Draft Direction under Condition 45 of the Public Telecommunications Licence granted to British Telecommunications plc of a dispute between BT and MCI Worldcom concerning the provision of a Flat Rate Internet Access Call Origination product (FRIACO)

Contents

Draft Direction

Explanatory Document

Annex 1

Annex 2

Draft Direction under Condition 45 of the Public Telecommunications Licence granted to British Telecommunications plc of a dispute between BT and MCI Worldcom concerning the provision of a Flat Rate Internet Access Call Origination product (FRIACO)

WHEREAS

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 has granted to MFS Communications Limited on 24 September 1993 and to WorldCom International Inc on 31 March 1994 to MCI Worldcom, a licences under Section 7 of the Act for the running of a telecommunications system as specified in the licence;

4.    Both MFS and Worldcom are now part of MCI Worldcom;

5.    MCI Worldcom has entered into a Standard Interconnect Agreement with BT on the date 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, in accordance with Condition 45 of the BT Licence, MCI Worldcom referred the dispute to the Director General of Telecommunications (the "Director") for a direction that the request for the service was reasonable and should be covered in an interconnection agreement with BT and for a direction in relation to the point of interconnection and charge for the service;

10.    Condition 45.1 of the BT Licence requires BT to offer to enter into an agreement

"(b) to provide such […] telecommunications services […] information and other services which, to the extent the parties do not agree […], the Director may determine are reasonably required (but no more than are reasonably required) to secure that Points of Connection are established and maintained and to enable the Operator [requesting the service] to provide Connection Services which it provides or proposes to provide."

Request for unmetered interconnection

11.    The service requested by MCI Worldcom is the provision by BT of Points of Connection to BT’s telecommunications system to enable calls originating on that system and conveyed to the Point of Connection by BT to be transferred to MCI Worldcom’s system for a fixed (unmetered) charge based on the number of Points of Connection provided by BT, rather than a (metered) charge based on the number of call minutes passing over the Point of Connection. The request was limited to calls originating on BT’s telecommunications system and destined (directly or indirectly) for numbers or number ranges allocated to Internet service providers ("Internet Traffic"). The service is referred to in this Direction as "FRIACO".

12.    BT has submitted that it does not believe that MCI Worldcom requires FRIACO interconnection to provide internet services (which fall within the definition of Connection Services) to its customers. Existing metered interconnection services available from BT would enable MCI Worldcom to do this. BT said that MCI Worldcom is not in fact requesting a new service but simply a change in the charging methodology from the existing pence per minute volume charge. Accordingly BT argues that FRIACO is not required to enable MCI Worldcom to provide services to end users and nor is the request for FRIACO reasonable;

13.    On 11 December 1999 BT announced that, from mid 2000, it will begin to provide certain of its retail customers with unmetered access to the internet. Rather than charging those customers on a volume basis, they will be charged an unmetered fixed monthly fee. The retail service will be called "SurfTime";

14.    The Director is considering, in parallel with this determination of the FRIACO interconnection request, whether SurfTime, as currently proposed by BT, complies with the Conditions of the BT Licence and with the law;

15.    As a consequence of this consideration, BT has made available to the Director forecasts of increasing internet traffic as a result of the introduction of the unmetered services including SurftTime service. The forecasts, provided by BT and other operators, predict that such traffic will increase by at least 200% over the next yearperiod from September 1999 to December 2000. By this time BT expects that 50% of total internet traffic is expected to be unmetered;

16.    The Director therefore considers that there is considerable potential demand for unmetered retail internet services;

17.    MCI Worldcom and other licensed telecommunications operators ("OLOs") wish to be able to provide such services to customers in competition with BT’s SurfTime service. However, that service contains retail elements which are not required by OLOs for them to provide such services;

18.    Approximately 80% of all calls made in the United Kingdom originate on BT’s network. In order to be able to provide an effective internet service to retail customers, OLOs are therefore obliged to interconnect with BT’s network;

