pursuant to paragraph 30 provided that, in relation to such action:

(i) paragraph 29 applies;

(ii) the Licensee acts in a reasonable manner at all times including, in particular, giving reasonable notice of any such action to the Operator;

(iii) except as provided in this Direction, the Licensee shall not raise any additional charge or require any additional payment of any kind; and

(iv) the rearrangement of Messages does not materially affect the quality of service provided to the Operator.

33 Where pursuant to paragraph 30 the Licensee has requested the Operator, or another operator, to complete rearrangement of Messages so that the Licensee can provide non-Single Tandem FRIACO to another operator, but the Operator, or other operator, does not take the required action, the Licensee’s obligation to provide non-Single Tandem FRIACO to any operator shall be limited to the number of Capacity Units equal to the number of Capacity Units in respect of which rearrangements have been completed, by the Operator or by another operator.

34 Where pursuant to paragraph 30 the Licensee has requested the Operator to complete rearrangements so that another operator can be provided with non-Single Tandem FRIACO traffic and the Operator does not take the necessary measures to enable the Licensee to carry out the necessary rearrangement, the Licensee may cease the provision of Single Tandem FRIACO to the Operator at any of its Tandem Switches. Such cessation shall be limited to the number of Capacity Units equal to the number of Capacity Units in respect of which the Operator has failed to complete rearrangement.

35 Before ceasing to provide Single Tandem FRIACO pursuant to paragraph 34, the Licensee shall give the Operator a reasonable opportunity to determine at which Tandem Switches the provision of Single Tandem FRIACO shall cease.

36 In addition to any action taken pursuant to paragraph 34, for the period that the Operator fails to complete such rearrangements, the Licensee shall not be obliged to enter into any further agreement with the Operator to provide Single Tandem FRIACO at any of the Licensee’s Tandem Switches.

37 Paragraphs 29 to 36 of this Direction shall only apply from 15 May 2002 until 31 January 2003, unless the Director shall otherwise direct.".

12. Where the Licensee is required to amend its Reference Interconnection Offer in order to comply with this Direction, it shall do so within 28 days of the date of publication of this Direction.

13. Except as otherwise defined in this Direction:

13.1 paragraph 4 of the BT Licence shall, with the necessary changes, apply to this Direction as it applies to the BT Licence; and

13.2 terms defined in the BT Licence or in the recitals hereto shall have the same meanings for the purposes of this Direction.

14. Unless otherwise stated, this Direction shall enter into force on the date of its publication.

David A Edmonds

Director General of Telecommunications

Consolidated Direction

(This is a consolidated version of the Direction of 26 May 2000, the Direction made on 13 February 2001 and published on 15 February 2001, and the Direction published on 15 May 2002. It is for information purposes only and does not form part of any of these Directions.)

1. BT (the "Licensee") shall offer to enter into an agreement with MCI Worldcom (the "Operator") on the terms of the necessary parts of the Licensee’s Reference Interconnection Offer as supplemented and varied by the provisions of this Direction ("the Offer").

2. The Offer shall relate only to the provision of FRIACO to the Operator and shall not relate to the provision of any other goods or services whatsoever except as expressly provided in this Direction.

3. The Offer shall include the following terms:

3.1 the Operator shall not be required to account for the volume of Internet Traffic passing through the Point of Connection, whether by reference to call minutes or otherwise;

3.2 the Licensee shall a provide a Point of Connection upon the Operator’s request at any DLE at which the Licensee separates Internet Traffic from other calls for any purpose (including, for the avoidance of doubt, for the purposes of the Licensee’s own business) (an "Enabled DLE");

3.3 where the Operator and the Licensee disagree whether a Point of Connection must be provided at any DLE, either party may refer the dispute to the Director for determination;

3.4 the Operator shall pay to the Licensee a charge not exceeding £ 341.92 (three hundred and forty one pounds and ninety two pence) per year (NB: These charges have now been incorporated into Condition 69.2 of BT's Public Telecommunications Licence), or such other amount as specified by the Director for each Point of Connection to which the Offer relates (the "DLE Charge"). Payment by the Operator of such charge shall be equivalent to the Licensee’s payment terms for corresponding metered interconnection services and shall be payable in arrears. Such payment terms shall apply from 26 May 2000. In addition, the Licensee may also offer the Operator alternative payment terms which are not payable in arrears where such terms are equivalent to the Licensee’s payment terms for corresponding metered interconnection services and apply from 26 May 2000;

3.5 where any Point of Connection is made available for the purposes of FRIACO for less than a whole year, the DLE Charge shall be reduced proportionately;

3.6 except as permitted by paragraph 4.3, the Licensee shall not make any additional charge or require any additional payment of any kind in addition to the DLE Charge under any agreement made as a consequence of the Offer and, in particular, shall not require any further charges for the use of any part of the Licensee’s Applicable System between the Subscriber’s telecommunications apparatus and the DLE;

4. The Offer may also include the following terms;

4.1 the Offer may only apply to Messages destined for numbers or number ranges which the Director has notified to the Operator and to the Licensee as being reserved for use with unmetered Internet Traffic;

4.2 the Licensee may require the Operator to demonstrate to the Licensee’s reasonable satisfaction that those numbers or number ranges are being so used;

4.3 the Licensee may make a reasonable additional charge for any IN or STP signalling services provided by the Licensee to the Operator at the Operator’s request for the purpose of using the FRIACO service and for any service provided under paragraph 8 and paragraphs 9 and 11. This paragraph applies from 26 May 2000;

4.4 The DLE Charge may be varied from time to time by agreement between the parties.

5. The Offer may also provide that nothing in any agreement made pursuant to it (the "Agreement") shall require the Licensee;

5.1 [deleted]

5.2 to provide a Point of Connection at any DLE which is not an Enabled DLE unless the Director shall otherwise direct.

