Select Committee on Trade and Industry Minutes of Evidence



  1.1  The UK is well to the fore in Europe in terms of E-commerce. It has also been benchmarked by the EU as having the most competitive European communications market. The two facts are connected. UK customers already have a far greater choice of supplier than in any other EU member state. The UK's unique policy of encouraging infrastructure competition, most visibly in terms of the cable TV companies, means that some 52 per cent of the population (12.6 million households, roughly 31 million people) have a choice of local loop supplier. Around 5 million customers have already exercised that choice by using a competitor of BT's for their local access. In Germany, despite the hype about the success of LLU, only some 150,000 lines have been unbundled: there are thirty times as many people using a non-incumbent local loop in Britain as there are in Germany.

  1.2  BT has staked must of its future on Europe as its home market and BT wishes to push forward as aggressively as possible with local loop unbundling across the whole of the EU. Any other stance would not make commercial sense. However, it is often not appreciated that until recently, official UK policy as publicly stated both by DTI and by Oftel was that local loop unbundling was undesirable in the UK. The nature of the competitive market was different—many other steps had been taken in interconnection and in indirect access—and it was the view of previous Conservative Governments and the initial view of this Government that unbundling would damage competitors building competing infrastructures such as cable companies. It was this philosophy that led to BT being banned from carrying television signals across its network—indeed, BT is still not allowed to broadcast over its local network.

  1.3  Therefore the "starting gun" for local loop unbundling was fired later in the UK than in Germany or the Netherlands, where liberalisation was approached from a different conceptual standpoint. Despite this later official mandate for unbundling, the UK is progressing well in developing LLU and we are confident that the UK will be up with the leaders in its development.

  1.4  The EU and Oftel recognise that LLU is a technically complex project which requires major construction works. We are working very hard to overcome many real practical challenges. The issues are not so much to do with technology, but with the physical world—finding space, building work, planning permission, installing security systems and air conditioning. All countries face the same problems. It takes time to develop the automated back office systems which will co-ordinate the physical and commercial processes that underpin successful unbundling. More advance planning and organisation would have been (and still is) possible if industry players were willing to take the risk of potentially abortive investments.

  1.5  BT has been seeking creative solutions to these issues. We are grateful for the constructive approach of some operators in working with us and would now ask all other players to work with us on solutions to these constraints eg, the need for a fair allocation process where demand exceeds supply. For example, in order to overcome overcrowding, operators can place their equipment in accommodation outside but close to the BT exchange and directly connected to it. This is a practical and effective method of speeding local loop unbundling, particularly where there are space or other constraints. Some companies have already approached BT for such arrangements for good commercial and security reasons.

  1.6  In the interim, BT has introduced wholesale ADSL services. More than 100 service providers (BT's own service provider, BT Openworld, is one) are customers, all treated equally by BT and competing with each other. So there is already competition in delivering broadband services using BT's local loop, as well as the competition offered by cable networks. Companies seeking local loop unbundling could start serving customers immediately using this set of wholesale services and then transfer their customers over to unbundled lines as they become available. In Germany, by contrast, the incumbent has no obligation to offer wholesale services, so this alternative interim solution is not available there.

  1.7  BT has met all of its unbundling obligations to date, and will also meet the requirements of the EU regulation on local loop unbundling which will be in place by 1 January 2001. But it requires all operators to play their part to help achieve the accelerated timetable.

  1.8  There remain two potential obstacles to UK customers deriving full benefit from LLU. One is the limitation of the requirement to provide LLU only to BT and Kingston Communications. We believe that all UK operators with significant local access networks should be equally obliged to unbundled. Otherwise service providers will not be able to serve large numbers of customers who do not get their local loop service from BT. This also exacerbates the other potential obstacle which is the lack of an "open access" requirement on operators taking over loops. All operators should give their customers freedom to use any service provider, and should not be free to restrict them to a single "in-house" option.

  1.9  BT also continues to develop prices which meet customer needs. We were the first European telco to offer unmetered access. Our Surftime package has made the UK one of the cheapest places in the world for residential customers using the Internet. We are continuing to improve our offerings—from 1 December we will be offering unmetered evening and weekend prices for voice telephony.

  1.10  This rapid pace of developments reflects the UK communications market—one of the most competitive in the world. This creates a challenge for public policy in terms of the future structure and nature of regulation, and how all operators should share the burden of shouldering social responsibilities. All operators urged deregulation in their submissions to the Government about the forthcoming Communications White Paper. All the players in a converged and open market need to share responsibility for addressing issues such as the digital divide.

