November 2000

Contents

Draft Direction

Consultation

Annex 1

Annex 2

Draft Direction

1. On 13 November 2000 the Director General of Telecommunications (the "Director") issued a consultation document on future interconnection arrangements for dial-up Internet in the United Kingdom. The Director is now publishing a Draft Direction which sets out how the proposals outlined in the consultation document could be given legal effect. It is drafted on the basis that Option 2 in Stage 1 (described in paragraphs 4.22 to 4.36 of the consultation document) is the Director’s preferred option.

2. The Draft Direction is attached at Annex 1. The Draft Direction will amend the FRIACO Direction adopted by the Director on 26 May 2000. Annex 2 contains a consolidated version of the Directions of 26 May 2000 and the Draft Direction. The consolidated version is for information purposes only and does not form part of the Draft Direction

Consultation

3. Please e-mail or send by post comments to Jan Willem van den Bos by close on 8 December 2000 at:

Oftel
50 Ludgate Hill
London
EC4M 7JJ

e-mail: janwillem.vandenbos@oftel.gov.uk

Further comments on comments will be received by Oftel until close on 22 December 2000.

4. Confidential responses should not be sent via the Internet. Written comments will be made publicly available in Oftel’s Research and Intelligence Unit except where respondents indicate that responses, or parts of it, are confidential. Respondents are therefore asked to separate out any confidential material into a clearly marked annex.

5. Unless you specifically ask for your comments, or part of them, to be kept confidential, they shall be made available to the public from the Oftel Research and Intelligence Unit/Library from 11 December 2000. Appointments to view written comments in Oftel’s Research and Intelligence Unit, which must be made in advance, can be arranged by ringing: 020 7634 8761 (fax: 020 7634 8946).

6. Copies of the Draft Direction are available on disc.

7. The Draft Direction can be made available in large print, Braille and tape formats. Please contact the Oftel Research and Intelligence Unit on 020 7634 8761, or by e-mail or call textphone 020 7634 8769 for more information.

Annex 1

Draft

Draft Determination relating to a dispute between BT and MCI Worldcom concerning the provision of a Flat Rate Internet Access Call Origination product ("FRIACO")

Draft Direction under Condition 45.2 of the Public Telecommunications Licence granted to British Telecommunications plc and under Regulations 6(3) and 6(6) of the Telecommunications (Interconnection) Regulations 1997 amending a Direction made by the Director General of Telecommunications on 26 May 2000 under Regulation 6(6) of the Telecommunications (Interconnection) Regulations 1997

WHEREAS

Introduction

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

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

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

        4.  Both MFS Communication Limited and Worldcom International Inc. are now part of MCI Worldcom;

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

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

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

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

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

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

The First Direction

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

        12.  Under the First Direction BT is required to provide to MCI Worldcom interconnection at each DLE where BT separates Internet Traffic from other calls for any purposes (an "Enabled DLE");

        13.  BT is further required to provide to MCI Worldcom a service for the conveyance of Internet Traffic from each Enabled DLE to any Point of Connection between BT’s Applicable System and MCI Worldcom’s Applicable System which is situated in a premises in which any of BT’s Digital Main Switching Units ("DMSUs") are located;

        14.  BT fulfilled this requirement by offering Interconnect Extension Circuits ("IECs"). An IEC is a direct link between an operator’s Point of Connection at a BT switch to another BT switch;

        15.  Some operators have used IECs to extend their network to interconnect at BT’s Enabled DLEs;

        16.  In the First Direction the Director also determined the charge to be made by BT for the use of each port dedicated to providing FRIACO. The pence-per-minute figures for 1997/1998 used in the derivation of the charge determined in the First Direction were taken from a calculation which involved some rounding and so resulted in figures that were not identical to the Network Charge Control charges in BT’s Carrier Price List for 1997/1998;

        17.  The relevant number of minutes per circuit used in the calculation of the charge for Product management, Policy and Planning ("PPP") is now slightly higher than was the case in the calculation used in the First Direction. This is because of the inclusion of the effect of international call minutes, which have a flatter time-of-day profile than domestic call minutes;

        18.  The 1993/1994 figure is reflated at RPI-8% to yield a charge in 1999/2000 prices. This is appropriate because the PPP charge should fall with increases in minutes per circuit (unlike the circuit charges, which are reflated at RPI-5%);

