Direction under Condition 45.2 of the Public Telecommunications Licence granted to British Telecommunications plc and under Regulation 6(6) of the Telecommunications (Interconnection) Regulations 1997

Contents

The Direction

Annex 1 & 2 - available as a pdf to download - click here to download documents

Explanatory Document

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 and Worldcom 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, 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 included in an interconnection agreement with BT and for a direction in relation to the point of interconnection and charge for the service;

10.    Condition 45.1of 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;

11.    Condition 45.2 of the BT Licence confers powers on the Director to make directions in relation to interconnection agreements;

Request for unmetered interconnection

12.    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. The service would be provided for a fixed (unmetered) charge based on the number of Points of Connection provided by BT and to which MCI/Worldcom connects a single tandem circuit with a capacity of 64 kbit/s, 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";

13.    BT has submitted that it does not believe that MCI Worldcom requires FRIACO interconnection to provide internet 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 connection services to end users and nor is the request for FRIACO reasonable;

14.    On 7 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 per call basis, they will have the option of being charged an unmetered fixed monthly fee. The retail service will be one of a number of internet access tariffs called "SurfTime";

15.    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;

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

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

18.    The Director believes that there is a serious risk that, without unmetered wholesale interconnection for internet calls originated on BT’s network, competition in the provision of unmetered retail internet access services will be restricted or distorted;

19.    MCI/Worldcom and other licensed telecommunications operators ("OLOs") wish to be able to provide unmetered services to customers in competition with BT’s unmetered SurfTime service, under which the whole of the internet access product would be provided by the OLO. To do this, an operator requires a wholesale call origination product from BT since approximately 80% of all calls made in the United Kingdom originate on BT’s network. In order to be able effectively to provide an internet service to retail customers, OLOs are therefore obliged to interconnect with BT’s network. However, such a service is only currently available from BT either on a metered basis, or includes retail elements which are not required by OLOs for them to provide unmetered retail services to consumers;

20.    If OLOs purchase BT’s metered wholesale call origination product, they are exposed to forecasting risk as they have no certainty about the extent to which their unmetered retail products 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 will remain the same. The lack of an unmetered wholesale call origination product therefore has the potential to create a situation under which an operator offering a retail unmetered service would suffer a margin squeeze;

21.    As has been indicated to BT, the Director does not accept BT’s argument that it faces the same risk as an OLO because its retail business will also be "purchasing" metered call origination. The Director takes the view that BT does not face similar risks when its position is assessed on an end-to-end basis. Any losses incurred by BT’s retail operation would be purely notional and offset by notional profits in its network business. There are two main reasons for this. First, the metered wholesale charges paid to BT Network (both by BT Retail and by OLOs) are based on an average cost. This wholesale charge is substantially above the marginal cost incurred by BT’s network business in providing the additional call volumes (at any time of day). This means that BT’s actual costs do not rise with call volumes in the same way as payments by OLOs using metered call origination;

22.    Secondly, marginal network costs do not grow proportionally with call volumes originating from individual customers. A large increase in call volume from an individual customer is likely to entail greater use of the network’s off-peak period. During the off-peak period, the network has spare capacity. Hence, the marginal cost to BT of a call is at (or not materially different from) zero. An increase in call volume from each individual customer would not necessarily therefore cause BT’s costs to rise in line with increased call volumes (or, indeed, at all). However, if OLOs only have a metered call origination service available from BT, they would be required to pay on a pence-per-minute basis for such extra calls.

23.    For these reasons BT’s network business increases its profitability by providing additional volumes and any losses apparently incurred by BT through its retail business as volumes grow and its metered payments to BT’s network increase are merely notional and, to a large extent, off-set by notional profits enjoyed by BT’s network.

Point of connection

24.    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;

25.    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 through the relevant BT DMSUs;

26.    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;

27.    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 PSTN voice network as currently configured. In particular, the DMSU switches would not be able to handle the expected increase in traffic. Despite an extensive switch replacement programme which BT was already undertaking, there was a significant risk that requiring connection for unmetered Internet Traffic which would be switched through 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;

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

29.    BT informed Oftel that it would be separating the Internet Traffic generated by SurfTime from other calls originating on BT’s system at the Digital Local Exchange ("DLE") rather than routing all calls through the relevant DMSU, to relieve the expected load on DMSUs. Depending on the manner in which the OLO has used its allocated numbers within the relevant number ranges, it is possible to separate Internet Traffic from other calls in two ways. Firstly the Internet Traffic can be separated from other calls by the DLE itself. This is only possible where blocks of more than 10,000 numbers (in some cases 1,000 numbers) have been dedicated to Internet Traffic by the OLO to whom they have been allocated. Secondly, Internet Traffic may be separated using Intelligent Network technology ("IN"). The IN provides capability at a number of centralised points to add additional functionality to the DLE, allowing it to identify and separate Internet Traffic down to the individual number level;

30.    One consequence of interconnecting at the DLE rather than the DMSU level is the increase in the number of signalling links required (when two telephone exchanges are connected together they must exchange signalling information as well as telephone traffic). Modern telephone exchanges are not designed to support large numbers of signalling links, and so may be limited in the number of DLEs to which they can be directly connected. "STP" (Signalling Transfer Point) working is one solution to this problem. In this way of working, BT itself collects the signalling from each of the DLEs and passes them to a dedicated Signalling Network consisting of a number of interconnected Signalling Transfer Point devices. By connecting its signalling links to the Signalling Network, an OLO can reach the required DLEs without having a dedicated signalling connection to each one. This can therefore considerably reduce the number of signalling links needed by the OLO’s network.