6. BT shall make the Offer no later than 1 June 2000 and shall ensure that FRIACO is available at Enabled DLEs within a reasonable period thereafter.

7. The DLE Charge and the Single Tandem Charge shall be reviewed by the Director from time to time by reference to information on Internet Traffic using FRIACO.

8. The Licensee shall provide to the Operator, within a reasonable period of the Operator’s written request, a service for the conveyance of Internet Traffic from each Enabled DLE at which the Operator has requested a Point of Connection under paragraph 3.2 to any other Point of Connection which;

8.1 is a Point of Connection between the Licensee’s Applicable System and the Operator’s Applicable System; and

8.2 is situated in any premises in which any of the Licensee’s Tandem Switches are located as the Operator shall reasonably request.

9. In addition to its obligations under paragraph 8, the Licensee, subject to paragraphs 10, 12, 18, 19 and 21 shall from 7 working days after the date of publication of this Direction, offer to provide to the Operator, within a reasonable period of the Operator’s written request, FRIACO switched through any one of the Licensee’s Tandem Switches, to the Operator’s Point of Connection to that Tandem Switch, on the terms set out (with the necessary changes), in paragraphs 1, 2, 3.1, 4, and 10-27 inclusive of this Direction ("Single Tandem FRIACO").

10. Subject to paragraph 11, the obligation under paragraph 9 shall not apply where the Licensee reasonably informs the Operator that no Capacity Units exist, at the Tandem Switch where Single Tandem FRIACO is requested by the Operator, during the entire period up to and including 31 January 2003.

11. Subject to paragraphs 12, 18, 19 and 21 where no, or insufficient, Capacity Units exist at a Licensee's Tandem Switch where Single Tandem FRIACO is requested by the Operator, at any point during the period up to and including 31 January 2003, the Licensee shall offer to provide the Operator, within a reasonable period of the Operator’s written request, Single Tandem FRIACO at that Tandem Switch, subject to reasonable rearrangements being carried out at that Tandem Switch as set out in to paragraphs 13, 14 and 15.

12. The Licensee shall only be obliged to provide Single Tandem FRIACO to the Operator to a limit of a maximum of forty 2 Mbit/s ports at each of the Licensee’s Tandem Switches, unless the Director shall otherwise direct.

13. Subject to paragraphs 15 and 16, where the Licensee is not already providing Single Tandem FRIACO to the Operator, and the Licensee reasonably believes that there is or, as a result of the request for Single Tandem FRIACO received from the Operator will be, insufficient Capacity Units at a Licensee’s Tandem Switch (the "Relevant Tandem Switch"), but the Licensee has agreed in writing to provide Single Tandem FRIACO at the Relevant Tandem Switch to the Operator, the Licensee may reasonably rearrange any or all Messages conveyed to or from the Operator’s Applicable System so such Messages are not switched by the Relevant Tandem Switch. The Licensee may not rearrange Messages conveyed using Single Tandem FRIACO.

13A. The Licensee shall at the request of the Operator also convert existing metered wholesale Internet Traffic at the Relevant Tandem Switch to Single Tandem FRIACO where:

- such metered wholesale Internet Traffic is paid for by the End-user at an unmetered rate; and

- the Operator has not requested additional metered wholesale Internet Traffic at the Relevant Tandem Switch with a Ready for Test Date (as defined in the Licensee’s Reference Interconnection Offer) falling within the preceding six months.

13B. Where the Operator has converted existing metered wholesale Internet Traffic pursuant to paragraph 13A, any further request for additional metered wholesale Internet Traffic at the Relevant Tandem Switch, which has a Ready for Test Date within six months of such conversion, shall be treated by the Licensee as a request for Single Tandem FRIACO.

14. Subject to paragraphs 15 and 16, where the Licensee is already providing Single Tandem FRIACO to the Operator, and the Licensee reasonably believes that there is or, as a result of requests for Single Tandem FRIACO received from other operators will be, insufficient Capacity Units at a Licensee’s Tandem Switch (a "Saturated Tandem Switch") the Licensee may reasonably rearrange any or all Messages conveyed, to or from the Operator’s Applicable System so such Messages are not switched by a Saturated Tandem Switch. The Licensee may not rearrange Messages conveyed using Single Tandem FRIACO.

15. The Licensee may only take action pursuant to paragraphs 13 and 14 (and those paragraphs will only apply) provided that, in relation to such action:

(i) it is necessary to enable the Licensee to provide Single Tandem FRIACO pursuant to paragraph 11;

(ii) the Licensee acts in a reasonable manner at all times including, in particular, giving reasonable notice of any such action to the Operator;

(iii) except as provided in this Direction, the Licensee shall not raise any additional charge or require any additional payment of any kind; and

(iv) the rearrangement of Messages does not materially affect the quality of service provided to the Operator.

16. The Licensee shall only require the Operator to rearrange any Messages pursuant to this Direction such that the number of Capacity Units subject to rearrangement is no greater than twice the total number of Single Tandem FRIACO Capacity Units that the Licensee is providing (including those which the Licensee has agreed, conditionally or otherwise, in writing to provide) to the Operator, at all the Licensee’s Tandem Switches, ("the Rearrangement Commitment"), unless the Director shall otherwise direct. Capacity Units counting towards the Rearrangement Commitment shall be any Capacity Units in respect of which the Operator completes rearrangement as a result of the operation of this Direction.