  1.11  Recent commentary about the need for service level competition has tended, worryingly, to disregard the importance of communications infrastructure. Without investment in world class infrastructure, UK customers will be unable to enjoy the new and innovative products of the future. There is also the implication that the network in place is that which was inherited by BT at the time of privatisation, and costs should therefore be "sunk". This is a misconception. Like any other infrastructure, such as roads or rail, the communications network needs constant upgrading and improvement. Since privatisation BT has spent billions of pounds to maintain, upgrade and improve its network. This year alone, BT's capital expenditure is expected to reach some £4.5 billion. BT will also be investing to build its UMTS network following its successful bid for a 3G licence.

  1.12  For such investments successfully to continue, and to ensure the UK retains its leading position, infrastructure build must be able to attract appropriate returns. In a dynamic, competitive market like the UK, such investment bears increasing risk. It is fair and proper that all operators who derive the benefits from these investments should be prepared to shoulder their costs and responsibilities.

  1.13  BT is being innovative and proactive in approaching the challenges posed by the new communications environment. Earlier this year, BT announced its plans to restructure the company into a number of stand-alone business lines, including a separation of its retail activities from its retail operations, to bring a greater transparency into its operations. This is a bold and unprecedented step in telecommunications. The US RBOCs have not taken this step, nor have any other EU telcos. Achieving this separation will be a challenge for many reasons, but it is another demonstration that far from resisting competition, BT is setting the pace in terms of liberalisation and structural innovation.

  1.14  The EU regulation on local loop unbundling will be in place by 1 January 2001. BT understands its legal obligations, and is doing its utmost to comply. We know that Oftel will be a tough judge of our performance. We now hope that the UK government will do all it can to ensure that UK companies get the same opportunities in other member states as other operators are getting in the UK.


  2.1  This paper is about the building of broadband Britain. It outlines the progress on Local Loop Unbundling and places it in a European context; it gives a progress report on the deployment of high speed "ADSL" services; and it concludes with some comments on the Communications White Paper, which offers the opportunity for the UK to create an integrated regulatory system for the converging industries of the Information Age.


What is happening in the UK?

  3.1  Local Loop Unbundling (LLU) became a regulatory requirement in the UK this year. Until recently, Oftel's policy statement[1]had rejected LLU as an impediment to the development of infrastructure based competition. This was one of a number of policies designed to encourage local network competition, particularly from the cable operators—another was the prohibition on BT using its network for broadcast conveyance, which will only expire in January 2001. Following a review by Oftel and consultation with industry and consumers, on 27 April 2000 BT accepted Oftel's proposal of a licence amendment (Condition 83) requiring it to provide LLU. Oftel brought the condition into force on 8 August.

  3.2  During the discussions with Oftel and other operators BT proposed a timetable, which Oftel indicated that it regarded as reasonable but would keep under review in case acceleration was possible. The key milestones in the timetable included:

    —  Initial co-location orders received—1 September 2000;

    —  Full LLU contract completed—December 2000;

    —  OFTEL determination of charges for loops—December 2000;

    —  Initial trials of co-location and limited manual processes—Q1 2001;

    —  Trial with automatic operational support systems—from April 2001; and

    —  Full LLU launch—1 July 2001.

  3.3  BT has met all timescales within this previously agreed plan to date but recognises that this has now been overtaken by the EU regulation on LLU.

  3.4  Following the draft European Regulation in July 2000, BT and OFTEL met and discussed how the timetable should and could be advanced. It is important to recognise that co-location is only one means of providing local loop unbundling and co-location depends on the speed with which BT's exchange buildings can be prepared to accommodate the equipment of other operators. To do this it is necessary to:

    —  Establish which exchanges need to be prepared. It is estimated that only a minority of BT's local exchanges will be sought out by other operators. These will be urban sites, close to commercial districts and business parks. Other operators are less likely to require loops in residential neighbourhoods and rural areas, where there are fewer profitable customers;

    —  Obtain planning permission where appropriate, undertake building works and install ancillary facilities such as air conditioning and security devices; and

    —  Resolve situations where there is more demand for co-location than the available space can accommodate.

  3.5  The issues connected with prioritisation are being addressed through an Oftel supervised technique known as the "bow wave process". Operators list the exchanges to which they desire access in order of priority. This enables a list of exchanges to be readied for unbundling to be drawn up, and operators are allocated space in the exchanges from which they most desire to operate. Oftel has determined that the balloting be administered by the Electoral Reform Society using a single transferable vote system. Unfortunately industry disagreement on the way space should be allocated where there is an excess of demand over supply at a particular exchange has delayed surveys of some of the most popular sites. Industry, having failed to agree on an allocation process, then asked Oftel to create one.

