House of Commons - Trade and Industry

Select Committee on Trade and Industry Sixth Report

SIXTH REPORT

The Trade and Industry Committee has agreed to the following Report:—

LOCAL LOOP UNBUNDLING

I. INTRODUCTION

1. We hold regular oral evidence sessions with the Director General of the Office of Telecommunications (Oftel). In the course of several of these sessions we have raised the issue of Local Loop Unbundling (LLU).[1] We decided that Local Loop Unbundling would be the main focus of the session arranged for 14 November 2000 with the Director General, Mr David Edmonds. A number of other issues, such as leased lines, payphones and the transparency of mobile phone tariffs, were also discussed. Following that session, we decided to take further oral evidence exclusively on LLU. We heard oral evidence on 19 December 2000 from Cable & Wireless, Kingston Communications, Thus and Energis; from OnCue Communications, Atlantic Telecom Group, and IOMart; and from BT. We also raised the issue with Patricia Hewitt MP, Minister for E-Commerce, on 13 December 2000 during our session on the annual report of the E-Minister and E-Envoy. Two Committee Members also visited BT exchanges, one in Christchurch and three in Edinburgh. Committee staff visited two BT exchanges in London, at Dulwich and Bishopsgate. We also discussed the issue both with officials in the Directorate-General Competition in the European Commission and with the European Parliament Industry, Trade and Energy Committee during our annual visit to Brussels in February 2001.

2. The picture is changing rapidly. In the two months since our last oral evidence session there have been new lists of exchanges to be opened to access by other operators and, at the same time, a significant falling away of interest among these operators. The Minister has acceded to our request for a regular update on progress, to be made publicly available. We have thought it best to report now rather than await the results of the process under way, which will not be apparent for some months to come.

Background

LOCAL LOOP

3. The term "local loop" refers to the physical circuit between a telecommunications operator's local exchange and the final customer's premises. Traditionally it takes the form of pairs of copper wires (one pair per telephone line). These were originally used to deliver "narrowband" services: basic telephony and slow speed data such as faxes. BT has the UK monopoly of local loops, from around 6,500 local exchanges. As new technologies have developed, it has become possible to deliver new, advanced services over the existing copper loop infrastructure. In particular, Digital Subscriber Loop (DSL) technologies are capable of transforming ordinary phone lines (the copper pairs) into high-speed digital lines capable of supporting services such as fast internet access or video-on-demand. There are variants of DSL:

HDSL offers the same data rate in both directions;

ADSL gives different upstream and downstream data rates, so that the line can be used to send a large quantity of data such as a television picture in one direction, and a small quantity such as a control channel in the other; and

VDSL can be used for higher data throughputs but is effective only at very short distances.[2]

4. The local loop owned by BT is a delivery system-a pipe through which a variety of services can be delivered. When the process of LLU is completed, end customers will be able to receive a range of higher bandwidth services from an operator other than BT. The service provider will attach their own broadband equipment to the loop at the exchange and provide the end customer with matching equipment. BT is already providing its own broadband services down the local loops.[3]

5. Access to higher bandwidth is a crucial pre-condition for the growth of e-commerce; a central DTI policy objective. Enhanced, faster internet browsing or interactive services require higher bandwidths. The vision of internet villages and widespread home teleworking will become a reality only when such services are readily available. Most people connect to the internet over the 'narrowband' phone line which requires users to wait while a dial-up connection is made before they can access the internet. It is estimated that one third of user time online is spent waiting.[4] Even with ISDN, small businesses are likely to struggle to take full advantage of e-commerce.[5] Broadband services can offer high-speed access, faster data rates and 'always on' connections.[6]

6. Local Loop Unbundling is by no means the only method of opening up access to broadband services. Cable, satellite or wireless local loops can all be used to deliver services. However, local access networks were generally rolled out by incumbent telecommunications operators over significant periods of time, protected by exclusive rights and often funded through monopoly rents. Other operators cannot match the economies of scale and coverage of these incumbent operators. The European Regulation on LLU notes that "it would not be economically viable for new entrants to duplicate the incumbent's metallic local access infrastructure in its entirety within a reasonable time. Alternative infrastructures such as cable television, satellite, or wireless local loops do not generally offer the same functionality or ubiquity for the time being".[7] Consequently, both the EU and the UK are putting such a strong emphasis on the success of LLU.

