Select Committee on Trade and Industry First Special Report




Oftel welcomes the Select Committee's report published on 20 March. As the Committee notes, the picture has changed significantly since it took its last oral evidence and is still developing. In this Memorandum, Oftel sets out the current position and comments on a number of the Committee's recommendations and conclusions. This Memorandum updates and expands Oftel's note of 9 May 2001.

The position on LLU in the UK at present is that:

  • all arrangements required by EC Regulation (EC) 2887/2000 which came into force on 2 January 2001 are in place;

  • all 4 trial sites are now operational with 8 operators participating;

  • the first commercial LLU facilities were handed over, with unbundled loops provided and operating, in April 2001;

  • a total of 15 distant location facilities have now been completed and handed over to operators;

  • further orders for distant location sites are now being provisioned and the first nine physical co-location rooms are also being constructed; with further orders expected over the coming months;

  • details of sites where orders are confirmed are posted on the LLU Fact Sheet on Oftel's website;

  • from April 2001, the ordering process has been "business as usual" which means that operators can order at any of BT's exchanges at any time they wish.

This progress has been secured with Oftel leading the process. Oftel has acted firmly where necessary, and will continue to do so. BT and a number of operators have also committed significant management resources and have learnt from experience in the early months. During this period there has been a significant worsening in the financial climate, which has led to a slowing of interest in, and some withdrawal from, LLU. A further contributory factor has been uncertainty over BT's ability to keep consistently to expected timetables for delivery of LLU products.

As a result of these factors, the number of facilities built and unbundled loops delivered is much less than first predicted. This reduction in demand has necessitated further changes to the processes which were designed to accommodate much more. Nevertheless, a firm and clear process is now established which, combined with the further Oftel regulatory action outlined in this Memorandum, will provide a sound basis for future demand.

Response to the Committee's conclusions and recommendations:

Broadband Fixed Wireless Access

(A)It is unfortunate that the Broadband Fixed Wireless Access auction was not as successful as had been anticipated. We welcome the Minister's recognition that there is a role for public sector intervention in the provision of infrastructure in such cases where the market cannot be expected to provide it (paragraph 8).

This is not an area of Oftel's responsibility.

Bow Wave Process

(B) The first list of exchanges to be opened up comprised those where there was a relatively low level of demand. The inability of industry to agree the allocation process unfortunately meant that the first Bow Wave allocation devised by Oftel consisted of exchanges which were low down on many operators lists (paragraphs 17 and 18).

(C) If the first Bow Wave list has now been largely disregarded, the wisdom of proceeding down that route in the first place must be open to question. The situation is in danger of becoming farcical. Some of the operators who have been quick to criticise both Oftel and BT for holding up the process of LLU now seem unprepared to commit themselves financially. The production of one Bow Wave list in November 2000 was closely followed by another in December 2000. This was followed by the 18 January announcement of a further change, and then the 19 February announcement that the Bow Wave process has in effect been abandoned. This sorry tale does not suggest a high level of administrative competence among those involved (paragraphs 21 and 22).

(D) The problems that arose in LLU in the autumn of 2000 cannot be attributed solely to one part of the industry. BT dragged their feet, other telecommunications operators could agree neither amongst themselves nor with BT, and Oftel should have intervened earlier than they did, and made a better fist of the implementation once engaged in the process (paragraph 27).

The Bow Wave Process was developed by industry in order to deal with the perceived high demand for unbundling facilities during autumn 2000. Due to a dispute between industry players over the minimum increment for space allocation Oftel was asked the determine the issue. Oftel did this speedily whilst continuing to allow an initial allocation of space in exchanges to go ahead. This showed Oftel's flexibility and pragmatism at a difficult period in the unbundling process.

The Bow-Wave Process was ended in April 2001 when it was no longer required as there had been a sharp reduction in demand for space in BT exchanges by competitors and in the light of BT's assessment that it had sufficient resources to process demand for co-location expeditiously on a 'business as usual' basis. This in turn was due to the process streamlining described later in this memorandum and based on the experience of the early months of the process


(E)A number of factors, including adverse press coverage, conspired to advance the timetable for LLU in the UK. The European Regulation clearly had the effect of concentrating minds (paragraph 29).

(F) There is still a considerable amount of uncertainty surrounding the timing of LLU and the ultimate delivery of high speed services to customers (paragraph 39).