        19.  The charge set out in paragraph 3.4 of the First Direction should be decreased accordingly;

        20.  The First Direction otherwise remains in force until revoked by the Director;

Independent technical experts’ report

        21.  During the Director’s consideration of MCI Worldcom’s request, BT submitted that the expected substantial increase in traffic, which would result from unmetered interconnection for Internet purposes, would exceed the capacity of the Public Switched Telephone Network ("PSTN") as currently configured. In particular, the DMSU switches would not be able to handle the expected increase in traffic;

        22.  A "Tandem Switch" is a DMSU, a Digital Junction Switching Unit, a Digital Local Tandem Exchange or a Wide Area Tandem, as defined in BT’s Network Charge Control Standard Interconnection Agreement (October 1997), Edition July 2000;

        23.  In view of BT’s concerns the Director sought independent technical expert advice on the options available for investment to enable unmetered interconnection at the tandem layer - that is, the layer of the PSTN which carries trunk traffic which is switched by a Tandem Switch;

        24.  Having considered the independent technical expert advice as well as further submissions from BT and other operators the Director is now in a position to amend his Direction of 26 May 2000 to provide for interconnection at the Tandem Switch;

        25.  Operators have Points of Connection not only at DMSUs but also at other Tandem Switches;

        26.  It is therefore appropriate to amend the references to "DMSU" in the First Direction to "Tandem Switches";

Amending the First Direction

        27.  Pursuant to Regulation 6(3) of the Telecommunications (Interconnection) Regulations 1997 ("the Regulations") 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 or both;

        28.   To the extent that this Direction requires existing interconnection agreements to be amended, this is justified to ensure that sustainable FRIACO-based services can continue to be provided for the foreseeable future despite the current constraints on the PSTN;

        29.  A Direction made under Condition 45.2 of the BT Licence operates as an exercise by the Director of the power of direction conferred by Regulation 6 of the Regulations. The Director may also make a Direction to resolve any interconnection dispute under Regulation 6(6) of the Regulations. The Regulations were made to implement in the United Kingdom Directive 97/33 EC of the European Parliament and Council on Interconnection in Telecommunications ("the Directive");

        30.  In the light of the provisions of the Directive (and in particular of Article 7, Article 9(3) and recital 10) it is apparent that one of the purposes of the Directive (and, therefore, of the Regulations) is to ensure competitive and cost-oriented pricing for interconnection. The phrase "specific conditions" in Condition 45.2(b) of BT’s Licence must, therefore, be interpreted so as to include specific conditions as to prices and charges for interconnection;

        31.  As the First Direction made clear (for example in recital 40) the original dispute between BT and MCI Worldcom continues to have unresolved issues, in particular as to the appropriate Point of Connection for FRIACO services, which the First Direction stated would be reviewed in the light of the experts' report;

        32.  In addition to amending the First Direction as to the appropriate Point of Connection, the First Direction also provided for a review of the charge made for FRIACO ports at Enabled DLEs. However, given the likely modest use of FRIACO in the original review period (until 1 December 2000), the Director believes that it is appropriate to ensure that the review dates of the charges made for FRIACO ports are suitably flexible to reflect changes in circumstances;

        33.  The experts’ report emphasised the need to allow the development of a network architecture that can accommodate adequately and appropriately the predicted rapid growth in Internet Traffic;

        34.  In order to encourage the development of such a network architecture the Director considers it appropriate to amend the First Direction and alter the interconnection obligations imposed on BT by that Direction;

Three stages of implementation

        35.  The experts’ report recommended that the proposed changes to the network should be implemented in stages;

        36.  It is not possible for all of the changes recommended to be implemented within the time which the experts considered is available before operational difficulties due to the expected growth in Internet Traffic could become apparent;

        37.  It is therefore appropriate to adopt a three stage approach;

        38.  The obligations placed upon BT in Stages 1 and 2 are necessary to resolve the problems arising from an increase in Internet Traffic in the short and medium terms. Stage 3 indicates what the Director believes to be a viable long term solution;

        39.  This Direction only places obligations upon BT during the implementation of Stages 1 and 2 since the Director believes that the best means of identifying and resolving the many issues surrounding the implementation of IP interconnection services is, in the first instance, by discussion between Oftel and the industry;

Stage 1

        40.  Stage 1 will last from 1 February 2001 to 31 January 2002, by which date BT could reasonably be expected to have reinforced its network to deal with the expected increase in Internet Traffic. During Stage 1 BT shall be obliged to provide FRIACO switched through any of the Licensee’s Tandem Switches, to a Point of Connection situated at that Tandem Switch;

        41.  The Director considers that in the Stage 1 if Internet Traffic continues to grow as estimated there could be a shortage of Tandem Switch capacity and that management of such capacity is therefore required in the short term;

        42.  Such management can be achieved by migrating the traffic of those operators being supplied with FRIACO pursuant to this Direction, away from Tandem Switch interconnection which would create additional capacity at the Tandem Switch (that is, "headroom"). BT should not be allowed to impose any additional charge or payment for migrating traffic away from the Tandem Switch.

