Examination of witnesses (Questions 175
- 199)
TUESDAY 19 DECEMBER (MORNING) 2000
MS EMMA
GILTHORPE, MS
ANNE MACHIN,
MR HUW
SAUNDERS and MR
BILL ALLAN
Chairman
175. Good morning, ladies and gentlemen. I believe
it has fallen to you, Mr Allan, to introduce yourself and your
colleagues.
(Mr Allan) Good morning. Thank you, Chairman. Bill
Allan, Chief Executive of Thus. I am joined by Huw Saunders from
Kingston; Emma Gilthorpe, from Cable & Wireless; and Anne
Machin, from Energis. We are here representing the alternative
operators this morning, and we are grateful to the Committee for
the opportunity to speak to you today. We are also grateful for
the recent intervention by Oftel and Government to try and improve
the process for unbundling.
176. I think it is fair to say we want to try
and avoid today (since this is the pantomime season) the "Oh,
no, you did"/"Oh, no, we didn't" approach to this,
but of necessity I think we are going to have that, in the sense
that you are going to be telling us a slightly different story
from the one we heard from Oftel and the one we are going to hear
from BT this afternoon. The impression I have is that there seems
to have been communications difficulties sometimes because there
was a lack of understanding on each side, or on all sides if we
take the triangle with Oftel as part of the process. On reflection,
do you think there were problems in the approach you had towards
the issue that, on reflection, you might have been able to deal
with differently? If you could start from that side and clear
away some of that aspect of the clutter, as it were.
(Mr Allan) I think in fairness, Chairman, there were
a number of statements made at the beginning of the year, certainly
by myself, which were reported in the press about my company's
position which we have not changed. We expressed concerns about
the process in terms of providing an equitable service with BT
and we needed the regulator to intervene. Since then there has
been increasing uncertainty in the process. I think there has
been confusion in some respects about the hype regarding DSL provisioning
and the realities regarding local loop unbundling. Sometimes I
feel the issues regarding how you unbundle the local loop has
been confused with the technology which can be applied to the
web. If you look at the industry position over the year, quite
a number of our competitors made old assertions about the opportunity
to roll out this type of service. There were bald numbers facing
the press. At least five major players have now withdrawn from
the market and many others have scaled down their ambitions. Whether
or not there was a problem in terms of communication, we would
argue that we argued the point clearly and concisely to BT but,
sadly, we do not believe that BT responded in kind. We also argued
that we felt the regulator should have intervened more quickly
than he did: he now has, and many of the steps he has taken recently
have been helpful, but it is a question of too little, too late.
177. For example, the bow-wave process of allocation—are
you happy with that? Do you feel you have had a fair crack of
the whip? What is the view of the participants? You may all wish
to answer this question because you may have different slants
on it.
(Mr Saunders) I think it is fair to say, Chairman,
that the industry understands there is bound to be a problem in
matching demand with supply. BT obviously has to find space within
its buildings. The difficulty I think we have encountered is really
best expressed by trying to understand the information flow between
BT and industry. At no time, I think prior to BT expressing during
the last three months that there have been specific problems at
specific exchanges, have we been able to pin down the scale of
the problem. The bow-wave process is imperfect. I think everybody
understands that. Really it is a question of coping with the positive
information we had originally, which has really pinned down the
specific problem: that BT never took a proactive stance on trying
to indicate what space was available so, as an industry, we could
understand how best to fit our demands within that space. That
is not something we think is industry's fault, it is down to BT
failing to actually grasp the scale of likely demand and reacting
accordingly in terms of going out and surveying their own buildings
and indicating to industry where there is likely to be a mismatch.
178. I can see BT being cast in the role of
the baddie here, to use the pantomime metaphor. Surely the fact
is that, unless they were really required to do so by something
more than a vague saying, "It's a good idea that we have
local loop unbundling", they are not going to give up one
of their assets; they are not going to change their style of management
from operating one kind of business to operating another. Do you
think, therefore, had you been in BT's position you would have
acted differently from them?
(Mr Allan) Chairman, I am not sure if that is the
point. I think the point is that BT have done certain things in
the marketplace this year they previously have not been allowed
to do. For example, had they offered retail prices at less than
cost for certain products and implemented services into the marketplace
without having agreed a wholesale profit with the industry then
this would give them a head start. It is not a question of allocation;
there are other questions here as to how BT behaved. There are
certain things which the regulator could have stepped in and taken
measures against which did not happen. If you look at internet
access in the UK, BT was not a leading provider of internet services.
