Select Committee on Trade and Industry Minutes of Evidence


  This memorandum is designed to assist the Trade and Industry Select Committee with its ongoing investigation into the work of OFTEL and, particularly, local loop unbundling ("LLU"). Each of the operators has been actively involved in the LLU process and has submitted orders for collocation space in both the first ordering round and the second ordering round. Three of the operators are actively involved in unbundling in other countries as well as the UK. Their commitment to the LLU process represents an investment amounting to several hundred million pounds and will lead to the creation of a substantial number of new jobs in the UK. For more information on the contributors, see the Appendix.

Why is LLU important?

  "Information, and access to information, continues to be the key driver of the growth and development of the Information Society and the knowledge driven economy" OFTEL, Access to Bandwidth: Proposals for Action, a Consultation Document issued by the Director General of Telecommunications, July 1999.

  LLU will open up the local access portion of BT's network to vigorous competition, thus eliminating the final barrier to the competitive provision of broadband services to customers. Broadband services include fast Internet access, fast data inter-site links, media services, business application services, and alternate voice services.

What is the goal of LLU?

  LLU will enable unrestricted access to broadband services by removing BT's stranglehold on its ubiquitous national local loop.

  This process is not about backbone networks. Since liberalisation in 1984, tens of billion pounds have been invested in broadband trunk and local networks but as we have seen, it is simply not viable to replicate BT's ubiquitous national local loop network. This is reflected in the fact that BT has retained about 80 per cent of the residential market and between 60-70 per cent of the business market in the UK.

  Even if it were possible to roll out one or a patchwork of local access networks, customers would still not have free and unrestricted access to a full choice of competitive services. Customers would be locked in by their network provider.

  BT's local access network is made of up ducts and copper and approximately 6,500 local exchange buildings. We believe that it is vital for public's substantial sunk investment in this network be unlocked for the benefit of everyone.

How do you deliver broadband services over copper?

  Copper lines need to be turbo-charged and effectively widened to get high bandwidth broadband services to the home and business using copper. The best available method is Digital Subscriber Line ("DSL") technology. DSL has certain limitations concerning the distance over which it can be provided.

What does this mean in practice?

  The best way for operators to provide services over unbundled local loops is for them to locate their equipment in BT's local exchanges ("collocation").

  Most operators would rather not fight BT for fair and reasonable access to its local exchange buildings but their choices are constrained by the physical limitations of DSL—enabled loops. Operators can use distant collocation, which involves installing equipment at premises in close proximity to BT's local exchange buildings but doe to the physical characteristics of the cooper loops, the effectiveness of DSL is reduced the further you are away from the BT.

  As BT itself has found, even putting DSL equipment in its own exchanges does not mean that all its connected lines can be turbo-charged.

Why not let BT have the monopoly on DSL-enabled lines and force them to sell services to their competitors over those lines?

  BT started to enable DSL lines once it became clear that OFTEL intended to mandate LLU and free and open access to BT's local exchange buildings. BT has currently fitted out 615 exchanges using its chosen DSL equipment and has plans to increase this to 839 by March 2001.

  Since June 2000, BT has provided a wholesale product to its competitors. BT's wholesale prices are not regulated, and indeed are subject to a number of complaints submitted to OFTEL by a number of operators and Internet Service Providers.

  As of November 2 2000, a grand total of 18,000 customers have been connected. BT woefully underestimated the complications of DSL installation and roll out. Despite intensive demand from customers and from service providers, the supply has been rationed.

  BT has recently announced plans to ration operators even more by restricting the number of customers they can connect from January, with successful suppliers having their daily "quota" reduced from nearly 100 lines per day to just 20 lines per day, and other suppliers being rationed to one or two lines per day. This is in spite of a clear and vibrant demand and forecasting process in place since April 2000.

  At this moment, it is not clear if BT's own Openworld offering is having its installation ability rationed in the same manner as the other Operators.

  We believe that such an outcome is inevitable when one technology is chosen by one operator for UK plc. As always, it is the customers, crying out for faster Internet access, and the suppliers who are able to supply these customers, who lose out.

How can the benefits of broadband be brought to customers?

  We believe that a range of operators using a range of technologies to provide a range of broadband services, both regionally and nationally, at competitive prices can best satisfy customers' unmet demand for the widest possible variety of services. This can only be achieved by having access to BT's exchanges and copper on a transparent and non-discriminatory basis on reasonable terms and conditions.

What do we have so far?

  We do not have transparent and non-discriminatory access and we do not yet have reasonable terms and conditions. Indeed, we do not even have access. If we compare BT's ease of access and its achievements of DSL installations at 615 exchanges to date, competitors are only just having sites handed over for the first kit installs at their trial sites, after starting in April 2000. This is a total of 9 months pre-preparation for five sites.

  A direct UK comparison based on the current allocation to operators of space at BT's local exchanges would show that it would take the operators over 30 years to achieve parity with BT's own roll out.

  In France, it took an average three months (which included in some cases the granting of temporary licences to trialists), with the first live unbundled customer operational within two months, for trialists to install equipment at their trial sites. Today, over 31 operators are trailing DSL services in France.

  In Germany over 50 companies have licenses, and thousands of collocations are live. In the Netherlands over 200 sites are now live.

  In the UK, the five trial sites will be up and running contemporaneously with commercial services, to be available at a promised 190 sites by end June 2001. Compare this to BT's own 839 sites by March 2001.

  A very limited promised supply of loops should be available, approximately 2,000 in the same period across the whole industry. That works out at 63 per BT local exchange site. Each site is of course going to be shared between 10's of competitive operators.

