A
consultation issued by the Director General of Telecommunications
Contents
Draft
Direction
Explanatory
Memorandum
Summary
Chapter
1 – Background
Chapter
2 – Functionality of the Intelligent Network for FRIACO
Chapter
3 – The Director’s Proposals
Chapter
4 – Consultation
Annex
A – Glossary
Draft Direction
under the provisions of Regulation 6(3) of the Telecommunications (Interconnection)
Regulations 1997 regarding the Intelligent Network Charge for Flat Rate
Internet Access Call Origination
WHEREAS:
A) The Secretary
of the State granted to British Telecommunications on 22 June 1984 a
licence (the "Licence") under section 7 of the Telecommunications
Act 1984 (the "Act") for the running of the telecommunication systems
specified in Annex A to the Licence;
B) By virtue of
Section 109 of, and paragraph 20 of Schedule 5 to, the Act, the Licence
has effect as if granted to British Telecommunications plc ("BT");
C) On 26 May 2000
the Director issued a direction (the ‘First Direction’) under Regulation
6(6) of the Telecommunications (Interconnection) Regulations 1997 (the
"Regulations") requiring BT to enter into an agreement with MCI
Worldcom plc relating to the provision of Flat Rate Internet Access
Call Origination ("FRIACO"). The First Direction specified
in paragraph 4.3 that BT may make a reasonable additional charge for
any Intelligent Network ("IN") or Signalling Transfer Point
("STP") signalling services provided by BT for the purpose
of using the FRIACO service and for any service provided under paragraph
8 of the First Direction;
D) On 15 February
2001 the Director published a second direction (the "Second Direction")
amending the First Direction by inserting inter alia new paragraphs
9 and 11 to require BT to make Single Tandem FRIACO available from its
tandem exchanges;
E) On 15 May 2002
the Director published a third direction (the ‘Third Direction’) which
amended paragraph 4.3 of the First Direction to enable BT to make a
reasonable additional charge for any IN or STP signalling services provided
by BT for the FRIACO services required to be provided under the First
Direction as amended by the Second Direction (the ‘IN Charge’);
F) BT, in accordance
with Condition 45 of the Licence, has entered into interconnection agreements
with a number of Operators regarding the provision of FRIACO. The term
"Operators" in this direction shall refer to those operators that have
entered into such an interconnection agreement with BT. The terms of
those agreements reflect the terms as set out in the First Direction
as amended by the Second and Third Direction;
G) Following a complaint
made by Cable and Wireless UK Services Limited and Energis plc the Director
has been investigating the level of the IN Charge made by BT. The Director
has reached the conclusion that BT should not be permitted to make the
IN Charge;
H) The Regulations
inter alia implement Directive 97/33/EC on interconnection in telecommunications
with regard to ensuring universal service and interoperability through
application of the principles of open network provision;
I) Regulation 6(1)
of the Regulations provides that the Director shall encourage and secure
adequate interconnection in the interests of all users and that he exercises
his functions in a way that provides maximum economic efficiency and
gives maximum benefit to end-users having regard to the matters set
out in Regulation 6(1)(a) to (g) of the Regulations.
J) Pursuant to Regulation
6(3) of the Regulations the Director may intervene at any time, in order
to make a direction specifying issues which must be covered in an interconnection
agreement, or to make a direction that specific conditions be observed
by one or more parties to such an agreement. The Director may in exceptional
circumstances make a direction that changes be made to interconnection
agreements already concluded where it is justified to ensure effective
competition or interoperability of services for users or both;
K) A draft of this
direction and the explanatory memorandum were published on [….2003]
and comments invited by [….2003];
L) Comments were
received from […] and these have been considered by the Director.
THEREFORE
the Director, pursuant
to Regulation 6(3) of the Telecommunications (Interconnection) Regulations
1997 makes the following direction:
1. With effect from
1 December 2001 BT shall not be permitted to make any additional charge
for Intelligent Network or Signalling Transfer Point signalling services
provided by BT to the Operators for the purposes set out in Paragraph
4.3 of a direction issued by the Director on 26 May 2000 as amended
by directions published on 15 February 2001 and 15 May 2002 (the ‘Consolidated
Direction’).
2. Paragraph 4.3
of the Consolidated Direction shall be revoked.
3. BT and the Operators
shall amend their interconnection agreements relating to the provision
of FRIACO to give effect to this direction by 28 days from the date
of this direction.
4. In respect of
any IN charge repayable by BT to the Operators in accordance with this
direction, BT shall pay to the Operators the amount repayable together
with interest calculated in accordance with paragraph 13.13 of the Standard
Interconnection Agreement.
5. The terms defined
or described in the recitals to this direction shall have the meaning
so defined or described. All other words or expressions used in this
direction shall have the same meaning as in the Directive, the Regulations,
the Act or the Licence as appropriate.
[Chris Kenny, Director
of Compliance]
A person authorised
under Paragraph 8 of Schedule 1 to the Telecommunications Act 1984
[Date] 2003
Explanatory
Memorandum
Summary
S1 In May 2000,
the Director General of Telecommunications (the 'Director') issued a
direction relating to a dispute between British Telecommunications plc
('BT') and MCI Worldcom plc ('Worldcom') requiring BT to provide Flat
Rate Internet Access Call Origination ('FRIACO') (the 'First Direction').
A copy of the First Direction is at http://www.oftel.gov.uk/publications/internet/fria0500.htm.
In the First Direction the Director also permitted BT to make a reasonable
additional charge for the use of the Intelligent Network (the 'IN')
to route FRIACO calls. The additional IN charge was permitted as the
Director accepted that in comparison to calls to numbers in blocks of
10,000, the routing of FRIACO calls to numbers in blocks of 1,000 required
additional switch decode. This switch decode was not available, and
the use of BT’s IN was one method of carrying out the additional processing
that was required.