19.    The Director therefore considers that unmetered interconnection for internet services is reasonably required to enable MCI Worldcom effectively to provide the unmetered retail internet access services it proposes to offer;

Point of connection

20.    In common with many OLOs interconnecting with BT’s network, MCI Worldcom has configured its own telecommunications network to interconnect at the Digital Main Switching Unit ("DMSU") level, this being the ‘usual’ point of handover for geographic and NTS voice and data telecommunications traffic;

21.    In its request to the Director, MCI Worldcom requested that the Point of Connection for FRIACO should be at the DMSU.   The traffic being passed from BT’s network to MCI Worldcom under the Standard Interconnection Agreement with BT  is switched thorough the relevant BT DMSUs.

22.    The Director takes the view that Condition 45 of the BT Licence requires BT to offer to provide a Point of Connection to its system at any place requested by an OLO unless there are good technical reasons for not providing connection at that point;

23.    During the Director’s consideration of MCI Worldcom’s request, BT submitted that due to the expected substantial increase in traffic which would result from unmetered interconnection for internet purposes would exceed the capacity of the PSTN voice network as currently configured. Despite an extensive switch replacement programme which BT was already undertaking, there was a significant risk that requiring connection for unmetered Internet Traffic at the DMSU would cause significant operational difficulties. Since the DMSUs, and their replacement Next Generation Switches (NGS), carry voice and internet traffic, BT argued that the potential consequences of  capacity difficulties would be far reaching. To avoid this a significant amount of additional investment in switch capacity would have to be made.

24.    The Director has sought external expert advice on these arguments put forward by BT. Consequently he cannot at present determine whether interconnection at the DMSU is reasonably required, but no more than is reasonably required, to secure the establishment of Points of Connection for unmetered interconnection for internet purposes Nevertheless the Director expects that he will be able to reach a view on BT’s submissions in due course.

25.    BT informed Oftel that it would be separating the Internet Traffic generated by SurfTime from other calls originating on BT’s system (a process known as "grooming") at the Digital Local Exchange ("DLE") rather than routing all call through the relevant DMSU to relieve the expected load on DMSUs.

26.    There are some 750 DLEs, as compared with approximately 75 BT DMSUs, in the United Kingdom. BT submitted that installing the equipment at DLEs to groom internet traffic – which can then be conveyed through high capacity dedicated links to BT or OLOs – requires considerable investment and time.   BT’s roll out programme for for grooming at the DLEs will commence on with those DLEs serving areas in which BT expects the demand for Surftime to be the greatest. The full national roll-out is scheduled to be completed by November 2000;

27.    On this basis, the Director therefore considers that FRIACO interconnection at those DLEs where BT proposes to provide Internet Traffic grooming facilities is, at present reasonably required, but is no more than is required, to secure the establishment of Points of Connection to enable MCI Worldcom to provide unmetered retail internet services. He is not at present in a position to reach the same conclusion in relation to FRAICO interconnection at the DMSU for the reasons given above (recital 24);

28.    However, OLOs which are currently connected at the DMSU will not be able to take advantage of this interconnection service without a means of conveyance of Internet Traffic from the DLE to the relvant DMSUs.

29.    To meet the concerns of OLOs wishing to purchase SurfTime, which are which are currently connected to BT’s network at DMSUs and which might, as a result of the BT’s migration by BT to the DLE grooming, be unable to continue to provide SurfTime unmetered internet services to all of their customers, BT has offered an "interim solution". Until 31 December 2000 BT will provide, at its cost, Internet Extension Circuits ("IECs") links between those DLEs where Internet Traffic grooming takes place and those DMSUs at which other operators are currently connected. Further details of BT’s offer are given at Annex 1;

30.    The Director considers is essential, if BT is to meet its obligation in Condition 45.1 of the BT Licence, that conveyance of Internet Traffic from DLEs to DMSUs where OLOs currently connected to BT’s telecommunications system, is made available by BT;

31.    Furthermore, he considers that providing such conveyance for FRIACO on terms different from those on which BT has agreed to provide DLE- DMSU IEC links for SurfTime is likely to result in significant distortions of competition. SurfTime would be preferred over FRIACO. The Director therefore takes the view that DLE-DMSU conveyance of Internet Traffic should be made available in conjunction with the provision of FRIACO on the same terms as it is made available in conjunction with SurfTime.