CABLE

7. In the UK, the cable infrastructure passes around 12 million homes, or around 50% of properties.[8] Oftel thinks it is not yet necessary to request cable companies to open up the access to their 'local loop'.[9] Others, particularly BT, have argued that cable companies should also be obliged to unbundle. BT told us "the same arguments about the beneficial effects of opening up networks which are applied to BT apply equally to the cable operators".[10]

WIRELESS

8. In November 2000, the Government held an auction of the 14 regional licences for the Broadband Fixed Wireless Access spectrum. The auction was not as successful as that for 3G mobile phones. Only 16 of the 42 available licences were sold, leaving 7 regions without any licences sold.[11] Ms Hewitt told us "what the outcome of the auction has probably told us is that there was not actually a commercial case for rolling out high-speed internet access wireless" in some areas.[12] She accepted that " there is likely to be a need for public sector intervention". On 13 February 2001, the Minister announced proposals for allocating the unsold licences and published a short summary of the Radiocommunications Agency report on the outcome of the auction.[13] At the same time, the Government announced a modest initiative for local broadband services and an audit of bandwidth requirements in 100 market towns.[14] 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.

Historical background to LLU

9. In 1995 Oftel looked at the issue of LLU for basic telephony and concluded that access to customers via indirect access was the better option commercially.[15] In a Statement in July 1996 Oftel set out its position on LLU.[16] It stated: "the most convenient point to access to the Access Network would probably be at BT's local exchange with calls being diverted at the Main Distribution Frame (MDF) to the second operator's switch which would be located in a nearby building". However, they go on to say "although Oftel recognised that direct connection to the Access Network is feasible, it would run counter to the UK policy of encouraging alternative infrastructure".[17] They conclude "direct competition to the BT Access Network would adversely affect the development of competition and would not be in the interests of the UK consumer".[18]

10. The current Director General of Oftel, David Edmonds, took up his position in March 1998. His appointment signalled a change of policy direction in this area. Mr Edmonds told us "I think that the view in Oftel, until my arrival, was that we could rely probably on infrastructure competition".[19] In December 1998 Oftel issued a consultation document putting forward options for promoting competition in the provision of higher bandwidth services, including LLU.[20] Oftel cite their reasons for reopening the issue as:

the rapid expansion of new technologies capable of delivering the new, advanced services of copper loop infrastructure;

the forthcoming EU 1999 review of telecommunications law with LLU high on the agenda;

the importance of bringing the benefits of new technologies to all;

developments elsewhere in the world.[21]

11. In July 1999 Oftel announced its preliminary conclusion that BT should be required to permit access to its local loops.[22] Whilst recognising there were technical and commercial issues that needed to be resolved by the industry, Oftel proposed that "these issues be settled on the fastest possible timescale with a view to enabling access to BT's local loops by July 2001".[23] BT argued that there should be no unbundling and that other operators should take a wholesale product from them.[24] In a Statement in November 1999, Oftel confirmed its determination that LLU should go ahead. Oftel also stated that:

the loops would be made available at a cost-based price, allowing for a reasonable element of profit;

Oftel would set out clearly the requirements on BT through a new licence condition;

LLU would be introduced by July 2001 or earlier if possible.

The document also noted that operators and service providers were keen to see the early introduction of LLU and viewed July 2001 as being too late. If industry discussions progressed sufficiently and support systems were built more quickly, Oftel agreed they would bring forward the implementation date.[25]

12. The proposal to add a new condition to BT's licence mandating the provision of LLU was put out for consultation in March 2000. In April 2000 the Board of BT agreed to back changes to its licence condition and Condition 83 was inserted.[26] It sets out the requirements under which BT must provide services necessary for LLU. Paragraph 1 states:

We were told by Thus that the Condition was not brought into force until 8 August 2000 and that this was as a result of operators specifically asking Oftel to invoke it.[28]

13. In the meantime, Oftel published a consultation paper in May 2000 on indicative pricing and pricing principles. The Statement of Conclusions was published in August 2000.[29] Further detailed consultations from Oftel followed.