        43.  In addition the obligation on BT to provide FRIACO pursuant to this Direction should also be subject to a ceiling set initially at 13,500 Tandem Switch 2Mbit/s ports for all FRIACO traffic supplied pursuant to this Direction;

        44.  The Director intends to review this ceiling at intervals of not less than three months during this Stage 1 to ensure as far as possible that the maximum number of FRIACO ports is made available to operators consistent with maintaining the integrity of the PSTN;

        45.  BT will be expected to allocate FRIACO ports supplied pursuant to this Direction on a "first come first served" basis as orders are placed;

Stage 2

        46.  Stage 2, which starts on 1 February 2002, requires the provision by BT of FRIACO switched through any of BT’s Tandem Switches to meet all reasonable demand as required by Condition 45 of its Licence. One way BT may choose to implement the obligations imposed by Stage 2 is by constructing a separate network to lay over the PSTN and which would carry only trunk Internet Traffic. This is the solution recommended by the technical experts’ report for the medium term, until Stage 3 can be implemented;

        47.  A significant issue in relation to any construction of a tandem overlay network for Internet Traffic (an "ISP Tandem Switch Overlay") is who should bear the cost of it. It is assumed that most of the traffic passing over this new network will not be ultimately destined for BT customers. This may require BT to invest in assets where there is a risk that it may be unable to recover the cost of such investment should operators migrate to interconnection based on IP technology in Stage 3. This is discussed in more detail in the explanatory document accompanying this Direction. In order to provide the correct incentives to both BT and operators, Oftel believes that any significant capital costs of any ISP Tandem Switch Overlay network should be shared between operators and BT and that BT should seek to recover its proportion of any capital costs through the normal margin it earns for the conveyance of traffic over the tandem level of the PSTN;

        48.  The Director estimates the cost of one Tandem Switch and associated equipment to be £2,500,000 and considers this amount be a significant capital cost;

        49.  If BT is required to invest in excess of £2,500,000 in purchasing Tandem Switches in order to fulfil its obligations pursuant to this Direction after 31 January 2002 but is unable to agree, by 1 May 2001, with the operators as to who should bear this additional expenditure, either of the parties may refer the matter to the Director requesting a determination or the Director may then intervene on his own initiative;

The charge for Stages 1 and 2

      50.  The charges for the provision of FRIACO switched through any of the Licensee’s Tandem Switches during Stages 1 and 2 have been derived using the same methodology as outlined in Annex 2 of the First Direction and paragraphs 69 to 87 of the Explanatory Document which accompanied the First Direction;

        51.  The Director considers that these charges fulfil the criteria set out in recital 30 above for the reasons given in Annex 2 of the First Direction;

        52.  A 2Mbit/s circuit contains thirty 64kbit/s circuits (plus signalling circuits) and the determined charge should therefore be multiplied by thirty to produce a 2Mbit/s circuit charge. However, the Director does not believe that a request for interconnection with a 64kbit/s circuit would necessarily be unreasonable;

Stage 3

      53.  Stage 3 implies supply by BT of an interconnection product based on IP technology. In recognition of the many issues surrounding the implementation of an IP interconnection regime, the Director intends to convene a meeting of interested operators under the chairmanship of Oftel to seek agreement as to the issues to be addressed and appropriate solutions. Should agreement not be reached within a reasonable time the Director would then consider, after consulting BT and the rest of the telecommunications industry, making a determination;

Draft Direction

        54.  A draft of this Direction was published on 24 November 2000 and comments invited.

THEREFORE

Pursuant to Condition 45.2 of the BT Licence and Regulations 6(3) and 6(6) of the Regulations, and having considered the views of the parties and those matters set out in Regulation 6(8) of the Regulations, the Director General of Telecommunications makes the following Direction:

        1.  The Direction made by the Director on 26 May 2000 is amended in accordance with paragraphs 2 to 8 of this Direction.

        2.  In paragraph 3.4 of the First Direction "£ 424.25 (four hundred and twenty four pounds and twenty five pence)" is replaced by "£ 418.11 (four hundred and eighteen pounds and eleven pence)".