31.    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 (and provide signalling and IN services) – 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 grooming at the DLEs will commence on with those DLEs serving areas in which BT expects the demand  to be the greatest. The full national roll-out is scheduled to be completed by November 2000;

32.    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 FRIACO interconnection at the DMSU for the reasons given above (recital 28);

33.    The charge determined does not include elements for the cost of either IN or STP services. In theory not all OLOs might wish to use STP signalling (although in such a case, its unmetered service would be restricted to an extremely small geographic area). In practice the Director expects the vast majority of OLOs to do so. Nor has the Director 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. BT has, however, reserved the right to review this at a later date and this Direction reflects that position;

34.    However, OLOs which are currently connected at the DMSU level will not be able to take advantage of the FRIACO interconnection service at the DLE without a means of conveyance of Internet Traffic from the DLE to the Point of Connection with their system at DMSU level;

35.    To meet the concerns of OLOs wishing to purchase SurfTime,  which are currently connected to BT’s network at DMSUs and which might, as a result of  BT’s migration  to the DLE, 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") 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 in the Product Description at Annex 1;

36.    The Director considers that it is essential, if BT is to meet its obligation in Condition 45.1 of the BT Licence, that conveyance of Internet Traffic is made available by BT from the DLEs at which FRIACO is provided to the DMSU premises where OLOs currently connect to BT’s telecommunications system. This Direction therefore requires BT to make such conveyance available on request;

37.    Providing such conveyance for FRIACO on terms different from those on which BT has agreed to provide DLE to DMSU IEC links for SurfTime may result in distortions of competition. SurfTime could be preferred over FRIACO;

38.    However, the Director also notes that Directive 97/33 EC of the European Parliament and Council on Interconnection in Telecommunications [etc] ("the Directive") requires all charges for interconnection services to be cost oriented, that is between a floor calculated on a Long-Run Incremental Cost basis and a ceiling calculated according to the stand-alone cost of the service in question;

39.    Further, the Director is not at present in a position to take a view on whether the effect of any distortions of competition are likely to be sufficiently significant to require him to take action against BT either under the Competition Act 1998 or to enforce the prohibition on undue preference in the BT Licence. In particular, he notes the limited comments on this point in during the consultation process;

40.    Nevertheless, the Director recalls that MCI/Worldcom’s request under Condition 45 of the BT Licence was in relation to Points of Connection at the DMSU level. He believes that FRIACO at the DLE, when taken together with services already proved by BT at charges in the BT Carrier Price List (IEC links, together with IN and STP signalling services) will enable OLOs to provide an acceptable and competitive level of unmetered retail internet access services. In particular, the Director sees no reason why IEC links ordered for SurfTime could not be reallocated for use (against reasonable payment) in conjunction with FRIACO. On the information at present available to him, such a requirement would appear to be reasonable for the purposes of Condition 45.1(b) of the BT Licence. Indeed, he notes that BT has agreed that such reallocation may take place. The issue of the appropriate Point of Connection will be reviewed in due course in the light of the external technical advisers’ report;

41.    The Director notes however, that BT’s interim offer in relation to SurfTime IEC links included a further element. In addition to the offer to pay for the cost of any IEC links used, BT also agreed that OLOs could continue to receive SurfTime traffic, on an interim basis, at DMSU level. The details of the options available to OLOs are given at paragraph 3.2 of BT’s Product Description for SurfTime (Annex 1). These options give OLOs a transitional period to migrate SurfTime traffic from their Points of Connection at DMSU level to Points of Connection at DLEs;

42.    The Director at present sees no reason why this facility (to migrate Internet Traffic from the DMSU level to the DLE over time) and all of the options set out in paragraph 3.2 of the SurfTime Product Description should not be made available in conjunction with FRIACO. Consequently, he currently takes the view that a requirement for DMSU level FRIACO interconnection in relation to the proportion of unmetered Internet Traffic shown at that paragraph is likely to be reasonable. Moreover, failure to provide this traffic migration on the same terms for both FRIACO and SurfTime may lead to distortions of competition;

43.    However, and without prejudice to his discretion to use his powers to enforce the BT Licence or the Competition Act 1998 prohibitions in appropriate circumstances, the Director is not making a determination in this Direction of any charge in relation to DLE to DMSU level conveyance of Internet Traffic;

44.    The Director recognises that the process required for provisioning both FRIACO at DLEs and any DLE to DMSU level Internet Traffic conveyance may mean that these cannot be provided immediately. However, he is concerned that undue delay may place OLOs at a competitive disadvantage as compared with BT, in particular given the launch of SurfTime. Consequently this Direction requires BT to provide both FRIACO and DLE to DMSU level conveyance of Internet Traffic (where requested) within a reasonable period – that is, a period which is sufficiently short that competition would not be materially distorted by such delay. In particular, the Director believes that the period for provisioning FRIACO at a DLE should run concurrently with the period for provisioning any IEC links or other Internet Traffic conveyance from that DLE;

Determination of charges

45.    BT submitted that the term "Connection Service" in Condition 45.1(b) of the BT Licence does not extend to apply to the pricing structure or tariff for a service already provided. BT maintained that it already provides an interconnection service for Internet Traffic and therefore it cannot be obliged, under Condition 45.1(b) to provide such a service at a different tariff;

46.    The Director does not accept this argument. The service to which BT refers is a metered wholesale service and, for the reasons given above (recitals 20-23) the Director takes the view that the provision of this service will not enable MCI/Worldcom effectively to provide the Connection Services (unmetered retail Internet services) it proposes;

47.    BT also argued that the Director   cannot use his powers under Condition 45.2 of the BT licence in relation to an agreement which is not an existing agreement. However, nothing in the terms of that paragraph, nor in the Regulations referred to in it, supports such a conclusion;

48.    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"

MCI//Worldcom is a Schedule 2 Public Operator.

49.    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. The Regulations were made to implement the Directive in the United Kingdom;

50.    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;

51.    The Director considers that charges for FRIACO interconnection at the DLE 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;

52.    The charge set out in the Direction is based on the premise that OLOs will connect a circuit of 64kbit/s capacity to each Point of Connection provided under the FRIACO agreement. BT has informed the Director that it would prefer to provide Points of Connection in conjunction with 2 Mbit/s capacity circuits. A number of the responses to the consultation confirmed that this is now the industry standard in these circumstances and MCI/Worldcom has agreed to BT’s proposal;

53.    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;

54.    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;

55.    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;

56.    A draft of this Direction and the explanatory document was published 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 necessary parts of the Licensee’s Reference Interconnection Offer as supplemented and varied by the provisions of this Direction ("the Offer").