If you look at ADSL, and the position they have been able to take
advantage of, BT now has the largest potential market share and
the fastest roll-out of service because the industry cannot offer
an economic service because BT is currently offering a product
which, we would argue, is less than cost. BT have said for certain
services there are pull-through revenues from e-commerce with
advertising because it is not clear where these revenues are coming
from. At this point in time the economic viability of local loop
unbundling and ESL(?) provisioning is unclear, because the alternative
carriers cannot provide economic services at good rates to their
customers.
179. There are various remedies for issues such
as this. For example, you could approach the Office of Fair Trading.
You could go to the Competition Commission. There are remedies
you could have sought, but you have not done so?
(Mr Allan) I think in fairness we worked with Oftel.
Oftel have taken certain steps and investigated these questions
and there has been a recent announcement by Oftel on this. There
have been certain steps taken, but we have tried to operate within
the framework, and there is the Competition Act as well so there
are certain protections there without having to go to the Office
of Fair Trading.
(Ms Machin) We have raised various issues with Oftel
and made representations and put complaints into Oftel. I think
as an industry we prefer to go through the route trying to bring
these issues up with Oftel and get Oftel to resolve them for us,
rather than take it on to the OFT.
180. We have come back to the Oftel one, but
perhaps we could stick with this whole question of exchanges and
the choices you have made. How many of your first choices were
listed in the first wave?
(Ms Machin) If you mean by "first choices"
within, say, the first 250 sites, probably round about ten.
(Mr Allan) The same. We are looking at similar exchanges.
(Ms Gilthorpe) We had less than 30 out of 381 in the
first bow-wave.
(Mr Saunders) We had 19. Chairman, I think there is
an issue we ought to try and clarify, which is this first 381
were accepted by the industry as a compromise. They were not the
first priorities that any operator had; simply those were the
only sites we thought we could address in the short-term in the
absence of an agreed method of allocating scarce space. As far
as most operators were concerned, they were way down our priority
list; that was a compromise agreed by industry in order to move
the process forward and not waste resources and leave BT sitting
on its hands while we sorted out the hard nut of the allocation
process.
181. What about the very popular stations, where
a number of people wanted a bit of the action? I think anything
in excess of nine it was deemed nobody would get in; there was
not even going to be some kind of raffle-type arrangement.
(Mr Saunders) It is not that nobody would get in,
it was a question that if there was a mismatch between demand
and supply how would that be managed. That has now been the subject
of determination and, as a result, the latest bow-wave process
that was run seven days ago has actually identified the top 360
sites by priority by all of the operators. We received the initial
results, on an individual operator basis, as to how many of our
priority sites are in that tranche of 360, and those are now going
to initial survey. I can say on the record, we have actually got
248 sites that we wanted within that first 360. Whether or not
we get space is a different issue which will become clear as those
surveys are processed.
(Ms Machin) I think that is part of the problem we
have with this, because of the time it takes to go from initial
survey through full survey and then the offers made by BT. There
is no certainty until you have actually agreed the offer from
BT that you are actually going to get space in that particular
exchange. We have only just received some of the offers back from
BT from the first part of the bow-wave process; so we are only
today looking at about 15 offers through from BT on the sites,
and it is only now we actually know which sites we will be able
to roll out to. This makes it very, very difficult for an operator
to actually construct a viable business case or to work out operationally
how you want to roll out, because you do not know when you are
going to get sites, which sites you are going to get and whether
they will be geographically close. In fact, we have got 10-15
sites and they are spread throughout the UK which makes a roll-out
extremely difficult.
182. Can I just get a handle on the significance
of nine: was this a figure you all agreed? Was it plucked out
of the air? Is there any reason for it?
(Mr Saunders) Basically it is an estimation by Oftel,
rather than the industry, of where the space problem was likely
to hit. In other words, at what level was there likely to be a
mismatch between supply and demand. I will not say it was entirely
arbitrary but it is of an arbitrary nature. It may or may not
be right in retrospect. In practice there have been sites within
that 381 where supply does indeed not match demand.
183. It has been put to you that Oftel are pretty
strong on the legal side—they know what they should or should
not be doing—but they are not very strong on the technical
side in the sense that maybe they have not been able to recruit
enough of your well paid engineers and consultants. It has been
put to me they fall down sometimes on the technical side. Is that
a view you would share?
