LOCAL LOOP UNBUNDLING - OFTEL RESPONSE
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
- 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
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
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
- 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
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
- 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
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.
(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
(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
(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
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
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
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
(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
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
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
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
- 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
- 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 http://www.Oftel.gov.uk/publications/local_loop/llufacts.htm
and is updated monthly.
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
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
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
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.