  3.6  BT's exchanges were not designed for multiple occupation. There are real space constraints in some locations.

  3.7  Nevertheless BT has worked with Oftel to meet the EU deadline. We have suggested creative ways to speed-up the process bypassing some of the difficulties, especially space constraints. With current arrangements, BT may be able to provide space for co-location in 190 exchanges by 1 July 2001, and 270 by the end of July, with, possibly, a further 100 exchanges coming on stream each month thereafter. This coverage could be further augmented significantly by locating the equipment of other operators in buildings close to BT exchanges rather than inside them, and linking their equipment by cable to the exchange. This would increase the number of customers able to take advantage of LLU by providing access to exchanges even where there is no space for the equipment of other operators; this would enable more operators to gain access to the most popular exchanges. Some operators have suggested that this is a good means of overcoming the constraint. Depending on the geographic spread of demand from OLOs and their willingness to locate their equipment close to BT premises, it would be possible to "open up" as many as 600 exchanges by 1 July 2001 utilising a mixture of on-and off-site co-location.

  3.8  The plan does depend on operators seeking surveys and then placing firm orders in a timely manner (operators were several weeks late on the 1 September 2000 deadline); progress will result from matching individual orders to the constraints of individual sites. Until firm orders are received, the improvement plan cannot be considered fully resilient.

  3.9  It is also necessary to ensure that a good automated "back office" system is established early and that manual ordering procedures are kept to a minimum. Unbundling a loop changes complex contractual relationships between BT, the operator taking over the line, and the end user customer. BT is developing computerised systems to ensure that this process runs smoothly and enables any problems to be identified, analysed and dealt with. However, systems involving manual inputs and processes are likely to trigger confusion and errors with adverse effects on customer service. BT is seeking to automate these processes, but this takes time and resource. Accelerating and expanding the number of sites will increase the risk of delay to automated systems which can cope with higher volumes.

  3.10  In the UK, the obligation to provide LLU currently applies only to BT and Kingston Communications. There is a strong case for its extension to other operators with extensive local networks. It is a pity that having led the world, the UK is now lagging the USA where the FCC is considering a requirement for cable operators to unbundled their networks. UK cable companies now pass around 12 million homes, more than half of the population. In the USA, around 70 per cent of broadband services today are provided via cable connections. In the UK cable companies have the capability for broadband delivery. The same arguments about the beneficial effects of opening up networks which are applied to BT apply equally to the cable operators.

  3.11  Moreover, in the UK there is a danger that under the current proposals LLU may simply shift any claimed broadband bottleneck. BT's customers have complete freedom in their choice of Service Provider—the most important being the ability to choose their Internet Service Provider (ISP), whether it be Freeserve, AOL or Demon or any of the hundreds of other ISPs who operate in the UK. Operators taking over loops are under no obligation to provide equivalent freedom and choice for their end user customers and may seek to restrict them to a single "in house" service provider. BT advocates a policy of "open access"—that end user customers should be free to use any service provider. This is the best way of ensuring a vigorous competitive market for on-line services in the UK. Perhaps more importantly, the UK's leading position in content provision based on our great creative industries could be undermined through increasing restrictions on that content being deliverable over any network as a result of asymmetric regulation.


  3.12  In recent months there have been suggestions that the UK's implementation of LLU has resulted in it falling behind other EU Member States in telecommunications liberalisation. We believe that the opposite is the case. LLU is only one part of the communications equation and the UK remains the most competitive environment for communications in the EU as benchmarked in EU surveys. The UK's LLU programme is the most ambitious in the EU.

  3.13  It is true that several member states mandated LLU before the UK and before the EU obliged them to do so. LLU was only mandated this year in the UK as policy previously was to promote infrastructure based competition. LLU was originally seen as a policy to encourage competition in "narrowband" voice telephony. In the UK such competition was already well established. Germany may have 150,000 unbundled local loops. Over 5 million UK customers obtain fixed telecommunications services from operators other than BT and over 12 million homes (some 52 per cent of the population) have the opportunity of cable services. When it was realised in the rest of Europe that LLU might promote competition in broadband services, LLU was mandated across the EU, accelerating the UK programme in the process. It is easy to exaggerate the progress in other Member States. BT has undertaken a survey of LLU activity across the EU.