16A. The Rearrangement Commitment shall also include Capacity Units which an Operator voluntarily requests the Licensee to convert from metered wholesale Internet Traffic to Single Tandem FRIACO at the same Tandem Switch where such metered wholesale Internet Traffic is paid for by the End-user at an unmetered rate.

17. The Licensee shall not be permitted to rearrange to any of its Tandem Switches any Messages conveyed, or to be conveyed, over the Operator’s Applicable System, which have already been rearranged pursuant to this Direction.

18. Where pursuant to paragraphs 13 and 14 the Licensee has requested the Operator, or another operator, to complete rearrangement of Messages so that the Licensee can provide Single Tandem FRIACO to the Operator or another operator, but the Operator, or other operator, does not take the required action, the Licensee’s obligation to provide Single Tandem FRIACO to any operator shall be limited to the number of Capacity Units equal to the number of Capacity Units in respect of which rearrangements have been completed, by the Operator or by another operator.

19. Where pursuant to paragraphs 13 and 14 the Licensee has requested the Operator to complete rearrangements so that another operator can be provided with Single Tandem FRIACO and the Operator does not take the necessary measures to enable the Licensee to carry out the necessary rearrangement, the Licensee may cease the provision of Single Tandem FRIACO to the Operator at any of its Tandem Switches. Such cessation shall be limited to the number of Capacity Units equal to the number of Capacity Units in respect of which the Operator has failed to complete rearrangement.

20. Before ceasing to provide Single Tandem FRIACO pursuant to paragraph 19, the Licensee shall give the Operator a reasonable opportunity to determine at which Tandem Switches the provision of Single Tandem FRIACO shall cease.

21. In addition to any action taken pursuant to paragraph 19, for the period that the Operator fails to complete such rearrangements, the Licensee shall not be obliged to enter into any further agreement with the Operator to provide Single Tandem FRIACO at any of the Licensee’s Tandem Switches.

22. Paragraphs 10 to 21 of this Direction shall only apply from the date of publication of this Direction until 31 January 2003, unless the Director shall otherwise direct.

23. The Operator shall pay to the Licensee a charge not exceeding £507.47 (five hundred and seven pounds and forty-seven pence) per year (NB: These charges have now been incorporated into Condition 69.2 of BT's Public Telecommunications Licence), or such other amount as specified by the Director, for each Point of Connection provided pursuant to paragraphs 9 and 11 and to which is connected a circuit of a capacity of no greater than 64 Kbit/s (the "Single Tandem Charge"). Where any such Point of Connection is provided for less than a whole year the Single Tandem Charge shall be reduced proportionately. Payment by the Operator of such charge shall be equivalent to the Licensee’s payment terms for corresponding metered interconnection services and shall be payable in arrears. Such payment terms shall apply from 15 February 2001. In addition, the Licensee may also offer the Operator alternative payment terms which are not payable in arrears where such terms are equivalent to the Licensee’s payment terms for corresponding metered interconnection services and apply from 15 February 2001.

24. Where the Licensee reasonably believes that, in order to fulfil the obligations in paragraph 9 for any period after 31 January 2003, it is required to incur capital expenditure in purchasing Tandem Switches in excess of £2,500,000 (two million and five hundred thousand pounds) ("Additional Network Expenditure"), unless the Director shall otherwise direct, it may so inform the Operator and request the Operator to enter into negotiations in good faith to agree how the Additional Network Expenditure should be borne.

25. If negotiations have been commenced under paragraph 24 but no agreement has been reached by 1 September 2001 (unless the Director shall otherwise direct) either party may thereafter refer the matter to the Director for a determination or the Director may in any event then intervene on his own initiative to determine the terms of the agreement.

26. The Licensee shall not disclose to any operators, the names of any operators ordering Single Tandem FRIACO, unless directed to do so by the Director.

27. The terms "Operator" or "operator" shall be deemed to include members of the Operator’s or operator’s Group to the extent to which such members have Annex II status.

28. In the event of a dispute between the Operator and the Licensee as to the reasonableness of any charge, period or request made by the Operator or the Licensee pursuant to the Agreement, the Director may make a further direction to determine the dispute.

29. Paragraphs 30 to 36 of this Direction shall apply where:

- no, or insufficient, Capacity Units exist at a Licensee's Tandem Switch where Single Tandem FRIACO is being provided, at any point during 16 weeks from an Operator’s written request for non-Single Tandem FRIACO traffic; and

For the purpose of this paragraph adjusted demand shall be calculated at the Tandem Switch as equal to the sum of the following:

- metered capacity supplied at the Tandem Switch;

- metered capacity requested by Operators;

30. Where the Licensee is already providing Single Tandem FRIACO traffic to the Operator, and the conditions in paragraph 29 are fulfilled, the Licensee may reasonably rearrange any or all Messages conveyed to or from the Operator’s Applicable System so that such Messages are not switched by the Tandem Switch. The Licensee may not rearrange Messages conveyed using Single Tandem FRIACO.

31. The Licensee shall only be allowed to make rearrangements pursuant to paragraph 30 equal to no more than the number of the Capacity Units equal to the difference between the Capacity Units at the Tandem Switch and the adjusted demand.