Determination of charges

32.    BT has submitted that the provisions of Condition 45 of the BT Licence do not permit the Director to determine interconnection charges;

33.    Condition 45.2 of the BT Licence requires the Director to make a direction at the request of a Schedule 2 Public Operator in order;

"(b) to lay down specific conditions to be observed by one or more parties to the agreement"

34.    MCI/Worldcom is a Schedule 2 Public Operator as result of its control of Worldcom International Inc

35.    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 Telecommunications (Interconnection) Regulations 1997 ("the Regulations"). The Director may also make a Direction to resolve any interconnection dispute under regulation 6(6) of the Regulations;

36.    The Regulations were made to implement Directive 97/33 EC of the European Parliament and Council on Interconnection in Telecommunications [etc] ("the Directive") in the United Kingdom;

37.    Recital 10 to the Directive provides inter alia

"Whereas pricing for interconnection is a key factor in determining the structure and intensity of competition in the transformation process towards a liberalised market; whereas organisations with significant market power must be able to demonstrate that their interconnection charges are set on the basis of objective criteria and follow the principles of transparency and cost orientation and are sufficiently unbundled in terms of network and service elements offered; […] whereas the level of charges should promote productivity and encourage efficient and sustainable market entry[…];

38.    Article 9(3) of the Directive sets out certain of the powers and duties of national regulatory authorities (the Director in the United Kingdom);

"[…] national regulatory authorities may intervene on their own initiative at any time, and shall do so if requested to do so by either party, in order to specify issues which must be covered in an interconnection agreement, or to lay down specific conditions which must be observed by one or more parties to such an agreement. National regulatory authorities may, in exceptional cases, require changes to be made to interconnection agreements already concluded, where justified to ensure effective competition and/or the interoperability of services for users.

Conditions set by the national regulatory authority may include, inter alia, conditions design to ensure effective competition, technical conditions, tariffs, supply and usage conditions, conditions as to compliance with relevant standards, protection of the environment and/or maintenance of end-to-end quality service. (emphasis added);

39.    In the light of these provisions it is apparent that one of the purposes of the Directive (and of the Regulations) is to ensure competitive and cost-oriented pricing for interconnection;

40.    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;

41.    The Director considers that charges for FRIACO interconnection derived from costs in the manner set out in Annex 2 to this Direction will fulfil those criteria for the reasons given in that Annex;

42.    The pricing methodology put forward by MCI Worldcom and the criticisms of it made by BT, are based on certain assumptions call volumes and call patterns. The Director considers that he is not able at present to reach a reasonable view as to which, if any, of these assumptions will prove to be correct in the medium to long term;

43.    Consequently, the Director considers that any interconnection agreement made between BT and MCI Worldcom must contain provisions permitting the interconnection charges to be reviewed in the light of actual Internet Traffic volumes and patterns. Such review should, in the absence of a different agreement between the parties, take place not later than six months from the date of this Direction;

44.    A draft of this Direction and the explanatory document was issued to the industry on 14 April 2000 and comments invited.

THEREFORE

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

1.    BT (the "Licensee") shall offer to enter into an agreement with MCI Worldcom (the "Operator") on the terms 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 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 traffic passing through the Point of Connection, whether by reference to call minutes or otherwise;

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

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

3.4    the Operator shall pay to the Licensee a charge of £236.51 (two hundred and thirty six pounds fifty one pence) per year for each Point of Connection to which the Offer relates (the "Charge");

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

3.6    the Licensee shall not make any additional charge or require any additional payment of any kind in addition to the 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 telecommunications system between the Subscriber and the appropriate DLE;

3.7    the Charge shall be reviewed by the Director before 1 December 2000 unless the parties otherwise agree in writing.