S2 The Director
understands that the shortage of switch decode is no longer a concern,
as the situation was remedied in July 2001 when there was an increase
in the amount of available switch decode. On the basis of this increase
in resource available, and both current and future forecast demand for
FRIACO, the Director provisionally concludes that sufficient switch
decode exists to enable FRIACO calls allocated in 1,000 number blocks
to be delivered without necessitating the use of the IN.
S3 During the course
of this investigation, BT has stated that the use of the IN to route
FRIACO calls also plays a central role in the management of network
congestion. Oftel acknowledges that, in principle, the use of the IN
to manage congestion has a number of benefits. For example, applying
such congestion controls at the point of call origination means that
such controls are likely to be most effective, and the use of a network
– wide call threshold represents a particularly effective solution to
the problem of focussed overload.
S4 However, despite
these strengths, the Director provisionally concludes that the use of
the IN to route FRIACO calls in order to control congestion does not
represent a necessary or proportionate response to any specified problem.
BT’s Standard Interconnection Agreement provides that interconnecting
operators agree appropriate network management procedures for congestion
management. The Director has found no evidence that the use of the IN
to route FRIACO calls, in order to control congestion, has been discussed
or agreed with interconnecting operators. Furthermore, the Director
notes that BT deployed purpose-built Signalling Transfer Point ('STP')s
in November 2001. These have sufficient throughput to be able to handle
any load likely to be generated by the Digital Local Exchange ('DLE')s.
Therefore, the Director believes that since November 2001, use of the
IN to route FRIACO calls has not been necessary to protect the STP network.
S5 Although this
investigation was initiated by a complaint from Cable & Wireless
UK Services Limited ('Cable and Wireless') which was later supported
by Energis plc ('Energis'), the Director considers that there is not
an existing dispute between Cable & Wireless or Energis and BT within
the meaning of Regulation 6(6) of the Telecommunications (Interconnection)
Regulations 1997 (the 'Regulations'). Therefore, the Director proposes
to issue a direction as set out below using his powers under Regulation
6(3) of the regulations, having considered the matters set out in Regulation
6(1) of the regulations. In particular, under Regulation 6(1) of the
regulations the Director, in exercising his functions under the regulations,
shall encourage and secure adequate interconnection in the interests
of all users, exercising his responsibility in a way that provides maximum
economic efficiency and gives the maximum benefit to end-users, and
in doing so shall have regard to, inter alia, the need to stimulate
a competitive market.
S6 If BT was allowed
to charge above the efficiently incurred cost of providing the FRIACO
service, competition between BT and the purchasers of FRIACO in downstream
markets would be distorted. Therefore, preventing BT from doing this
is necessary to ensure effective competition to the benefit of end users.
S7 Therefore pursuant
to Regulation 6(3) of the regulations the Director proposes to direct
that BT shall no longer have the right to make a charge for the use
of the IN to route FRIACO calls. Furthermore, the Director also proposes
that the Direction take effect from 1 December 2001, thus requiring
BT to repay all purchasers of FRIACO the IN charge paid since 1 December
2001, plus interest in accordance with paragraph 13.13 of the Standard
Interconnection Agreement.
S8 In addition,
it is noted that all signalling charges are effectively included in
the price of a 2Mbit/s IEC (Interconnection Extension Circuit) link.
Therefore, the Director also proposes to direct that BT shall no longer
have the right to make an additional charge for the use of its STP network
to route FRIACO calls. It is noted that BT has never made an additional
charge for use of STP signalling arrangements for FRIACO.
Chapter
1
Background
1.1 This Chapter
sets out the background to the draft Direction which accompanies this
explanatory memorandum. Oftel has undertaken an investigation which
was initiated by a complaint received from Cable & Wireless on 30
March 2001, which was later supported by Energis in February 2002, about
BT’s additional charge for using the IN to route FRIACO calls. Some
service providers have also expressed concern about the level of BT’s
IN charge associated with FRIACO.
1.2
Set out below is a brief history of FRIACO in the United Kingdom.
1.3 In December
1999, a dispute between Worldcom and BT (the 'Dispute') 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.
1.4 On 26 May 2000
the Director issued a direction relating to the dispute requiring BT
to provide FRIACO (the 'First Direction').The First Direction required
BT to offer only DLE FRIACO, that is, wholesale flat rate internet access
from its local exchanges. This allowed those Other Licensed Operators
('OLO's) 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. For those
OLOs which were interconnected at the Digital Main Switching Unit ('DMSU'),
the Director required BT to offer a service for the conveyance of internet
traffic from each enabled DLE to any Point of Connection of the OLO
at the DMSU. BT fulfilled this requirement by offering Interconnection
Extension Circuits ('IEC's).
1.5 Under paragraph
4.3 of the First Direction, BT was permitted to make a reasonable additional
charge for any IN or Signalling Transfer Point ('STP') service provided
by BT to operators for the purpose of using the FRIACO service. Paragraph
53 of the explanatory memorandum of the First Direction explained that
the IN was needed for identifying the 1k number blocks allocated for
FRIACO.
1.6 In addition,
paragraph 33 of the recitals to the First Direction explained that:
"the Director [has not] determined the charge for IN services since
he believes that, where possible, charges should be set by negotiation
between the parties. Nevertheless, he may intervene should BT’s charges
for IN capability give rise to dispute. BT will, therefore, be free
to provide such services on request and to charge for them. The Director
understands that BT proposes to charge £64 per 64kbit/s circuit for
IN capability. The Director also understands that, at present, BT takes
the view that all signalling charges are effectively included in the
price of a 2 Mbit/s IEC link and therefore does not propose to raise
additional charges for STP signalling where used."