32. The Licensee may only take action pursuant to paragraph 30 provided that, in relation to such action:

33. Where pursuant to paragraph 30 the Licensee has requested the Operator, or another operator, to complete rearrangement of Messages so that the Licensee can provide non-Single Tandem FRIACO to another operator, but the Operator, or other operator, does not take the required action, the Licensee’s obligation to provide non-Single Tandem FRIACO to any operator shall be limited to the number of Capacity Units equal to the number of Capacity Units in respect of which rearrangements have been completed, by the Operator or by another operator.

34. Where pursuant to paragraph 30 the Licensee has requested the Operator to complete rearrangements so that another operator can be provided with non-Single Tandem FRIACO traffic and the Operator does not take the necessary measures to enable the Licensee to carry out the necessary rearrangement, the Licensee may cease the provision of Single Tandem FRIACO to the Operator at any of its Tandem Switches. Such cessation shall be limited to the number of Capacity Units equal to the number of Capacity Units in respect of which the Operator has failed to complete rearrangement.

35. Before ceasing to provide Single Tandem FRIACO pursuant to paragraph 34, the Licensee shall give the Operator a reasonable opportunity to determine at which Tandem Switches the provision of Single Tandem FRIACO shall cease.

36. In addition to any action taken pursuant to paragraph 34, for the period that the Operator fails to complete such rearrangements, the Licensee shall not be obliged to enter into any further agreement with the Operator to provide Single Tandem FRIACO at any of the Licensee’s Tandem Switches.

37. Paragraphs 29 to 36 of this Direction shall only apply from 15 May 2002 until 31 January 2003, unless the Director shall otherwise direct.

38. Except as otherwise defined in this Direction;

David A Edmonds

Director General of Telecommunications.

Explanatory Document

Summary

S.1 The Director General of Telecommunications (the ‘Director’) is making a Direction under Condition 45.2 of the licence granted to British Telecommunications plc (‘BT’) and under Regulation 6(6) of the Telecommunications (Interconnection) Regulations 1997, on a number of matters relating to the terms and conditions under which Single Tandem Flat Rate Internet Access Call Origination (‘ST FRIACO’) and Digital Local Exchange Flat Rate Internet Access Call Origination (‘DLE FRIACO’) are supplied in the United Kingdom. This latest Direction amends the Direction published on 15 February 2001, which in turn amended the Direction of 26 May 2000.

S.2 This explanatory document sets out:

a) the background to this latest Direction, explained in Chapter 1;

b) the Director’s objectives and approach, described in Chapter 2;

c) the issues considered by the Director in making this Direction; and

d) the reasoning behind the Director’s solutions.

S.3 The issues discussed are as follows.

S.4 Chapter 3 looks at the equivalence of the payment terms for metered and unmetered interconnect. In the consultation document (published on 28 January 2002), the Director proposed that BT should offer revised terms for FRIACO, equivalent to those for metered interconnection, and although he did not specify precisely how this should be done, two examples of equivalent payment terms were given. These examples demonstrated two different ways in which BT might achieve equivalence with metered interconnection by amending to payment in arrears.

S.5 In this document, the Director is confirming his proposals, adding clarification where appropriate to emphasise how equivalence with metered interconnection can be achieved. The Director is further confirming that the changes must be retrospective, ie applicable from the date the respective products were first introduced. The Director, in addition, states that BT must publish a revised FRIACO offer containing equivalent payment terms within 28 days of the publication of the Direction.

S.6 The Director further noted that BT had the option, in addition to the offering of equivalent payment terms in arrears as described above, of reaching mutually satisfactory individual arrangements with operators in which the payment terms remained upfront, and therefore not equivalent to metered interconnection, but with the FRIACO charge reduced to compensate. The Direction confirms that this remains a valid additional option.

S.7 Chapter 4 looks at the scope for BT to charge for Intelligent Network (‘IN’) services. In the consultation document, the Director proposed that BT should be given explicit permission to make an IN charge in connection with ST FRIACO, in the same way as it has been given permission to make an IN charge for DLE FRIACO. The Director proposed that permission should be given retrospectively to the start of ST FRIACO. In this document, the Director is confirming this proposal, and gives a more detailed explanation of IN services and why a charge is necessary.

S.8 Chapter 5 discusses the facility for an operator’s rearrangement commitment to be wholly or partly satisfied by voluntary conversion of its capacity units at a tandem switch from non-ST FRIACO to ST FRIACO. In the consultation document, the Director outlined two alternatives, namely conversion of capacity only for wholesale metered traffic that is already sold on an unmetered basis at the retail level, and conversion of capacity for any metered wholesale traffic. Following consultation, the Director has decided that adoption of the second alternative would be disproportionate in relation to the level of demand expressed for this facility.

S.9 In this document, therefore, the Director is confirming the first of the above proposals, and that such conversion will count towards an operator’s rearrangement commitment. The Director is also introducing certain associated restrictions, designed to limit the opportunity for an operator to use the conversion of capacity to obtain ST FRIACO that, under the guidelines set out in the Direction published in February 2001, it would not be entitled to receive.

S.10 Chapter 6 gives an outline of the circumstances in which the Director considers BT should invest in additional capacity for metered traffic during FRIACO Stage 1.

S.11 Chapter 7 discusses the facility for BT to reasonably require rearrangement of traffic in order to maintain the supply of ST FRIACO. In the consultation document, the Director proposed that BT should be permitted to do this when it receives a request for metered capacity at a tandem switch where ST FRIACO has been purchased and there is insufficient capacity available to meet the new request for metered traffic.

