Issued by the Director General of Telecommunications

Contents

Direction

Summary

Chapter 1 – Background

Chapter 2 – Responses to the consultation

Chapter 3 – Functionality of the Intelligent Network for FRIACO

Chapter 4 – The Director’s decision and reasoning

Chapter 5 – Proposals for industry discussion

Annex A – List of respondents

Annex B – Glossary

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, following responses to the consultation on the draft Direction referred to in Paragraph K below, that BT shall be permitted to make a charge of £42 per 64kbit/s circuit per annum for the IN with effect from 1 August 2001 to 31 May 2002, and with effect from 1 June 2002, BT shall not be permitted to make any IN or STP 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 (the ‘Directive’);

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 4 April 2003 and comments invited by 7 May 2003;

L) Comments were received from a number of interested parties 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 June 2002 BT shall not be permitted to make any 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. With effect from 1 August 2001 to 31 May 2002 BT shall be permitted to make a charge of £42 per 64kbit/s circuit per annum for Intelligent Network services provided by BT to the Operators.

3. Paragraph 4.3 of the Consolidated Direction shall be revoked.

4. 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.

5. 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.

6. 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

21 July 2003

Summary

S.1 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 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 (switch resource required to analyse the dialled number in order to route a call). 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. The First Direction was subsequently amended by further directions of 15 February 2001 and 15 May 2002.

S.2 Following a complaint made by Cable and Wireless UK Services Limited (‘Cable and Wireless’) and Energis plc (‘Energis’) 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 any charge for the IN. A Draft Direction (the ‘Draft Direction’) to that effect was published for consultation on 4 April 2003. In the explanatory memorandum accompanying the Draft Direction, the Director set out his understanding that the shortage of switch decode was no longer a concern, as the situation was remedied in July 2001 when there was an increase in the efficiency of use of the existing switch decode. On the basis of this increase in resource available, and both current and future forecast demand for FRIACO, the Director provisionally concluded 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.

S.3 In the explanatory memorandum accompanying the draft Direction, the Director also addressed BT’s arguments that the IN was necessary to protect the Signalling Transfer Point (‘STP’) network from focussed overload. It had been argued by BT that the volume of call attempts that could be generated by its Digital Local Exchanges (‘DLEs’) was greater than could be handled by BT’s STP network. This was 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 Digital Main Switching Units (‘DMSUs’). However, BT deployed purpose-built STPs in November 2001, which have sufficient throughput to be able to handle any load likely to be generated by the DLEs.

S.4 The Director also considered further arguments made by BT that the IN plays a central role in the management of network congestion. In particular, in relation to the protection of DLEs from local overload and the protection of interconnecting networks from focussed overload. The Director was not persuaded that use of the IN dip to control congestion represented a necessary or proportionate response to any specified problem. Therefore, the Director provisionally concluded that the justification for an IN charge fell away after November 2001, when the purpose-built STPs were deployed.

S.5 BT has made a number of further representations in response to the Draft Direction, particularly with regard to the comparison between a switch based design and use of the IN in relation to the protection of DLEs from local overload. The Director now accepts that the use of an inferior algorithm as the basis for call gapping prior to May 2002 prevented BT from adopting a switch based design. However, since the end of May 2002 when the algorithm was improved, it has been possible for BT to provide a comparable service using call gapping. Therefore, the Director concludes that since the end of May 2002, the use of the IN to route FRIACO calls has not been necessary to protect the DLE from local overload. Accordingly, the Director is removing BT’s right to make an additional charge for use of the IN to route FRIACO calls, with effect from 1 June 2002.