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

3.    The Offer shall include the following terms:

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

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

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

3.4    the Operator shall pay to the Licensee a charge of £ 424.25 (four hundred and twenty four pounds twenty five 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    except as permitted by paragraph 4.3, the Licensee shall not make any additional charge or require any additional payment of any kind in addition to the 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 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    to provide a Point of Connection at any DMSU; or

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 Charge shall be reviewed by the Director by reference to information on Internet Traffic using FRIACO in the period to 1 December 2000, 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.

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.

26 May 2000

Explanatory Document to the Direction concerning FRIACO

Introduction

1. The Director General has issued a direction under Condition 45 of the BT Licence and Regulation 6(6) of the Interconnection Regulations 1997 for the resolution of the dispute between BT and WorldCom. The direction requires BT to offer to provide a Flat Rate Internet Access Call Origination product (FRIACO) at a charge of £424.25 per 64kbit/s circuit per annum which will be provided in blocks of 30 circuits per 2Mbit/s route with effect from 1 June 2000. The direction will be reviewed by 1 December 2000 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 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 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 WorldCom.

4. WorldCom considered that BT’s reply failed to meet its requirements on a number of counts. These are detailed below. As a consequence 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 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 30 x 64kbit/s circuits (or 2Mbit/s traffic routes) assigned to Internet traffic within each interconnection link. 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. WorldCom proposed that 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.

WorldCom’s Case in Favour of FRIACO

7. 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.

8. 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, WorldCom stated that effective competition requires such a product to be available so as to allow competing operators to launch competitive flat-rate products before or coincident with the launch of BT SurfTime.

BT’s Case for Rejecting 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 WorldCom to offer " the Connection Services relevant in this case, and further, that 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 (Internet Protocol) 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 this direction relate to FRIACO at the DLE switch layer only.

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, operators’ payments to BT will increase but their flat rate income from each customer will be fixed. The lack of an unmetered call origination product therefore has the potential to create a situation whereby a competing operator offering such a service would suffer a margin squeeze and under which that operator may face greater risks than those faced by BT’s own businesses. BT has argued that its own flat rate services operate on metered interconnection charges. But BT is able to offset any risk from unmetered retail prices by its profits from metered call origination charges. This issue is discussed in ‘Oftel’s Competition Assessment of Wholesale Unmetered Interconnection’ at paragraphs 27 to 30 below.

14. Shortly before it announced SurfTime BT informed Oftel of its plans to separate its own Internet traffic from other ‘voice’ calls, at the local exchange in order to relieve the DMSU transit layer from the forecast rapid growth of longer duration Internet calls. This was to be achieved through a technique called ‘grooming’ where the calls are separated using Intelligent Network technology (IN). By extending IN functionality to the DLE exchange layer, local exchanges are able to identify and separate Internet calls down to individual number level.

15. DLE grooming of Internet traffic is a necessary input to SurfTime and is being progressively rolled out to all DLEs by October 2000. At the same time BT is taking steps to ensure that sufficient capacity is available at the DLE level of the network to carry the expected higher volumes of traffic resulting from unmetered tariffing arrangements. BT has stated its belief that there is insufficient capacity at the DMSU ‘tandem’ layer of the PSTN to cope with this increased demand. Enhancing capacity and installing grooming functionality has enabled BT to extend its IP network out to the DLE level, to avoid any risk of overloading the DMSU layer as a result of unmetered access.

16. One consequence of interconnecting at the DLE rather than at the DMSU is that there are approximately 10 times as many DLE switches, around 750 in total. Each 2Mbit/s interconnection circuit contains a channel which carries the signalling data required to control a call. Most modern switches have a limited number of signalling ports on which these signalling links can terminate. For operators to be able to migrate their interconnection to the DLE layer their switches need to be able to terminate a signalling link for each DLE. The limited port capacity may therefore limit the number of DLEs to which the operator can be directly connected. BT is therefore introducing STP (Signalling Transfer Point) working as one means of solving this problem. With STP, BT collects the signalling information from each of the DLEs and passes them to a dedicated Signalling Network consisting of a small number of interconnected Signalling Transfer Point devices. By connecting its signalling links to the Signalling Network, an operator can reach the required DLEs without having a dedicated signalling connection to each one. This can therefore considerably reduce the number of signalling links needed by the operator’s network.

17. While Oftel welcomes these developments 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 by BT of these new network facilities to allow them to plan and introduce their own products to compete with SurfTime. Hitherto normal interconnection arrangements have required operators to interconnect primarily at the DMSU layer rather than the DLE. 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 operators about BT’s network development is that operators are currently unable to compete with SurfTime by rolling out their own network infrastructure to match 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. After this time, BT has proposed that operators will be required to bear the full costs themselves.

IECs and FRIACO

18. Until Oftel has received the external technical advice on the implications of unmetered Internet traffic being carried to the DMSU switch layer this Direction requires FRIACO to be made available at the DLE. However most operators interconnect with BT at the DMSU for traditional metered traffic and have agreed a DLE migration timetable with BT for SurfTime. This means that some SurfTime traffic will continue to be switched at the DMSU while the operator either builds its network to the DLE or uses IECs provided by BT. Over time the proportion of DMSU switched traffic will reduce as DLE interconnection increases. At present operators have agreed to reduce the proportion of DMSU switched traffic to 25% by 31 December 2000.

19. Oftel would consider it a reasonable request that conveyance of FRIACO traffic to the DMSU via either IECs or the PSTN should be on the same basis as agreed for SurfTime. Oftel also considers that it is essential that BT offers DLE to DMSU conveyance for Internet traffic originating on BT’s network and transferred to WorldCom under the FRIACO agreement. At present WorldCom cannot use the DLE FRIACO service unless DLE to DMSU traffic conveyance is made available. There is, therefore, a reasonable demand for DLE to DMSU Internet traffic conveyance in conjunction with FRIACO.

20. As described in paragraph 12 above, Oftel is still considering the reasonableness of WorldCom’s request for FRIACO interconnection switched through the DMSU. However, BT is providing IEC links in conjunction with SurfTime which could also convey FRIACO traffic from the DLE to the DMSU buildings at which WorldCom currently interconnects with the BT network.