Oftel took the decision to require LLU in November 1999, well in advance of the EC Regulation. Oftel welcomed the EC Regulation which provided a firm EU-wide legal framework. Oftel has scrutinised the detail of a large number of aspects of unbundling, making formal Determinations of some and overseeing the provision of satisfactory terms in other cases. It is unlikely that this work will cease for some time ahead. Nevertheless, firm ground rules have been set. These, combined with the further work in hand (detailed in the Annex) to ensure that BT offers reasonable terms and delivers to them, should mean that future take-up will be driven primarily by commercial demand for DSL service, as is appropriate.

As noted above, commercial delivery of unbundled loops has now begun and LLU is into its implementation phase. Ordering of all unbundling facilities has been on a business as usual' basis since May 2001. However, the level of delivery of high speed services will depend on:

  • the extent of consumer demand for the services on offer;

  • the ability of BT's competitors to fund the investment necessary to compete vigorously
  • the reasonableness of the terms on offer from BT to its competitors for the key unbundling services and confidence in BT's delivery of products on time;

  • the availability of an automated Operational Support System (OSS) capable of efficient handling of orders in volume.

These conditions are "necessary conditions" - unbundling will not happen on a significant scale unless they are satisfied. The first two are outside Oftel's remit and it is the commercial decision of operators whether they wish to fund rollout of infrastructure and services. Nevertheless, Oftel has been devoting considerable effort to investigating and where necessary ensuring the reasonableness of BT's terms of supply, by for example:

  • investigating whether charges for physical and distant co-location are reasonable;

  • investigating sharing of ducts between BT and operators using distant co-location facilities;

  • proposing to require "co-mingling" of BT and operators' equipment in the same room of an exchange building;

  • determining the contractual terms in the Access Network facilities agreement;

  • investigating alleged "undue discrimination" by BT as between provision of services to itself and provision of services to competitors;

  • investigating the cost of provision of backhaul services to allow competitors to connect their equipment at BT exchanges to the nearest point of presence of their own networks;

  • pressing for more flexibility by BT in providing physical co-location facilities economically to meet the needs of competitors who wish to start service at different times;

  • monitoring the timely provision of co-location facilities and loops under the business as usual process;

  • working to resolve a dispute between operators and BT over the setting of service levels for the provision of unbundling facilities; including a reasonable level of liquidated damages.

Further detail on progress on these matters is set out in the attached Annex.

BT missed its deadline (2 July) for delivery of a functional automated OSS and has recently proposed a revised deadline of 5 November. While this is not an immediate problem as orders can at present be processed reasonably efficiently using a much simpler interim system, the automated system will become necessary as volumes build up. Concerns that the deadline might slip further increases the possibility that operators will delay orders for co-location, to avoid the risk of having facilities lying largely idle due to the inability of BT's systems to cope with demand. Accordingly, Oftel will take appropriate regulatory steps to require BT to adhere to its revised timetable so that further slippage does not occur.

Kingston Communications

(G)We trust that Kingston Communications are now working towards LLU (paragraph 47).

Kingston Communications has, as required by Regulation 2887/2000 published a reference offer for the provision of unbundling services.

Practical Considerations

(H) We understand that Oftel has had little hands-on experience of the practicalities of LLU and that some senior officers had not even visited an exchange. The episode has shown up some weaknesses in Oftel's grasp of the technical issues involved (paragraph 35).

(I) We look forward to the results of Oftel's investigation [into the costs of co-location space]. We trust that BT and the rest of the telecommunications industry will work together to find innovative ways to accommodate operators in sites with high demand and limited available space (paragraph 38).

Oftel does not understand the Committee's view that there is weakness in its grasp of the technical issues involved. Review of the technical issues Oftel has overseen shows that its technical resources, supplemented where necessary by appropriate external expert advice, have been and remain, fully adequate for fulfilment of its responsibilities. In particular, all those with day-to-day technical responsibility for unbundling have more than adequate familiarity with BT exchanges.

Oftel has already secured significant reductions in pricing of distant location facilities and escorted access charges and has issued a draft direction which, if confirmed, will remove one off site clearance and asbestos removal charges from operators bills for physical co-location. Oftel is also examining whether BT's designs for shared co-location space in exchanges are least cost and whether a cheaper design can still meet operators needs. Oftel has issued a draft Direction which states that BT should meet reasonable requests for co-mingling (where operators site their DSL equipment in the same operational space as BT with no physical segregation). If confirmed, the draft Direction will give operators another option for co-location. Oftel also continues its scrutiny of costs and will complete its investigations shortly. Further details of Oftel's investigations can be found in the attached Annex.

Terms and Conditions

(J) The terms and conditions upon which BT will make available unbundled local loops were yet another facet of LLU in which Oftel found itself the ultimate arbitrator (paragraph 41).