S.12 In this document, the Director is confirming this proposal, and that BT should look 16 weeks ahead when assessing whether spare capacity exists in this situation.

S.13 Finally, Chapter 8 looks at the period to which an operator’s request for ST FRIACO relates, and consequently what period BT should use to assess whether sufficient spare capacity exists for new requests for ST FRIACO to be supplied without rearrangement. The Director is confirming his proposal that the period of assessment for new ST FRIACO requests should be to the start of FRIACO Stage 2 on 1 February 2003.

S.14 Readers of this document are recommended to read it in conjunction with the following documents previously published by the Director in connection with FRIACO:

Chapter 1 Background

1.1 This chapter sets out the background to the Direction, providing a brief history of FRIACO in the United Kingdom and setting out the principal requirements of the ST FRIACO Direction published by the Director on 15 February 2001.

1.2 In December 1999, a dispute between MCI WorldCom plc (‘WorldCom’) and BT was referred to the Director. WorldCom complained that BT was supplying unmetered products to consumers, without making available a comparable wholesale product which would enable its competitors to provide equivalent unmetered services.

1.3 As BT had almost exclusive control of the local network connecting customers’ premises to the Public Switched Telephone Network (‘PSTN’), it was usually necessary for an Other Licensed Operator (‘OLO’) wishing to offer unmetered products to its customers, to pay BT for use of that local network. In the absence of a wholesale unmetered service, the OLO would have obtained fixed revenue from its customers but paid for use of the local network on a metered (pence per minute) basis. Thus, if its customers used the service extensively (as might prove to be the case with unmetered internet connection), the OLO’s revenues would not cover its costs.

1.4 WorldCom’s original requirement was for flat rate interconnection at BT’s tandem exchanges where most operators historically connected to BT’s network. BT resisted this, arguing that the unrestricted conveyance of unmetered Internet traffic across the tandem network would cause it to overload affecting all types of calls. BT had already started to ‘groom’ its own Internet traffic off the network at local exchanges so that calls could be conveyed across its separate Internet Protocol (‘IP’) network for delivery to Internet Service Providers (‘ISPs’). From early 2000 BT similarly required other operators to extend their networks to the local exchanges, in a phased manner.

1.5 As the Director has a duty to ensure that the interests of all consumers are served, he could not risk overloading of the network, with all its attendant consequences. Thus, the Director’s first FRIACO-related Direction, published on 26 May 2000, required BT to offer only DLE FRIACO, that is, wholesale flat rate Internet access from its local exchanges. This allowed those OLOs interconnecting at the local exchange level to purchase wholesale unmetered call origination in order to offer services to compete with BT’s SurfTime Internet products, launched on 1 June 2000.

1.6 For those OLOs interconnected at the tandem network level, as an interim measure BT made available Interconnection Extension Circuits (‘IECs’) from the local exchange to the tandem exchange.

1.7 In the meantime, as it had become clear from the consultation that preceded the May 2000 Direction that it was unreasonable to expect OLOs to interconnect at all of BT’s local exchanges, the Director commissioned independent technical advice on how unmetered Internet traffic could be conveyed to tandem exchanges without overloading the core network. The advice received confirmed that the expected growth in Internet calls would soon exceed the capacity of the network unless action was taken. A staged programme of developments was recommended which would allow limited tandem interconnection in the short term and unlimited access within 2 years.

1.8 This advice led the Director to make the second FRIACO-related Direction, published on 15 February 2001, requiring BT to make ST FRIACO available from its tandem exchanges. The further work by Oftel and its consultants had identified some spare capacity in BT’s tandem exchanges, and that more capacity could be released by re-arrangement of OLOs’ metered traffic to local exchanges.

1.9 The Direction contained a two-staged solution. During Stage 1, which started on 26 February 2001, in order to ensure that the obligation on BT to provide ST FRIACO is reasonable and technically feasible given the potential shortage in tandem switch capacity;

1.10 In the medium to longer term, from the start of Stage 2 on 1 February 2003, BT’s obligation to supply ST FRIACO will not be dependent on the limitations noted in paragraph 1.9 above. By that stage, BT will be expected, if necessary, to have taken further steps to address network capacity issues in order to meet this obligation. The cost of any additional capacity necessary for Stage 2 must be borne by all operators who purchase ST FRIACO.

1.11 Meanwhile, Oftel is monitoring industry discussions on the development of an IP Interconnection FRIACO service, which could provide a more efficient means for operators to connect to BT’s network.

1.12 BT’s other obligations, to supply interconnection for metered Internet access (pursuant to its Reference Interconnection Offer) and to supply FRIACO to the DLE, remain in force.

Chapter 2

Oftel’s objectives and approach

2.1 The Direction deals with issues arising from the original dispute between WorldCom and BT which remain to be resolved, and which have been raised by operators during the twelve months since the Director’s last Direction on FRIACO, issued in February 2001. These issues relate to the terms and conditions under which DLE FRIACO and ST FRIACO are provided to operators by BT.

2.2 Directive 97/33/EC requires national regulatory authorities to encourage and secure adequate interconnection in the interests of all users, exercising their responsibility in a way that provides maximum economic efficiency and gives the maximum benefit to end-users. In particular, national regulatory authorities should take into account, inter alia, the need to stimulate a competitive market, and (when resolving interconnection disputes) the availability of technically and commercially viable alternatives to the interconnection requested.