(Ms Gilthorpe) I think the operators and the industry
generally would be sympathetic to the general resource problem
that Oftel faces in competing for good quality individuals; but
the reality is that the industry do provide a lot of information
and expertise to the regulator and have done throughout this process
in order to keep them informed. Whilst things have improved significantly
in the last few months, in the early stages of the process I think
there was a question as to whether the right people at the regulator
were involved. I guess both the industry and the regulator are
guilty of not raising that to the fore early on. It does still
come back to the fact that BT is obliged to unbundle its local
loop. If Oftel is sure of its legal ground then I am somewhat
surprised they have not sought to use their powers.
(Mr Saunders) As an industry the resource issue is
predominantly one which lies with Oftel, but mostly lies with
BT. A lot of the problem is to do with unbundling the local loop,
otherwise it could be solved at a stroke and certainly could be
alleviated by BT putting more resource into the planning process
to enable us to actually shorten the period between ordering sites
and making them available to deploy our services. I think there
is considerable concern in the industry that BT has consistently
under-estimated the resource requirements.
184. Even now?
(Mr Saunders) Even now.
Mr Laxton
185. Do you now have access to the exchanges
that you would desire to have access to? Is that the situation
following on from Oftel's decision on the second bow-wave to bring
in another 360 exchanges?
(Ms Machin) No, those exchanges are the exchanges
that will be initially surveyed. We have an indication of each
of the ones that we selected we potentially can get into; but
until the surveys are completed and we go on to full surveys we
will not know whether there are any specific restrictions on space
within those exchanges.
186. With respect, that was not quite the question.
My question was: are you now satisfied with the exchanges you
want access to, as a result of Oftel's announcement for a further
360 exchanges, in theory, never mind about the issue of whether
you can get into them in a practical sense—do you now have
the exchanges you require access to?
(Ms Machin) Those are the ones, yes.
(Ms Gilthorpe) It varies from company to company.
(Ms Machin) Predominantly, yes.
(Mr Allan) It is helpful, yes.
(Ms Gilthorpe) It is progress, but there are probably
another 300 or so we would like to get access to going forward
as the process continues.
(Mr Saunders) The key issue then is, access is possible
in some of those exchanges, as Anne pointed out, but the big problem
is when will we get it? At the moment the current process indicates
that we will not get physical access to deploy our equipment and
services in most exchanges until probably May or June, and that
is unacceptable.
187. The Chairman is making reference to the
decision by Oftel to take out of the frame those exchanges where
there is a lot of competition for space for nine or more. Do you
think there is going to be a possibility of an arrangement, or
would you be prepared to participate in an arrangement, where,
say, ten licence holders wanted to get involved in a particular
exchange to do some trading of space if there was a problem? Is
that something you would be able to come to some agreement with
amongst yourselves?
(Mr Allan) It is something we suggested going back
to the beginning of the year. At one point there were indications
that 30 carriers wished access to exchanges and physically that
is very difficult to manage and there are different ways to get
there. This would also need to include BT companies. BT would
have to be a service provider in the same way as companies here.
With some of the issues we have wrestled with there were two trials:
there was an option four trial, which is a wholesale arrangement
whereby we take BT's service and offer it to our customers. We
are doing that, as we speak, but we do not have service level
agreements in place to the quality I need and the guarantees I
need to give my customers. It is rather difficult to manage if
BT does not deliver their promise because it is my brand and my
reputation that gets harmed. The second issue was going to be
congregation trials. We were given Edinburgh to begin in December
and the idea there was that carriers were working with BT trying
to work out the practicalities to make this happen: how many different
operators you can accommodate and how physically to make the equipment
work. Our trial has been pushed back to February, so this has
been a moving target in respect of: the whole dynamics as to how
the process will work is changed today from what it was in terms
of how we understood it was going to work at the beginning of
this year. That makes it very difficult for us to plan in terms
of businesses; and it makes it difficult to advertise and market
the services when we do not know how we can do it and when we
can do it.
188. It may perhaps be commercially confidential
in that there are four of you here and you are in essence competing
with each are: but are you able to tell us how many survey requests
each of you have put into BT, or is that something you want to
shy clear of?
(Ms Gilthorpe) 100 per cent. for Cable & Wireless
(Ms Machin) 100 per cent. of first base.
(Mr Allan) 420 exchanges.
(Mr Saunders) The way the process works at the moment
is that each bow-wave is now taken in isolation. On this phase
we have asked for around 360; but previously we indicated we wanted
a lot more sites than that. The actual number is still volatile
which partly depending upon what sites we get over what period.
