Memorandum submitted by Vtesse Networks
Limited
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 four
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
— 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.
— 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.[169]
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.
— 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.
— 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.
— 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.
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.
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.
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
— New investment translates into new civil
construction of ducts, cabinets and chambers. Operators use "code
powers"[170]
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 six months rather than seven days or one month under the
previous regime. This is a significant obstacle to implementing
new networks.
— 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.
— We suggest telecoms construction be
exempt from S 9 and the procedures returned to the regime
that prevailed prior to 2004.
— 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.
— 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.
— 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.
— 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[171]
regulations, Vtesse frequently is frequently refused permission
without justification.
— Councils should be encouraged to permit
these new construction techniques.
— 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.
— Councils should be required to make
such networks "open access" to lower cost and reduce
civils works with next generation networks.
Fiscal barriers
— 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.
— 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.
— We recommend the de-rating of fibre
in line with the Government Report commissioned in 2004[172]
. 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[173]
.
We also believe that there should be tax incentives
for community fibre construction, as in Holland[174]
. 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.[175]
— 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..[176].
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.[177]
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
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.[178]
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[179]
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[180]
equipment to the last length of BT's copper loop from the cabinet
to the premises. VDSL2 can deliver up to 40Mbps[181]
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.[182]
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
1995-96 it has decreased by 13%, and has decreased substantially
by 27% since 2006. This latest decrease represents a loss to the
Exchequer of around £90 million 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
http://www.ofcom.org.uk/static/archive/oftel/publications/broadband/dsl_facts/LLUbackground.htm
169
Statutory powers for construction of apparatus http://www.ofcom.org.uk/telecoms/ioi/e_c_c/ecc_faq/£5 Back
170
http://www.ofcom.org.uk/telecoms/discussnga/duct/ductreport.pdf Back
171
http://www.hauc-uk.org.uk/ Highways and Utilities Committee Back
172
Pursuant to commitment made by Rt Hon Stephen Timms, the then
Minister of State for Energy, E-Commerce and Postal Services,
5th April 2004 Back
173
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. Back
174
Onsnet in Nuenen http://www.rogerdarlington.co.uk/Nuenen.html Back
175
See Rating Manual Volume 5 Section 871 para 12 Back
176
See multipliers at http://www.voa.gov.uk/business_rates/rating-multipliers.htm Back
177
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. Back
178
Contract Notice 74907-2009-EN, Official Journal of the European
Union, 17 March 2009 Back
179
Digital Britain Final Report page 62 para 48 and Back
180
http://en.wikipedia.org/wiki/Very_high_speed_digital_subscriber_line_2 Back
181
Our analysis reveals that over 25Mbps should be available to all
210 buildings in Hatt Back
182
As submitted to the Lands Tribunal by the Valuation Office in
conjoined cases RA 50 & 63 2004 Back
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