S.6 The Director notes that it was necessary for BT to use the IN to route FRIACO traffic until the end of July 2001, due to the shortage of switch decode available at that time. However, for the period 1 August 2001-31 May 2002, the Director accepts that BT needed to use the IN for FRIACO as it was unable to apply a switch based solution due to the limitations of the algorithm in use at one particular type of DLE. However, as it was necessary for BT to upgrade the algorithm on one type of DLE only, the Director has considered the proportion of DLEs where it was necessary to upgrade the algorithm in order to adopt a switch based design. The Director believes that for that period, the charge made during that period should be applicable only to the proportion of DLEs which required the upgrade of the algorithm to adopt a switch based design. Accordingly, the Director concludes that BT should make an adjusted charge of £42 per 64kbit/s circuit for the use of the IN for FRIACO calls with effect from 1 August 2001 to 31 May 2002, based on a weighted average using the proportion of the DLEs as weights.

S.7 Although this investigation was initiated by a complaint from Cable and Wireless which was later 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 Direction is made using the Director’s powers under Regulation 6(3) of the Regulations, with consideration of 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.

S.8 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.

S.9 Therefore pursuant to Regulation 6(3) of the Regulations the Director directs that BT shall no longer have the right to make a charge for the use of the IN to route FRIACO calls with effect from 1 June 2002. Furthermore, the Director directs that BT shall make an adjusted charge of £42 per 64kbit/s circuit per annum with effect from 1 August 2001 to 31 May 2002. Thus BT will be required to repay all purchasers of FRIACO the IN charge paid since 1 June 2002, together with the refund of the difference between the adjusted charge and what was charged in relation to the period from 1 August 2001 to 31 May 2002, plus interest in accordance with paragraph 13.13 of the Standard Interconnection Agreement.

S.10 In addition, it is noted that the cost of signalling required for FRIACO circuits is reflected in the price of a 2Mbit/s IEC (Interconnection Extension Circuit) link. Therefore, the Director also directs 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.

S.11 In relation to ongoing congestion management issues, the Director wishes to encourage wider industry discussions on the appropriate protection mechanisms, and will take steps to facilitate a suitable forum for such discussions.

  Chapter 1 – Background

1.1 This chapter sets out the background to the Direction. The period during which responses to the consultation on the draft Direction were invited ended on 7 May 2003, and a list of respondents is set out in annex A. As set out in the summary above, the consultation followed an investigation which had been 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 (‘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. For those OLOs which were interconnected at the 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 IECs.

1.5 Under paragraph 4.3 of the First Direction, BT was permitted to make a reasonable additional charge for any IN or STP service provided by BT to the OLOs 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 has issued a Direction using his powers under Regulation 6(3) of the Telecommunication (Interconnection) Regulations, having considered the provisions of 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 June 2002, and adjusting BT’s charge for the IN between 1 August 2001 and 31 May 2002. This is justified in order to ensure effective competition. The 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 addition, the 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 amending the FRIACO directions referred to above to remove the right to make an additional charge.

1.13 The structure of this explanatory memorandum is as follows. Chapter 2 sets out the responses to the consultation on the draft Direction. The functionality of the IN for FRIACO is discussed in chapter 3, and chapter 4 sets out the Director’s 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 – Responses to the consultation

2.1 Oftel received responses to the consultation on the Draft Direction from BT, Energis, ntl, Thus, Tiscali, and NIACT. In addition, Oftel received two confidential responses from service providers.

2.2 Non confidential responses to the consultation 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.

BT

2.3 In its response, BT argued that technical functionality to implement a switched based solution has existed only since May 2002, when the number of call gapping slots was increased, the algorithm on System X switches (a particular type of switch in BT’s local exchanges) was changed, and low rate gapping became possible. However, BT argued that such a switch based call gapping solution would provide a severely degraded quality of service to all end users of FRIACO-based services and in extreme circumstances could result in complete switch failure.

2.4 In particular, BT stated that the IN controls prevent any high call rate incident focussed on one OLO/ISP affecting calls to other OLOs/ISPs. BT stressed that implementation of a FRIACO design incorporating call gapping would result in increased end user impact and extended timeframes of disruption caused by network incidents. It suggested that service disruption would be experienced by all FRIACO operators and their ISPs in the event of a network incident in another FRIACO operator’s network. BT further argued that use of the IN was vital to meet its obligations under Condition 20 of its licence (which covers essential requirements and essential public interests).

