Contents

The Draft Direction

Explanatory Memorandum

Chapter 1 Summary

Chapter 2 Background

Chapter 3 History of the Dispute

Chapter 4 Submissions of the parties

Chapter 5 The Director’s proposals

Chapter 6 Consultation and timetable for responses

Schedule List of Operators

DRAFT DIRECTION UNDER REGULATIONS 6(6) OF THE TELECOMMUNICATIONS (INTERCONNECTION) REGULATIONS 1997 RELATING TO A DISPUTE BETWEEN BRITISH TELECOMMUNICATIONS PLC ("BT") AND THE OPERATORS LISTED IN THE SCHEDULE ("THE OPERATORS") OVER THE WITHDRAWAL OF OVERFLOW FACILITIES FROM NTS TRAFFIC.

WHEREAS:

(A) The Secretary of 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 telecommunications systems specified in that Licence;

(B) By virtue of section 109 of, and paragraph 20 to, Schedule 5 of the Act the BT licence has effect as if granted to British Telecommunications plc ("BT");

(C) The Secretary of State has granted to each of the operators listed in the Schedule ("Operators") a licence under Section 7 of the Act for the running of telecommunications systems specified in that licence;

(D) On 1 January 1998, the European Parliament and Council Directive 97/33/EC came into force and was implemented in the UK through the Telecommunications (Interconnection) Regulations 1997 (the "Regulations") and conditions in the licences of operators;

(E) Regulation 6(6) of the Regulations provides that where there is a dispute concerning interconnection between organisations, the Director General of Telecommunications (the "Director") shall, at the request of either party, take steps to resolve the dispute within six months of the date of the request. The direction which the Director makes to resolve the dispute must represent a fair balance between the legitimate interests of the parties, and must be notified to the parties in accordance with Regulation 8(3). The parties are entitled to a full statement of the reasons on which the direction is based;

(F) The Operators each entered into a Standard Interconnection Agreement ("SIA") with BT on the dates shown in the Schedule;

(G) On 28 June 2001 the Director issued a determination regarding the ownership of NTS links ("NTS Links Determination"). In the NTS Links Determination the Director concluded, inter alia, that ownership of NTS traffic originated by BT or transited via BT’s network should be transferred to the terminating operator and with it responsibility for payment for terminating links;

(H) BT subsequently issued a Supplemental Agreement to all operators seeking to amend issue 2.9 of the SIA to implement the Links Determination. The Supplemental Agreement included an amendment to the traffic routing rules contained in paragraph 5.4.6 of Annex A to the SIA. The effect of the proposed amendment was that BT would no longer overflow traffic on the operator owned links. Within the context of this draft direction, overflow describes the provision of alternative routing from one BT switch connection with an operator’s network to another BT switch connection with that operator’s network, for traffic that either originated on BT’s network, or originated on a third party network and transited via the BT network.("Overflow");

(I) The Operators refused to sign the Supplemental Agreement as they considered that the withdrawal of Overflow proposed by BT was outside the scope of the NTS Links Determination. The Operators also consider that BT does not have the right to withdraw Overflow for traffic on NTS links and are therefore in dispute with BT;

(J) On 25 September 2002 BT referred a dispute to the Director based on the Operators’ refusal to implement the NTS Links Determination. After discussing the matter with BT the Director advised BT on 23 October 2002 that, in accordance with the provisions of Regulation 6(6) of the Regulations, he would consider the dispute between BT and the Operators in relation to BT’s proposed withdrawal of Overflow;

(K) The Regulations place upon the Director the general responsibility to encourage and secure adequate interconnection in the interests of all users;

(L) The Director has considered, inter alia, the information provided by the parties and the matters set out in Regulation 6(8) of the Regulations. The principle points are summarised in the explanatory memorandum, which accompanies, and is published with, this direction;

(M) A draft of this direction and the explanatory memorandum, containing the Director’s reasons, was issued to interested parties on 25 February 2003. Comments were invited by 25 March 2003. The Director in making this direction has taken these comments into account.