        3. In paragraph 3.4 of the First Direction the words "(the "Charge")" shall be replaced by "(the "DLE Charge")" and references to "Charge" in subsequent paragraphs of the First Direction shall be amended in the same way.

        4.  In paragraph 3.6 of the First Direction, after the words "…by paragraph 4.3" insert the words "and by paragraph 8G,".

        5.  Paragraph 5.1 of the First Direction is deleted;

        6.  In paragraph 8.2 of the First Direction the reference to "DMSUs" shall be replaced by "Tandem Switches";

        7.  Paragraph 7 of the First Direction is deleted and replaced with the following:

                "7. The DLE Charge and the Tandem Charge (as defined in paragraph 8G) shall be reviewed by the Director from time to time by reference to information on Internet Traffic using FRIACO, unless the parties otherwise agree in writing."

        8.  After paragraph 8 of the First Direction insert:

                "8A In addition to its obligations under paragraph 8, the Licensee shall, from 1 February 2001, offer to provide to the Operator, within a reasonable period of the Operator’s written request, FRIACO switched through any of the Licensee’s Tandem Switches, to a Point of Connection situated at that Tandem Switch on the terms set out (with the necessary changes) in paragraphs 1, 2, 3.1, 4 and 8B to 8I inclusive of this Direction.

                8B Subject to paragraph 8F, the obligation placed upon the Licensee in Paragraph 8A shall only require the Licensee to provide a maximum of 13,500 Tandem Switch 2Mbit/s ports for all FRIACO traffic supplied pursuant to paragraph 8A (the "Ceiling"), unless the Director shall otherwise direct from time to time.

                8C Subject to paragraph 8F, where the Licensee is providing FRIACO to the Operator pursuant to paragraph 8A it may redirect to another existing Point of Connection with the Operator's Applicable System all or any Messages originating on or conveyed over the Operator’s Applicable System. Should the Operator not agree to the redirection then the Licensee’s obligation in paragraph 8A will not apply to the Point of Connection in relation to which the                   Licensee wishes to redirect traffic pursuant to this paragraph.

                8D The Licensee may only take action pursuant to paragraph 8C (and that paragraph will only apply) provided that;

                    8D.1 the Licensee acts in a reasonable manner at all times including, in particular, giving reasonable notice of any such action to the Operator;

                    8D.2 no such action is taken in respect of a Point of Connection at any DLE including a Co-located DLE, unless otherwise agreed between the Licensee and the Operator; and

                    8D.3 except as provided in this Direction, the Licensee shall not raise any additional charge or require any additional payment of any kind as a result of the application of paragraph 8C.

                    8E Nothing in paragraphs 8A to 8D shall allow the Licensee to take action under paragraph 8C in respect of any person to which the Licensee is not providing FRIACO pursuant to paragraph 8A.

                    8F Paragraphs 8B to 8E of this Direction shall only apply from 1 February 2001 until 31 January 2002.

                    8G The Operator shall pay to the Licensee a charge of £ 589.74 (five hundred and eighty nine pounds and seventy-four pence) per year for each Point of Connection provided pursuant to paragraph 8A and to which is connected a circuit of a capacity of no greater than 64 Kbit/s (the "Tandem Charge"). Where any such Point of Connection is provided for less than a whole year, and subject to paragraphs 8C to 8D, the Tandem Charge shall be reduced proportionately.

                    8H Where the Licensee reasonably believes that, in order to fulfil the obligation in paragraph 8A for any period after 31 January 2002, it is required to incur capital expenditure in purchasing Tandem Switches in excess of £2,500,000 (two million and five hundred thousand pounds) ("Additional Network Expenditure") it may so inform the Operator and request the Operator to enter into negotiations in good faith to agree how the Additional Network Expenditure should be borne.

                    8I If negotiations have been commenced under paragraph 8H but no agreement has been reached by 1 May 2001, either party may thereafter refer the matter to the Director for a determination or the Director may in any event then intervene on his own initiative to determine the terms of the agreement".

        9.  Paragraph 2 of this Direction shall have effect from the seventh day following the adoption of this Direction.

        10.  Paragraph 10 of the First Direction shall apply to this Direction.

David A Edmonds

Director General of Telecommunications.