2.5 However, BT later confirmed that although it believes an IN-based solution for FRIACO offers congestion management advantages over a switch based solution, some of the controls had not been implemented until very recently, therefore it accepted that these advantages are unlikely to be as significant as suggested previously.

2.6 The Director welcomes BT's confirmation, as it provides support for the Director's view that the use of the IN for FRIACO calls is not strictly necessary and so BT should not be permitted to charge for it in addition to the FRIACO virtual circuit charges. In the light of this statement from BT, the Director does not consider it necessary to address all the detailed technical points made in BT's published response in this explanatory memorandum, although the main technical issues are discussed in chapter 3 below.

2.7 However, in its response, BT also argued that it would be impossible to operate IN and switch based solutions for FRIACO in parallel. If a switch based call gapping solution was adopted for FRIACO, all OLOs would have to migrate to that solution, regardless of whether they would be prepared to pay for the higher quality of service offered by the IN.

2.8 The Director does not accept the validity of this argument, but in any event, as the Director emphasised in the explanatory memorandum accompanying the Draft Direction, whether or not the IN will continue to be used for FRIACO is a decision for BT. The Direction simply removes BT’s right to make a reasonable additional charge as from 1 June 2002, and adjusts the charge with effect from 1 August 2001 to 31 May 2002.

Cost recovery issues

2.9 BT stated that it has invested a significant sum in the IN to facilitate DLE grooming for dial-IP services and FRIACO should recover a substantial part of this investment. BT has stated that, if there were to be no charge for the IN from December 2001, there would be a deficit to recover.

2.10 On the basis of the evidence provided by BT on the unit costs of the IN and the number of FRIACO ports in use in 2000-01 and 2001-02, the Director is not convinced that the recovery of costs through the IN charge, or the deficit, is of the magnitude that BT has stated. Indeed, as noted in the consultation on the Draft Direction, since the actual usage of the IN by FRIACO circuits was rather less than allowed for in the IN charge that is set by BT, this might have resulted in over recovery of the costs.

2.11 BT has further stated that investment was made in a Service Control Point (‘SCP’) pair to support the IN for FRIACO, and that if BT were unable to make a charge for the IN for FRIACO this would leave BT with a stranded asset.

2.12 The Director clearly indicated in the consultation on the Draft Direction that since the IN is part of a multifunction platform and can support many services including FRIACO, any investment that would have been made would only be considered as investment brought forward and would not necessarily be stranded. In the recent consultation on the draft Direction, the Director suggested that the cost of brought forward investment could be relevant if certain conditions applied, although the Director provisionally concluded that it appeared likely that at least one of the four conditions did not apply. The conditions as set out for the consultation were:

2.13 BT has not provided the Director with any evidence to show that these four conditions have been met, or to challenge the conditions. Therefore, the Director concludes that the issue of brought forward investment is not relevant.

2.14 BT also raised the issue of ongoing costs, but has not provided any details to substantiate the argument. It should be noted that the Director has already taken such ongoing costs into consideration as he has considered the fully allocated costs when addressing the issue of cost recovery. BT has also referred to STP probe capital costs. However, BT has not provided any details to substantiate these costs.

2.15 BT has suggested that if regulatory action is justified, then a mechanism such as a charge control might be more appropriate, as this would not only encourage efficient design network by BT, but also does not involve any necessity for Oftel to engage in detailed network design exercises.

2.16 The Director reiterates that while he has concluded that there is no justification for a charge on the use of the IN for FRIACO, he has made no conclusion on whether the IN should be used or not. The use of the IN should be a commercial decision between BT and the operators. The Director has not engaged in any network design operations or mandated any single network design option.

2.17 Having made the conclusion that there is no justification to charge for the IN, the Director also believes that the use of a charge control is a totally inappropriate method to require BT to refund the charges paid by operators since 1 June 2002. This is because the level of the charge has never been subject to price control and to include it within a basket for regulated charges will distort the incentives that BT is given with respect to the regulated charges. This would be economically inefficient and reduce the benefits of the charge control mechanism.