21. Oftel notes that IEC links are available from BT as a Standard Service – its Carrier Price List contains details of the prices on which they may be purchased.

22. In its earlier consultation, Oftel expressed the concern that offering DLE-DMSU conveyance for FRIACO-based services on different terms to those on which BT conveys internet traffic between those two points for SurfTime could cause distortions of competition in that SurfTime would be preferred over competing FRIACO-based offerings from OLOs.

23. The response to the consultation on this particular point was limited. Although concerns were expressed about the impact of the SurfTime launch on the unmetered internet access market, there was no specific concern about the effect on competition of a potential disparity between the DLE-DMSU offer for SurfTime (see paragraph 17 above) and the terms on which it might be offered to in conjunction with FRIACO.

24. BT said that the IEC links for FRAICO should not be available on the same NTS terms as those for SurfTime. FRIACO is in reality an Indirect Access product rather than an NTS product. OLOs pay for any links needed in association with Indirect Access.

25. Although Oftel takes the view that BT should provide links from DLE to DMSU level, it accepts that BT is not obliged to provide IEC links (or other DLE to DMSU conveyance) below cost. This Direction is made pursuant to Condition 45 of BT's licence which implements a number of the obligations in the Interconnection Directive (97/33) into the licence. The aims and provisions of the Directive (as part of European law) are to be applied by the Director General when exercising his powers under Condition 45 and the Telecommunications (Interconnection) Regulations 1997. Article 7 of the Directive requires charges for interconnection services to be cost-oriented. This is explained in recital 10 to the Directive:

26. Oftel is concerned that SurfTime may be preferred as a result of differences in pricing of DLE to DMSU conveyance as between it and FRIACO. However, Oftel is not at present in a position to take a view on whether the effect of any distortions of competition are likely to be sufficiently significant to require Oftel to take action against BT either under the Competition Act 1998 or to enforce the prohibition on undue preference in the BT Licence. In particular, Oftel notes the limited comments on this point in during the consultation process and the fact that BT has yet to make public its terms for the provision of DLE to DMSU Internet Traffic conveyance. Oftel also notes that the SurfTime IEC links offer was put forward by BT in response to concerns expressed that OLOs could not build to relevant DLEs to achieve launch of competing services to remain effective competitors in the unmetered retail internet access market as a result of the launch of BT’s SurfTime.

Oftel’s Competition Assessment of Wholesale Unmetered Call Origination

27. Oftel believes that there is a serious risk that, without unmetered wholesale interconnection for internet calls originated on BT’s network, competition in the provision of unmetered retail internet access products will be restricted or distorted. WorldCom and other licensed telecommunications operators ("OLOs") wish to be able to provide services to customers in competition with BT’s SurfTime service, under which the whole of the internet access product would be provided by the OLO. To do this, an operator requires a wholesale call origination product from BT since approximately 80% of all calls made in the United Kingdom originate on BT’s network. In order to be able effectively to provide an Internet service to retail customers, OLOs are therefore obliged to interconnect with BT’s network. However, such a service is only currently available from BT either on a metered basis, or includes retail elements which are not required by OLOs for them to provide unmetered retail services to consumers.

28. If OLOs purchase BT’s metered wholesale call origination product, they are exposed to forecasting risk as they have no certainty about the extent to which their unmetered retail products will be used. If call volumes per customer exceed their forecasts, OLOs’ payments to BT will increase directly in line with the higher volume of calls, but their (flat-rate) income from each customer will remain the same. The lack of an unmetered wholesale call origination product therefore has the potential to create a situation under which an operator offering a retail unmetered service would suffer a margin squeeze.

29. As has been indicated to BT, Oftel does not accept BT’s argument that it faces the same risk as an OLO. Oftel takes the view that BT does not face similar risks when its position is assessed on an end-to-end basis. Any losses incurred by BT’s retail operation would be purely notional and offset by notional profits in its network business. There are two main reasons for this. First, the metered wholesale charges paid to BT Network (both by BT Retail and by OLOs) are based on an average cost. This wholesale charge is substantially above the marginal cost incurred by BT’s network business in providing the additional call volumes (at any time of day). This means that BT’s actual costs do not rise with call volumes in the same way as payments by OLOs using metered call origination. Secondly, marginal network costs do not grow proportionally with call volumes originating from individual customers. A large increase in call volume from an individual customer is likely to entail greater use of the network’s off-peak period. During the off-peak period, the network has spare capacity. Hence, the marginal cost to BT of such a call is at (or not materially different from) zero. An increase in call volume from each individual customer would not necessarily therefore cause BT’s costs to rise in line with increased call volumes (or, indeed, at all). However, if OLOs only have a metered call origination service available from BT, they would be required to pay on a pence-per-minute basis for such extra calls.

30. For these reasons BT’s network business increases its profitability by providing additional volumes and any losses apparently incurred by BT through its retail business as volumes grow and its metered payments to BT’s network increase are merely notional and, to a large extent, off-set by notional profits enjoyed by BT’s network.

Comments and Issues arising from responses to the Draft Direction

31. Oftel issued the draft Direction on FRIACO on 14 April 2000 and invited responses from the parties to the dispute (BT and WorldCom) and from other interested parties in the industry. Fourteen replies were received of which two were marked Confidential. The remaining twelve were placed on the public record and comments on comments were received by 19 May. All the comments have been considered and responses to key, non-legal, points made and questions asked are given below. Any issues relating to the Director General’s vires in relation to the various legal instruments are addressed in the text of the Direction.

Legal and Regulatory issues

32. In its comments on the draft Direction, BT raised a number of "Legal and Regulatory Issues". WorldCom provided comments on the majority of those issues on 19 May 2000. This part of the explanatory document summarises the issues raised by both BT and WorldCom, and gives Oftel’s views on them. The headings refer (in summary form) to BT’s arguments.

A. Unmetered interconnection at the DLE is not reasonably required to enable WorldCom effectively to provide the unmetered retail Internet access services it proposes to offer.