EUROPEAN REGULATION

14. In April 2000, the European Commission published a Recommendation expressing the view that all fixed line incumbent operators should offer unbundled local loops.[30] In July 2000, the European Commission published a draft Regulation on LLU. It went through an unusual fast-track process of agreement, with the active co-operation of the European Parliament. Mr Edmonds told us "in European terms, moving from where they were to the publication and adoption of the Regulation has been very quick".[31] The Regulation came into force on 2 January 2001.[32] It requires the incumbent company (BT in the UK)[33] to set out its contract terms and prices, to meet reasonable requests, and to introduce a product that is cost-orientated. It also requires those with significant market power to offer LLU, sub-loop unbundling, and line sharing.[34] It has been suggested that the draft Regulation had the effect of speeding up the process of LLU in the UK. We consider this in paragraphs 28 and 29.

II THE IMPLEMENTATION OF LOCAL LOOP UNBUNDLING

The 'Bow Wave' process

15. Following the November 1999 document, discussions began between industry and BT over the specifics of managing the process of LLU. By agreement between Oftel and the network operators, a task force was established to address the issues.[35] On the basis of forecasts made by the operators, it became apparent that there would initially be a huge demand for co-location space from a number of different operators.[36] As a consequence, a sub-group undertook the task of developing a process to manage the initial flood of orders. This process is known as the 'Bow Wave' process. Some progress was made on developing this, but the industry group were unable to agree on some "significant details". The process developed meant that, in the initial phase, each operator would submit up to a maximum of 1,500 prioritised requests for co-location space in BT's exchanges to the Electoral Reform Society (ERS). On the basis of these requests, the ERS would then run a Single Transferable Vote (STV) process to ascertain the overall priority ranking of each BT exchange. On the basis of these rankings, operators would be informed of the sites that they had chosen which fell within the top 500 priority exchanges. Operators would then submit requests for surveys to be carried out in phased tranches of the priority sites.[37] BT initially refused to carry out detailed surveys of its sites, or to permit operators to survey them.[38] Oftel, however, determined that BT should carry out the surveys.

16. By September 2000, it had become clear that the telecommunications industry had been unable to reach agreement not only on the order of allocation but also on the technical requirements. In basic terms, some operators wanted six racks and others wanted three racks. The standard co-location space consists of a number of equipment racks that are configured in rows of six and made available in multiples of three. If there was a shortage of space, some operators argued that only three racks should be allocated to an individual operator; others suggested six. A rack has a footprint of around 600mm by 800mm.[39]

17. Oftel were required to step in to produce what Mr Edmonds described as a "transitional space allocation methodology".[40] Oftel excluded from the prioritised list any site where more than nine operators were bidding for space, and produced a list of 361 exchanges in England, Wales and Scotland. In effect, this meant that the first list of exchanges to be opened up comprised those where there was a relatively low level of demand. This list was made available to us on a confidential basis. It was clear that the key sites were not included. 44 of the hundred most desired exchanges were in London, but only one London exchange featured in the list. Some of the exchanges selected were in major towns, but the list includes a number of rural exchanges. Only 11 of those in the Bow Wave list were in the top 361 in the list produced by the Electoral Reform Society.

18. Mr Edmonds told us "it is not a very satisfactory list for many operators because it is not their top 360 because the top 360, almost by definition, were those that most operators wanted".[41] Mr Huw Saunders of Kingston Communications noted that "as far as most operators were concerned, they were way down our priority list; that was a compromise agreed by industry in order to move the process forward".[42] Energis stated that the result of this allocation process was that it was impossible for operators to formulate a coherent business plan.[43] 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.

19. In Northern Ireland, BT had told operators that they had sufficient space to cope with demand. However, after the Bow Wave had been run and actual orders came in, BT found they were unable to cope. A separate Bow Wave process was then run for Northern Ireland which resulted in 20 exchanges being allocated. Oftel were not involved in this process. The list appears to reflect demand.

20. Six days before our second oral evidence session, on 13 December 2000, Oftel produced a second Bow Wave of allocations, an additional 360 exchanges. Oftel noted "the selection of these 360 exchange sites means that the most popular of BT's exchanges will be opened up to rival operators".[44] 132 sites are in London, 67 in the Home Counties, 55 in the Midlands, 16 in Wales, 30 in the North West, 27 in the North East, 31 in Scotland and 2 in Northern Ireland.[45] Mr Saunders of Kingston Communications told us they had got 248 sites they wanted within the 360.[46]

21. By mid-January 2001, it became clear that operators had not placed as many firm orders for co-location as had been anticipated. The first 25 sites (out of around 650 being processed) had reached the stage where operators could place firm orders for co-location. Orders were placed at only 14 of these 25 sites, with an average of 1 or 2 operators per site. Consequently, on 18 January 2001 Oftel put forward a proposal to advance operators' top priority sites ordered in the second round of bidding, announcing that "operators will be able to have earlier access to the most popular of BT's exchanges".[47] In other words, Oftel proposed that the sites selected in the first Bow-Wave process would now be put on hold. 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.