2.18 BT has further stated that it has incurred significant capital costs made specifically to support STP signalling which have not been recovered yet. BT proposes to introduce a cost oriented charge for the use of the STP network to support narrowband data dial services, one of which is FRIACO.

2.19 The charges for the use of STP signalling are currently reflected in the charge for IECs. It is not clear to the Director what separate charge BT is intending to make. However, should it wish to, the charge control mechanism allows BT the flexibility to de-average the IEC charges in order to separately charge for the cost of STP signalling, as long BT’s obligations under the price cap are still met. In accordance with its obligations, the Director expects BT to notify him about any changes it makes to the IEC charges.

2.20 BT also argued that the Director’s proposals to make retrospective changes to the FRIACO IN charge, pursuant to Regulation 6(3), were inconsistent with the Director’s reasoning made in the consultation on Charges for Emergency Service (999) calls, published on 5 May 2003, which can be viewed at www.oftel.gov.uk/publications/pricing/2003/bt9990303.htm.

2.21 As explained in the later Statement on 999 calls, which was published on 23 June 2003 (www.oftel.gov.uk/publications/pricing/2003/bt9990603.htm) the Director did not have any power to consider retrospection to those charges, as his intervention was not on the basis of ensuring effective competition, but rather to ensure that the quality and security of the emergency services is maintained. In contrast, the Director’s removal of BT’s right to make an additional charge for use of the IN to route FRIACO calls, and the adjustment of the charge between 1 August 2001-31 May 2002, are based on the need to ensure effective competition.

Energis

2.22 Although Energis broadly welcomed the Director’s proposals, it argued that the IN charges should be remedied retrospectively from July 2001 and not December 2001 or May 2002. The basis for this argument was that the charges were for the express purpose of providing switch decode, and not as an interim solution for protecting the STP network or for congestion management purposes. Energis was concerned that the justification of these charges sets a precedent which risks circumventing the normal contractual process, as BT has not followed the proper procedures to discuss the functionality of the IN with other operators. In particular, Energis has argued that if any control was necessary, the process set out in the SIA should have been followed by BT before any solution was imposed.

2.23 The Director has carefully considered the appropriate date from which the Direction should take effect, and has concluded for the reasons set out in chapters 3 and 4 below that the appropriate date for removal of BT’s right to make an additional charge for use of the IN is 1 June 2002, and that the appropriate period for an adjusted charge is 1 August 2001 to 31 May 2002.

2.24 Energis has also argued that the Director would be acting beyond his regulatory powers if he accepted that the use of the IN for FRIACO calls is justified for congestion management control. Energis alleged that it would be a disproportionate and unjustified extension of the charging regime set out in the First Direction, as the original basis on which Oftel permitted BT to make a reasonable additional 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.

2.25 In the exercise of his regulatory powers, the Director considers all relevant information and evidence. In this case, although the original justification for the IN charge was BT’s need to use the IN to route numbers allocated in 1k blocks, the Director must also consider relevant evidence and information which has come to light since the date of the First Direction. This includes evidence on congestion management issues.

Ntl

2.26 Ntl welcomed the Director’s proposals, but expressed concern about the delay which occurred before the Director was made aware that the decode limitation was no longer an issue. Ntl confirmed that during discussions with BT, BT has never described the IN charge in terms of congestion management or to aid number portability. Ntl suggested, that in the light of BT’s assumption of a higher usage of FRIACO circuits than is the case, a review of the other costs relating to FRIACO should take place.

2.27 The Director notes this suggestion, but it is outside the scope of this current investigation. The further suggestion from nlt that Oftel should have considered the charges relating to other number blocks allocated to Operators at the 1,000 number block level also falls outside the scope of this Direction.