33. BT argued that, since it already provides a Standard Service for the conveyance of calls to the Internet (albeit on a metered basis) it considered that Oftel’s use of his powers under BT’s Telecommunications Act licence to resolve an alleged competition issue – referring to Oftel’s concerns regarding SurfTime, which, BT stated, constituted the basis of the proposed Direction – was inappropriate. This was because Oftel had misunderstood the nature of SurfTime, which BT says does not have anti-competitive effects.

34. BT Retail will buy the metered Standard Services from BT Network on a pence-per-minute basis. The SurfTime service is, however, presented to consumers on a flat-rate basis. So, if BT Retail’s forecasts are too low it will nevertheless have to pay BT Network on a per-minute basis and sustain a loss.

35. WorldCom said that existing interconnect Standard Services do not enable it to convey traffic between its system and that of BT as WorldCom reasonably requires. By not offering an unmetered service, BT has placed itself in breach of Condition 45.1 of its licence and of Regulation 6 of the Telecommunications (Interconnection) Regulations 1997. MCL/WorldCom also referred to the Director’s duty under Section 3 of the Telecommunications Act 1984 to promote competition.

36. Oftel notes that the essential difference between the two parties on this point is whether it is reasonable for BT to provide unmetered interconnection services. BT is required (by Condition 45.1) to provide interconnection to enable WorldCom effectively to provide the retail services it proposes. Oftel notes that the Interconnection Directive (97/33 EC), from which the obligations on BT in Condition 45.1 are derived, has as its aim the securing of:

In addition, as WorldCom has pointed out, the Director has a general duty to promote competition under the Telecommunications Act.

37. For the reasons given at paragraphs 27-30 above, Oftel takes the view that unmetered wholesale internet call origination is reasonably required to enable WorldCom to provide retail unmetered internet access whilst avoiding potential restrictions of competition in the provision of such services.

B. BT argues that there is no principle of competition law which prohibits BT from introducing a new retail service without introducing a corresponding new wholesale product at the same time, in the absence of anti-competitive behaviour.

38. BT said that, because BT does not gain any unfair competitive advantage through its launch of SurfTime (BT’s comments are summarised above), the issue of SurfTime is irrelevant to Oftel’s assessment of whether BT should be required under its licence to provide wholesale unmetered internet call origination.

39. WorldCom said that, when considering whether BT is in breach of its licence, the Director General is entitled to take into account competition concerns, and in particular, to ensure that the flat rate internet access market is not foreclosed by BT.

40. Oftel accepts that there is no principle of competition law which requires BT to offer equivalent wholesale products on retail launch in the absence of an effect on competition resulting from conduct associated with that launch. However, the Director is in this case making a determination under Condition 45 of BT’s licence. The Director is required (by the provisions of both Directive 97/33 and the implementing Regulations and s.3 of the Telecommunication Act) to consider the effect on competition of the interconnection service requested. In this case, the Director takes the view that effective competitive could be restricted by the absence of unmetered wholesale internet call origination from BT’s network for the reasons given above and has made the Direction accordingly.

C. BT said that it considered that Oftel’s regulatory powers should not be used as a means of dealing with alleged anti-competitive behaviour

41. WorldCom noted that the Director has discretion whether to proceed under the Telecommunication Act 1984 or the Competition Act 1998. He may proceed under the Competition Act if he is satisfied that this is the more appropriate way of proceeding.

42. Oftel does not believe that the use of Competition Act powers is appropriate in this case. Regulation 6(6) of the Interconnection Regulations (and Article 9.5 of Directive 97/33 from which it is derived) place a duty on the Director to take steps to resolve the dispute within six months of its being referred to him for determination. WorldCom made such a request. In view of this obligation on the Director in European Community law and the implementing Regulations, together with Condition 45 which imports those obligations into BT’s licence, use of domestic law Competition Act powers is not appropriate in this case.

D. BT also said that, in its view, the Director could not rely on Condition 45 of BT’s licence in this case to impose a price control for FRIACO interconnection

43. BT essentially had two arguments here. Firstly, BT stated that FRIACO is not required to enable WorldCom to provide the unmetered retail services it proposed. Secondly BT noted in particular that the term "Connection Service" in Condition 45(1)(b) of the licence does not encompass the charging structure for the conveyance of messages. BT could not be obliged, under that paragraph if its licence, to provide the same service (wholesale interconnection) as it currently provides, but at a different price (unmetered as distinct from the current pence-per-minute basis). BT also said that it was unaware of there being a dispute to which Regulation 6(6) of the Interconnection Regulation could apply.

44. WorldCom stated that it viewed Condition 45.1 as imposing an obligation on BT, not as providing the Director General with powers and duties. It also pointed out that Regulation 6(6) does not require a complainant specifically to invoke it in order for it to apply.

45. Oftel’s views on BT’s first argument are given at paragraphs 27-30 above. For the reasons given there, the Director General believes that FRIACO is reasonably required to enable WorldCom to offer the services it proposes. As to BT’s second argument, Oftel notes that – as WorldCom points out – Condition 45.1 imposes obligations on BT, but does not, in itself confer power or duties on the Director General. Such powers are conferred by paragraph 2 of the Condition.

46. Oftel further notes that Condition 45.1(b) requires BT to allow the effective provision of the retail services in question. Oftel takes the view that WorldCom could not effectively provide those services if it cannot do so on competitive terms, including as to price. BT’s argument is based solely on the definition of "Connected Services" and does not appear to take account of the accompanying obligation on BT to permit WorldCom to provide those services effectively

E. The draft direction ignores the technical and practical difficulties of complying with the proposed Direction within the timescales envisaged. The timescale was "precipitous".

47. The responses to the earlier draft direction identified a number of issues not specifically addressed in that document. These issues and Oftel’s response to them are discussed in this document as shown below

2 Mbit/s minimum capacity per FRIACO route – paragraph 59

Use of STP (Signal Transfer Points) – paragraph 16 & 63

Numbering – paragraph 52

F. BT stated that the procedure leading to the publication of the draft determination is marred by impropriety and that the determination would be a misuse of the Director General’s powers.