  3.14  The conclusions are as follows:

    —  Standard LLU is currently mandated in nine of the 15 EU countries but is effectively operational in only six of them.

    —  The only substantial deployment of standard LLU is in Germany (150,000 lines some two years after introduction); most of the other implementations are small scale.

    —  The planned UK deployment is for 0.7 million lines in the first year—over four times the total number of loops supplied in Germany since launch.

    —  The interval between unbundling being mandated and deployment varies considerably but is typically between nine months and two years. In the UK, deployment is on track to better these timescales.

    —  The interval in the UK is related to the large-scale planned deployment and the consequent need to develop, test and implement an automated systems solution.

  3.15  A country-by-country summary of progress in Europe is provided in the table overleaf:

MandatedImplemented Volumes (est.)Notes
GermanyYes (9/96)Yes (1/98) 150k
FinlandYes (5/97)Yes Not knownLLU mostly between incumbents
NetherlandsYes (12/97) Yes (early 2000)Limited scale Co-location issues
DenmarkYes (7/98)Yes 7/99) Limited scale
AustriaYes (7/99)Yes (6/00) Limited scale
ItalyYes (3/00)No (trials in progress; target 12/00) Co-location issues
UKYes (4/00)No (trials in progress)
SpainYes (6/00)No
FranceYes (9/00)No (trials in progress; target 01/01)
IrelandNo (draft law) No
SwedenNoYes (3/00) Very limited scaleCo-location problems
BelgiumYes (10/00)No
PortugalNoNo Consultation in progress


  3.16  The text of the EU Regulation on local loop unbundling has now been agreed by the European Parliament and Council of Ministers. Formal adoption by the Council of Ministers is expected during November with no further changes. The Regulation will take effect from 1 January 2001.

  3.17  The Regulation will require those declared to have "significant market power"—understood to be likely to be BT and Kingston Communications in the UK—to offer:

    —  Local loop unbundling,

    —  Sub-loop unbundling (connection at points between the customer's premises and the local exchange), and

    —  Line-sharing (enabling another operator to provide broadband services on a line while the incumbent continues to provide narrowband telephony over the same line).

  3.18  The position on LLU in the EU has been summarised above. No Member State currently requires sub loop unbundling. No operator in any Member State offers sub loop unbundling. OFTEL is currently holding a consultation on line sharing. No Member State currently requires line sharing, nor is it available anywhere in the EU.


  4.1  High speed access to the Internet is a critical building block for eBritain. It is crucial for the development of a dynamic, competitive market for broadband services. BT is committed to play its part in making it available. The principal programme is our deployment of ADSL services which enable service providers, including BTOpenworld, to deliver broadband services to their end user customers. In 1999 we announced our intention to invest £5 billion over five years to support network modifications to support the ADSL rollout.

The forward march of ADSL

  4.2  By the end of March 2000 we had spent £250 million preparing the first 400 exchanges in the ADSL programme. This covered installing apparatus, customer equipment, routing devices in the network and high-speed transmission links from exchanges to the premises of on-line service providers. Costs such as installation at customers' premises, provision of billing and other support activities associated with the service are on top of the £250 million. This is one of the most aggressive ADSL enabling programmes in the world. The following table shows the progress of our exchange and network enablement and our plans for next year:

March 2000June 2000 September 2000March 2001 End 2001
Exchanges ADSL equipped415 515619839
UK households covered26% 30%40%50% 70%

  This means that by the end of March 2001 high speed Internet access by means of ADSL will be in exchange areas which cover:

    —  11.5 million households (50 per cent);

    —  1.4 million businesses (50 per cent);

    —  45 per cent of primary/secondary schools;

    —  57 per cent of nursery schools;

    —  58 per cent of colleges;

    —  46 per cent of public libraries; and

    —  56 per cent of existing Internet users.

  4.3  It is not technically or economically feasible to rollout ADSL to 100 per cent of the UK as ADSL can only be used within three to four kilometres of the exchange. However, ADSL is not the only broadband technology. Alternative broadband delivery platforms now under trial or coming on stream in the reasonably near future include cable, broadband wireless technologies, third generation mobile and satellite.


  4.4  BT's current ADSL portfolio includes wholesale products designed to allow any service provider to offer competitive retail broadband services to end user customers in the UK. BT's service provider arm, BTOpenworld buys these wholesale services on the same basis as any other service provider. Our ADSL products are:

    —  BT IPStream (business) launched June 2000.