NOW, THEREFORE:

PURSUANT TO REGULATION 6(6) OF THE INTERCONNECTION REGULATIONS, AND HAVING CONSIDERED THE VIEWS OF THE PARTIES AND THOSE MATTERS SET OUT IN REGULATION 6(8) OF THOSE REGULATIONS, THE DIRECTOR MAKES THE FOLLOWING DIRECTION TO RESOLVE THE DISPUTE BETWEEN BT AND THE OPERATORS:

1. BT shall to provide an Overflow facility for traffic on NTS;

2. Where an Operator requires BT to provide an overflow facility on an NTS interconnect link from a BT switch connection it shall Fully Provide the NTS interconnect link to the Required Grade of Service (defined in the explanatory memorandum which accompanies and is published with this direction);

3. This direction shall form part of the interconnection agreement in force between BT and each of the Operators.

4. Except as otherwise defined in this direction, words or expressions used shall have the same meaning as in the Act, the BT licence or BT’s Standard Interconnect Agreement as appropriate.

5. This direction shall take effect on the date it is published.

Heather Clayton

Director of Investigations

A person authorised under paragraph 8 of Schedule 1 of the Telecommunications Act 1984

25 February 2003

Explanatory Memorandum

Chapter 1

Summary

1.1 The Director General of Telecommunications ("the Director") has issued a draft direction in accordance with the provisions of Regulation 6(6) of the Telecommunications (Interconnection) Regulations 1997 ("the Regulations") for the resolution of a dispute between British Telecommunications plc ("BT") and Cable and Wireless plc, Wavecrest (UK) Limited, Energis Communications Limited, ntl Group Limited, and Easynet Group ("the Operators").

1.2 BT referred this dispute to the Director on 25 September 2002 as a result of a number of operators refusing to sign a Supplemental Agreement issued by BT. The scope of the dispute (as clarified and confirmed by the Director in a letter to BT on 23 October 2002) is that BT is in dispute with the Operators over BT's proposal to withdraw overflow facilities from NTS traffic. The Director has considered the submissions made by BT and the Operators and has issued a draft Direction and this Explanatory Memorandum containing the Director’s reasons in respect of this dispute on 25 February 2003. Comments are requested and will be taken into account in making a final Direction.

1.3 BT requested that the Director resolve this dispute by requiring that the standard routing rules applying to NTS traffic in the direction BT to operators shall be amended so that no alternative routing ("overflow") from one BT switch connection to another BT switch connection will be provided.

1.4 The details of the Director’s consideration of the submissions made by BT and the Operators, together with the reasons why the Director is minded to make this draft Direction, are set out in Chapters 4 and 5.

1.5 In summary, the Director is minded to direct that BT should provide an overflow facility on NTS traffic. In addition, where an Operator requires BT to provide an overflow facility on NTS traffic it shall Fully Provide the NTS interconnect link from a BT switch connection to the Required Grade of Service (as defined below).

1.6 In accordance with Regulation 6(6) of the Regulations and having considered the facts specific to this dispute this draft Direction, in the opinion of the Director, represents a fair balance between the legitimate interests of the parties in this case. In making this draft Direction the Director has taken into account the matters set out in Regulation 6(8) of the Regulations and has had regard to the Director’s duties to encourage and secure adequate interconnection in the interests of all users in a way that provides maximum economic efficiency and gives the maximum benefit to end users.

Chapter 2

Background

Description of NTS Traffic

2.1 Number Translation Service ("NTS") describes a range of specially tariffed services including Freefone (080x), Local Call Fee Access or LCFA (0845), National Call Fee Access or NCFA (0870) and PRS (mostly 0900/0901). Such services involve the routing of calls to a non-geographic number to a network termination point, i.e. the translation of a number from its non-geographic format into a geographic number to enable calls to be routed to a specific location.

2.2 This dispute concerns BT seeking to withdraw the provision of a facility for overflow (as described below) to ensure that NTS calls carried on BT’s network for termination on the Operators networks do not fail due to congestion at the designated point of interconnection between BT’s network and the Operator’s network.

Description of Overflow on NTS traffic

2.3 Within the context of this dispute, overflow describes the provision of alternative routing from one BT switch connection with an operator’s network to another BT switch connection with that operator’s network, for traffic that either originated on BT’s network, or originated on a third party network and transited via the BT network. The provision of an overflow facility ensures call completion in situations where congestion prevents conveyance at the designated point of interconnection between the BT network and an operator’s network.