Thus

2.28 Thus supported Oftel’s technical assessment of the capabilities of the IN platform, accepting that it is not an essential feature required to support either traffic routing or a network protection capability. However, Thus urged the Director to widen the scope of the Direction to include all Number Translation Services (NTS) and Surftime calls.

2.29 Issues relating to NTS and Surftime fall outside the scope of this Direction.

Tiscali

2.30 Tiscali expressed support for Oftel’s proposal to remove BT’s right to make additional charges for use of the IN to route FRIACO calls and for STP signalling services for FRIACO. Tiscali also believes that the proposal to make this Direction effective from 1 December 2001 is fair, since the use of the IN was no longer justified after November 2001.

2.31 However, Tiscali has also requested Oftel to direct BT to pass on any rebates on FRIACO to ISPs who contracted with BT to take Surfports.

2.32 As a general matter of policy and practice, the Director does not direct third parties who might benefit from any refund paid under the provisions of such a direction to make rebates to their customers. That is a matter for commercial negotiation between the parties concerned.

NIACT

2.33 From a consumer point of view, NIACT welcomed Oftel’s proposals. NIACT believes that the proposals will help stimulate competition, lower costs and overall improve the services for telecommunications consumers.

Chapter 3 – Functionality of the Intelligent Network for FRIACO

3.1 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

3.2 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.

3.3 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.

3.4 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.

3.5 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.

3.6 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’.

3.7 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.

3.8 However, Oftel understands that the shortage of switch decode is no longer a concern, as the situation was remedied in July 2001 (although there was regular dialogue with BT throughout 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 concludes that sufficient switch decode has existed since 1 August 2001 to enable FRIACO calls to numbers allocated in 1,000 number blocks to be delivered without necessitating an IN dip.

Congestion control

3.9 During the course of the investigation, and in its response to the consultation, 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 a detailed explanation 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.

3.10 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 may be particularly severe, due to the aggressive redial characteristics associated with the software auto-diallers frequently used for internet calls.

3.11 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.

3.12 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, and the responses to the consultation support this position.

3.13 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

3.14 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.

3.15 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.

3.16 BT has cited three reasons why IN-based rate-limiting was preferred to permanent call-gapping until the end of May 2002:

• BT argued that only a limited number of call-gap slots were available until May 2002;
• BT argued that it was impossible to apply a call-gap of less than one second until May 2002; and
• BT argued that the algorithm used by DLEs for call gapping could not have supported FRIACO traffic until the end of May 2002.

3.17 Although the Director provisionally concluded in the Draft Direction that none of the reasons given by BT, as set out above, was a major constraint on BT’s ability to control congestion using permanent call gapping, BT has provided more detailed evidence in response to the Director’s proposals.

3.18 In particular, BT has provided evidence on the algorithms used by DLEs for call gapping. The algorithm which was initially used for call gapping was replaced in a software rollout across all BT’s System X DLEs between early April and the end of May 2002. BT has demonstrated to the Director’s satisfaction that prior to the completion of that software rollout, the algorithm previously deployed, while capable of protecting the DLEs, would have caused an unacceptable level of call rejection on FRIACO calls even under normal traffic loadings.

3.19 Having carefully considered that evidence, the Director concludes that, until the end of May 2002, it would not have been possible for BT to provide functionality using a switch based solution which would have been comparable to the functionality provided by the IN.

3.20 Therefore, the Director concludes that there is a legitimate requirement to protect DLEs from overload conditions, but that it has been possible for this requirement to be adequately met since the end of May 2002 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.

3.21 However, the Director notes that BT only needed to upgrade the call gapping algorithm on its System X switches. Therefore, the Director concludes that the other DLEs would have been able to provide comparable functionality, using call gapping, to the functionality provided by the IN, from 1 August 2001 (as the switch decode issue was resolved in July 2001). As explained in the next Chapter, the Director is adjusting BT’s IN charge for the period 1 August 2001-31 May 2002 to a weighted average of the relevant charge for that period, to reflect this.

Protection of the STP network from focussed overload

3.22 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.

3.23 The specific concern raised by BT in discussion with Oftel, prior to the publication of the draft Direction, 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.