1.7 However, as
the original request from WorldCom was for interconnection at the DMSU,
some aspects of the dispute remained unresolved. Following BT’s submission
that the expected increase in unmetered internet traffic would exceed
the capacity of the public switched telephone network, Oftel obtained
advice from technical experts on the options available to enable unmetered
interconnection at the tandem layer. The Director made a second FRIACO-related
direction (the 'Second Direction'), published on 15 February 2001, requiring
BT to make Single Tandem ('ST') FRIACO available from its tandem exchanges,
with the implementation occurring in stages (see the Second Direction
for details).
1.8 The Director
made a third FRIACO-related direction, published on 15 May 2002 (the
'Third Direction'). The Third Direction amended, inter alia,
paragraph 4.3 of the First Direction to allow BT to make a reasonable
additional charge for any IN service provided by BT for ST FRIACO. This
was simply to bring the arrangements for ST FRIACO into line with DLE
FRIACO and was without prejudice to the outcome of this investigation
(which was ongoing in May 2002).
1.9 Although this
investigation was initiated by a complaint from Cable & Wireless
which was subsequently supported by Energis, the Director considers
that there is not an existing dispute between Cable & Wireless or
Energis and BT within the meaning of Regulation 6(6) of the Telecommunications
(Interconnection) regulations 1997 (the 'regulations'). Therefore, the
Director proposes to issue a Direction using his powers under Regulation
6(3) of the Telecommunication (Interconnection) regulations, having
considered Regulation 6(1) of the regulations.
1.10 Regulation
6(3) of the regulations allows the Director to make a direction that
changes be made to interconnection agreements already concluded in exceptional
circumstances where it is justified to either ensure effective competition
or interoperability of services for users or both. Under Regulation
6(1) of the regulations the Director, in exercising his functions under
the regulations, shall encourage and secure adequate interconnection
in the interests of all users, exercising his responsibility in a way
that provides maximum economic efficiency and gives the maximum benefit
to end-users. In doing so the Director shall have regard to the matters
set out in Regulation 6(1) (a) to (g) of the regulations. In particular,
sub-paragraph (b) of Regulation 6(1) refers to the need to stimulate
a competitive market.
1.11 Having investigated
the complaint made by Cable & Wireless (later supported by Energis),
the Director believes that for the reasons set out in this explanatory
memorandum it is justified in the circumstances to make a direction
under Regulation 6(3) removing BT’s right to make a charge for the IN,
with effect from 1 December 2001. This is justified in order to ensure
effective competition. The proposed direction will enable purchasers
of FRIACO to buy the service at a price which reflects the efficiently
incurred costs of the service, which will encourage more effective competition
to the benefit of end users of unmetered internet access. Having considered
Regulation 6(1) the Director believes that to make such a direction
provides maximum economic efficiency and gives maximum benefit to end-users,
and is required in order to stimulate a competitive market.
1.12 In Oftel’s
recent consultation on its review of Fixed Narrowband Wholesale Exchange
Line, Call Origination, Conveyance and Transit Markets, 17 March 2003
[http://www.oftel.gov.uk/publications/eu-directives/2003/eu-narrow/index.htm],
it was stated at paragraph 15.23 that Oftel would be separately consulting
on the IN charge for FRIACO services. Following this consultation, if
the Director confirms the proposed Direction, the Director envisages
that this issue would be resolved before the new regulatory regime comes
into effect.
1.13 In addition,
the draft direction clarifies the position in relation to additional
charges for use of the STP network to route FRIACO calls. Notwithstanding
the provision which allows BT to make an additional charge for these
services, all the costs have in fact always been included in the charge
for the IEC link. The Director sees no reason why this will change in
the foreseeable future and therefore is proposing to amend the FRIACO
directions to remove the right to make an additional charge.
1.14 The structure
of this explanatory memorandum is as follows. Chapter 2 discusses IN
functionality in relation to FRIACO and explains why the Director believes
there is no longer any justification for using the IN in the context
of FRIACO. Chapter 3 then sets out, in the light of this initial technical
conclusion, the Director’s provisional conclusion that to continue to
allow BT to make an additional charge for the IN would not be appropriate
since it would prevent more effective competition in internet termination
and ultimately in unmetered internet access from emerging to the benefit
of end users. Furthermore, it would lead to excessive charges and economic
inefficiency which would be contrary to the interests of end-users.
For similar reasons, an additional charge for STP, when the costs are
recovered elsewhere, is not appropriate.
Chapter
2
Functionality
of the Intelligent Network for FRIACO
2.1 Intelligent
networks have a wide variety of possible applications, from the routing
of complex call types (eg time of day routing), to the provision of
value-added call termination services using intelligent peripherals
(eg messaging services). Set out below is a summary of those applications
that BT has argued to be relevant to FRIACO.
Routing of numbers
allocated in 1k blocks
2.2 The original
justification given by BT for the use of the IN to route FRIACO calls,
and the basis on which Oftel permitted BT to make an additional reasonable
charge for use of the IN, was that it was a necessary consequence of
Oftel’s decision to allocate FRIACO numbers in blocks of 1,000 numbers.
2.3 Since 14 February
2000, Oftel has adopted a policy of allocating numbers for internet
services in blocks of 1,000 numbers rather than the 10,000 number blocks
previously used, and still used, for the majority of non-internet services
such as most calls to geographic numbers. This policy applies to all
new allocations of numbers for both metered internet services and unmetered
internet services using FRIACO, and has since been extended to some
other designated number ranges, for example, geographic numbers in conservation
areas. It is based on the need to conserve numbers and the experience
of the exhaustion of the 0906 and 0905 premium rate numbering ranges.
Oftel believes that allocating in blocks of 10,000 numbers may result
in the inefficient use of numbers, with ranges being exhausted within
a relatively short period of time.