2.3 The changes brought about by this Direction do not represent any judgement by the Director as to the relative merits of narrowband internet connections vis-à-vis broadband internet connections. Nor are any of the changes prompted primarily by a desire to stimulate the demand for FRIACO products, as suggested by BT in its response to the consultation. Rather, the changes seek to ensure that all services are provided on a "level playing field", maximising the ability of operators to make the most economically efficient interconnection arrangements possible, and in turn delivering the maximum benefit to end-users, as noted in paragraph 2.2 above.

2.4 The Director’s approach to the making of this Direction involved the publication of a consultation document on 28 January 2002, containing a number of proposals for discussion. This was followed by a 28 day period of consultation, during which time responses were received from eight respondents, one of whom asked for their response to be kept confidential. The remainder of the responses can be viewed on Oftel’s website, at www.oftel.gov.uk/publications/responses/2002/fria0102/index.htm .

2.5 Following full consideration of all the responses, the Director is confirming his proposals in the attached Direction. The draft Direction, included as an annex to the consultation document, contained two areas where there was a choice of potential outcome, depending on the Director’s consideration of the responses received and the various factors involved. The final Direction in each case contains the most appropriate outcome.

2.6 Most of the responses addressed only those issues discussed in the consultation. However, some respondents took the opportunity to raise certain other FRIACO-related issues which were not directly relevant to the issues consulted upon. In most cases, the Director is responding directly to those respondents, since the majority of these issues are being dealt with separately.

2.7 One particular issue of wider interest which should be mentioned, however, is that of the termination of FRIACO liability following the cessation of a FRIACO circuit, raised by MediaWays. In essence, BT is refusing to provide a refund for the unused portion of the DLE FRIACO Virtual Path charge, in the event of cancellation of FRIACO circuits.

2.8 It appears to the Director, without fettering his discretion concerning the complaint before him (see paragraph below), that BT may have misinterpreted paragraphs 3.5 and 23 of the Direction (for DLE and ST FRIACO respectively). These paragraphs state that where any Point of Connection is provided for less than a whole year, the Charge shall be reduced proportionately.

2.9 This issue is being dealt with separately by the Director in the context of a compliance case, reference CW/00500/01/02, following a complaint by Carrier 1.

Chapter 3

Equivalent payment terms for metered and unmetered interconnect

3.1 This chapter addresses the issue of the payment terms for unmetered interconnection, currently comprising DLE FRIACO and ST FRIACO.

3.2 In its response to an earlier consultation, Energis highlighted the fact that payment terms differed between metered and unmetered interconnection services and that this might create a distortion between the two, since paying in arrears (as is the case for metered interconnection) is more attractive than paying upfront (as is the current practice for FRIACO).

3.3 Although in previous Directions the Director has not commented on payment terms specifically, it is important to clarify that the derivation of both DLE FRIACO and ST FRIACO charges implicitly assumes equivalent payment terms for metered and unmetered interconnection. This is because the cost information used in calculating charges for FRIACO included costs of working capital, which reflected the payment terms for metered interconnection services. The terms for the payment of the FRIACO charge should, therefore, be equivalent to those for metered interconnection.

3.4 There are various methods by which the payment terms for FRIACO could be made equivalent to those for metered interconnection. Assume, for illustration, that the payment terms for metered interconnection provide 45 days’ credit, comprising:

b) further month to pay the bill, providing an additional 30 days’ credit.

3.5 Equivalent payment terms for FRIACO could be achieved in a number of ways. Two examples have already been given by the Director in the consultation document published on 28 January 2002, as follows:

• 12 monthly payments, with billing monthly in arrears (providing, on average, the 15 days’ credit noted in (a) above) plus a further month to pay the bill (as noted in (b) above); or
• a single annual payment, with billing 6 months and 15 days into the annual period covered by the FRIACO service (providing about 15 days’ credit, on average, since the single payment would be made 15 days later than the midpoint of the year), plus a further month to pay the bill.

3.6 The Director does not propose to direct BT as to the precise method by which the payment terms for FRIACO should be made equivalent to those for metered interconnection, as requested by some operators, since the principal goal of addressing this issue is to create a "level playing field" for the various methods of internet access. This is in line with Oftel’s strategy of regulatory intervention only where necessary to achieve the best deal for the consumer.

3.7 However, the Director does consider it necessary to emphasise that equivalence of the payment terms for FRIACO with those for metered interconnection can only be achieved by amendment of the payment terms to some form of payment in arrears, as illustrated in the examples given above.

3.8 Accordingly, the Director has amended Paragraphs 3.4 and 23 (NB: In the draft Direction the Director proposed to amend Paragraph 3.5 as well. However, there is no need to amend this paragraph, as the payment terms which govern the DLE charge are clearly set out in paragraph 3.4 of the Direction, as amended) of the Direction to state that the FRIACO charges determined within the Direction are to be associated with payment terms for FRIACO that are equivalent to those for corresponding metered interconnection services (ie call origination and local-tandem conveyance), and that such terms must consist of some form of payment in arrears. BT should publish a revised FRIACO offer containing equivalent payment terms within 28 days of the publication of the Direction.

3.9 The equivalent payment terms that are to be introduced, should apply retrospectively (for DLE FRIACO, from 26 May 2000, and for ST FRIACO, from 15 February 2001). Thus, those operators already having ordered and/or paid for unmetered interconnection should receive a refund of any amount "overcharged", given that they may have paid in advance and so on terms that were not equivalent. The amounts that are to be refunded should be agreed between the parties to the particular contract.