Oftel has undertaken, and continues to undertake a substantial amount of work looking at the terms and conditions upon which BT will make unbundled local loops and associated facilities available. Details of this work are described in paragraph 10 above and in the attached Annex.


(K) We look forward a quick resolution of the complaint against BT over ADSL. If LLU is to work, it is important that BT is not awarded a de facto competitive advantage (paragraph 45).

The complaint alleged that BT's service provider business, BTOpenworld, was receiving a cross-subsidy from BT. The retail price charged by BTOpenworld is less than the wholesale price charged by BT. BTOpenworld's business case relied on secondary revenues from advertising and e-commerce. Oftel examined BTOpenworld's business case and the assumptions underlying it to see whether there was any evidence of anti-competitive behaviour.

In January 2001, Oftel concluded that there was no evidence to suggest that BTOpenworld was receiving a cross subsidy. In recognition of the uncertainties in what is very much an emerging market, however, Oftel committed to continuing to monitor BTOpenworld's performance against its current business case to assess whether in practice its assumptions are realistic. Oftel proposed to do this six months and a year after the original decision. Oftel is currently collecting information to carry out the first review and hopes to reach a decision in the near future.

If, in the course of monitoring BTOpenworld's performance against its current business case, it should emerge that BT is or has been using profits from its wholesale DSL business (where there is little competition) to subsidise losses in BT Openworld Oftel will take the appropriate action. BT would then have to take action to remedy any such 'margin squeeze' by either lowering its wholesale prices or raising its retail prices.

(L) Despite the complaints of other operators, one positive result for consumers from LLU to date is the speedier introduction of BT's ADSL programme (paragraph 46).

BT currently offers four wholesale DSL services which are available to all service providers, as well as BTOpenworld, on non-discriminatory terms. BT has enabled nearly 900 exchanges covering over 50% of UK households. BT expects to have enabled 1000 exchanges covering 60% of households by the end of September 2001. Over 160 Service Providers and operators have taken up BT's wholesale ADSL products (and offer ADSL services or are planning to). Nearly 70,000 end users have had ADSL installed of which over 30% are businesses.

There are two major developments in prospect which will benefit consumers. ADSL is a distance-dependent technology and is currently limited to those within 3.5km of an ADSL-enabled exchange (as measured by length of line). This means that at present only 70% of those living in an ADSL-enabled exchange area are able to receive ADSL services. From 18 July, however, BT will be introducing a rate-adaptive modem which will increase the reach of ADSL to include those located up to 5.5km from an ADSL-enabled exchange. This will mean that c. 90% of those living in an ADSL -enabled area will be able to receive ADSL services.

In addition, BT is looking at introducing 'self-install' which is already available in other countries such as the US and France. Currently, installing ADSL requires a visit from a BT engineer. Oftel is urging BT to introduce a self install option as soon as possible and expects this to significantly reduce prices.


(M) We look forward to hearing that the UK has indeed caught up with Germany and the Netherlands by the end of 2001. We recommend that the Government press the Commission to produce a scoreboard on progress on unbundling as part of the e.Europe benchmarking programme. We recommend that the Government encourage the European Commission to produce a similar document [to Oftel's factsheet] detailing progress across all Member States (paragraphs 49 and 52).

The Committee was concerned that progress in the UK on unbundling was falling behind the rest of Europe. Clearly, Germany in particular embarked on the process much earlier, for different policy reasons, and has a head start. Oftel believes that it has scrutinised the detail of at least as many aspects of unbundling as other European regulators and put appropriate regulatory measures in place to deal with the issues identified. Oftel considers that the regulatory climate for unbundling in the UK is as attractive as anywhere in Europe. Subject to commercial demand, this should be apparent in comparative statistics over the coming years. Oftel is fully committed to maintaining a close dialogue with European and other regulators on this subject. Good practices which are found to work well elsewhere will be considered for adoption in the UK.


(N) It is of some concern that uncertainty has led to major players ceasing to participate in LLU. We have gained the impression that there may not be quite the demand for broadband services, particularly from domestic consumers, that was originally anticipated (paragraph 50).

(O) It would appear that there are still some considerable challenges ahead before LLU is successfully implemented. We can only hope that the lessons from the process of LLU to date have been learnt. The UK cannot afford further delays if we are to meet the obligations set down by the European Regulation (paragraph 51).

(P) The process of LLU to date has run less than smoothly. The blame for the delays and problems incurred to date must lie at the door of all participants in the process. Whilst the importance of LLU should not be overstated, it is an important delivery mechanism for broadband services. If the Government is to meet its objective of making the UK one of the world's leading knowledge economies, LLU must be successful (paragraph 53).