2.4 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. This process of ‘switch decode’ continues
until sufficient digits have been analysed for the routing of the call
to be uniquely determined.
2.5 If the number
of digits which must be analysed increases, this will result in an increase
in the amount of switch decode required at each DLE. If FRIACO numbers
had been allocated in blocks of 10,000, then it would only have been
necessary to decode the first six digits of the dialled number in order
uniquely to determine the owner of the number block, and hence route
the call. However, because FRIACO numbers are allocated in blocks of
1,000 it is necessary to decode the first seven digits of the dialled
number in order to route each call.
2.6 At the time
when FRIACO was introduced, BT was of the view that there was insufficient
switch decode at each of its DLEs to support the routing of FRIACO numbers
allocated in blocks of 1,000. BT therefore adopted an alternative solution,
which was to offload the detailed analysis of the dialled number to
an external processor. The external processor carries out the detailed
analysis of the called number and returns the required routing information
to the DLE. The specific solution adopted was based on BT’s existing
IN platform, 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). This process is commonly referred
to as an 'IN dip'.
2.7 At the time
the FRIACO service was launched in May 2000, Oftel accepted that in
comparison to calls to numbers in blocks of 10,000, such as the majority
of geographic numbers, the routing of FRIACO calls to numbers in blocks
of 1,000 required additional switch decode. This switch decode was not
available, and the use of BT’s IN was one method of carrying out the
additional processing that was required. Therefore, the Director permitted
BT to make a reasonable additional charge for use of the IN to route
FRIACO calls because of the additional processing required to route
calls where numbers are allocated in blocks of 1,000 numbers.
2.8 However, Oftel
understands that the shortage of switch decode is no longer a concern
as this situation was remedied in July 2001. (Although there was regular
dialogue with BT during the course of the investigation, this information
only became apparent to Oftel in February 2003). On the basis of this
increase in resource availability and both current and forecast future
demand for FRIACO, the Director provisionally concludes that sufficient
switch decode now exists to enable FRIACO calls to numbers allocated
in 1,000 number blocks to be delivered without necessitating an IN dip.
Congestion control
2.9 During the course
of this investigation, BT has stated that the IN is not just required
to route numbers allocated in blocks of 1,000 numbers, but also plays
a central role in the management of network congestion. Oftel is unable
to provide full details of BT's arguments due to commercial confidentiality.
However, the Director has fully evaluated BT's technical arguments,
and his conclusions are set out below.
2.10 BT has expressed
particular concern about the need to protect its originating network,
and possibly other operators’ transit networks, from overload conditions
triggered by the failure of a component in the terminating operator’s
network. Such a failure would be expected to trigger an unanticipated
mass call event, as subscribers attempt to re-establish their dial-up
connections to the internet. A mass call event triggered in this manner
is expected to be particularly severe, due to the aggressive redial
characteristics associated with the software auto-diallers frequently
used for internet calls.
2.11 Oftel acknowledges
that the use of the IN dip for congestion has a number of benefits,
at least in principle. The use of the IN dip allows congestion controls
to be applied at the point of call origination, which is where such
controls will be most effective, whilst the use of an IN-based network-wide
call threshold represents a particularly effective solution to the problem
of focussed overload.
2.12 However, despite
these benefits, it is not obvious that the use of the IN dip to control
congestion represents a necessary or proportionate response to any specified
problem. BT’s Standard Interconnection Agreement specifies that interconnecting
operators agree appropriate network management procedures for congestion
management. Oftel understands that BT has not notified interconnecting
operators that it is using the IN dip for congestion control.
2.13 BT has identified
three specific congestion issues that are being addressed by its use
of the IN dip. These are described below.
Protection of
DLEs from local overload
2.14 One of the
main concerns expressed by BT is the need to protect its DLEs from overload.
BT has addressed this issue by limiting the rate at which IN queries
can be triggered from each DLE. This in turn limits the number of FRIACO
call attempts.
2.15 Oftel acknowledges
that this is a way of protecting the DLE from a local overload condition,
but also notes that it is closely equivalent to the permanent application
of call-gapping to FRIACO numbers. Since the use of permanent call-gapping
would not require the use of an IN dip, Oftel has discussed with BT
why this solution was not adopted.
2.16 BT has cited
four reasons why IN-based rate-limiting is preferred to permanent call-gapping:
- BT has argued
that, until May 2002 only a limited number of call-gap slots were
available. Oftel does not however accept that this was a major constraint,
since a single call-gap slot could have been used to apply a control
to any consecutive range of numbers, and a single call-gap slot could
therefore have been used to apply a control to all FRIACO numbers;
- BT has argued
that, until May 2002 it was impossible to apply a call-gap of less
than one second. Oftel does not however accept that this was a major
constraint, since applying a call-gap of one second to multiple sub-ranges
is functionally similar to applying a call-gap of a fraction of a
second to a single range of numbers;
- BT has raised
arguments about the affectiveness of the algorithm used by DLEs for
call gapping. Oftel has considered whether this is likely to have
a material impact on the delivered quality of service, given the level
of call attempts expected in practice, and has provisionally concluded
that this is unlikely because the rate of call attempts expected in
routine operation is expected to be well below the threshold rate
that must be applied in order for congestion control to be effective;
and
- BT has argued
that even where call-gapping is effective, a very high level of rejected
calls can still result in switch overload. Oftel acknowledges this
concern, but notes that this problem has so far only arisen in relation
to a very small number of unanticipated voice mass call events, and
that BT is not proposing the introduction of an IN dip for voice calls
in order to address this.
2.17 Furthermore,
Oftel notes that there is at least one respect in which permanent call-gapping
represent a better solution to congestion control than IN-based rate-limiting.