Mr Berry
189. In your written submissions you were pretty
critical of both BT and Oftel—phrases like the "parlous
state of Oftel", "BT is anti-competitive", "prevarication"
etc. etc. That is pretty strong stuff, but these submissions,
I know, were mainly written in November. Are things moving on
now? Given events this month, do you still feel as strong about
the parlous stage of Oftel and BT's anti-competitive practices?
Has there been any evidence of change since you drafted these
memos?
(Ms Gilthorpe) I think there has been some progress,
in that Oftel and, indeed, the Minister's intervention has meant
we have gained commitments from BT which, whilst they have been
comments which have been mooted before, we did not have any actual
firm commitment, for instance, to the number of sites they were
prepared to roll out. The reality, however, is one of the key
issues relating to the discrimination that BT is engaging in,
in that it is favouring its own business, i.e. it is getting access
to in excess of 800 sites by July, whilst we will only have 200
in the buildings and 400 distant sites. There is a case that sits
with Oftel at the moment which we put to them in the middle of
September which we are asking them to rule on, which is fundamental
to all of our businesses. It is very important that BT is brought
into this process, otherwise they will continue to roll our services
ahead of the rest of the marketplace which is neither beneficial
to us from a business perspective, nor indeed to the consumer.
190. Because of all these problems, delays and
so on are any of you reconsidering investment in local loop unbundling?
(Ms Machin) Energis are certainly considering scaling
back on our initial investments, simply because of the uncertainties
and the difficulties that we are having on constructing business
plans. As I say, you do not have any certainty, for instance,
about geographic locations you would be at. It is very difficult
to go back on networks that need to actually bring traffic back
on to our own networks if sites are geographically dispersed,
initially certainly, and we have no visibility of whether we will
get critical mass in a particular area; so these investment decisions
are hard to make. As a result of the position we are in now, where
we actually have to commit to BT to take space in those rooms,
yes, we are scaling back. We are not pulling out. We will be going
forward with a significant number but we will be going forward
with less than originally planned.
191. I do not want to sound discourteous but
is there any risk here of crying wolf?
(Ms Machin) No.
(Ms Gilthorpe) I do not think that is justified. There
are a number of operators who have already made it clear they
are going to pull out. None of us can be sure as to what the motives
are of those operators because it remains commercially confidential
to them; but I think we see a trend which takes a state of being
within the marketplace that is reflected by the level of uncertainty.
If there was a certainty of regulatory environment then I personally
believe it would be highly unlikely, that there would be so many
operators that would have chosen not to take part in this process.
No, I do not think there is an issue of crying wolf.
Mr Morgan
192. Can I pick up Ms Gilthorpe's previous answer.
While you are saying that BT had an unfair advantage because,
by definition, you mentioned they have access to all their exchanges,
and you mentioned 800, and you do not and therefore they can potentially
go ahead and roll out service quicker than you can—surely,
even with the best will in the world you are never going to be
able to get into all 800 exchanges anyway right away, are you
not saying BT should be artificially stopped from rolling out
services until such time as you have caught up?
(Ms Gilthorpe) I think the ideal situation would have
been that we all started at day one with a process that worked
and so we all applied for exchange space contemporaneously. That
has not now happened, and certainly Cable & Wireless's position
is that BT has managed to already roll out a few hundred sites.
What is most important to us is that on a going forward basis
they are not allowed to continue to reap benefit from that advantage.
I am not sure there will be much value in attempting to turn back
the clock on BT; but certainly to bring them into the process
now has to be the objective from a competition policy point of
view. It is clearly not going to lead to a level playing field.
As I mentioned before, it is not at all good for the consumer
if there is no competition. BT are only speeding up their roll-out
now because of the competitive threat that is presented to them.
As I have said before, one of the points we need to get fixed
here is that for the exchanges they have not yet got access to,
they must be part of the process that operators are part of, so
we all have to face the same level of risk in making investment
decisions.
193. How does that work in practice? Are you
saying that BT cannot provide broadband services on exchange unless
somebody else can do it at the same time, or what? How are you
ensuring there is a level playing field?
(Mr Allan) It really depends how you are in competition.
How you want competition to be introduced. At this moment in time
it is an historical legacy. BT has a monopoly position over the
local loop, so that is the last connection between the consumer's
house or business to the exchange. The alternative carriers could
try and replicate that network but that would be a huge cost and
would also be a huge time constraint involved in doing it. It
is unlikely anybody would do it. If you look at the history of
telecom where innovation happens and where competition really
happens it is at the service level. The question is: how do you
get the services and different types of services to consumers
so they have choice? The access and the technology is largely
neutral. It is a question of how you deploy it. We would be happy
to cooperate in different ways of sharing access and sharing different
technologies to offer competition at a service level, and that
should be where the consumer benefits.