3.24 Prior to the publication of the draft Direction, BT informed Oftel that its solution to this issue 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. 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. Accordingly, based on the information available at the time, the Director set out in the draft Direction his view that there was a need to use the IN to protect the STP network prior to November 2001 but not subsequently.

3.25. Having considered the responses to the draft Direction, the Director has reached a different view. Further information has shown that, while there may have been a theoretical problem relating to the protection of the STP network prior to November 2001, BT was not in practice using the IN actively to manage this problem. Accordingly, the Director no longer believes the issue of protection of STP network is relevant to considering whether BT needed to use the IN in relation to FRIACO.

Protection of interconnecting networks from focussed overload

3.26 BT has argued that the use of the IN may also protect elements within the networks of interconnecting operators from any overload condition.

3.27 Oftel acknowledges that the use of the IN may provide a means of protecting interconnecting operators’ networks, as well as the ISPs they serve. However, this does not appear to be a consideration in BT’s current use of the IN overload controls, since BT has not made any contact with interconnecting operators in order to establish an appropriate threshold for the congestion control. Indeed, BT has confirmed that such controls have only been implemented very recently, and therefore any congestion management advantages of the use of the IN appear not to have been realised. In any case, it is the responsibility of interconnecting operators to manage congestion within their own networks, rather than for BT to impose a solution.

3.28 Interconnecting operators are free to enter into commercial negotiations regarding the use of the IN dip for this purpose, if they wish to do so. The Director concludes that, in the absence of such agreement between operators, the use of the IN is not required to protect the networks of interconnecting operators from overload conditions.

Number portability

3.29 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.

3.30 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.

3.31 Oftel acknowledges the potential benefits of this approach to number portability, and has set out its own proposals in this area (Proposals to change the framework for number portability, 20 December 2002, 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.

3.32 Interconnecting operators are free to enter into commercial negotiations regarding the use of the IN dip for this purpose, if they wish to do so. The Director concludes that, in the absence of such agreement between operators, the use of the IN is not required for the purposes of number portability of FRIACO numbers.

Conclusion

3.33 The Director has considered all the arguments made by BT as to why an IN charge is justified to handle FRIACO traffic and has concluded that there is no longer any justification for such a charge. Indeed, the Director has concluded that the justification fell away after the end of May 2002.

3.34 When FRIACO was launched the Director accepted the use of the IN was necessary because of the shortage of switch decode in the DLE, however this problem was remedied in July 2001. The Director also accepts that prior to the end of May 2002, BT would not have been able to use a switch based solution for FRIACO calls due to the limitations of the algorithm in use at BT’s System X DLEs at that time. 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 removing BT’s right to make an additional charge for the use of IN to route FRIACO calls with effect from 1 June 2002, and is reducing the charge with effect from 1 August 2001 to 31 May 2002. The next chapter discusses why this is appropriate in the light of the Director’s technical analysis.

  Chapter 4 – The Director’s decision and reasoning

Director’s decision

4.1 The Direction removes BT’s right to make an additional charge for use of the IN to route FRIACO calls with effect from 1 June 2002, and adjusts the charge for the period 1 August 2001-31 May 2002. It also removes BT’s right to make an additional charge for STP signalling services for FRIACO.

4.2. As explained in the previous chapter, the Director has concluded that use of the IN was no longer justified after the date when the call gapping algorithm on BT’s System X switches was upgraded. BT has informed the Director that this had occurred by the end of May 2002 and therefore this Direction requires BT to repay all purchasers of FRIACO the IN charge paid since 1 June 2002, together with interest on the repayments in accordance with Clause 13.13 of the Standard Interconnection Agreement.