IN-based rate-limiting applies a single threshold to all traffic that
uses an IN dip to route calls. This means that a failure in one terminating
operator’s network will impact on the quality of service for all calls
that use the IN. However, there are now sufficient call-gapping slots
to allow permanent call-gapping to be applied on an individual basis
to each number range belonging to a FRIACO operator, and this would
ensure that a failure in one FRIACO operator’s network would not affect
other operators.
2.18 The Director
provisionally concludes that there is a legitimate requirement to protect
DLEs from overload conditions, but that this requirement can adequately
be met by the permanent application of call-gapping. The ability to
apply congestion controls using call gapping is already available, and
so this approach should not require BT to incur any significant additional
cost. The Director is not seeking to require that BT should put call-gapping
in place. However, Oftel believes that OLOs should pay only efficiently
incurred costs of protecting DLEs from overload and hence concludes
that there is no justification for imposing the significantly higher
IN charge in this respect.
Protection of
the STP network from focussed overload
2.19 FRIACO was
one of the first services deployed by BT to make extensive use of a
STP network for interconnect signalling links. The benefit of this approach
is that it allows multiple operators to share signalling links to BT’s
DLEs. This is much more efficient than requiring every operator to maintain
dedicated signalling links to every DLE. However, a consequence of this
shared use of signalling links is that signalling congestion due to
a failure in one terminating operator’s network will impact on the quality
of service for all calls that use the shared signalling network.
2.20 The specific
concern raised by BT in discussion with Oftel was that the volume of
call attempts that could be generated by its DLEs, even after the local
application of IN-based rate-limiting, was greater than could be handled
by its STP network. This is because the STP network originally deployed
by BT was not a purpose-built STP network, but was based on System X
switches which were no longer required as DMSUs.
2.21 The solution
adopted by BT was to use the IN to set a network-wide limit for the
number of calls that can be carried to each FRIACO operator. This ensures
that the aggregate volume of call attempts generated by all BT’s DLEs
does not exceed the capacity of the STP network.
2.22 However, BT
deployed purpose-built STPs in November 2001. These have sufficient
throughput to be able to handle any load likely to be generated by the
DLEs. Therefore, the Director believes that since November 2001, use
of the IN to route FRIACO calls has not been necessary to protect the
STP network.
Protection
of interconnecting networks from focussed overload
2.23 BT has argued
that the use of the IN may also protect elements within the networks
of interconnecting operators from any overload condition.
2.24 Oftel acknowledges
that the use of the IN may provide a means of protecting interconnecting
operators’ networks. However, this does not appear to be a consideration
in BT’s current use of the IN dip, since BT has not made any contact
with interconnecting operators in order to establish an appropriate
threshold for the congestion control. It is difficult to see how the
congestion control can be effective in these circumstances. In any case,
it would clearly not be for BT to impose such a solution, since it is
the responsibility of interconnecting operators to manage congestion
within their own networks.
2.25 The Director
therefore provisionally concludes that the IN dip is not required to
protect the networks of interconnecting operators from overload conditions.
Interconnecting operators are free to enter into commercial negotiations
regarding the use of the IN dip for this purpose.
Number Portability
2.26 During the
course of this investigation, BT has argued that the use of an IN dip
for FRIACO may also provide an efficient means of supporting number
portability in relation to FRIACO numbers.
2.27 The technical
implementation of number portability in the UK relies on the terminating
switch forwarding a call to a ported number, and this can be difficult
to implement in cases where the terminating switch is actually a modem
bank, as may be the case for FRIACO calls. Even where it is possible
for the terminating switch to forward calls, this tends to result in
calls being routed in an inefficient manner. An alternative approach
is to use an IN dip from the originating exchange to identify the destination
of each call, and then route accordingly.
2.28 Oftel acknowledges
the potential benefits of this approach to number portability, and has
recently set out its own proposals in this area (Proposals to change
the framework for number portability, 20 December 2002, http://www.oftel.gov.uk/publications/numbering/2002/nupo1202.htm).
However, Oftel also notes that the formal responsibility for the provision
of FRIACO number portability lies with the operator who owns the FRIACO
number block, and not with BT as an originating operator.
2.29 The Director
therefore provisionally concludes that the IN dip is not required in
order to support number portability for FRIACO numbers. Interconnecting
operators are free to enter into commercial negotiations regarding the
use of the IN dip for this purpose.
Conclusion
2.30 The Director
has considered all the arguments made by BT as to why an IN charge is
justified to handle FRIACO traffic and has provisionally concluded that
there is no longer any justification for such a charge. Indeed, the
Director has provisionally concluded that the justification fell away
after November 2001.
2.31 When FRIACO
was launched the Director accepted the use of the IN as necessary because
of the shortage of switch decode in the DLE, however this problem was
remedied in July 2001. During the course of this investigation he has
also accepted that an interim use of the IN was justified to protect
the STP network from focussed overload, but that problem was remedied
in November 2001. In respect of the other reasons provided by BT during
the course of the investigation as to why the use of the IN is necessary
for FRIACO traffic and so why an IN charge is justified, the Director
does not accept that any of these can justify the use of the IN at BT’s
current charges in the absence of commercial agreement with other interconnecting
operators in respect of those particular matters. Accordingly, the Director
is proposing to remove BT’s right to make an additional charge for the
use of IN to route FRIACO calls. The next chapter discusses why this
is appropriate in the light of the Director’s technical analysis.
Chapter
3
The Director’s
Proposals and Reasoning
Director’s Proposals
3.1 The draft Direction
which accompanies this explanatory memorandum proposes to remove BT’s
right to make an additional charge for use of the IN to route FRIACO
calls. It also removes BT’s right to make an additional charge for STP
signalling services for FRIACO.
