Memorandum submitted by Vtesse Networks Limited

 

Broadband Speed

 

OVERVIEW

 

A nationwide broadband infrastructure, or Next Generation Networks as it is referred to, is at the heart of delivering increased competitiveness and efficiency to the UK economy. It is also crucial to enabling the transition to e-Government and the increased efficiencies and cost savings that are associated with it.

One such example of "Connected Government" and the associated efficiencies is the DVLA, where web access and connecting to VOSA, for MOT data, and insurance companies has seen Vehicle Excise Duty avoidance fall from 4% to 1% in 4 years, as well as improved service levels leading to good public feedback.

Vtesse Networks has been designing and operating next generation networks for corporate customers since 2000; longer than any other operator in the UK. It has been studying options for next generation networks for consumer customers for the last two years.

As a result of its experience Vtesse has acquired a unique insight into the economics and feasibility of serving the "Final Third" of the UK population which is the most difficult segment of the market to address.

As a member of a consortium led by Babcock International Group bidding for European Regional Funding to "rewire Cornwall", Vtesse is currently running next generation trials in Hatt and Saltash, respectively a small settlement and small town in Cornwall. It is clear that current barriers are restricting the options available.

Failing to address the issues around "the Final Third" will inevitably lead to the emergence of a "digital divide". There will be those parts of the country where broadband infrastructure delivers good service and those where services are inadequate. As well as undermining economic growth in precisely the areas where it is desirable, the benefits of e-Government will be undermined by the requirement to run parallel services for citizens with poor or no access to the internet.

 

 

QUESTIONS RAISED BY THE COMMITTEE

 

Is the target for universal access to broadband at a speed of 2Mb/s by 2012 ambitious enough?

We do not believe that this target is ambitious; indeed it falls well short of the norm in other countries. Furthermore only competition and additional investment will lead to improved speeds to the "Final Third" of citizens outside the cable TV areas.

Vtesse's experiences have identified that there are significant regulatory, administrative and fiscal barriers which need to be removed to ensure that improved speeds are available across the whole network and therefore available consistently to the Final Third too.

Regulatory barriers

o Vtesse's experience of conducting trials of next generation networks in Cornwall, detailed below on page 6, has shown that the main barrier to providing an economic service to small settlements such as Hatt is the cost of connection from the settlement to the nearest larger town served by BT or another operator. The analysis reveals that Hatt is not unique, and may represent up to 25% of BT's existing connections, and up to 14 million people.

o The only method that ensures economic viability of settlements such as Hatt is the use of BT ducts into which Vtesse's own fibre could be installed, or use made of spare BT fibre if available. Our knowledge of the BT network indicates that, for most settlements in the "Final Third", the BT duct could take an additional small cable. This is consistent with the recent findings of Ofcom[1]. For those settlements that are fed from poles, access to these with the installation of an overhead cable would also result in an economic solution. Failing that, the next best option is a short-haul microwave radio link. However, the charges currently made for using existing masts put up for mobile telephony are too expensive.

o We have also discovered that BT has determined that its own regulated products supplied to itself and other Communications Providers are too expensive for NGA. To solve this, it uses fibre directly in its own Fibre to the Cabinet products. It has refused to supply this fibre or access to duct to install other Communications Providers ("CPs") fibre; Ofcom has already agreed to this concession without allowing other CPs access to the same components.

o We recommend that third party access to BT fibre or BT duct is mandated in those areas outside the existing cable TV footprint on the same terms and conditions as BT supplies itself.

o Our investigations reveal that BT's charges for connecting a cabinet to a customer are up to 3 times the equivalent cost in the Netherlands, Italy and Spain, at some 120 per shared sub-loop. There is no evident reason why a copper loop in the UK should be more expensive by that order than one in the Netherlands or Italy.

o We suggest that a substantial reduction in BT's sub-loop charges is imposed for 10 years in those areas similar to Hatt in order to stimulate investment in Fibre to the Cabinet Next Generation Networks.

o BT also benefits from sharing infrastructure in villages where power is delivered overhead. Vtesse has been refused access to these facilities owned by the distribution companies, despite the fact that they are already used by BT.

o We suggest that electricity companies are required to share overhead plant with other communications providers subject to the same terms and conditions as are already applied to BT.