4.    The Offer may also include the following terms;

4.1    the Offer may only apply to traffic destined for numbers or number ranges which the Operator has notified to the Licensee are being used for 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 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 shall require the Licensee;

5.1    to provide any Point of Connection at any DMSU;

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

6.    BT shall make the Offer no later than 1 June 2000.

7.    Except as otherwise defined in this Direction;

7.1    paragraph 4 of the BT Licence shall, mutatis mutandis, apply to this Direction as it applies to the BT Licence; and

7.2    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.

[…] May 2000

Explanatory Document to the Direction concerning FRIACO

Introduction

1. The Director General has issued a draft direction in accordance with Condition 45 of the BT Licence and Regulation 6(6) of the Interconnection Regulations 1997 for the resolution of the dispute between BT and MCI Worldcom. The direction sets out that BT shall offer to provide a Flat Rate Internet Access Call Origination product (FRIACO) at a charge of £236.51 per 64kbit/s circuit per annum with effect from 1 June 2000. The direction will have effect until 1 December 2000 when the service will be reviewed with regard to the interconnection arrangements and the charges that should apply in the light of the usage of the service.

Background

2. On 17 September 1999 MCI Worldcom wrote to BT giving details of its proposal for a FRIACO charging methodology and seeking to meet BT to discuss how to proceed. Meetings were held over the following weeks to discuss a number of related issues. BT gave no firm commitment to FRIACO but it did agree to conduct a feasibility study into the requirement.

3. On 15 December 1999 BT wrote to MCI Worldcom stating that its feasibility study into the FRIACO proposition led it to conclude that it did not wish to proceed with the development of FRIACO at this stage. BT cited concerns about network capacity and the principle of capacity charging. In addition BT pointed to its netDial IP proposals as offering a viable alternative to FRIACO for MCI Worldcom.

4. MCI Worldcom considered that BT’s reply failed to meet its requirements on a number of counts. These are detailed below. As a consequence MCI Worldcom made its formal complaint and reference for direction to the Director General on 24 December 1999.

Description of FRIACO

5. The FRIACO service requested by MCI-WorldCom consists of single tandem call origination on an unmetered basis, with charging based on capacity rather than on volumes of traffic. The chargeable capacity is measured at the Point of Interconnection and is the number of 64kbit/s traffic circuits or 2Mbit/s traffic routes assigned to Internet traffic within each interconnection link. MCI-WorldCom proposed that the charge should be calculated by multiplying the standard LRIC based pence per minute (ppm) charges for network elements used to convey the calls by the average number of minutes of traffic conveyed by each 64kbit/s circuit used in the provision of each network element.

6. FRIACO calls would need to be separated (groomed) by BT at the DMSU from ‘ordinary’ PSTN traffic, although the latter would be free to make use of the additional capacity made available to FRIACO.

MCI-WorldCom’s Case in Favour of FRIACO

7. MCI Worldcom has maintained that the combination of a wholesale flat rate interconnect product from BT and handover of such calls at points of interconnect (POIs) at the DMSU level are necessary if effective and sustainable long term competition in the UK market for Internet services is to be achieved. Furthermore, MCI-WorldCom stated that effective competition requires such a product must be available so as to allow competing operators to launch competitive flat-rate products before or coincident with the launch of BT SurfTime.

8. MCI-WorldCom stated that, in its view, the request is reasonable. The FRIACO proposal requires no additional network functionality or build and since charges will be on the basis of capacity bought operators can accurately set retail prices to adequately cover costs whilst BT will know what the maximum traffic levels presented to its network will be.

BT’s Case for Rejecting MCI-WorldCom’s Request

9. BT set out its arguments as to why it believed FRIACO was not ‘reasonably required’ under Condition 45 of its Licence. In essence BT argued that FRIACO was not required to enable MCI Worldcom to offer " the Connection Services relevant in this case, and further, that MCI Worldcom’s request for FRIACO at the DMSU is not reasonable". In addition FRIACO is not a new service as such but a new price variation of the existing interconnection arrangements.