Oftel too is disappointed that the number of operational LLU sites is much less than originally anticipated. The main reason is less demand from operators than first forecast. A key factor has been the adverse financial climate. Some operators have also decided not to pursue unbundling as the route to providing high-speed services to their customers. Uncertainty over BT's timely delivery of the process and costs involved has also contributed. Oftel continues to work hard to address these latter issues as explained in this Memorandum.

The withdrawal, for the time being, from the unbundling process of a number of players has undoubtedly acted as a brake on the momentum of orders placed for co-location "hostels" within BT exchanges. This has held back those operators who have remained committed to the process. The fact that some operators have withdrawn is not a surprise. Indeed, it was clear from the outset that any assessment that the market could support some 30 operators offering services in competition to BT over unbundled loops was a very optimistic one. The extent of the withdrawal reflects the sudden reversal of sentiment of the capital markets to the sector and DSL in particular. This is not unique to the UK. While the bulk of the withdrawals occurred during the Winter period, there have been company liquidations and other withdrawals very recently.

On the basis of initial orders for co-location, BT designed facilities at a number of exchanges for a considerably larger number of players than are currently prepared to commit contractually to build. (Operators were not initially willing to make a contractual commitment to build without sight of the design and cost.) Collective facilities were initially favoured, to take advantage of economies of scale. However, the withdrawal from the process of a number of those operators who placed initial orders means that the collective facilities will need to be re-designed. The players remaining are, quite naturally, not prepared to meet the costs of provisioning extra space which they will not need; and BT, perfectly reasonably, is unwilling to build "speculatively" and bear the costs, especially as it now seems very unlikely that much of the demand expressed last Autumn will be taken up in the near future.

Under Oftel's leadership, industry agreed on improvements to the ordering process. The revised agreement provides for a contractual commitment upfront by operators to meet the collective cost of build at any site where the design cost per operator does not exceed £33000 (and for speedy inter-operator discussions where the design costs lies between £33k and £45k). Under normal circumstances, this would be sufficient to ensure that a number of sites proceed smoothly from design to build with only the more difficult and expensive sites being subject to review by the operators post-design. In practice, the process remains somewhat problematical owing to recent company liquidations. Oftel therefore continues to press for further improvements to the agreed process to ensure that operators can place orders, individually or collectively, as they prefer, with high confidence that any order will be fulfilled according to an agreed timescale.

Withdrawals from the process have not until recently affected the preparation of distant co-location facilities at exchanges to nearly the same extent. Such facilities are prepared individually for each interested operator rather than collectively for a number of operators. However, Oncue Communications, which had placed a number of committed orders for distant co-location facilities, went into liquidation on 29 June 2001, thereby putting a brake on progress in getting distant co-location facilities built.

Milestones Passed

Since Oftel gave evidence to the Committee, the following significant milestones have been passed:

  • issue by BT of 3 reference offers, as required by EC Regulation 2887/2000 (29 December 2000);

  • confirmation by BT that orders can be placed for distant co-location at any site and that BT has sufficient resources to meet anticipated demand expeditiously (December 2000);

  • completion by BT of facilities for co-location at first four "trial" sites, installation of equipment by competitors at those facilities and connection of first unbundled loops (January 2001);

  • determination by Oftel of the form of the "Access Network Facilities Agreement" - the main contract between BT and its competitors for the supply of unbundling facilities (February 2001);

  • announcement by Oftel of own initiative investigation into costs of co-location (January/March 2001). Progress so far includes significant reduction in BT charges for certain facilities for distant co-location and escorted access charges and draft Direction by Oftel prohibiting BT for charging for site-clearance (June 2001). The investigation continues;

  • confirmation by BT that orders can be placed for physical co-location at any site and that BT has sufficient resources to meet anticipated demand (April 2001);

  • launch of first commercial unbundled services in Portsmouth (April 2001);

  • provision by BT of distant co-location facilities at first sites (apart from trial sites) and connection of first customers at those sites (April 2001). A total of 15 distant location facilities have now been completed and handed over to operators;

  • publication of Guidelines on availability of co-location facilities and use of space at BT exchanges (June 2001);

  • determination by Oftel of key charges, in particular the connection charge and monthly rental of unbundled loops to be paid by operators to BT(December 2000); and draft Determination of corresponding charges for "shared loops" (June 2001);

  • draft Direction by Oftel to BT to introduce the necessary processes to provide for "co-mingling" of operators' DSL equipment in BT exchanges (i.e. installation in areas not physically segregated from BT equipment) (June 2001).