 

Administrative barriers

o New investment translates into new civil construction of ducts, cabinets and chambers. Operators use "code powers[2]" to effect installation and construction of new facilities on public land, but are dependent upon the public authority administrative processes connected with this. The Traffic Management Act 2004 Section 9 substantially increased the notice period for certain work to up 6 months rather than 7 days or 1 month under the previous regime. This is a significant obstacle to implementing new networks.

o Telecommunications construction across the UK is well down from its peak in 2000. A large amount of works in, say, London, is related to water or the Olympics, which is no reason to hamper telecoms construction in say, Wiltshire.

o We suggest telecoms construction be exempt from S 9 and the procedures returned to the regime that prevailed prior to 2004.

o Local authorities and their administrative processes can have a disproportionate impact on new construction and the terms under which it is done. In one extreme case, North Lincs Council refused to allow Vtesse to install on public land and then charged an excessive amount for permission to install duct on private land owned by it adjacent to a public right of way.

o The use of two important networks controlled by Government - the railways and the canals - can be made uneconomic in several ways. For example National Rail charges are such that in many cases it is cheaper to use the roads with substantially higher environmental impact and costs. Furthermore approval times for installation on the railways have lengthened to the point of being of little practical use. This issue is quite unrelated to the proper regulations covering track possessions.

o We therefore suggest that telecoms wayleave charges levied by state controlled bodies, including National Rail and the other bodies should be limited by statute to the recovery of administrative costs. Public bodies and agencies should be under an obligation to grant wayleaves within 28 days, and there should be a standardised form for this to reduce legal and administrative costs.

o Vtesse has been using a new construction technique relying on small-bore cable or ducting which has several benefits. It substantially reduces the spoilage compared with normal construction from approx. 360 cubic metres to less than 3 cubic metres per kilometre of new construction, thus reducing significantly the amount of spoilage which has to be removed to a landfill. In addition, it takes approx. a third of the time to install microduct systems with the consequent reduction in impact on traffic and other disruptions. As a result, it costs up to a third of conventional construction. Despite the benefits and compliance with the HAUC[3] regulations, Vtesse frequently is frequently refused permission without justification.

o Councils should be encouraged to permit these new construction techniques.

o We have discovered that a number of local authorities have used public money to built duct networks for traffic light, CCTV and internal use. Many of the ducts are not full.

o Councils should be required to make such networks "open access" to lower cost and reduce civils works with next generation networks.

Fiscal barriers

o Fibre based services, whether Fibre to the Home, Fibre to the Cabinet or for the "middle mile", also termed backhaul, are essential to improving speed and coverage. The application of Business Rates to the use of fibre disproportionately taxes new entrants and discourages investment.

o For example, the impact of the tax on Vtesse's design for Cornwall could increase operating costs by up to 20%, rendering the investment uneconomic notwithstanding substantial subsidies for capital expenditure. Business Rates and its impact on the use of fibre, particularly "open access" fibre is considered in more detail on page 7.

o We recommend the de-rating of fibre in line with the Government Report commissioned in 2004 [4]. Any potential revenue loss can be made up from returning buildings used for telecommunications to being treated like any other building and listed separately, which was the case prior to the statutory change in 1994 [5].

o We also believe that there should be tax incentives for community fibre construction, as in Holland [6]. In addition, or alternatively, consideration should be given to Government support for loans for community fibre builds.

 

 

Is the Government right to propose a levy on copper lines to fund next generation access?

There may be a case for introducing a levy to fund Next Generation Access ("NGA"), but this is at odds with the introduction by Government of a new tax on NGA through the application of business rates[7].

The new tax on NGA has been set at a rateable value of 7.5 per home passed, equivalent to 3.64 in 2009/10[8]. .. To illustrate the point: if we take the position of a house connected to a next generation network and a penetration of say 30%, that householder will have paid 6 in levy, but the operator will have been taxed over 12 each year to provide the service. The actual numbers will depend upon the implementation of the grant of the levy, which are yet to be finalised, but the principle remains the same.

We believe it would be more efficient simply to remove the Business Rates on NGA rather than create additional administration to collect and then dispense the Broadband Levy.

 

 

Will the Government's plans for next generation access work?

Next generation networks will require substantial investment. BT does not have sufficient resources to deploy these in an estimated half of the country. Furthermore, as referred to above, significant fiscal, administrative and regulatory barriers undermine an already weak investment case for other companies.

We recommend that in order to ensure next generation services and the economic benefits they bring are available across the entirety of the UK, an environment be created that will attract more investors.


Are companies providing the speed of access which they promise to consumers?

There are a range of issues affecting the actual speed which consumers receive.

They include an imbalance between managing content and delivery. Currently network operators are expected to invest in order to carry high levels of traffic which are the consequence of content providers increasing the quantity of, and demand for, information substantially. From the operators point of view there is no prospect of a short term return on the investment.

The impact of the BBC iPlayer is a good example where some networks were designed before the iPlayer was deployed. The consequence is that related content generates substantial traffic which results in networks being swamped at peak times.

At lease part of the solution is the creation of a better division between wholesale and retail provision of content, as Ofcom is already implementing for commercial content.

 

To what extent does current regulation strike the right balance between ensuring fair competition and encouraging investment in next generation networks?

We do not believe it does.