48. BT pointed out that WorldCom’s request was in relation to FRIACO at the DMSU, not at the DLE. Consequently it had not been in a position to discuss FRIACO at the DLE with WorldCom, or to present arguments in relation to FRIACO at the DLE. BT has never refused to supply FRIACO at DLE. On misuse of powers, BT said that the proposed 1 June date for the entry into force of the determination (the same as SurfTime) was a clear indication that the determination was intended to address the competition concerns resulting from SurfTime. Oftel should have used the Competition Act instead.

49. WorldCom said that, although it is true that BT has been slowly developing a form of groomed interconnection at the DLE, this does not contain the flat-rated element required by WorldCom. In relation to BT’s claims that it has not been given the opportunity properly to respond to the issue of DLE flat-rate interconnection, WorldCom said that BT has consistently rejected any proposal for flat-rate interconnection at any level of the BT network. On BT’s final point, WorldCom pointed out that the Director General has discretion as to whether or not to use his Competition Act powers.

50. Oftel notes that WorldCom requested interconnection for unmetered Internet call origination services from BT in September 1999 and referred a dispute arising from BT’s refusal to supply the service on 24 December 1999. BT has been aware since then that Oftel has been considering WorldCom’s request for a determination, but has only recently confirmed to Oftel that DLE level FRIACO could be made available. It has also been configuring its network so that Internet traffic will be groomed at DLEs rather than DMSUs for the purposes of its own SurfTime product, about which it has been consulting both Oftel and the relevant industry group since February 2000. Further, BT has had the opportunity to comment on a draft of this Direction. In the light of this, Oftel considers that it is disingenuous of BT to assert that it has not properly been able to make adequate representations on the issue of DLE-level unmetered interconnection.

51. As to the alleged misuse of the Director’s power by using the provisions of the Telecommunications Act licence held by BT instead of powers under the Competition Act, Oftel refers to the reasons given in paragraph 42 above. Use of the Competition Act is not appropriate in these circumstances.

The consultation also prompted responses on a range of other issues.

Numbering

52. FRIACO is an Indirect Access (IA) service where the terminating operator and ISPs are responsible for all customer contact including billing. In order to be able to identify calls charged at the new unmetered wholesale rate BT’s billing system has to be able to distinguish these from all other metered calls. All interconnection charge bands have a minimum of 100k number blocks allocated to them. FRIACO will therefore require its own discrete 100k range of numbers. These will be issued to FRIACO operators in blocks of 1k from the 100k sub-range of 0808 99. Operators will not be able to use single numbers or other ranges from within their existing 0800 or 0808 allocations. Oftel is conscious of concerns that 0808 means free-to-caller under the numbering conventions. As these calls will not be billed by BT they will be free to FRIACO customers. The fact that FRIACO operators may levy additional charges for flat rate or metered Internet access is not new. Indirect Access services have used 0800 codes for some time and many involve the IA operator raising their own charges to their customers.

DLE Grooming for FRIACO

53. Some responses indicated a belief that provision of FRIACO is not dependent upon the same DLE enhancements as BT is providing for SurfTime and can therefore be made available immediately from all local exchanges. This is not the case. There is a risk that non-enhanced DLEs may not have the necessary capacity for the introduction of unmetered calls. In any case the use of IN for grooming is a pre-requisite for identifying the 1k number blocks allocated for FRIACO as described in paragraph 52 above. IN charges are given in paragraph 57 below.

IP Handover

54. Some operators are seeking the handover of FRIACO traffic as IP traffic directly from BT’s modems. This requirement was not part of the request for a Direction made to Oftel by Worldcom and is not included in the final Direction. Operators interested in this type of interconnection are encouraged to enter into negotiations with BT.

DMSU Interconnection

55. There are concerns that forcing operators to build out to all, or a substantial number of, DLEs will result in costly and inefficient network build. Many routes will be lightly loaded and may never be economic. Oftel will not comment on the practicality of interconnection at the DMSU switch for unmetered traffic before it has received the expert advice it has sought. However, Oftel believes that interconnection at the DMSU building would still be reasonable even if the risks of congestion were such as to make interconnection through the DMSU switch undesirable. [Operators may therefore seek to interconnect at the DMSU building via IECs, from their existing DMSU interconnection links, to DLEs.]

Charges

56. Confirmation was sought on what costs were included within the FRIACO charge and whether any additional charges would be incurred. FRIACO charges have been constructed to include all the network costs incurred in providing the service at the DLE.

57. Charges for provision of grooming services (IN) have not been included in this Direction, as Oftel has not undertaken to determine an appropriate cost based charge. The IN charge has been provided by BT to Oftel and is £64 per year for each 64kbit/s FRIACO port. This equates to £1,920 per year for each 2Mbit/s circuit and will be published in BT’s Carrier Price List alongside the determined FRIACO charge. Under the network charge control regime, the IN charge is classed as a new service and therefore not immediately regulated. Under the NCCR, operators are free to complain to Oftel about any new service for which they consider the charge to be excessive. If Oftel receives a complaint in this regard it will consider it in the normal manner.

58. The NTS Retail Uplift is not included in the FRIACO charge as FRIACO is an Indirect Access service.

59. FRIACO capacity is available at a minimum of 2Mbit/s at a time; ie 30 x 64kbit/s circuits, this being the normal route size for interconnection. Once purchased an operator may charge their customers on any basis they wish (eg unmetered, metered or a combination of both types of charging).

IECs

60. As stated BT has agreed to pay for IECs between DMSUs and DLEs for SurfTime for a limited period. However, BT has stated that this proposal reflects the similarity between SurfTime and NTS, for which BT would normally pay for such links. BT has stated that, in contrast, it does not pay for IECs for Indirect Access traffic. Since FRIACO is an Indirect Access service BT does not pay the cost of IECs. It has now stated its intention to review the question of who pays for NTS IECs with effect from January 2001 which will bring charges for NTS IECs into line with those for non-NTS IECs. Note: BT considers that operators will be responsible for payment for IECs used for FRIACO.