As noted by the Committee, a progress note (in particular recording the latest figures for committed orders and actual handovers of physical and distant co-location facilities) is available on Oftel's web-site at and is updated monthly.

Miscellaneous Points

Moving beyond "full unbundling", BT has also, as required under EC Regulation 2887/2000, published reference offers for "shared access", under which BT continues to provide traditional telephony while a competitor provides higher bandwidth services over the same loop; and "sub-loop unbundling" under which the competitor connects at a point within BT's local access network ("at the street cabinet") rather than at the local exchange. Oftel expects that in future there could be significant commercial interest in shared access although at present operators appear to want to concentrate on achieving a fully satisfactory set of services for full unbundling. Nevertheless, Oftel has already determined the principles for assessment of charges for shared access and will shortly publish its proposals for charges for the key services.

Sub-loop unbundling appears to be a service for which there will be minimal, if any, demand for some time ahead. It appears to be of utility mainly in the context of roll-out of VDSL services (very high-speed DSL) and the technology is not yet ready for commercialisation. Even so, it may be that provision by BT of a suitable VDSL wholesale access service would be a more attractive option to competitors. Oftel will consider and consult on the practicalities later this year.

Conclusions on Local Loop Unbundling

The introduction of unbundling has proved a very difficult process. This was not unexpected; similar difficulties have been and are being experienced wherever unbundling has been introduced. Oftel has learned from others' experience; the issues which have proved problematical in the UK have not been previously solved satisfactorily elsewhere. Accordingly, BT's "commitment" to deliver unbundling at 600 exchanges by 1 July was not met for the reasons explained above ie. lack of sufficient commitment to ensure that provisional orders were confirmed. Nevertheless, more robust ordering processes are now in place. Moreover, Oftel continues to investigate the cost of co-location and is pushing for improvements in the ordering process, so as to enable industry to place orders with confidence that the price will be reasonable and the order delivered on time. But the reality is that the pace of roll-out will be determined not solely by the regulatory framework and processes but, particularly at the present time, by the investment climate and by commercial demand.

Other Delivery Routes for Broadband Services

Oftel's approach is to encourage competition to drive broadband access for users. Unbundled loops represent only one route by which broadband services are currently being delivered to consumers. Three other important routes are BT's wholesale DSL service, cable modems and leased lines. In future fixed and mobile wireless, and satellite are also expected to deliver broadband services. A brief update on these services follows:

BT's ADSL Service

Details of BT's current ADSL rollout can be found in paragraph 20 above.

The regulatory framework is clear. Oftel has both undertaken, and is currently conducting, a number of investigations into complaints about BT's behaviour. Oftel has also issued a Determination relating to provision of interconnection facilities for other operators at points on BT's broadband network.

Separate from the regulatory issues, there have been technical and commercial problems associated with the launch of ADSL These are primarily for BT and the industry to resolve but Oftel is actively monitoring the situation to satisfy itself that there is no breach of the rules and that resources are being devoted to resolution of the problems

Cable Modems

Both NTL and Telewest are installing cable modems. Latest publicly available figures indicate that over 52,000 users have had cable modems installed. These typically offer speeds up to 512 kbps downstream and 128kbps upstream

Leased Lines

Larger businesses get broadband services via dedicated leased lines. In August 2000, Oftel issued a consultation document following an Effective Competition Review of the UK leased lines market. Oftel's analysis found that competition was not effective in the retail market resulting in prices higher than they would be in a competitive market. We identified that the main problem was in the wholesale market. In the consultation document Oftel proposed to tackle this by requiring BT to offer an appropriate wholesale Leased Lines product (a Partial Private Circuit) and proposed price controls on some or all Partial Private Circuits (PPCs).

Oftel issued a further statement on Leased lines in December 2000, with a draft Direction for consultation, requiring BT to offer Partial Private Circuits. In March 2001 Oftel confirmed the Direction requiring BT to conclude negotiations within a set period on the provision of certain wholesale private circuits on terms which accord with the EC Interconnection directive. The aim is to increase competition in this market segment. In the light of the outcome of this Direction Oftel will decide on the need (or not) for regulation of wholesale leased lines.

BT recently informed Oftel that, following the Oftel direction, ten operators have signed a Schedule of Agreement on the provision by BT of wholesale leased lines. This Schedule sets out the key areas agreed during the negotiations. BT will now proceed towards implementation and anticipates that the agreed wholesale products will be available by the first week in August 2001. Oftel will continue to monitor the negotiations closely.

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