Annex 2

Consolidated Direction

(This consolidated version of the Direction of 26 May 2000 and the Draft Direction is for information purposes only and does not form part of the Draft Direction)

THEREFORE

Pursuant to Condition 45.2 of the BT Licence and Regulations 6(3) and 6(6) of the Regulations the Director General of Telecommunications makes the following Direction:

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

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

3. The Offer shall include the following terms:

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

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

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

        3.4  the Operator shall pay to the Licensee a charge of £ 418.11 (four hundred and eighteen pounds and eleven pence) per year for each Point of Connection to which the Offer relates (the "DLE Charge");

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

        3.6  except as permitted by paragraph 4.3 and by paragraph 8G, the Licensee shall not make any additional charge or require any additional payment of any kind in addition to the DLE Charge under any agreement made as a consequence of the Offer and, in particular, shall not require any further charges for the use of any part of the Licensee’s Applicable System between the Subscriber’s telecommunications apparatus and the DLE;

4. The Offer may also include the following terms;

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

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

        4.3  the Licensee may make a reasonable additional charge for any IN or STP signalling services provided by the Licensee to the Operator at the Operator’s request for the purpose of using the FRIACO service and for any service provided under paragraph 8;

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

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

        5.1 [deleted]

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

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

7. The DLE Charge and the Tandem Charge (as defined in paragraph 8G) shall be reviewed by the Director from time to time by reference to information on Internet Traffic using FRIACO, unless the parties otherwise agree in writing.

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

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

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

        8A. In addition to its obligations under paragraph 8, the Licensee shall, from 1 February 2001, offer to provide to the Operator, within a reasonable period of the Operator’s written request, FRIACO switched through any of the Licensee’s Tandem Switches, to a Point of Connection situated at that Tandem Switch on the terms set out (with the necessary changes) in paragraphs 1, 2, 3.1, 4 and 8B to 8I inclusive of this Direction.

        8B. Subject to paragraph 8F, the obligation placed upon the Licensee in Paragraph 8A shall only require the Licensee to provide a maximum of 13,500 Tandem Switch 2Mbit/s ports for all FRIACO traffic supplied pursuant to paragraph 8A (the "Ceiling"), unless the Director shall otherwise direct from time to time.

        8C. Subject to paragraph 8F, where the Licensee is providing FRIACO to the Operator pursuant to paragraph 8A it may redirect to another existing Point of Connection with the Operator's Applicable System all or any Messages originating on or conveyed over the Operator’s Applicable System. Should the Operator not agree to the redirection then the             
        Licensee’s obligation in paragraph 8A will not apply to the Point of Connection in relation to which the Licensee wishes to redirect traffic pursuant to this paragraph.

        8D. The Licensee may only take action pursuant to paragraph 8C (and that paragraph will only apply) provided that;

                8D.1 the Licensee acts in a reasonable manner at all times including, in particular, giving reasonable notice of any such action to the Operator;

                8D.2 no such action is taken in respect of a Point of Connection at any DLE including a Co-located DLE, unless
                otherwise agreed between the Licensee and the Operator; and

                8D.3 except as provided in this Direction, the Licensee shall not raise any additional charge or require any additional payment of any kind as a result of the application of paragraph 8C.

                8E. Nothing in paragraphs 8A to 8D shall allow the Licensee to take action under paragraph 8C in respect of any person to which the Licensee is not providing FRIACO pursuant to paragraph 8A.

                8F. Paragraphs 8B to 8E of this Direction shall only apply from 1 February 2001 until 31 January 2002.

                8G. The Operator shall pay to the Licensee a charge of £ 589.74 (five hundred and eighty nine pounds and seventy-four pence) per year for each Point of Connection provided pursuant to paragraph 8A and to which is connected a circuit of a capacity of no greater than 64 Kbit/s (the "Tandem Charge"). Where any such Point of Connection is provided for less than a whole year, and subject to paragraphs 8C to 8D, the Tandem Charge shall be reduced proportionately.

                8H. Where the Licensee reasonably believes that, in order to fulfil the obligation in paragraph 8A for any period after 31 January 2002, it is required to incur capital expenditure in purchasing Tandem Switches in excess of £2,500,000 (two million and five hundred thousand pounds) ("Additional Network Expenditure") it may so inform the Operator and request the Operator to enter into negotiations in good faith to agree how the Additional Network Expenditure       should be borne.

                8I. If negotiations have been commenced under paragraph 8H but no agreement has been reached by 1 May 2001, either party may thereafter refer the matter to the Director for a determination or the Director may in any event then intervene on his own initiative to determine the terms of the agreement".

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

10. Except as otherwise defined in this Direction;

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

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

David A Edmonds

Director General of Telecommunications