Overflow for other traffic types

2.4 On 23 August 2002, C&W referred a dispute to the Director requesting that BT provide overflow for directory enquiry traffic using the new 118 code ("DQ118 traffic") that BT carries on its network for termination by C&W. BT had agreed to carry C&W’s DQ118 traffic on the interconnect capacity between BT’s and C&W’s networks already used to carry C&W’s NTS traffic.

2.5 This matter is being considered separately. The Director issued a draft Direction on 17 January 2003, which proposed that BT should be required to provide overflow capacity for DQ118 traffic, regardless of the type of interconnect capacity used to carry the DQ118 traffic type.

Routing Principles

2.6 BT currently provides an overflow facility to the Operators for NTS traffic. BT proposes to remove this facility on the basis that the NTS interconnect links are now owned by the Operators as a result of the NTS Links Direction 2001. Operator-owned interconnect links are currently subject to routing principles that are set out in Annex A to the Standard Interconnect Agreement ("SIA").

2.7 The requirement on operators to dimension their routes is set out in Paragraph 5.3.1 of Annex A to the SIA, which says:

2.8 Fully Provided is defined in Annex D to the SIA, which says that Fully Provided means:

2.9 Paragraph 5.3.2 sets out the forecast requirement of capacity, based on a proposed grade of service, where a Traffic Route is used for the conveyance of traffic for both parties, which says:

2.10 Where an interconnect link carries more traffic than which capacity has been ordered for and the grade of service decreases, it is known as being run as "high-usage". Paragraph 5.3.3 (b) sets out the requirements for a high usage interconnect link:

Description of Fully Provided to a Required Grade of Service for NTS Traffic

2.11 Within the context of this dispute, Fully Provided describes capacity on a traffic route which will carry all of the relevant traffic streams at the required grade of service. ("Fully Provided")

2.12 In the context of this dispute, the Director’s proposed direction that the Operators should Fully Provide their NTS links to the required grade of service where they request an overflow facility on NTS traffic means that the Operators should Fully Provide their links to a grade of service of better than 0.008 subject to the route dimensioning giving a grade of service of better than 0.02 at 10 per cent traffic overload and better than 0.05 at 20 per cent traffic overload, unless the Parties agree otherwise. ("Required Grade of Service")

Chapter 3

History of the dispute

3.1 On 28 June 2001, the Director issued a Direction regarding a dispute concerning BT’s proposal to charge for NTS interconnection links from 1 January 2001 ("the NTS Links Direction"). The Direction detailed the Director’s decision that BT’s proposal to charge for interconnection links which terminate BT originated or BT transit NTS calls was justified. Ownership of NTS interconnection links should be transferred from BT to the terminating operator when BT had completed its part of any work requested by the operator in order to optimise their interconnection arrangements.

3.2 As part of the steps taken by BT to implement the NTS Links Direction, it issued a Supplemental Agreement to all operators in June 2002. The Supplemental Agreement sought to make amendments to Annex A of the SIA to the effect that BT would no longer provide an overflow facility for NTS traffic. Prior to the change of ownership on NTS links, BT would overflow an NTS call if there was insufficient capacity on its links, so that the call would be successfully terminated on an operator’s network. As operators would now own the NTS links, as a result of the NTS Links Direction, BT proposed to withdraw the overflow facility as it claimed that it was encumbant on an operator to pay for the capacity on links carrying traffic that was the operator’s responsibility.

3.3 On 29 July 2002, BT issued a reminder to those operators that had yet to sign the Supplemental Agreement. The Operators party to this dispute refused to sign the Supplemental Agreement and explained to BT why they would not do so, principally on the grounds that the revisions contained in the Supplemental Agreement were not discussed as part of the NTS Links Direction. Also, withdrawal of the overflow facility would increase the risk of call failure. As such, BT referred the matter to the Director for determination on 25 September 2002.

3.4 It was not clear from BT’s referral whether it was seeking the Director to enforce the implementation of the NTS Links Direction or whether it was referring a new dispute relating to the proposed removal of overflow. BT believed the withdrawal of overflow to be a natural and implicit consequence of the NTS Links Direction. The Operators held that no mention of BT’s proposals was ever made during the negotiations which led up to that Direction. Neither was the proposal considered in the text of the NTS Links Direction.