10. In support of its assertion that FRIACO at the DMSU was not reasonable BT presented an analysis of the likely effects of unmetered Internet traffic flowing across the PSTN. BT’s network was already facing significant capacity constraints, which it had planned to alleviate through its programme of migrating from older System X DMSU switches to higher capacity New Generation (NGS) switches. This programme was designed to accommodate forecast growth in traditional fixed and mobile voice traffic.

11. BT considered that the use of the PSTN for IP calls was inappropriate given that this digital traffic can be far more cost effectively carried across IP networks. Furthermore the rapid growth in IP call volumes plus the increase in average call duration from unmetered Internet access would require significant further investment in network capacity over and above that already planned. By shifting Internet interconnection to the DLE (and later to the Concentrator) BT is taking steps to manage IP traffic sensibly and cost effectively.

12. Oftel has noted BT’s concerns over the impact of unmetered IP traffic on the PSTN and has commissioned a panel of technical experts to examine BT’s submission. This panel is not expected to report for several weeks and this direction has been structured to take this into account. As a result the terms of the direction will be reviewed on the advice given by the expert panel and on the basis of real traffic measurements taken after the introduction and establishment of unmetered Internet services.

BT’s SurfTime Proposals

13. On 7 December 1999 BT announced a new retail product providing unmetered Internet access, called SurfTime, which it would launch in the spring of 2000. The details of the SurfTime product have subsequently been revised, but the underlying principle of an unmetered Internet access product remains. Other operators can, in partnership with BT, provide unmetered Internet access services using BT’s SurfTime as the means of conveying calls to the DLE. However, some operators wish to offer a seamless Internet access service to the customer under which the whole of the Internet access product would be provided by the operator. To do this, an operator requires a wholesale call origination product. This service is currently available only on a metered basis. This creates risk for operators who have no certainty about the extent their unmetered services will be used. If call volumes per customer exceed their forecasts OLOs’ payments to BT will increase but their flat rate income from each customer is fixed. The lack of an unmetered call origination product therefore has the potential to create a situation under an operator offering such a service would suffer a margin squeeze.

14. At the same time as it announced SurfTime, BT announced its plan to ‘groom’ Internet protocol (IP) traffic at its local exchanges (DLE) in order to remove these rapidly growing and longer duration calls from its tandem (DMSU) switch layer. Under this arrangement, data traffic is separated from voice traffic at the DLE so that it can be passed onto an IP network for onward conveyance. BT believes that this is a more efficient method of handling data traffic than the traditional method of conveying it over a circuit switched network.

15. The DLE ‘grooming’ of Internet traffic is a necessary input to SurfTime. BT have stated that sufficient capacity is available up to the DLE level of the network to carry the expected higher volumes of traffic resulting from unmetered tariffing arrangements, but it is possible there is not sufficient capacity at the DLE to DMSU layer of the network to cope with such increased demand. The DLE grooming facilities being installed on BT’s network allow BT to avoid this problem by building its IP network out to the DLE level, thus avoiding the risk of stimulating substantial additional traffic over the DLE to DMSU layer.

16. While Oftel welcomes this development which should allow the provision of Internet access services at a lower cost, it is concerned that other operators were not given sufficient advance notice of these developments by BT of its network facilities to allow them to plan and introduce their own products to compete with SurfTime. Other terminating operators interconnect with BT mainly at the DMSU. If they are to take advantage of the development of BT’s network to compete with SurfTime, they would also need to build out their networks to the DLE layer. This takes time, and the effect of the lack of notice given to OLOs about BT’s network development is that operators are currently unable to compete with SurfTime by matching BT’s rollout of its IP network. BT has offered to bear the costs of providing Interconnection Extension Circuits (IECs) for operators taking SurfTime traffic at the DLE until December 2000 (see Annex 1). After this time, BT has stated that operators will be required to bear the full costs themselves.