3.2. As explained
in the previous chapter, the Director has provisionally concluded that
use of the IN was no longer justified after the date when BT deployed
purpose built STPs which had sufficient throughput to be able to handle
any load likely to be generated by the DLEs (see paragraph 2.23 above).
BT has informed the Director that this occurred in November 2001 and
therefore it is proposed that the Direction should have effect from
1 December 2001. This will require BT to repay all purchasers of FRIACO
the IN charge paid since 1 December 2001, together with interest on
the repayments in accordance with Clause 13.13 of the Standard Interconnection
Agreement.
3.3 In addition,
it is proposed to remove BT’s right to make an additional charge for
STP signalling services for FRIACO, as signalling costs are included
within the IEC charge. The Director notes that BT accepted in May 2000
that all signalling charges were effectively included in the price of
a 2 Mbit/s IEC link (see Paragraph 33, the First Direction). The Director
also notes that currently, no such additional charge is made for STP
signalling services for FRIACO. By removing the right for BT to make
an additional charge for STP signalling services, the Director is therefore
simply seeking to clarify that no additional charges should be made
for STP signalling services.
Director’s Reasons
3.4 As explained
in the previous chapter the Director has provisionally concluded that
since November 2001 there has been no justification for imposing an
IN charge to route FRIACO traffic. The Director believes that the routing
service that the IN currently provides can be provided through the DLE
by the enhanced switch decode capability provided in July 2001. Similarly,
protection of the DLE from overload can be managed through permanent
call-gapping at the DLE, and the network overload can be protected against
by the use of purpose built STPs that BT has already deployed. The Director
also considers that BT has market power in the relevant market (see
below) and therefore for BT to charge in excess of cost of providing
FRIACO services (given that the use of the IN is no longer justified)
would adversely affect competition in the relevant market to the detriment
of end users.
3.5 Accordingly,
the Director considers that it is justified in this case to amend existing
interconnection agreements using his powers under Regulation 6(3) of
the Regulations to remove BT’s ability to make an additional charge
for the IN and STP signalling services for the purpose of FRIACO services,
in that to do so will ensure the development of effective competition
in the services using FRIACO. Further, having considered Regulation
6(1) of the regulations the Director believes that to make such a direction
provides maximum economic efficiency and gives maximum benefit to end-users,
and is necessary in order to stimulate a competitive market. In the
absence of the proposed Direction BT will be effectively charging for
the FRIACO service in excess of costs, as it will be making a charge
where the costs are zero, since there is no need to use the service
to which the charge relates. The effect of this would be to require
purchasers of FRIACO to pay an excessive amount and so hinder the development
of more effective competition in internet termination and ultimately
unmetered internet access and so operate against the interests of end
users.
The Relevant
Market
3.6 The Director
has considered what is the relevant market in which to assess whether
BT has market power in relation to the provision of FRIACO and various
applications of the IN.
3.7 Chapter 2 has
discussed the various applications of the IN that BT has cited with
respect to FRIACO. Each of the applications, namely routing, congestion
control, protection of DLEs from local overload, and protection of the
STP and interconnecting networks from focussed overload, is related
to the origination of FRIACO numbers. FRIACO is a call origination product
and therefore is part of the market for call origination. Hence in determining
the relevant market, it is necessary to examine if the different applications
that the IN provides are part of the market for call origination.
3.8 Due to the different
functions that each application provides, a purchaser of call origination
will not view any of these as a substitute for call origination itself.
Further, any supplier offering these applications would not be able
to easily enter into the provision of call origination due to the significant
sunk and fixed costs involved in providing call origination services.
3.9 The Director
believes that a provider of call origination services will seek to provide
all types of call origination services because of the economies of scope
present in doing so. Therefore providers of call origination would compete
to provide a range or basket of services across a customer’s exchange
line rather than offering only limited services across many exchange
lines. Such competition means customers choose the provider who can
provide the range of services at the lowest price. The fact that wholesale
call origination services face a common pricing constraint suggests
that all call origination services should be treated as part of the
same wholesale market.
3.10 In a similar
manner, the provider of call origination will provide the applications
associated with the call origination since the functionalities of such
services are a value added element to the basic call origination service.
As argued above, a common pricing constraint operates for the provider
of such applications and therefore such services would be part of the
market for call origination. The relevant market for the assessment
of market power is therefore wholesale call origination.
BT’s Market Power
3.11 Although BT
faces competition in call origination from other providers of direct
access networks, its market share in call origination is greatly in
excess of those of its competitors. The Director estimates BT's current
market share for call origination by volume to be around 75 per cent
across all customers or 82 per cent for residential customers over the
last three years (1999/2000 – 2001/2002). In addition, substantial barriers
to entry are faced by new entrants due to the significant sunk costs
required in providing such services.
3.12 The Director
therefore concludes that BT has market power in the market for wholesale
call origination. This implies that in addition to having market power
in the provision of FRIACO, BT also has market power in the provision
of applications such as routing FRIACO calls and the protection of the
DLE and STP network.
Consequences
3.13 In the light
of the Director’s conclusion that BT has market power in the relevant
market and the Director’s provisional finding that use of the IN to
handle FRIACO traffic is not required (see Chapter 2), the Director
has considered the consequences of continuing to allow BT to make a
charge for the use of the IN. He believes that these will lead to economic
inefficiency, distort competition and so not be in the interests of
end users.
3.14 The Director
believes that the routing service that the IN currently provides can
be provided through the DLE by the enhanced switch decode capability
available since July 2001. Similarly, protection of the DLE from overload
can be managed through permanent call gapping at the DLE, and the network
overload can be protected against by the use of purpose built STPs that
BT has already deployed. The costs of the switch decode and signalling
links are already recoverable by BT through the average charges for
the Call Originating Local Exchange Segment and the IEC links. To permit
BT to recover the costs of the IN for provision of the above applications
would lead to higher costs to users of FRIACO, and consequently, higher
costs to end-users. This would not be economically efficient, as it
would price the applications above the true cost of providing the services.