3.5 Oftel sought clarification from BT as to the nature of the dispute. On 23 October 2002 Oftel wrote to BT setting out that the dispute would be considered as a new dispute under Regulation 6(6) of the Telecommunications (Interconnection) Regulations 1997.

Chapter 4

Submissions of the parties

BT’s arguments

4.1 BT said that the NTS Links Direction transferred the ownership of the NTS interconnect links to operators. As such, traffic on those links became operator-owned. BT had never provided an overflow facility to operator-owned traffic at the BT switch connection and so traffic on NTS links was to be brought into line with all other operator-owned traffic types, e.g., indirect access traffic.

4.2 Paragraph 5.3 of Annex A to the SIA sets out the rules for interconnect traffic route dimensioning and that, with the exception of the limited applicability of High Usage Traffic Routes, Traffic Routes should be Fully Provided. Where the limited application of High Usage is permitted this allows for a maximum of 15% of the traffic offered to the High Usage route to be overflowed. BT argued that any overflow facility would result in the Operators NTS interconnect links being "run hot", effectively using their NTS interconnect links in a similar fashion to High Usage routes instead of being dimensioned on a Fully Provided basis. This would adversely affect the overall grade of service across the whole of BT’s network and therefore impact on both BT’s and other operators grade of service unfairly.

4.3 Any overflow facility offered by BT on NTS traffic was therefore open to abuse, as the Operator could under-provision its NTS links. This would have two negative effects. First, the overflowed traffic caused by the under-provisioning would result in higher network costs and a reduced grade of service, affecting all operators using BT’s network. Secondly, the under-provisioning Operator would be benefiting at the expense of operators who had Fully Provided their links both in terms of cost and security of call success. BT believed that as ownership had changed it was not able to order extra capacity on an Operator’s behalf, neither was it able to instigate a re-routing plan to balance the Operator’s traffic. Therefore, BT would have great difficulty in stopping an abuse.

4.4 BT also said that it was withdrawing overflow on NTS links because it was not able to recover the costs that such a facility would incur. In normal situations, where there was no congestion on the NTS link or other network inefficiencies present, an NTS call originating on BT’s network would be routed to the BT switch connection where the Operator NTS link was sited and handed over to the Operator’s network. If, however, handover was not possible at that BT switch – and an overflow facility was available – the call would be routed through BT’s network to the next BT switch connection where the Operator had an NTS link. However, it was not possible to identify within the Call Accounting Records whether that call had used the overflow facility and so the network costs of that call could not be recovered. The built in assumption of the Call Accounting Records would be that the call had used the shortest possible network route (the optimal route). As such, an overflow facility would use additional BT network facilities and drive intra BT switch expansion. It would therefore result in additional costs for BT which would not be recovered from the Operators.

4.5 BT said that it had suggested to operators at the Standard Contract Forum held in March 2002 that overflow might be provided on NTS traffic if overflowing calls could be charged on a "facility rental" basis, i.e., operators pay BT a fixed regular charge for the provision of an overflow facility. This suggestion had been immediately turned down by operators involved in the discussions with no alternative propositions put forward. BT believed that this demonstrates that the Operators expect overflow to be provided at BT’s expense.

4.6 BT said that it was, and always has been, prepared to use network management facilities to re-route traffic in case of unforeseen and exceptional traffic peaks. Through this mechanism, BT would co-operate with the Operators to put in place whatever temporary network solutions would deal with the specific situation.

C&W’s arguments

4.7 C&W argued that NTS traffic was not an elective traffic stream in that an originating caller is not likely to know whether an NTS number is owned by BT or an operator. Without such knowledge, it is reasonable that the originating caller will expect the call to be conveyed transparently by BT with no change to the likelihood of successful call completion despite change of ownership of the NTS links. Should BT withdraw the overflow facility on NTS traffic, the number of NTS calls that fail would dramatically rise. This would result in the originating caller blaming the service provider and seeking alternative service.