17. In Oftel’s view, provided the detail of the arrangements can be agreed satisfactorily (including in adequate time), this would overcome the competition problem potentially introduced by SurfTime and the need to pick up Internet traffic at the DLE. In order for there to be no discrimination between operators using SurfTime and those using FRIACO, Oftel believes these arrangements should also apply to FRIACO customers as well as SurfTime customers.

Oftel’s View

18. Having considered the arguments put forward by BT and MCI-WorldCom, Oftel considers that MCI-WorldCom’s request for FRIACO is reasonable and that the charging methodology set out by MCI-WorldCom forms the basis of an appropriate charging methodology. However, Oftel believes that an adjustment to the original methodology proposed by MCI-WorldCom is appropriate to allow for BT’s concern that non-coincident busy hours might lead to under recovery costs.

Oftel’s proposal

19. Oftel proposes to determine that BT must make available FRIACO at all IN (Intelligent Network) enabled DLEs. Oftel has not, at present, determined that FRIACO must be made available at the DMSU. Oftel will consider this issue as soon as practicable, but it is currently awaiting a report from its expert panel which will set out the network implications for FRIACO at the DMSU. However, in the meantime, Oftel has determined that FRIACO at the DLE is a ‘reasonable’ request by MCIW. Moreover, Oftel is conscious that in the context of SurfTime many operators have expressed concern about the lack of availability of an unmetered wholesale call origination product. This product should therefore also meet their needs and remove the risk of the margin squeeze identified above..

20. The charges have been derived according to the methodology described above, with an adjustment to allow for non-coincident busy hours. The adjusted flat rate charge for wholesale call origination at the DLE is £236.51 per circuit per annum. Annex 2 sets out a fuller derivation of the charge. IN costs have not been included in this charge. Since IN costs are incurred in providing this product, Oftel intends to include an allowance for these costs in the charge set in the final Direction.

22. Oftel proposes to review the charge for FRIACO after an initial period. In that time it intends to collect information on the usage patterns of FRIACO customers and on how the adjustment ratio described above is affected both by traffic flows on the PSTN and by FRIACO traffic

The Pricing Methodology

23. Oftel has considered carefully the methodology proposed by MCIW, the arguments put forward by BT and finally, evaluated the adjustments suggested by MCIW which might overcome the problems identified. Each of these issues is considered below.

24. The aim of the methodology is to derive a charge based on the cost of capacity supplied rather than, as is more traditional in telecommunications, one based on usage of the capacity. Since capacity supplied can be measured in terms of the number of circuits available, a relatively simple way of calculating the cost of this is to calculate the cost of a circuit (of a particular bandwidth, in this case 64kbit/s).

25. Since the cost of a circuit is not directly visible to MCIW, it attempted to derive this from available data. Available data included those relating to minutes of traffic per circuit per annum and cost per minute of the elements used in providing call origination services. Multiplication of these figures yields a figure for the cost per circuit per annum. MCIW calculated this number for Single Tandem Call Origination and suggested that it should be charged this amount for each FRIACO interconnection circuit it had connected at the single tandem switch. MCIW’s calculation made no allowance for changes in call volume or distribution following from the introduction of FRIACO since the costs per circuit do not vary with either the volume or the distribution of the traffic going over the circuit.

26. While this would be appropriate if each individual MCIW customer had a FRIACO circuit dedicated to its use, it is less clear that it is appropriate if, as is intended by MCIW, traffic originating from a number of FRIACO customers is aggregated over each FRIACO circuit. MCIW’s proposal was that the payment of a cost based charge for a 64 kbit/sec circuit would cover the charges payable to BT for the conveyance over the BT network of as much traffic as MCIW could generate, subject to the total traffic delivered to each FRIACO interconnection port not exceeding the amount which could be carried on a 64 kbit/sec circuit. Under this arrangement, MCIW would never use, in total, more than one circuit for each FRIACO circuit paid for.