4.3 In addition, the Director has concluded that although the upgraded algorithm was not installed at the System X switches until the end of May 2002, the other types of DLEs would have been able to provide comparable functionality to the functionality provided by the IN, from 1 August 2001 (as the switch decode issue was resolved in July 2001). Therefore, the Director is adjusting BT’s IN charge for the period 1 August 2001-31 May 2002, to a weighted average of the relevant charge for that period, to reflect the fact that the algorithm only needed to be upgraded on the System X switches. This Direction requires BT to repay all purchasers of FRIACO the difference between the IN charge paid in relation to the period 1 August 2001 to 31 May 2002, and the £42 per 64kbit/s circuit specified in this Direction, together with interest on the repayments in accordance with Clause 13.13 of the Standard Interconnection Agreement.

4.4 Further, BT’s right to make an additional charge for STP signalling services for FRIACO is removed, as signalling costs are reflected 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

4.5 As explained in the previous chapter the Director has concluded that since the end of May 2002 there has been no justification for using the IN to route FRIACO traffic. The Director believes that the routing service that the IN currently provides can be provided through the DLE by the increased efficiency of use of switch decode which resulted from a switch software development in July 2001. Similarly, protection of the DLE from overload can be managed through permanent call-gapping at the DLE since the end of May 2002. 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.

4.6 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 promotes maximum economic efficiency and maximum benefit to end-users, and is necessary in order to stimulate a competitive market. In the absence of the Direction BT would be effectively charging for the FRIACO service in excess of costs, as it would 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

4.7 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.

4.8 Chapter 3 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.

4.9 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.

4.10 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.

4.11 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

4.12 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 (1999-00–2001-02). In addition, substantial barriers to entry are faced by new entrants due to the significant sunk costs required in providing such services.

4.13 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.

Consequences

4.14 In the light of the Director’s conclusion that BT has market power in the relevant market and the Director’s finding that use of the IN to handle FRIACO traffic is not required (see chapter 3), 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.

4.15 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. 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.

4.16 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.

4.17 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.

4.18 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 at the margin 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.

4.19 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 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.

4.20 It should be noted in this context that in the Director’s recent consultation document published on 17 March 2003, 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 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 Direction is consistent with the proposals made in the wholesale unmetered narrowband internet termination market review.

4.21 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 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

4.22 The Director has considered when the Direction should take effect. As discussed in chapter 3, the switch decode capability at the DLE was enhanced by July 2001 and the algorithm used for call gapping was upgraded by the end of May 2002. Therefore the Director concludes that there was no justification for using the IN to route FRIACO calls after 31 May 2002.

4.23 It might be argued that retrospective adjustment of charges would not benefit effective competition or end users because it is unclear whether there will be matching retrospective rebates to downstream customers. Even if this were the case, the Director considers that retrospection is important in this case. Whilst the Director cannot fetter his discretion in future cases, he seeks to ensure that the Direction provides the right signals in relation to other cases for BT to make appropriate charges only when there is a justification for doing so. A failure to apply retrospection in this case would mean that BT would retain a financial benefit from its overcharging and it might presume that it would similarly benefit were it to behave in a similar manner in other cases ie BT would still have an incentive to make a charge until such time that an investigation is concluded. In contrast the application of retrospection in this case removes the benefit to BT from its overcharging and, by reducing the incentive to overcharge in other cases, seeks to ensure effective competition for the benefit of end users. The Director believes that it is his duty to ensure effective competition which protects end-users from incurring charges that are not justified. Accordingly, the Director is removing BT's right to make a reasonable additional charge as from 1 June 2002.

4.24 In addition, the Director has considered the issue of the deployment of the upgraded algorithm across all BT System X switches by the end of May 2002. The Director considers that the other types of DLEs would have been able to provide comparable functionality to the functionality provided by the IN, from 1 August 2001 (as the switch decode issue was resolved in July 2001). The Director has obtained the relative numbers of System X switches, compared to BT’s other types of DLEs, from the data set out in the Network Information Publication Principles (‘NIPP’) data, for October 2001. On the basis of that information, the Director has calculated the appropriate charge for the period 1 August 2001 to 31 May 2002, using a weighted average. Therefore, the Director is adjusting BT’s IN charge for the period 1 August 2001-31 May 2002 to a weighted average of the relevant charge for that period, to reflect the fact that the algorithm only needed to be upgraded on the System X switches. On this basis, the Director considers that the appropriate charge for the period 1 August 2001-31 May 2002 is £42 per 64kbit/s circuit per annum. Therefore, this Direction requires BT to repay all purchasers of FRIACO the difference between the IN charge paid in relation to the period 1 August 2001 to 31 May 2002, and the £42 per 64kbit/s circuit specified in this Direction, together with interest on the repayments in accordance with Clause 13.13 of the Standard Interconnection Agreement.