How have we got here?

  Negotiations opened in July 1999. It has been a long, gruelling and resource-intensive process. This form of self-regulation, where industry seeks to negotiate commercial solutions with BT, cannot and indeed has not produced fair and equitable results.

  This should come as no surprise as it repeats a pattern first established in the early years of liberalisation. In that pioneering time, it took around three years unsuccessfully to conclude a commercial agreement on interconnection with BT. OFTEL was asked to step in and had to make a determination. It has been intimately involved in interconnection ever since.

  For LLU however, the industry, acting initially without the benefit of an LLU mandate, again took up the cudgels to attempt to get a commercial agreement from BT on LLU. At every critical stage, this approach has inevitably failed, requiring the industry as a whole to refer matters to OFTEL for timely and effective resolution.

How can the UK catch up with the US, Austria, France, Finland, Denmark, the Netherlands, Germany and Sweden?

  OFTEL must use the full range of powers available to it to enable competitors to enter the market on a level playing field with BT.

  We are glad that 14,000 customers to date can get access to broadband services using BT's DSL-enabled lines but this is not good enough for UK plc.

  Some may argue that BT should be stopped from further damaging competition and building on its headstart. We believe that the positive and most effective response is for OFTEL to focus its attention by using all the powers at its disposal to ensure that competitors can enter the market secure in the knowledge that the environment is fully transparent, non-discriminatory, quick and reasonable, and that the key supplier offers its copper and its local exchange buildings at cost-based prices.

  We would hope that OFTEL should employ a similar approach to BT's wholesale DSL-based service. We are aware on a number of ongoing formal complaints that aim to secure a competitive offering from BT to its competitors.

What are OFTEL's existing powers to act?

  BT is primarily regulated by means of its licence. Unless BT is specifically required to do something under its licence, OFTEL can rely on its powers under the Competition Act 1998, in particular in relation to the prohibition on abuse of a dominant position.

  OFTEL in April 2000, modified BT's licence so as to include an LLU mandate at Condition 83 of BT's licence. Condition 83 came into force in August 2000. This obligation was effectively negotiated between BT and OFTEL and inevitably contains areas of compromise.

  This negotiation flowed from the licence modification rules—under the Telecommunications Act 1984, a licensee must consent to a modification or the proposed modification is referred to the Competition Commission. OFTEL did take into account some operator concerns but it seems inevitable that the regulator would be keen to obtain BT's consent in order to avoid a having to refer the matter to the Competition Commission as the only way to secure modification of BT's licence.

  Where Condition 83's compromise areas prove difficult in practice or act as barriers to achieving policy objectives, it is open to OFTEL further to modify BT's licence and change the terms of Conditions 83. OFTEL could do this either with BT's agreement or, if that was not forthcoming, by referring the matter to the Competition Commission. This could take some time but it would be worth it to get the regulatory regime right.

  In the event of a breach of any current requirements, OFTEL has a range of options that it could use to ensure fair competition. OFTEL can enforce Condition 83 using its statutory powers under the Telecommunications Act 1984. OFTEL can grant rapid relief to operators about to suffer loss or to address potential licence breaches using provisional orders. Continuing behavioural issues can be addressed using final orders. OFTEL can issue orders following explicit complaints or after an investigation on its own initiative.

  OFTEL has powers under the Competition Act 1998 to act against abuse of a dominant position. OFTEL therefore does have power to grant rapid relief where this is warranted. Ultimately, organisations found to be breaching the Competition Act can be fined. To date, OFTEL has chosen to rely upon its powers under Condition 83 and BT's licence.

What does this mean in practice?

  OFTEL must rigorously audit BT's behaviour and the resources and capabilities it has put in place to meet the reasonable demands of the industry (as expressed informally in January and in June 2000 and formally on 12 September, 2000 and 7 December 2000).

  Where difficulties arise which threaten the process, OFTEL should seek swiftly the fastest way to resolve this, whether by issuing a subject specific policy statement after consultation with interested parties or by relying on its existing powers to address such threats. OFTEL has not, in the past, acted as quickly as it might have.

What in the short term are the next major issues of concern?

  The short term issues of principal concern are: BT's resources or lack thereof and the costs of the process.

  OFTEL must ensure that BT has or will have sufficient resources to free up the local access bottleneck. This is straightforward where the resources are external. For example, BT has employed external building contractors and surveyors to scope out the possibility of applicants being housed in BT's local exchange buildings and then design the solution.

  Where the resource issue concerns BT's ordering and provisioning systems to connect loops and related software systems to automate otherwise manual processes, the issues are many and complex but come down to making the resources available effectively to enable operators to submit their orders for local exchange space and for loops. This area is traditionally the area causing greatest delay to the introduction of new products and services by BT.

  Space in the local exchange buildings is also a resource. Any unallocated space in the local exchange buildings should potentially be available to operators for installation of their chosen DSL equipment. Currently BT is not offering space other than in separate and potentially costlier rooms. Another option is distant collocation but given the physical limitations of DSL, this may not be the optimal solution for the provision of high quality broadband services to customers.

  There remains substantial uncertainty and lack of transparency surrounding the costs of obtaining access to BT's local exchange buildings and related services. There are some interesting examples of what BT considers to be reasonable space preparation, for example, repainting, floor coverings, and additional building security systems and separate access, all of which adds both to cost and length of time taken to prepare collocation space, and seem at best curious and at worst, spurious.

13 December 2000

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