3.10 The Director further noted in the consultation document published on 28 January 2002 that it is possible for BT and an operator purchasing FRIACO to reach a mutually satisfactory arrangement, in which the payment terms for FRIACO remain upfront, and therefore not equivalent to and less favourable than those for metered interconnection, but with the charge for FRIACO reduced to compensate. The Direction makes it clear that BT is also entitled to offer such arrangements as an alternative and in addition to the combination of charges for FRIACO previously determined and equivalent payment terms as described above. Any such arrangement would, however, have to be non-discriminatory and cost-oriented, in order for BT to comply with its licence.

Chapter 4

Charging for Intelligent Network services

4.1 This chapter looks at recovery of the costs associated with the use of Intelligent Network (‘IN’) equipment, in connection with the supply of FRIACO.

4.2 DLEs have traditionally routed calls by decoding the dialled number, one digit at a time, starting with the most significant digit, and comparing the result with routing tables stored on the switch. The decode process continues until sufficient digits have been analysed for the routing of the call to be uniquely determined. Calls to geographic numbers, for example, which are allocated in blocks of 10,000 numbers, can be routed once the first 6 digits of the 10 digit dialled number have been analysed.

4.3 If the number of digits which must be analysed increases, this will result in an increase in the processing capacity required at each DLE. This is the case for calls to all FRIACO numbers, which are allocated in blocks of 1,000, and can therefore be routed only once the first 7 digits have been analysed. This creates a potential problem, since the call handling capacity of DLEs is normally limited by processor capacity.

4.4 The solution adopted by BT is to offload the detailed analysis of the dialled number from the DLE to an external processor and associated database. The DLE only decodes sufficient digits of the dialled number to determine that a call is to a FRIACO number, before submitting a query to the external processor. The external processor carries out the detailed analysis of the called number and returns the required routing information to the DLE. An IN architecture is used, under which the DLE acts as an IN Service Switching Point (SSP), whilst the external processor and associated database constitute an IN Service Control Point (SCP).

4.5 Under the terms of the first FRIACO Direction published on 26 May 2000, the Director confirmed in paragraph 4.3 (and provided supporting explanation in paragraph 33) that BT was permitted to impose reasonable charges on OLOs for the costs associated with IN services. This IN charge, which can be levied in addition to the DLE FRIACO charge that is determined by the Director, is classified as a ‘new’ Standard Service under the Network Charge Control and therefore is not currently subject to any regulation.

4.6 It was the Director’s intention that this permission for BT to impose reasonable charges on OLOs for the costs associated with IN services, should apply equally to ST FRIACO. Accordingly, the Director has amended Paragraph 4.3 of the Direction to apply additionally in respect of any service which has already been provided or will be provided under paragraphs 9 and 11 of the Direction. For the avoidance of doubt, paragraph 4.3 of the Direction applies from 26 May 2000.

4.7 It should be noted, however, that this amendment is made without prejudice and does not fetter the Director’s discretion with regard to the current investigation into the level of the charges associated with IN services (also known as the ‘IN Dip’), reference CW/00407/04/01 – see issue 21 of Oftel’s Competition Bulletin, at page 5.

Chapter 5

Voluntary conversion of capacity units counting towards an operator’s rearrangement commitment

5.1 This chapter looks at the ways in which an OLO can satisfy its rearrangement commitment.

5.2 In order to release some additional capacity for ST FRIACO, the Direction of 15 February 2001 stated in paragraphs 13 and 14 that BT could, where insufficient capacity existed at the relevant tandem switch, reasonably rearrange any or all of an ST FRIACO operator’s non-ST FRIACO (ie metered voice or data) traffic (but see paragraph 5.3 below). The Guidance document published on 18 July 2001 gave details of the actions the Director would consider to be reasonable in this connection.

5.3 Paragraph 16 of the Direction limits the amount of an OLO’s non-ST FRIACO traffic that BT can reasonably rearrange to no greater than twice the total number of ST FRIACO Capacity Units that BT is providing or has agreed to provide to that OLO, at all of BT’s tandem switches. This is known as an operator’s ‘Rearrangement Commitment’.

5.4 Paragraph 4.63 of the Explanatory Document to the February 2001 Direction set out the ways in which an operator might satisfy its rearrangement commitment.

5.5 Firstly, under the heading ‘Forced rearrangement at ST charges’, it detailed the situation where BT asks an ST FRIACO operator to rearrange non-FRIACO traffic in order that BT can meet a request to supply ST FRIACO, and the rearrangement is carried out with the operator paying charges at the single tandem rate for the rearranged traffic.

5.6 Secondly, under the heading ‘Forced rearrangement at DLE charges’, it set out the situation where BT asks an ST FRIACO operator to rearrange non-FRIACO traffic in order that BT can meet a request to supply ST FRIACO, and the rearrangement is carried out with the operator choosing to pay DLE charges for the rearranged traffic. In these circumstances, the operator would also need to pay the charges for any IBLs, CSIs, STP links, IECs, or other links necessary to achieve rearrangement.

5.7 Thirdly, under the heading ‘Voluntary’, the Direction detailed the situation where, unrelated to a specific request from BT, an ST FRIACO operator voluntarily chooses to interconnect at the DLE, paying DLE interconnection charges and the cost of any necessary IBLs, CSIs, STP links, IECs, or other links.

5.8 In Paragraph 16 of the Explanatory Note to the Guidance document published on 18 July 2001, the Director noted one operator’s suggestion that it should also be possible for an OLO’s rearrangement commitment to be wholly or partly satisfied by the voluntary conversion at a tandem switch of its capacity units currently being utilised for unmetered Internet traffic (carried on a metered basis at the wholesale level) into ST FRIACO capacity.