3.15 Furthermore,
allowing BT to charge above the true cost of providing the services
would distort competition in downstream markets between BT and the purchasers
of FRIACO and therefore preventing BT from doing this is necessary to
ensure effective competition to the benefit of end users.
3.16 The current
charge for the IN constitutes 17.4 per cent of the cost of purchasing
a FRIACO circuit. This is a significant cost for operators who need
to purchase large volumes of FRIACO circuits to meet the demands of
their customers. A high charge for purchasing FRIACO, including the
IN dip, is likely to impact adversely on the strength of such operators
to compete effectively with BT in the internet termination market. Operators
particularly face a higher risk than BT in pre-ordering FRIACO circuits
in anticipation of demand from ISPs and retail consumers. The Director
takes the view that BT does not face similar risks when its position
is assessed on an end-to-end basis. Any transfer charges incurred by
BT Retail Systems Business for purchasing FRIACO circuits would be purely
notional and be offset by notional profits in its network business.
There are two reasons for this.
3.17 First, the
IN charge paid to BT's Network Business (both by BT Retail Systems Business
and OLOs) is significantly above the marginal cost incurred by BT Network
Business in providing FRIACO IN dips. This means that BT's actual costs
of the IN service per FRIACO circuit are substantially lower than the
IN charges made by OLOs purchasing FRIACO circuits. Secondly, BT Network
Business does not incur the marginal cost of the IN unless there is
traffic flowing on a FRIACO circuit. Until FRIACO traffic actually flows
on the circuit, no FRIACO IN dips will be triggered and no marginal
cost will be incurred. However, OLOs are required to pay the standard
charge for IN per FRIACO circuit irrespective of whether they use it
or not. In addition, if BT is allowed to continue to charge for the
IN, this, as explained above, will mean one of the key input services
into the provision of retail unmetered internet access would be inflated
above its efficiently incurred costs. This is likely to hamper the development
of effective competition in internet termination and unmetered internet
access. The effect would be to require purchasers of FRIACO to pay an
excessive amount for FRIACO which would feed through to excessive retail
prices and so reduce the benefit end users.
3.18 Therefore,
the Director believes that there are exceptional circumstances which
make it appropriate for him to intervene in interconnection agreements
to ensure effective competition. Also, to allow BT to make an additional
charge for STP when the costs are already recovered would also result
in FRIACO being purchased in excess of its true costs and so for the
same reasons as discussed above, the Director is proposing to remove
this right.
3.19 It should be
noted in this context that in the Director’s recent consultation document
which related to FRIACO and internet termination he set out the provisional
conclusion that there was no individual or collective significant market
power in the internet termination market. A copy of the consultation
document is at http://www.oftel.gov.uk/publications/eu_directives/2003/eu_narrow_term/index.htm
However, such a conclusion was predicated on the basis of appropriate
regulation of the wholesale call origination market. The appropriate
regulation that is considered to be relevant for unmetered internet
termination is the regulation relating to FRIACO. Amongst other things
this includes ensuring that the charges for the FRIACO service reflect
the costs of the service and so do not include the IN charge for which
there is no justification. Accordingly the Director believes this draft
Direction is consistent with the proposals made in the wholesale unmetered
narrowband internet termination market review.
3.20 Whether or
not the IN will continue to be used for FRIACO will be a decision for
BT. It is for BT to decide how to provide services over its network
so long as they satisfy regulatory requirements. However, for the reasons
set out above the Director’s provisional conclusion is that use of the
IN for FRIACO calls is not necessary and so BT should not be permitted
to charge for it in addition to the FRIACO virtual circuit charges.
Implementation
3.21 The Director
has considered when the proposed Direction should take effect. As discussed
in Chapter 2, the switch decode capability at the DLE was enhanced by
July 2001 and purpose-built STPs were in place by November 2001, therefore
the Director provisionally concludes that there was no justification
for using the IN to route FRIACO calls after November 2001. Accordingly
the Director proposes that BT’s right to make a reasonable additional
charge be removed as from 1 December 2001.
Cost recovery
3.22 The Director
does not dispute that use of the IN for FRIACO was necessary initially
from May 2000, but has provisionally concluded that it became unnecessary
after November 2001. The Director has therefore considered whether BT
has had the opportunity to recover its reasonably incurred costs relevant
to the provision of IN for FRIACO in the period May 2000 - November
2001.
3.23 It is clear
that BT's charges for FRIACO IN in the period May 2000 - November 2001
covered the relevant operating and capital costs reasonably incurred
in that period. Firstly, the charge of £66 per 64 kbit/s circuit was
set by BT itself based on its fully allocated costs. Secondly, since
IN costs are caused on a per 'dip' or per call basis, the charge was
based on an assumed number of FRIACO calls per circuit, reflecting a
mature usage level. The Director does not consider such an approach
to be unreasonable. Indeed, in principle it is consistent with the way
in which the Director has himself set the adjustment ratio which is
used in the derivation of the FRIACO circuit charge (Review of adjustment
ratio for DLE FRIACO, which is at www.oftel.gov.uk/publications/internet/2002/dlefriaco0702.htm).
However, the Director notes that the actual usage of the IN by FRIACO
circuits was rather less than allowed for in the IN charge set by BT,
ie the actual number of calls per circuit was less than BT's assumption.
This feature, although not unreasonable in itself, ensured in the view
of the Director that BT's revenue from FRIACO IN at least matched its
costs in the period May 2000 - November 2001.