27. However, MCIW’s ability, under its FRIACO proposals, to aggregate traffic from a number of different circuits gives rise to the possibility that the distribution of traffic could affect the level of cost. In particular, BT raised the issue of a possible under recovery of costs if different network elements had different busy hours. The problem is that, if the different circuit elements paid for by a FRIACO customer had different busy hours, FRIACO customers might have traffic concentrated in the busy hour of the concentrator to which they were connected. In these circumstances BT might not be able fully to recover its costs.

28. To illustrate this point, consider the diagram below. Suppose one FRIACO circuit had been paid for and it was notionally a circuit between customer A and the DMSU. Assume that customer A used the circuit between the concentrator and the DLE for one hour in the busy hour for its concentrator, while customer B used the circuit between its concentrator and the DLE for one hour in the busy hour relating to its own concentrator. The total traffic at the interconnection port would never exceed one circuit’s usage, so the costs of this arrangement, under FRIACO, would be covered by the charge for one circuit. However, given the non-coincident busy hours of the two concentrators in this example, BT would have to provide two circuits, one for each FRIACO customer. BT might therefore face a situation where it would have to supply extra circuits over and above those paid for under the FRIACO methodology in order to maintain the grade of service in the busy hour for all parts of the network.

Figure 1

29. The effect of non-coincident busy hours shows up as a reduction in the efficiency of the network, in terms of the average volume of traffic per circuit when measured at the network (as opposed to the local) busy hour. One way of taking into account the effect on the costs to BT of non-coincident busy hours is to therefore adjust the FRIACO methodology to allow for this reduced utilisation in the calculation.

30. MCIW has proposed such an amendment to the FRIACO methodology to adjust for differential busy hour traffics per circuit between different network elements. The proposed adjustment involves scaling the (average) cost per circuit of each network element by the ratio of network busy hour traffic per interconnect circuit to network busy hour traffic per network element circuit. The basis for this calculation is explained further in Annex 2, by way of a stylised example.

31. The 1994/5 bottom up LRIC model contains information on these utilisation factors, which are expressed in Busy Hour Erlangs. For interconnect circuits the figure is 0.51, while for concentrator to local exchange links, the figure is 0.35. On the basis that these utilisation rates capture the effects of non-coincident busy hours, it would be appropriate to uplift the costs of the concentrator to DLE circuit by the ratio 0.51/0.35 (= 1.46). This would give the costs of concentrator to DLE circuits per interconnect circuit. Oftel considers this to be an appropriate method by which adjustments can be made for non-coincident busy hours.

32. However, the appropriateness of this adjustment depends on an assumption that FRIACO usage patterns are likely to be similar to those of the PSTN network. If FRIACO usage patterns are different then it will be likely to impact on the ratios above. Thus adjustments may need to be made to the price in the future once the usage patterns of FRIACO customers are clearer.

Industry Responses

33. Please email or send comments to Geoff Brighton by close on Friday 12 May 2000. 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 Monday 15 May and further comments on these comments will be received by Oftel until close on Friday 19 May 2000.

Oftel

April 2000

Annex 1: BT SurfTime II Interconnection Arrangements

1.   BT will pay for IEC links between DMSU and DLE until 31 December 2000.

2.  The deadline for placing orders for IECs, to be in place by 1 June 2000 at the first launch DLEs, is 14 April 2000.

3. Where IECs have been ordered by 14 April, but have not been provisioned by 1 June 2000, BT will transport and pay for metered traffic via DMSU until the IEC link is available.

4. BT will install ‘Signal Transfer Points’ (STPs). These will carry signalling traffic only and will be provided using a number of DMSUs replaced by NGS as STP Nodes. Alternatively, DLE interconnect may be provided with single signalling links as described in the Interconnect Agreement (Annex A para 5.2.13) or a pair of signalling links.

5. BT has proposed the following two options covering migration from DMSU to DLE interconnect, for which BT’s completion target remains June 2001:

Option 1A

The ratios for DLE/DMSU traffic, as proposed by BT for unmetered IP traffic to end users, excluding NTS, are:

There would be no further commitment on operators beyond this ratio at this time. The arrangements to apply from 1 January 2001 will be reviewed in September 2000.