4.8 C&W also stated that overflow enables operators to "right size" their interconnect networks. It recognises that there is an obligation on operators to Fully Provide links and overflow is a useful tool that can be used during the provisioning process for extra capacity. Without this, operators might "over-size" their links which is a costly waste of resources and capital.

4.9 If overflow was withdrawn on NTS traffic, C&W would have to over provide interconnection capacity to ensure NTS traffic was successfully terminated on its network. This would increase costs and may also lead to under-utilisation of available capacity between BT and C&W. On the other hand if C&W were not to over-provide interconnection capacity its customer satisfaction rating may suffer leading to possible loss of business and a resultant reduction in competitive market stimulation.

4.10 As an immediate step, C&W would want BT to work with operators to identify which links are currently causing overflow in BT’s network. BT should then allow operators to submit Advance Capacity Orders (ACOs) to correct these on the same basis as the NTS Links Direction. Following that Direction, operators were given a period of time to submit ACOs and would not be charged for the links until BT had completed the work in the ACO. C&W say that operators were not made aware of BT’s proposals to withdraw overflow on NTS traffic until well after the ACO submission date. Had they been aware earlier, they would have submitted different ACOs and now face the prospect of costs that could have been avoided.

4.11 C&W would also like to see BT develop an overflow product that copes with the peaks of traffic that can occur. C&W accepts that BT should be able to recover its costs on any such product. However, C&W points out that it currently provides overflow for traffic originating on its own network and it provides this service as it places a high emphasis on successful call completion. The alternatives to overflow proposed by BT are unacceptable to C&W, on the basis that they are not economically viable.

Easynet’s arguments

4.12 Easynet argued that overflow was an essential assumption when designing networks. It provided the following reasons as to why BT should continue to offer overflow on NTS traffic:

• Overflow may use free resources elsewhere in the network, leading to greater network efficiency;
• Overflow prevents an operator losing revenue through traffic failing at a BT switch connection due to network outages, rather than operator under capacity. In particular, an operator could be penalised (by losing traffic) for outages caused by BT;
• Overflow protects traffic in instances where it would not be appropriate to install new capacity, i.e., when traffic peaks unexpectedly for a short period. This could be as a result of a major network outage elsewhere in BT or the operator’s network.;
• BT’s interconnection provisioning timescales do not allow operators to dynamically respond to increases in traffic. Overflow provides a buffer between increases in traffic and the installation of new circuits.

4.13 If overflow was withdrawn on NTS traffic, Easynet said that it would have to invest in additional interconnect links in order to avoid losing traffic. These would most likely be capital intensive costs which some operators might find difficult to justify. Also, even with additional capacity, overflow is needed as traffic could continue to be lost due to network outages or through unexpected events.

4.14 Easynet said that BT’s proposal to use the network management facility as a substitute for overflow was not acceptable. Such a solution involved alerting an engineer to the problem, analysing the situation and ensuring that a re-route was the correct solution. During that time, traffic would be lost. In terms of cost recovery, Easynet said that BT currently recovered costs of overflow through network charge controls.

Energis’ arguments

4.15 Energis argued that an overflow facility enables successful call completion that is in the interests of all parties – customers, service providers, terminating operators and BT (as a transit or originating operator).

4.16 If the overflow facility was withdrawn, Energis believes that this would lead to an increase in call failure. This itself would affect costs as the cost of conveying traffic to the point of congestion, or failure, is not recovered if the call is then aborted.

4.17 Energis said that it fully provides its interconnect links so that overflow of NTS traffic should be kept to a minimum. Given the high level of connectivity between its network and BT’s, Energis believes that there would be little incremental cost in providing overflow over otherwise unused capacity. Energis also state that this issue was not raised at the time that the ACOs were submitted following the NTS Links Direction. Had it been and the ACO process allowed for more flexibility in ordering and provisioning of capacity, then the requirement for overflow facilities would be reduced. The only alternative to overflow would be for calls to fail which would be in no-one’s interests.

ntl’s arguments

4.18 ntl argued that successful calls during normal traffic conditions should be given every opportunity to reach termination. By limiting the routes that NTS calls can use this premise is compromised. Some form of overflow should remain available between BT switches to allow onward routing to other ntl NTS interconnect routes.