    —  BT VideoStream launched June 2000.

    —  BT IPStream (consumer) launched August 2000.

    —  BT DataStream (business) launched September 2000.

    —  Trial announced for BT DataStream (consumer)—Q1 2001.

    —  Trial announced for SDSL point to point—March 2001.


  4.5  BT currently has more than 100 (wholesale) customers for its ADSL services including both service providers and other operators as well as BT Openworld. They all compete on equal terms and currently deliver services to over 14,000 end users. BT has just announced plans for ramping up end user installations on behalf of all the service providers.

The next steps

  4.6  BT continues to play a leading part in development of new technologies—we have already announced our intention to trial a number of enhancements to our existing ADSL products, in line with customer requirements. We have announced our intentions to trial Symmetric Digital Subscriber Line (SDSL) based services next year. These are of particular use for small businesses and people working from home. We are also exploring other Broadband technologies such as Very high speed Digital Subscriber Line (VDSL) which provides much higher bandwidth (up to 14M) to the home.


  5.1  BT was the first large-scale operator in the world and the first former EU incumbent to move from metered to unmetered tariffs for internet access, following huge investment in the capacity of the network. It is not simply a matter of changing the bill, which is why other companies have yet to follow our lead. What is more, the UK offers the cheapest interconnection prices to competitors of any country in the world except Hong Kong. The OECD benchmarking study, published in September, showed that the UK continued to be the cheapest in Europe for off-peak internet access, while peak rate prices have also moved below average levels.

  5.2  Recent surveys have also shown that, in percentage terms, more UK schools are on-line than in the USA, and more UK business use e-commerce than their US counterparts. The UK's good record deserves praise not criticism.


  6.1  The UK market has now evolved to the stage when the focus of the regulatory system needs to change from active promotion of competition to maintenance of competition. In formal terms this means moving from a regulatory regime based on "ex ante" rules—prescribing in detail what operators can or cannot do—to one based on general competition law, as brought up to date by the 1998 Competition Act.

  6.2  This is not a view propounded solely by BT. All telecommunications operators submitting views to the Government about the forthcoming Communications White Paper argued for a move away from an ex ante prescriptive regime to one relying more on competition law. Although many of the requirements of the regulatory system will still have to comply with EU telecommunications Directives, there remains considerable scope for the changes the industry clearly seeks.

  6.3  Oftel supported this deregulatory principle in its 2000 Strategy Statement, which set out procedures to be followed when considering the deregulation of a market. BT supports Oftel in its consideration of deregulation but, if this programme is to achieve results, it is important to give it a high priority and make deregulation a specific objective. BT was disappointed when Oftel's Leased Lines consultation envisaged extending price controls to products previously not regulated, and proposed controls on local access circuits which the implementation of LLU would render unnecessary.

  6.4  For these reasons, BT has argued—in its proposals for the Communications White Paper—that objectives for deregulation should be embedded in the regulatory system, and that regulators should be encouraged to use devices to limit regulation, such as sunset clauses, the exercise of "forbearance" and the promotion of self-and co-regulation. The recent pamphlet by Keith Boyfield[2]drew attention to the steady increase in the cost and size of sectoral regulators in the UK. We believe this provides independent support for BT's case for deregulatory incentives to be included in whatever new regulatory structure emerges from the Communications White Paper.


  7.1  BT emphatically rejects recent comments that the UK has, in any significant sense, fallen behind other EU Member States in communications. We continue to enjoy the most competitive communications market in the EU. Other Member States mandated LLU in an attempt to catch up with the UK, which starts from a position where more customers obtain access from sources other than the former incumbent than in any other Member State. BT's LLU implementation plan is ambitious—but based on sound engineering practice and the creation of a robust back office system to support mass deployment. BT is also promoting competition in broadband services through its wholesale ADSL products.

  7.2  The UK's communications industry is driven by competition. That is why it is meeting the needs of customers. The task now is to ensure that the full benefits of LLU are realised. There are two important steps—all operators with significant local networks should be required to provide LLU, and the UK should adopt an "open access" policy so that customers can use any service provider they wish, irrespective of their access provider, whether BT, cable, an unbundled local loop operator or any other.

  7.3  The Communications White Paper represents a crucial opportunity for the UK to create a regulatory system to support eBritain.

November 2000

1   Indirect Access, Equal Access and Direct Connection to the Access Network, 1996. Back

2   The Politics of Regulation, European Policy Forum, 2000. Back

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2001
Prepared 20 March 2001