It is a difficult balance to strike and the creation of Openreach has demonstrated this point. The intention was to address a bottleneck on the supply side and the consequence has been to largely halt third party investment in access networks.

We suggest that in order to redress this imbalance and encourage investment, access to BT ducts and fibre is mandated in areas outside the Cable TV footprint. This would have the effect of stimulating investment and encourage the building of Fibre to the Cabinet services, the basis ultimately for fibre to the home. In order to protect this investment, we suggest that in turn any new Fibre to the Cabinet investment should receive a 10 year statutory protection, provided services are made available on non-discriminatory terms.

This approach provides a degree of certainty and protection, which have been enjoyed by each entrant in each phase of telecommunications development since 1846[9].

 

Are there other views that stakeholders think the Committee should be aware of?

 

More detailed comments follow on three key areas:

1. Vtesse Networks trial of fibre to the cabinet in Cornwall

2. Rates

3. BT's fibre growth and rates bill


1. Vtesse Networks Trial of Fibre to the Cabinet in Cornwall

 

Vtesse Networks is part of a consortium led by Babcock Networks, a subsidiary of Babcock International Group, together with Motorola, Surf Telecom, South West Communications and Digital Peninsula shortlisted for a European Regional Development grant to implement a Next Generation" network in Cornwall[10].

In support of this, Vtesse Networks is currently undertaking trials of so-called Fibre to the Cabinet ("FTTC") also termed sub-loop or "D-Side" unbundling[11] in two small areas in Cornwall - Higher Pill, a small un-cabled area in Saltash, just over the estuary from Plymouth, and Hatt, a small community of around 200 houses 3km by road to the north west of Saltash. The intention of the trials is to test the viability of delivering a full cable-TV equivalent service over FTTC in cooperation with Virgin Media, who are responsible for content delivery.

Hatt belongs to a group of small settlements that get poor broadband as it is too far from the serving exchange in Saltash to get broadband speeds of much above 2Mbps. This will only improve with further investment. Our analysis reveals that there are up to 18,000 UK settlements similar to Hatt, with between 200 and 1,600 inhabitants. This group represents up to 14 million people and over 6 million phone lines:- 25% of BT's installed base of 24 million lines. The majority of these settlements are served from a BT exchange in another urban area, and so line lengths tend to be too long to get ADSL2 broadband at any improvement over the original version of ADSL, which itself does not perform well at these distances.

In both Saltash and Hatt we are installing a cabinet and active equipment next to a BT "green cabinet" and connecting so-called VDSL2[12] equipment to the last length of BT's copper loop from the cabinet to the premises. VDSL2 can deliver up to 40Mbps[13] and is therefore considerably faster than the likely 2Mbps or less currently available in Hatt. The main challenge with Hatt is the cost of what is termed the "middle mile" or "backhaul" - the connections from the green cabinet back to other parts of Vtesse Networks network. Most of Saltash is cabled, and as part of the trial will be connected to Virgin Media's existing fibre. This makes Higher Pill economic. However, connectivity to Hatt is problematic. The options for Hatt are summarised below:-

 

Method

Payback/Feasibilty

Comment

Conventional digging

75 years

Not practical

Microduct

25 years

Better, but still not feasible

Microwave using existing towers

Marginal due to rental costs on existing towers

Prices set by mobile economics, not NGA economics

Microwave on new towers

Feasible

Limit on capacity for TV over broadband

BT regulated product (WES)

Not feasible

Rental costs too high

Rental of third party fibre

Feasible, but business rates increases costs by 50%

None available between Hatt and Saltash

BT fibre or duct access

Good economic case

BT has fibre, the ducts to Hatt have space, but BT refuses to supply

 

 

This analysis provides a strong case, in circumstances in which the BT infrastructure is the only economic option, for requiring third party access to BT duct, overhead poles or fibre.

 


2. Rates

Below are key points covered in Vtesse Networks' submission to the Caio report which can be found at:-

http://www.computerweekly.com/DowntimePDF/pdf/Caiopaper.doc

Rating dates back to the Poor Relief Act of Elizabeth 1 in 1601. Today fibre is rated pursuant to two principal cases. R v Chelsea Waterworks (1833) 5 B & Ad 156 established in law that pipes buried under the ground constituted a separate "hereditament" (the unit of rateability) from the "herbage" rated above the ground. Electric Telegraph Co v Overseers of Salford (1855) 11 Ex 181 established that Telegraph poles and wires could be rated, even if the railway company on whose land they were installed, had the right to require them to be moved. The Electric Telegraph Company was one of the companies later nationalised to form what became BT.

Three different systems are applied to UK operators:

1. The Receipts and Expenditure method applied to BT, adjusted by market share up to 2005, and based on a settlement reached with BT prior to 2000. It is adjusted by a mechanism which is not public.