3.24 It is possible
that there could be a further cost relating to the cost of brought-forward
investment. This could be relevant if all of the following conditions
applied:-
i) if BT needed
to expand the capacity of its IN platform in order to serve FRIACO
for the short run period of May 2000 - November 2001;
ii) if there
was a material cost of such additional capacity; and
iii) if
such capacity would have been left unused for a material period of
time after November 2001 in the (hypothetical) scenario that BT had
stopped using the IN for FRIACO after that date. The growth over time
in use of the IN of other (ie non-FRIACO) traffic means that at most
any IN capacity installed for FRIACO would have represented an investment
brought forward.
Given the discussion
above of costs and revenues in the period between May 2000 - November
2001 a further condition would also need to apply for there to be any
need to make allowance for costs of brought forward investment (if any):-
iv) if the investment
cost (if any) multiplied by BT's cost of capital for the period of
time such capacity was unused (if any) were materially larger than
the excess of FRIACO IN revenue over cost in the period May 2000 -
November 2001.
3.25 It appears
to the Director that it is likely that at least one of i-iv does not
apply and so BT has not been denied the opportunity to recover its reasonably
incurred costs. However, if BT were able to provide the evidence to
convince the Director that all of i-iv applied and the magnitude of
any unrecovered cost (net of the over-recovery in May 2000 - November
2001), the Director would make a downward adjustment to the retrospective
rebates to be paid by BT to operators that purchased FRIACO after November
2001.
3.26 As explained
in 3.22, the IN charge is based on an assumed number of FRIACO calls
per circuit, reflecting a mature usage level of the circuit. Since the
actual usage of the IN by FRIACO circuits during May 2000-November 2001
was rather less than allowed for in the IN charge set by BT, this might
have resulted in over-recovery. Consequently there might be a question
of retrospective rebates during this earlier period of May 2000-November
2001. However, the Director believes that the basis for charging for
the IN is consistent with the approach used in the Adjustment Ratio
in the derivation of the FRIACO charge. The methodology for the adjustment
ratio reflects the importance of deriving FRIACO charges that capture
cost causation and are reasonably stable and sustainable. In a similar
manner, the Director does not consider it unreasonable for the level
of the IN charge to have been stable by basing it on the mature number
of calls per FRIACO circuit during the period of May 2000-November 2001
in which levying an IN charge was legitimate. Stability has the advantage
of facilitating business planning for operators by providing reasonable
predictability of the IN charge. Therefore, to allow operators with
retrospective rebates on the basis of the actual number of calls rather
than the mature number of calls will be inconsistent with the aim of
providing stability in the charge. The Director clearly stated that
this was his approach in the determination on the adjustment ratio when
he stated that "one of the important principles adopted by Oftel
in deriving FRIACO charges is that certainty about the charge should
be promoted to facilitate business planning. Therefore the Director
considers that changes in the adjustment ratio should not apply retrospectively".
Accordingly, the Director thinks it is inappropriate to provide operators
with retrospective rebates for the period May 2000-November 2001.
Interest charges
3.27 In accordance
with Clause 13.13 of the Standard Interconnection Agreement, it is proposed
that BT will pay interest on repayments made under this Direction to
operators from 1 December 2001. The applicable annual rate set out in
Clause 13.13 as the 'Oftel Interest Rate' is the London Inter-Bank Offered
Rate (LIBOR) plus 3/8 per cent.
Chapter
4
Consultation
4.1 The Director
General's proposed draft direction is being made available to interested
parties, together with the Director General's reasons, so that stakeholders
may have a reasonable opportunity to make representations. The Director
General seeks the views of interested parties on the proposals contained
in this consultation document by 7 May 2003. All non-confidential
responses will be published. Having considered any such representations,
the Director General will, if appropriate, make the direction and will
notify BT and interested parties of that direction and his reasons for
making it.
4.2 Where possible,
comments should be made in writing and sent by e-mail to ruth.gibson@oftel.gov.uk.
However, responses may also be posted or faxed to the address below.
If any stakeholders are unable to supply their comments in one of these
ways, please use the contact details below to discuss alternatives:
Ruth Gibson
Oftel
50 Ludgate Hill
London EC4M 7JJ
tel: 020 7634 8976
fax: 020 7634 8772
Further copies
of this document
4.3 This document
can be viewed in the Publications section of Oftel's website
(www.oftel.gov.uk), under classification
‘internet access’. Paper copies and more accessible formats such as
large print, Braille, disc and audio cassette can be made available
on request. Please contact Oftel's Research and Information Unit by
phoning 020 7634 8761 or by sending an email to infocent@oftel.gov.uk.
Publication of
representations made by stakeholders
4.3 On this occasion,
Oftel is not programming a formal period during which interested parties
may comment on the representations made by others. However, in the interests
of transparency, all representations will be published, except where
respondents indicate that a response, or part of it, is confidential.
Respondents are therefore asked to separate out any confidential material
into a clearly marked annex. However, in the interests of transparency,
respondents are requested to avoid confidential markings wherever possible.
4.4 Non confidential
representations can be viewed on Oftel’s website in the Publications
section under the classification Responses to Oftel consultations.
They can also be viewed at Oftel’s Research and Information Unit. Appointments
must be made in advance by phoning 020 7634 8761 or sending an e-mail
to infocent@oftel.gov.uk.
Annex
A
Glossary of
terms and acronyms
DLE – Digital
Local Exchange
– The telephone exchange to which customers are connected, usually via
a local concentrator.
DMSU – Digital
Main Switching Unit
– The main type of tandem switch, primarily used for conveying long
distance calls.
FRIACO
– Flat Rate Internet Access Call Origination
IEC
– Interconnection Extension Circuit
IN – Intelligent
Network
– A telecommunications network in which the network intelligence is
centralised and separated from the switching function.
STP – Signalling
Transfer Point
– A facility whereby C7 signalling messages can be passed between exchanges
without requiring a discrete circuit between them.
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