61. Some operators have suggested that they should be able to reallocate 2Mbit/s circuits ordered in connection with SurfTime for provision of FRIACO based services. BT has confirmed that operators can re-allocate capacity ordered for SurfTime to FRIACO. Such re-allocation may involve additional work by BT to enable the network and billing systems to recognise FRIACO as opposed to metered traffic over the circuits. SurfTime capacity which is ready for service on 1 June may not therefore be usable for FRIACO on the same date. Operators are encouraged to work closely with BT and to ensure their networks are ‘FRIACO ready’ as quickly as possible in order to minimise the circuit re-allocation time. It must be remembered that SurfTime circuits are capable of carrying mixed SurfTime and other NTS traffic whilst FRIACO circuits are for unmetered traffic only.

Review of FRIACO charge.

62. Concern was expressed that Oftel’s intention to review the FRIACO charge after 6 months creates uncertainty for operators who are proposing to take risks offering unmetered services. The only way of calculating a charge which does not vary with usage would be to base the charge on a network of circuits dedicated to the operator (i.e. the operator would pay for the full cost of every circuit over which its traffic went). This would clearly be expensive. A more realistic approach is to reflect the fact that FRIACO will share the network with PSTN traffic. The appropriate method for sharing the costs in these circumstances is to base them on the amount of traffic conveyed over the network in the busy hour, since this reflects the costs imposed on the system. There is a possibility that FRIACO may impact on this key cost driver. It is difficult to determine what this impact may be prior to the introduction of FRIACO.

Signalling using STP

63. The STP signalling arrangements described in paragraph 16 above will apply equally to FRAICO services. Under normal signalling arrangements i.e. using the signalling path within the 2Mbit/s IEC, signalling costs are included within the IEC charge. BT has confirmed that from 1 June no additional charge will be raised for STP working. This means that signalling costs will continue to be met by IEC charges whether paid by BT or the SurfTime/FRIACO operator.

Effective Date

64. Operators will be able to request FRIACO from 1 June. BT will process orders for new FRIACO interconnection capacity according to normal timescales. Re-allocation of capacity ordered and provided for SurfTime is discussed in paragraph 61 above.

Oftel’s view

65. Having considered the arguments put forward by BT and WorldCom, Oftel considers that WorldCom’s request for FRIACO is reasonable. Oftel has considered responses to its draft determination and believes that the methodology as set out in the draft determination forms the basis of an appropriate charging methodology.

Oftel’s proposal

66. Oftel determines that BT must make available FRIACO for Internet traffic at enhanced DLEs which are being used to support SurfTime. These enhanced DLEs have been upgraded to cope with the traffic volumes that are likely to be generated as a result of unmetered Internet access. BT is to provide FRIACO in multiples of 2Mbit/s. The charge for FRIACO is £424.25 per 64 kbit/s circuit per annum. This is equivalent to £12727.50 per 2Mbit/s port per annum. The charge has been derived according to the methodology described in the next section. Operators will incur separate charges for provision of grooming facilities and may need to incur additional charges for STP signalling links though BT has said that it will not charge for these.

67. Oftel proposes to review the charge for FRIACO after an initial period. In that time it proposes to collect relevant information (e.g. usage patterns of FRIACO customers) to refine the methodology further. These developments may require adjustments to be made to the charge.

68. Oftel has not at present determined that FRIACO must be made available at the DMSU. Oftel is currently awaiting a report from its expert panel which will set out the network implications for FRIACO at the DMSU. The report is expected by the end of June.

The Pricing Methodology

69. Oftel has further considered the methodology proposed in the draft determination and has noted operators’ responses to the methodology. The pricing methodology used by Oftel in making the final determination is described below.

70. The methodology used by Oftel to arrive at a capacity based charge is in two main parts:

1. Oftel derives a LRIC based charge for a remote-local circuit.
2. Oftel derives an adjustment ratio for the number of remote-local circuits necessary per DLE port.

Please see Appendix I for the detailed calculation of the charge.

1. Charge for a circuit

71. Oftel believes that it is appropriate for FRIACO charges to be set in a way which is consistent with the pence per minute charges regulated under the Network Charge Control. Oftel believes that this requires the charge to be set on the basis that it would have been set at the beginning of the existing Network Charge Control. The charge should then be adjusted for efficiency gains and inflation in order to arrive at an appropriate 1999/00 charge.

72. Oftel wished to use 1996/97 data for pence per minute charges and minutes per circuit but 1996/97 data on minutes per circuit are not available. However, minutes per circuit data are available for 1994/5 so Oftel decided to use these figures in the calculation. The underlying data were set out in the bottom up network Long Run Incremental Cost model.

73. The minutes per circuit in that model were derived from the Busy Hour Erlangs per circuit and the data on the proportion of traffic in the busy hour, which was given as 9.2%. This latter figure excluded international traffic. International traffic is distributed more evenly than inland traffic, so the effect of this exclusion was to overstate the proportion of total traffic in the busy hour. Oftel has calculated that the inclusion of international traffic would reduce the proportion of traffic in the busy hour to 8.95%. If this percentage is combined with the Busy Hour Erlangs per circuit data, the total minutes on local exchange circuits rise by 2.8%. Oftel has incorporated this adjustment in arriving at the charge for a local exchange circuit.

74. The per circuit charge is calculated by multiplying together the minutes per circuit and the pence per minute charge for DLE interconnection. However, network charges in 1994/95 were not determined on the basis of Long Run Incremental Cost (LRIC), so the actual 1994/5 interconnection charges would not serve as the correct starting point. Oftel has overcome this difficulty by deriving pence per minute charges for 1994/95 from the LRIC-based 1997/98 charges. It has done this by deflating the 1997/8 charges by RPI-8% per annum.

75. Oftel has thus been able to generate a cost-based charge for a circuit in 1994/95 prices. These 1994/95 prices are then reflated (by RPI-5% per annum) to adjust for efficiency gains and inflation to derive a charge for 1999/00.

76. An alternative approach would be to base the calculation on 1999/2000 minutes per circuits figures and pence per minute charges. However, Oftel does not believe that it would be appropriate to do this since the actual minutes per circuit in 1999/2000 are probably in excess of what was expected when the Network Charge Control was set. Such a calculation would therefore not be set on the same basis as the pence per minute charges, which were set in the absence of any knowledge of actual volumes in 1999/2000. In Oftel’s view a calculation incorporating 1999/2000 pence per minute charges would also have to incorporate the forecasts made of expected minutes per circuit volumes in 1999/00, when the pence per minute charges were set. However, no specific forecasts of expected minutes per circuit in 1999/00 were made when the Network Charge Control was established. As this forecast information is not available Oftel believes that its approach as set out above is therefore the most reasonable and practical way of calculating the charge per circuit.