2. A formula of 7.50 per home passed applied to Cable TV companies fixed by negotiation. This charge is irrespective of the amount of fibre installed within a franchise area, the largest of which now includes the whole of Greater London.

3. A "tone of lists" established at the top of the "dot.com" boom and agreed by the ratings advisers to several operators, a number of which subsequently went into receivership.

 

This table shows the "Tone of lists" charges for the period April 2005 to March 2010 - referred to as the 2005 List[14]. A new entrant has a rateable value of 500 applied to the first pair of fibres used, but this rapidly falls to under 50 a fibre after 6 fibres (3 pairs) used on the same route. After 48 fibres no further charge is levied. This is highly regressive. For an owner of fibre, the highest RV per km applied is 1,920 pre route km, but 48 separate users using a pair each from the same duct would be charged in total 24,000, 12.5 times as much. This follows no known market behaviour, and is a substantial barrier to an open market in fibre, such as exists in Stockholm and other cities in Europe, and also in Korea and Japan.

There are a large number of anomalies. The charge per fibre initially falls, but rises again for the 12th, 14th, 17th, 23rd fibres etc. The charge for 44 fibres is lower than 43 fibres, so the marginal charge for the 44th fibre is negative.


3. BT's fibre growth and rates bill

According to its statutory accounts, BT has been installing optical fibre at a very high rate.

 

Its fibre estate has grown by a factor of four between 1995 and the present day. It continues to add around 1 million fibre kilometres every year. This is a huge amount. A small national fibre network consists of some 2,500 kilometres of fibre pairs, and the larger ones are around 10,000 km pairs.

 

Information from BT's regulatory accounts reveal that its access services based on this fibre have been growing at a correspondingly fast rate - over 600% since the start of records in 2004

 

However, its business rates bill has actually declined. Since 1995/6 it has decreased by 13%, and has decreased substantially by 27% since 2006. This latest decrease represents a loss to the Exchequer of around 90m per year.

 

This discount is in stark contrast to BT's accounts for Openreach, BT Retails, and BT Wholesale, the principal "occupiers", which shows no reduction in profitability over the same period.

 

The VO maintains that the Rateable Value of BT tracks its profitability, through the Receipts and Expenditure method. However it would be impossible for any other operator in the UK rated on the "tone" to quadruple its fibre base, but at the same time decrease its rates bill to such an extent.

 

This raises significant competitive issues for a new entrant which bears a tax charge which increases with increased fibre use, whereas its main competitor does not.

 

It would appear that whilst telecoms is an extreme example, the rating system in general favours larger companies over smaller ones through "quantum discounts". Given the importance of Small and Medium sized companies to the economy, it raises the question of whether the current rating system operates counter to other national and regional economic objectives.

September 2009



[1] http://www.ofcom.org.uk/telecoms/discussnga/duct/ductreport.pdf

[2] Statutory powers for construction of apparatus http://www.ofcom.org.uk/telecoms/ioi/e_c_c/ecc_faq/#5

[3] http://www.hauc-uk.org.uk/ Highways and Utilities Committee

[4] Pursuant to commitment made by Rt Hon Stephen Timms, the then Minister of State for Energy, E-Commerce and Postal Services, 5th April 2004

[5] The 1988 Statutory Instrument SI2263/1989 excluded BT's buildings from its "hereditament". BT buildings were rated separately by local authorities See Kennet District Council v British Telecommunications, House of Lords, [1983] RA 43. Statutory Instrument SI 3123/1994 added BT buildings to its "hereditament", and thereby applying a huge discount for quantity inherent in the rating system.

[6] Onsnet in Nuenen http://www.rogerdarlington.co.uk/Nuenen.html

[7] See Rating Manual Volume 5 Section 871 para 12

[8] See multipliers at http://www.voa.gov.uk/business_rates/rating-multipliers.htm

[9] The 1846 Electric Telegraph Company Act granted the company the "sole Privilege" of exploiting the Cooke and Wheatstone Telegraph Patents and granted the company Code Powers to build a telegraph system on public land in exchange for a flat pricing structure.

[10] Contract Notice 74907-2009-EN, Official Journal of the European Union, 17 March 2009

[11] Digital Britain Final Report page 62 para 48 and
http://www.ofcom.org.uk/static/archive/oftel/publications/broadband/dsl_facts/LLUbackground.htm

[12] http://en.wikipedia.org/wiki/Very_high_speed_digital_subscriber_line_2

[13] Our analysis reveals that over 25Mbps should be available to all 210 buildings in Hatt

[14] As submitted to the Lands Tribunal by the Valuation Office in conjoined cases RA 50 & 63 2004

http://www.landstribunal.gov.uk/judgmentfiles/j562/RA-50&63-2004.pdf