Mr Laxton
194. In your comments to Mr Morgan you said
that in an ideal set of circumstances you would wish to see the
ability for everyone to have access to roll out their services
at the same time, including BT. Are you seriously suggesting you
would expect BT to be in the business of providing access at every
exchange they own (because earlier you said you were looking for
100 per cent. access) the length and breadth of the UK, irrespective
of whether they knew there was going to be a demand there or not?
(Ms Gilthorpe) No, not at all. That is not what I
am suggesting, and I apologise if that is the impression I gave.
Of course, BT has to provide the information that allows them
to tell the industry how much space they have got and where. What
I am saying is that the way that BT businesses inter-relate with
each other, there should be a part of the business that does that—goes
around the exchanges and does the auditing of space—and
then the part of BT business which is separate which rolls out
its own DSL service should be treated the same way as the rest
of the industry. They have space for eight operators and, whatever
process applies to that, BT should be in the lottery process,
if you like, to see if it is going to be one of those eight operators
with the other side of business responsible for looking after
that facility. That is the problem we have. The assumption seems
to have been within BT that because it is all really part of the
BT organisation they get first advantage; they own the exchange
space and, therefore, they put all their kit in there; yet BT
is a dominant player in the local loop. If competition policy
is applied appropriately here they should be obliged to provide
that on non-discriminatory terms, not only to other operators
but as between their own business and other operators.
(Mr Allan) BT is divisionalised and have a structure
to do it.
Mr Berry
195. As you say, a lot of people hope local
loop unbundling will improve the service to the consumer. How
do you see demand for those products going? How do you see the
market developing? You have made some key assumptions about what
the effect is going to be of this whole process on the services
that are available and that consumers want?
(Mr Saunders) I think there is a fair variation in
individual companys' business plans is the bottom line. There
is a significant range of potential service offerings that DSL
access technology can actually support. We are already deploying
mass market residential orientated services, and are similarly
deploying services addressing small and medium enterprises in
the business environment. I guess individual operators seeking
to make use of local loop unbundling capabilities and DSL technologies
will have a variety of different aims and objectives, indeed business
cases, they are seeking to fulfil. I do not think it is the case
that there is a single set of applications that will be delivered
by most operators to the same market sector.
Mr Morgan
196. When the great day comes and you actually
get into a BT exchange, can you tell us what exactly happens?
What do you need in there? How long does it all take, or do you
not know yet?
(Ms Machin) Once we get the site handed over we then
have to instal our equipment, our electronics equipment, a piece
of equipment called DSLAMS. We think that will take somewhere
up to around four months for the first set of exchanges. There
are various processes for the metallic path facilities through
from BT. There is various engineering work that needs to be carried
out. We think from the actual date the room is handed over to
us, the first exchanges will take about four months before we
can deliver service to our customers.
197. When you say a room being handed over to
you, if two or more of you are in the same exchange, how do you
physically separate your work from each other, or does that present
additional problems?
(Mr Saunders) There are standard lay-outs—the
so-called "hostel" developed by BT and industry to have
standard rack spaces with delineation between different operators'
equipment that ensures that is not a problem. Whether or not that
hostel(?) design is the most appropriate use of space is a matter
of some dispute between BT and industry. Certainly going forward,
we would hope that more effective and efficient means of using
space are developed. Just to pick up on a point, I think it is
probably true that in the first instance there will be some significant
time lag between the so-called hostel hand-over and the actual
service delivery. However, as time goes on that time frame will
reduce. I would certainly anticipate it would be a matter of weeks
rather than months. By the time we get to the hundredth hostel
or two hundredth hostel from our own perspective we believe, providing
we have got sufficient visibility when hostel hand-over will take
place, we should be in a position to actually start delivering
service to customers within the matter of two to four weeks.
198. Is that as you gain experience from the
process?
(Mr Saunders) I think that is probably true, and also
a better understanding of the physical reality of the BT network.
I think there are some uncertainties still about what service
can be delivered over what lines etc.—a lack of information
again from BT, perhaps, but that is something during the trials
phase we will be starting in the next few weeks we would hope
to better understand.
199. What sort of investment are we talking
about in terms of a typical exchange in terms of cash?
(Mr Saunders) It depends how many customers you are
seeking to address really.
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