Wavecrest’s arguments

4.19 Wavecrest argued that an overflow facility should be provided on NTS traffic because there is a difference in the nature of NTS and other traffic types, specifically Indirect Access ("IA") traffic types. With IA, the customer has an alternative choice if calls are failed – to dial another IA code or to omit the IA code altogether. No such alternative choice is available with NTS traffic. Wavecrest argues that withdrawing overflow on NTS traffic would not be in the interests of the end customer.

4.20 Without an overflow facility, Wavecrest stated it would face an initial loss of revenue due to calls failing to complete. This would be followed by customer dissatisfaction and ultimately loss of customer business. Wavecrest believed BT could provide a chargeable overflow product for NTS traffic.

Chapter 5

The Director’s proposed decision and reasons

5.1 Having duly considered the representations made by BT and the Operators in response to the Director’s investigation into this dispute, the Director is minded to conclude that BT should be obliged to provide an overflow facility for NTS traffic. In addition, where the Operators request that BT provide an overflow facility on NTS traffic they should be obliged to Fully Provide their NTS links to the Required Grade of Service.

5.2 The Director is of the view that his proposed decision represents a fair balance between the legitimate interests of the parties to the dispute, in accordance with Regulation 6(6) of the Regulations. He has also, in making this draft Direction, taken into account the matters set out in Regulation 6(8) of the Regulations, in particular the interests of users, the regulatory constraints on the parties, the relative market position of the parties and the promotion of competition. The Director has also considered BT’s proposals in light of the availability of technically and commercially viable alternatives to overflow and in relation to the resources available for it to continue to provide an overflow facility.

5.3 In reaching this initial view, the Director has also considered his general obligations to encourage and secure adequate interconnection in the interests of all users, and in a way that provides maximum economic efficiency and gives maximum benefit to end-users. In doing so, the Director has considered whether BT’s proposal to withdraw overflow facilities on NTS traffic is reasonable, given the effect this would have on the Operators NTS traffic and the ability of BT to continue to provide such a facility. Further the Director has considered the need to ensure that an overflow facility is used appropriately.

BT’s regulatory obligations

5.4 Pursuant to Regulation 4(1) of the Regulations, BT has been determined as having Significant Market Power ("SMP"), inter alia, in the market for fixed public telephone networks and services. BT is therefore obliged, in accordance with Condition 45 of its Licence, to offer to interconnect in this market with all Schedule 2 Public Operators who have made a reasonable request for such interconnection. BT’s regulatory obligation to interconnect does not apply where there are technically and commercially viable alternatives to the interconnection requested or where the interconnection is inappropriate in relation to the resources available to meet the request. In this dispute, the Operators have requested that BT continue to provide an overflow facility on their NTS interconnect links. It is the Director’s initial view that there is no viable alternative to such a facility and that BT has resources available to meet this request, particularly in light of the proposed obligation on Operator’s to provision the links to a required grade of service where the Operator has requested an overflow facility.

Relevant market(s) and the position of the parties to the dispute

5.5 The Operators are in dispute with BT concerning overflow for NTS traffic from the BT network to their network that has either originated on the BT network or has transited the BT network from another originating operator. BT’s relationship with the Operators in terms of this dispute is as an originator of NTS traffic, as a transit operator of NTS traffic originating on another operator’s network, and as the provider of interconnection between BT and the Operator’s network. For the purposes of the current network charge controls imposed on BT (see the February 2001 Network Charge Control Statement: www.oftel.gov.uk/publications/pricing/pcr0101.htm), call origination and interconnection specific services have been designated as being non-competitive, i.e. they are services in which there is little or no competition. Inter-tandem transit services, on the other hand, have been designated as being prospectively competitive services i.e. they are not currently fully competitive, but are expected to become more competitive over the life of the network charge control.

5.6 BT has proposed amendments to Annex A of the Standard Interconnect Agreement to the effect that if an operator’s NTS interconnect link at a BT switch is congested or faulty, BT will not overflow a call between switches within its own network to another operator-owned NTS link, but will instead fail the call. BT has argued that the amendments are required because:

• as a general principle overflow should not be provided for operator-owned traffic types;
• BT would not be able to recover its costs in providing overflow; and
• BT believed that some operators would be inclined to abuse overflow.