5.9 The arguments in favour of this are as follows:

5.10 The February 2001 Direction did not explicitly allow for conversion of capacity. The Director considers that conversion of metered wholesale Internet capacity at a tandem switch that is unmetered at the retail level should be permitted, and that an operator’s rearrangement commitment can be wholly or partly satisfied by such voluntary conversion.

5.11 Accordingly, the following text is being added as paragraph 13A of the Direction:

"The Licensee shall at the request of the Operator also convert existing metered wholesale Internet Traffic at the Relevant Tandem Switch to Single Tandem FRIACO where:

- such metered wholesale Internet Traffic is paid for by the End-user at an unmetered rate; and

- the Operator has not requested additional metered wholesale Internet Traffic at the Relevant Tandem Switch with a Ready for Test Date (as defined in the Licensee’s Reference Interconnection Offer) falling within the preceding six months.".

5.12 In addition, the following text is being added as paragraph 16A of the Direction:

"The Rearrangement Commitment shall also include Capacity Units which an Operator voluntarily requests the Licensee to convert from metered wholesale Internet Traffic to Single Tandem FRIACO at the same Tandem Switch where such metered wholesale Internet Traffic is paid for by the End-user at an unmetered rate.".

5.13 As the conversion to ST FRIACO of metered capacity does not involve BT in physical rearrangement of traffic to DLEs, the Director expects that in such circumstances BT would not normally have reasonable grounds for refusing to supply ST FRIACO within the shortest timescales possible (ie the timescales set out in paragraph 16 of the Guidance document published on 18 July 2001).

5.14 Following consultation, the Director considers that appropriate safeguards are necessary to prevent conversion of capacity enabling an operator to obtain ST FRIACO "by stealth" and without the need for reasonable rearrangements. It is envisaged that this could occur either:

The operator might, in either of these circumstances, end up with additional metered capacity plus ST FRIACO capacity. The ST FRIACO capacity might not have been available without rearrangement. If rearrangements were not possible for whatever reason, then BT would need to invest in additional tandem capacity that would not have been required in the absence of ST FRIACO.

5.15 In order to prevent these types of abuse from occurring, the Director is adding the following safeguards to the Direction.

5.16 In order to deal with scenario (a), where an operator has increased its metered interconnect capacity at a particular tandem switch, it will not be permitted to convert any metered capacity at that tandem switch into ST FRIACO at any time within six months of the Ready For Test ("RFT") date for the additional capacity.

5.17 In order to deal with scenario (b), where an operator has converted metered interconnect capacity into ST FRIACO at a particular tandem switch, a request for additional metered capacity at that tandem switch required to be RFT at any time within six months of the conversion will be treated for the purposes of capacity assessment and acceptance of the request as though it was a request for ST FRIACO capacity.

5.18 The Director does not propose at this stage to extend the scope of the rearrangement commitment still further, to include either voluntary conversion of any Internet traffic that is carried on a metered basis at the wholesale level whether it is used for unmetered or metered purposes at the retail level; or voluntary conversion of capacity from non-ST FRIACO at a particular tandem switch to ST FRIACO at a different tandem switch; in view of the lack of demand for these additional facilities.

Chapter 6

Circumstances in which the Director considers BT should invest in additional capacity for metered traffic during FRIACO Stage 1

6.1 In the Guidance document published on 18 July 2001, the Director set out at Annex A to the Explanatory Note the circumstances in which BT is obliged to invest in additional tandem capacity during FRIACO Stage 1. For the sake of clarity, and in order to set in context the discussion which follows in Chapter 7 regarding the rearrangement of traffic in order to maintain the supply of ST FRIACO, the points made in that document are reproduced below, suitably amended to take account of the inclusion of conversion of capacity into operators’ rearrangement commitments (see Chapter 5). It should be noted that the content of this chapter has not, with the exception of paragraph 6.4, been incorporated into the Direction.

6.2 The Director considers that there remains an obligation upon BT to build additional capacity where there is insufficient capacity to meet demand for metered interconnect ports, not only at a particular tandem switch where no ports have been allocated to ST FRIACO, but also in some circumstances where some ports have been allocated for ST FRIACO purposes.

6.3 In essence, during Stage 1, BT is required to invest in tandem capacity where it would have been required to do so had ST FRIACO not been introduced. In other words, BT is expected to make incremental additions to tandem capacity in order to meet its obligations to supply metered interconnection.

6.4 ST FRIACO and rearrangements have made the issue of whether investment is required more complex. However, at a general level, the total demand for tandem capacity at a given switch that would have existed had ST FRIACO not been introduced is equal to the sum of the following:

1. Tandem metered capacity supplied and requested at the switch;

2. Non FRIACO capacity rearranged to DLE as a result of the Direction;

3. Growth on these rearranged routes;

4. Tandem capacity converted from metered to ST FRIACO;

5. Growth on the routes that have been converted to ST FRIACO.

6.5 If the total capacity on a switch is less than the above demand for tandem capacity that would have existed at the switch had ST FRIACO not been introduced, then BT is required to make additional investment in Stage 1 in order to meet its obligations to supply metered interconnect.

6.6 In order to provide further clarification, we set out below some scenarios in which BT would or would not be required to invest in new capacity during Stage 1. Note that this is not intended to be an exhaustive list of the scenarios that might arise.

6.7 Scenario 1: No ST FRIACO is being supplied at the switch. BT receives a request for metered interconnect. No spare capacity available.