Option 1B

For IP traffic including NTS the ratios proposed are:

There would be no further commitment on operators beyond this ratio at this time. The arrangements to apply from 1 January 2001 will be reviewed in September 2000.

Option 2

i. By 30 September 2000, operators would convert existing NTS interconnect to single tandem routing and interconnect with all DLEs (which have more than 10 Erlangs of Internet unmetered and NTS traffic), co-located with the DMSUs to which they are interconnected.

ii. By 31 December 2000, operators would interconnect with an additional 150 DLEs.

6. Options 1A, 1B and 2 are available to IPOs, each of the individual operators can make a choice as to which option they wish to take and BT does not require the industry as a whole to take a decision.  Smaller operators (defined as those with less than 100x 2Mbits/s interconnection capacity supporting calls to the internet that are unmetered to the end user) are exempt from the proposals in para 5. They need not connect to DLEs, but will be limited to a maximum of 5x 2Mbits/s of interconnect per DMSU for unmetered IP calls to the end users.

7. If the Operator requires, the DLE interconnect route may be dimensioned ‘High Usage’ as per the Interconnect Agreement (Annex A, para. 5.3.3). Traffic reaching the maximum capacity would overflow to DMSU, the interconnect capacity used at the DMSU would count towards the DMSU target ratios described in para 5.1. The basis of charging will be pence per minute based on the cost of conveyance between DLE and DMSU only.

Annex 2: Non-coincident busy hours – Stylised example

This example demonstrates how the uplifting of costs by an amount equal to the ratio of relative network utilisation should result in an appropriate adjustment to allow for non-coincident busy hours. Suppose that there are four different busy hours at different parts of the network and that the traffic profile in these hours across DLEs is given in the following table.

Suppose that there are no differences in utilisation arising from different economies of scale in different network components, and that, for each component, the utilisation factor is 0.5 Busy Hour Erlangs (BHEs) per circuit. Then the circuits required at each DLE are as follows:

The second table sets out the number of circuits that will be needed at each DLE in order to convey the required volume of traffic. This is simply equivalent to the volume of traffic during the DLE busy hour multiplied by 2. Thus, for example, for DLE 1 the number of circuits needed is 100*2 and for DLE 2 the number of circuits needed is 120*2.

The network busy hour is hour 3 since it has the largest volume of traffic at 390 BHEs. Without any adjustment for non-coincident peaks, a BHE/circuit ratio would imply that 780 circuits were required (since 2 circuits are needed for every unit of traffic). But this would be an underestimate of circuits required. 390 BHEs is the total traffic in the network busy hour, but the network has to be dimensioned according to traffic in the local busy hour. If account is taken of needs in the local busy hour, 950 circuits are needed to carry 390 BHEs in the network busy hour. The ratio of BHEs at the network busy hour circuit is reduced from 0.5 to 0.41 (i.e. 390/950) because of non-coincident peak traffic demands.

Thus the effects of non-coincident peaks show up as a reduction in the network busy hour BHEs/circuit. Therefore, one way of adjusting costs to take account of the effects of non-coincident busy hours is to multiply the per circuit cost by the ratio of traffic per circuit at the local busy hour divided by traffic per circuit at the network busy hour.

In the example above, this is equivalent to 0.5/0.4 = 1.25. Thus, in order to allow for non-coincident busy hours under FRIACO, the cost of a circuit would be multiplied by 1.25 in order to arrive at a price for each circuit.

Charge for FRIACO at the DLE

Estimated minutes of traffic per circuit per annum [Source: Analysys]

BT’s pence per minute charges [Source: BT’s Carriers Price List, April 2000]

Unadjusted Flat rate charge per annum for Call Origination to DLE, £

Adjusted Flat rate charge per annum for Call Origination to DLE, £

Note:

1. PPP minutes are based on the number of Call origination minutes per circuit per annum.
2. IN costs are not included. They may need to be included if grooming is required to supply FRIACO