Ownership of traffic

5.7 The Director has considered BT’s view that BT to operator NTS traffic is owned by the terminating operator and that BT should not be obliged to offer any more than the basic conveyance from BT’s network to the operator’s point of interconnection.

5.8 The Director recognises that the incentives to correctly dimension links between BT’s network and an operator’s network are different depending upon who has responsibility for the traffic type and interconnection capacity used to carry that traffic. It is the Director’s initial view that overflow is required for NTS traffic regardless of the "ownership" of this traffic type. The terms of ownership of the traffic alone should not preclude the provision of such a service as it is in the interests of end-users that calls complete.

Recovery of costs

5.9 The Director has considered BT’s argument that requiring BT to provide overflow for NTS traffic will result in BT incurring additional network costs that it will not be able to recover.

5.10 In the Director’s view it is reasonable that if BT is required to provide overflow for any NTS traffic it should be able to recover the costs of doing so.

5.11 Currently, BT recovers the costs of NTS traffic conveyance through the Network Charge Differential (NCD) which relates charges to an estimate of NTS traffic routing patterns. The NCD also relies on estimates of costs of underlying conveyance services that are regulated through the Network Charge Controls (NCC).

5.12 BT’s wholesale charges for NTS traffic are derived using the NCD methodology because BT is currently unable to measure, on a call-by-call basis, how an NTS call is routed to the point of egress from BT’s network.

5.13 The NCD charge is based on the number of points of connection (POCs) an operator has with BT and the consequent expected percentage of single and double tandem charges incurred. For example, it was calculated that an operator with 68 or more POCs would incur 100% of the single tandem conveyance charge for each NTS call originating on BT’s network. However, an operator with just one POC would incur 137.6% of the same charge, on the basis that it was more likely that the call would have re-routed via double tandem.

5.14 A sample of calls from a number of operators was used to calculate the NCD. The route of each call from the sample was examined to establish how many switching stages were used. However, of those sampled calls, a number would have been routed sub-optimally (either due to congestion at the operator link (overflow) or network inefficiencies). A call measured by BT as double tandem might in reality have been a single tandem call overflowed because of congestion. Therefore, to some degree each operator’s measured percentage of single tandem calls will have been under-estimated, and each operator’s NCD charge is higher than it would be if overflow had not been provided by BT at that time.

5.15 Whereas the NCD represents an estimate of the actual routing of a call, the base conveyance charges are regulated through the NCC. The controls were last set in 2001 for a four-year period through to 2005. Charges are subject to RPI-X controls where the value of X is set so as to bring forecast basket revenues into line with costs, including the cost of capital, in the final year of the control. The charges for the conveyance services are derived from forecast component cost and volumes, to which forecast routing (usage) factors are applied. For a fuller discussion, see the February 2001 NCC statement:

5.16 It is understood that BT provided overflow facilities for NTS traffic (to itself) when the forecasts were last set (2001). The forecasts for network component costs and volumes made at that time would therefore have incorporated the use of overflow. It is therefore to be expected that BT will recover the costs of continuing to provide a certain amount of overflow for NTS traffic.

5.17 In the Director’s initial view, the costs of overflowing current NTS traffic volumes will be recovered through existing charging mechanisms. The requirement on the Operators to Fully Provide their NTS interconnect links (see below) to the Required Grade of Service where an overflow facility is requested, which is the same grade of service as BT applied when it owned the links, should mean that there is no material increase in NTS traffic overflow.

Correct dimensioning of interconnect capacity

5.18 The Director notes BT’s concerns that Operators, in owning the NTS Links, may be tempted to run routes "hot", i.e. to provide insufficient capacity on a particular link and rely on BT overflowing calls from one BT switch interconnected with their network to another such BT switch. The Director has considered the arguments made by BT and believes that as a principle overflow should be provided by BT. However, the Director has noted BT’s concerns that it is unable to order extra capacity on an Operator-owned NTS link. In the Director’s initial opinion, to require BT to provide the facility of overflow and to oblige the Operators to Fully Provide their NTS links to the Required Grade of Service, where BT is requested to provide an overflow facility, represents a fair balance between the legitimate interests of the parties.