Cost recovery

4.25 The Director does not dispute that use of the IN for FRIACO was necessary initially from May 2000, but has concluded that it became unnecessary after 31 May 2002. In addition, the Director has also concluded that the charge paid by Operators for use of the IN for FRIACO calls between 1 August 2001 and 31 May 2002 should be adjusted, as explained above at Paragraph 4.24. 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-May 2002.

4.26 It is clear that BT's charges for FRIACO IN in the period May 2000-August 2001, and BT’s adjusted charge (as a result of this Direction) between 1 August 2001 and the end of May 2002, covered the relevant operating and capital costs reasonably incurred in that period. Firstly, the charges were set based on BT’s 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-May 2002.

4.27 As explained at paragraph 2.12 above, in the consultation on the Draft Direction, the Director recognised that any brought forward investment might carry an opportunity cost, and he suggested that the cost of brought forward investment could be relevant if certain conditions applied. BT has not provided the Director with any evidence to show that these four conditions have been met, or to challenge those conditions. Therefore, the Director concludes that the issue of brought forward investment is not relevant.

4.28 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-May 2002 was rather less than allowed for in the IN charge set by BT, this might have resulted in over-recovery for that reason. Consequently the Director has considered the question of retrospective rebates during this period as a result of this form of over-recovery.

4.29 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-May 2002 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 considers it inappropriate to provide operators with retrospective rebates on the basis of differences between forecast and actual usage for the period May 2000-May 2002.

Interest charges

4.30 In accordance with Clause 13.13 of the Standard Interconnection Agreement, BT will pay interest on repayments made under this Direction to operators from 1 August 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.

Continuation notices

4.31 This Direction will be the subject of a Continuation Notice which will be published before 25 July 2003 to ensure that this Direction continues to have effect after 25 July 2003. Although the Director consulted on the proposed Continuation Notices from 3 July 2003 to 14 July 2003, it was not possible to include this Direction in that consultation due to the timing of the publication of this Direction.

Chapter 5 – Proposals for industry discussion

5.1 In this explanatory memorandum which accompanies the Direction, the Director has set out why he is removing BT’s right to make an additional charge for the use of the IN to route FRIACO calls. However, although the Director has not been persuaded by BT’s arguments that use of the IN is essential for congestion management, the Director recognises the IN may have a useful role to play in tackling congestion management issues in the future. In particular, it appears that it is particularly important to ensure that a major failure of one ISP or its serving OLO does not impact on the ability of others to continue providing services, given the potential increase in calling rates for unmetered services which can be triggered during a failure. Additionally, individual ISPs and operators may wish to have pro-active means for protecting their networks from focussed overloads.

5.2 The Director also considers that the present method of managing congestion within BT’s network may not be optimum, being a compromise between protecting its signalling network and protecting the DLEs. It may also be the case that any unforeseen overload on voice services using IN might impact on Internet access.

5.3 The Director considers that this investigation highlights the importance of multilateral industry discussion and consensus in addressing such issues, and considers a unilateral approach by operators to resolving the issues to be unsatisfactory. Therefore, the Director wishes to encourage wider industry discussions on the appropriate protection mechanisms, and will take steps to facilitate a suitable forum for such discussions.

Annex A – List of respondents

• BT;
• Energis;
• Tiscali;
• Ntl;
• Thus;
• NIACT;
• service provider 1; and
• service provider 2.

Annex B – 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.