22. Oftel believe there are a number of contributory factors that led to this situation — some operators who placed initial orders have now pulled out of LLU, some are waiting for their priority sites to become available, others are concerned about costs. On 19 February 2001 press reports stated that the Bow Wave process had been abandoned. We are told that BT wrote to all operators notifying them that they could now fulfill all orders for co-location. The Bow Wave process was no longer needed. 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.

THE ROLE OF BT

23. A number of Other Licensed Operators (OLOs) complained forcefully to Oftel that BT were deliberately thwarting the progress of LLU. Six operators met Mr Edmonds to complain about the delay and BT's "recalcitrance".[48] Thus told us that before the licence condition was in force "BT had failed miserably to engage in meaningful contract discussions with its competitors".[49] Mr Edmonds told us " I think there was a series of examples during those months in the early part of the summer when BT were deliberately holding back on information, when BT were not progressing the roll-out of local loop unbundling as fast as we would have wished".[50] He went on to describe the "almost bitter conversations" Oftel had with BT and "almost trench warfare for much of the summer".[51] BT were dragging their feet and not responding as quickly as Oftel would have wished.[52] BT described their relationship with Oftel as a "professional relationship going forward".[53] Mr Saunders of Kingston Communications recognised that the Bow Wave process was imperfect but identified the specific problem as "BT never took a pro-active stance on trying to indicate what space was available so as an industry we could understand how best to fit our demands within that space. That is not something we think is industry's fault, it is down to BT failing to actually grasp the scale of likely demand and reacting accordingly".[54] The Minister, Ms Hewitt, told us she was certainly not happy in September 2000. There had been "a near breakdown in the relationship between BT and several of the other operators who wanted to take advantage of local loop unbundling".[55]

THE ROLE OF OFTEL

24. We received a considerable amount of evidence criticising Oftel for their handling of LLU. Some consider that Oftel should have intervened earlier. The inability of the sub-group tasked to sort out the allocation may not have been solely due to BT's reluctance to facilitate the process. Viatel, who were a member of the sub-group charged with negotiating the contract terms with BT, believed the group ran into problems because of BT's intransigence. They also felt, however, Oftel should have intervened earlier.[56]

25. Mr Bill Allen of Thus remarked that once Oftel had intervened, many of the steps they took were helpful "but it is a question of too little too late".[57] In their submission, Kingston Communications wrote that:

The Computing Services and Software Association began their Memorandum with: "It is now evident that Oftel has failed markedly in its quest to have BT provide access to other carriers at the local loop level".[59] They went on to criticise Oftel in harsh terms:

The Communications Management Association (CMA) stated "there is no doubt that Oftel made a serious error in not intervening in the market earlier".[61] Cable & Wireless believed that Oftel could be accused of under-performing at two fundamental levels: failing to devise the appropriate regulatory structure; and failing to get sufficiently involved in on-going, detailed implementation.[62] Mr Paul Markham of OnCue Telecommunications told us that in September 2000, the operators suggested to Oftel that they should take a proactive chairmanship role on the sub groups. Oftel had been somewhat reluctant to do so until that point.[63]

26. Mr Edmonds told us that, with hindsight, had he known that industry would be unable to agree on space allocation he would have intervened earlier.[64] However, he refuted the suggestion that Oftel could have acted sooner or been harder on BT. Oftel had persuaded the BT Board to discuss licence amendments in April 2000. However, Oftel did not have any statutory power until August 2000 when the licence condition was in place. Mr Edmonds remarked "I actually think that Oftel, working with the industry and I give great credit to many parts of the industry, has done remarkably well to get to the point where we now are".[65]

27. The only organisation to defend Oftel in evidence to us were Consumer Communications for England (CCE) who stated "LLU in the UK has been pursued with vigour by the current Director General, reversing the policy of his predecessor".[66] Viatel applauded Oftel's "comparatively early initiatives" to introduce LLU, but went on to say they were concerned that Oftel "has not taken a firm enough hand with BT over its implementation".[67] 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.