Promotion of competition

5.19 It appears to the Director that, if BT refused to provide overflow for NTS traffic, it could lead to BT’s downstream activities in the NTS termination market having a competitive advantage.

5.20 A refusal to supply the Operators with an overflow facility is likely to give BT’s NTS traffic, and other service providers terminating NTS calls on BT’s network, a competitive advantage because BT’s calls would be less likely to fail. These services will be able to take advantage of BT’s ability to dimension its own network incorporating "high usage" routes with overflow, where it is efficient to do so. Requiring BT to provide overflow to the Operators (who would be required to Fully Provide to a Required Grade of Service) should result in a more equivalent quality and cost of service for NTS call conveyance to that which BT provides itself. It is therefore in the interests of promoting competition to require BT to provide overflow for NTS traffic destined for an Operator’s network.

Economic efficiency

5.21 Sub-optimal investment decisions by the Operators may also arise as a result of BT’s refusal to provide overflow. Forcing the Operators to invest in higher capacity NTS links where only a small or irregular amount of overflow may be required would result in inefficient over-dimensioning of NTS links. Requiring BT to provide overflow should therefore minimise the cost of interconnection and therefore of providing NTS services.

Interests of end-users

5.22 The Director believes that it is in the interests of end-users of NTS calls that BT be required to provide overflow for NTS traffic terminating on the Operators networks. In the absence of an overflow facility, there is a higher risk that calls will fail if congestion prevents onward conveyance at the designated point of interconnection between the BT network and the Operators networks.

Implementation

5.23 It is that Director’s initial view that the final direction should form part of the interconnection agreements in force between BT and each of the Operators.

Conclusions

5.24 Having duly considered the representations made by BT and the Operators in response to this request for a direction and the matters set out in Regulation 6(8) of the Telecommunications (Interconnection) Regulations 1997, the Director is minded to conclude that BT should continue to provide an overflow facility for NTS traffic terminating on the Operators networks. Further, where an Operator requests to be provided with an overflow facility, the Operator should be required to Fully Provide its links to the Required Grade of Service.

5.25 In the Director’s initial view the Operators request to be provided with an overflow facility on NTS traffic is a reasonable request given that the facility is currently being provided by BT. Further, the Director is of the initial view that BT has the ability to provide such a facility in light of its available resources, and the proposed obligation on Operators to Fully Provide their links to the Required Grade of Service where an overflow facility is requested. The Director is also of the initial view that there is a lack of any viable alternatives and that the potential impact on end-users of BT failing to provide overflow for NTS traffic is high.

5.26 The Director considers that this direction represents a fair balance between the legitimate interests of the parties to the dispute, and takes into account the interests of the users, the regulatory constraints on the parties, the relative market position of the parties and the promotion of competition.

Chapter 6

Consultation and timetable for responses

6.1 The Director’s draft determination is being made available to interested parties, together with the Director’s reasons, so that they may have a reasonable opportunity to make representations.

6.2 Please e-mail or send comments in writing to:

Sean Browne
Oftel
50 Ludgate Hill
London
EC4M 7JJ

tel: (020) 7634 5331
fax: (020) 7634 8949

e-mail: Sean.Browne@oftel.gov.uk

6.3 Comments on this consultation must be sent to Oftel by 25 March 2003. Oftel does not intend on this occasion to hold any comments-on-comments phase during which observations may be made on the representations made by others.

6.4 Confidential responses should not be sent via e-mail. Written comments will be made publicly available in Oftel’s Research and Intelligence Unit, except where a respondent indicates that a response, or part of it, is confidential. Respondents are therefore asked to separate any confidential material into a clearly marked annex. In the interests of transparency, respondents are asked to avoid confidential markings where appropriate.

6.5 The final direction will be made as soon as possible after the end of the above mentioned consultation period.

Schedule

List of Operators in dispute with BT and the date each entered into the Standard Interconnect Agreement with BT

Operator Date

Cable and Wireless plc 1 May 1998
Easynet Group 18 December 1997
Energis Communications Limited 20 June 1997
Ntl Group Limited 22 December 1997
Wavecrest (UK) Limited 10 July 1997