2. Adjustment Ratio

77. In order for FRIACO to cover its costs, it is necessary to ensure that the Grade to Service provided to PSTN customers does not deteriorate with the introduction of FRIACO. Under FRIACO, the limitation on usage is established by the capacity at the FRIACO port. Since ports carry more traffic than local exchange circuits in the busy hour (which is the relevant period for network dimensioning), each FRIACO port will require more than one local exchange circuit to support it, if the Grade of Service on the local exchange circuits is not to be reduced. The second stage of the calculation is to compute the number of RCU-DLE circuits that are necessary to support each DLE FRIACO port.

78. In the draft determination, the cost per circuit was multiplied by the ratio of network busy hour (NBH) traffic per interconnect circuit to NBH traffic per remote-local circuit. Oftel had stated in the draft determination that the circuits to ports ratio adjusted for the multiple local busy hour effect. However, upon reflection, Oftel considers that the ratio in fact adjusts for three factors which account for the differences between utilisation factors at the remote-local circuit and the local-tandem circuit (i.e. DLE port) during the NBH:

• Economies of Scale – this has the effect of increasing the utilisation factor at the DLE FRIACO port during NBH;

• Grade of Service (GoS) – a higher GoS in the remote-local circuit has the effect of reducing the utilisation factor at the circuit during the NBH;

• Multiple Busy Hours – this has the effect of reducing the utilisation factor at the circuit during the NBH.

All these factors need to be adjusted for in order that BT recovers the full cost of supplying all the circuits necessary for each DLE FRIACO port. The adjustment proposed by Oftel does this.

79. In subsequent discussions, BT has stated that the utilisation factor at Internet ports is much higher than the average utilisation factor for all ports during the NBH. A higher utilisation factor at Internet ports implies that more remote-local circuits are needed per port. Oftel accepts that greater costs are incurred per port if NBH traffic per port is higher. Oftel therefore has included the utilisation factor for BT-OLO Internet ports in the numerator of the circuit to ports ratio in calculating the charge for this Determination.

80. This raises the question of whether the denominator of the adjustment should also be increased to reflect the hotter running of local exchange circuits. This would be appropriate if the remote-local circuits could be run hotter for FRIACO traffic without PSTN customers suffering a degradation of service. BT has claimed that PSTN customers will suffer a degradation of service if remote-local circuits are run hotter than is implied by the current NBH traffic per circuit for those network elements. Oftel accepts that this would be the case, unless FRIACO and ordinary PSTN as traffic could be distinguished and assigned a different grades of service.

81. The sequential nature by which calls are routed through various network elements means that the probability of ‘channel’ availability at the RCU port will be lower for both PSTN and FRIACO customers if FRIACO traffic is run hotter in the RCU-DLE circuits. This is because RCU ports cannot distinguish between FRIACO and PSTN traffic and therefore the rise in the average NBH traffic per RCU-DLE circuit would result in a lower Grade of Service to all customers. Therefore PSTN customers would suffer some deterioration of GoS.

82. However, it is possible that the higher utilisation of local exchange circuits brought about by FRIACO would result in a higher overall utilisation level for these circuits. This is because the total capacity required to carry busy hour traffic at a given GoS, is not linear in the level of that busy hour traffic (ie the Erlang formula is non-linear with respect to carried traffic). Therefore as the total volume of traffic rises the average utilisation rate rises. In terms of its effect on costs, this means that the marginal cost of an erlang of traffic is lower than the average cost of an erlang of traffic. The extent to which this is likely to be a significant effect is dependent on the demand for the FRIACO service ie if the additional increment of traffic generated by FRIACO is significant, the average utilisation rate will rise and average costs of LECO circuit usage will fall.

83. This determination does not include an allowance for this adjustment since the appropriate scale of any such adjustment to allow for this effect is as yet unknown. However, Oftel considers that it would be reasonable for future prices for FRIACO to reflect a share of any corresponding increase in BT’s busy hour circuit utilisation resulting from the non-linearity of the Erlang formula.

84. BT has provided up to date utilisation factors. The utilisation factor for remote to local NBH usage currently stands at 0.36 which is very close to the figure published in the draft determination. The utilisation factor for existing BT-OLO Internet ports is 0.78. Oftel believes that it would be appropriate to uplift the costs of the remote-local circuit by the ratio of 0.78/0.36.

85. Oftel recognises that it is possible that this ratio could be too low if, as may be possible, an operator were to run DLE FRIACO ports at above 0.78 erlangs per circuit (in the limit 1 erlang per circuit is the maximum). Oftel is not currently in a position to judge to what extent operators might be likely to run their ports at a higher rate than 0.78 erlangs per circuit. It does not therefore propose any further uplift beyond that resulting from incorporating the port utilisation factor of 0.78 in the calculation.

86. The ratio may also change because of the manner in which BT applies its dimensioning rules. Oftel is aware that BT dimensions its network not only on the basis of GoS during the network busy hour, but also on the basis of GoS during an ‘overload’ situation. If the binding constraint for the purposes of network dimensioning is the ‘overload’ situation, then it follows that the ratio should reflect the utilisation factors during ‘overload’ rather than during the network busy hour. This would be likely to affect both the numerator and the denominator and so the final effect on the adjustment ratio is unclear. Oftel proposes to consider this issue further during the period of the review. However, for the purposes of the present determination the calculation does not take account of this factor.

87. WorldCom observed in its response to BT’s comments that the ratio may be too high for a reason associated with the assumptions behind the Erlang formula. WorldCom stated that the costing of upstream network elements should be based on a form of the Erlang formula that reflects the finite number of circuits available downstream (as compared with the more usual form of the Erlang formula that effectively assumes an infinite number of such circuits). However, WorldCom accepts that such an approach is not fully developed and therefore cannot be used to set a price for FRIACO at the present time.

Calculation of FRIACO Charge Appendix 1