The timetable for unbundling

28. The publication of the draft European Regulation in July 2000 meant that the original timetable for LLU had to be brought forward. BT told us that the "acceleration of the EU timetable" caused them some concerns in the summer 2000 period. They went on to say that relationships with the industry have improved "since the pull forward of the Regulation occurred in the summer".[68] Oftel told us that a combination of pressure from them, from the industry, and then the announcement of the European Regulation created a quicker timetable.[69] Mr Markham of OnCue Telecommunications was of the opinion that the European Regulation was the driving force that speeded up LLU in the last months of 2000.[70] The Minister, Ms Hewitt, told us that BT had not "grasped quickly enough the implications for their timetable of the European Union Regulation".[71]

Action	Original timetable	Revised timetable
BT takes orders for co-location	Jan 2001	1 September 2000
BT delivers co-location	June 2001	June 2001
Completion of Operational Support Systems (OSS)	June 2001	April 2001
Trials using OSS		April-June 2001
Widespread automated provision of unbundled loops	July 2001	July 2001[72]

29. Oftel note that the obligations for fully unbundled loops imposed by the Regulation are not materially different from the obligations under Condition 83. Nevertheless, the Regulation will help Oftel to ensure that BT complies fully and promptly with those obligations. Enforcement powers available under the Telecommunications Act are "rather cumbersome and laborious".[73] 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.

30. Trial sites were to be ready by 3 January 2001; some were ready in December 2000.[74] Mr Allen of Thus told us their trial had been pushed back to February.[75] Energis said that they were unaware when their trial in Leeds would start. BT told us that one trial was delayed because it was a distant location site and the cable had to cross a main road and go through a cellar, thus requiring planing permission.[76] In a supplementary Memorandum to the Committee, BT stated that 6 of the 7 trial sites were completed on, or ahead of, time. Operators, however, had been slow to take possession.[77]

31. BT believe they may be able to provide space for co-location in 190 exchanges by 1 July 2001 and 270 by the end of July 2001. A further 100 exchanges may possibly come on stream each following month.[78] If other operators are prepared to distant locate rather than co-locate,[79] BT believe it would be possible to unbundle 600 exchanges by 1 July 2001, including some of the second Bow Wave sites. Mr Markham of OnCue made the point in oral evidence that it was still unclear exactly when the second Bow Wave of sites would come on stream.[80] The situation is only slightly clearer following the 18 January 2001 announcement.

Surveys

32. Following the allocation process, operators put in requests to BT for surveys to be carried out. We understand that BT have plans, held at a regional level, of all their exchanges; but on-site surveys are required on, for example, floor-loading, ventilation, access and back-up power supply. BT told us that they surveyed 120 of the top sites in advance in order to facilitate the process.[81] Oftel's figures showed that orders for initial surveys had been placed in 364 of the first list of 381 sites. The initial surveys found space in 83% of those 364. After the initial survey, operators can ask BT for a full survey, design and costing. Full surveys (with costings and orders) have been submitted for 166 sites.[82] BT gave evidence to us a month later, on 19 December 2000, and said that out of the first Bow Wave process, they had received 178 requests for surveys. Out of the full 381 sites, space was available in 78%.[83]

33. Ms Anne Machin of Energis remarked that one of the problems is the time it takes to go from initial survey, through full survey, and then to the offers made by BT. There is no certainty until an operator actually agrees an offer from BT that they will get space in a particular exchange. From the first Bow Wave process, Energis had just received around 15 offers from BT in December 2000.[84] Mr Saunders of Kingston Communications suggested problems could be alleviated if BT put more resources into the planning process in order to shorten the period between ordering sites and making them available to other operators. He also thought that other operators would not get physical access to deploy their equipment and services until May or June 2001.[85] Sir Peter Bonfield of BT told us that they would have to hire an additional 600 people to work in their planning operations early in 2001 and "maybe up to 2,000 during the balance of the year".[86] He said that BT is developing computerised systems to ensure that the process of LLU runs smoothly. However, because the timetable had moved forward, BT have had to divert people from the computer programmes to the manual procedures.[87]

34. Worldcom raised the related issue of unbundling BT's concomitant information and billing systems. In their opinion, Oftel is currently disproportionally focussed on unbundling BT's physical assets and on pricing issues. Oftel needs to ensure that "the significant advantages of incumbency and power derived from BT's information and billing endowments are neutralised".[88]

Practical considerations

35. BT say that the key issues surrounding LLU are not so much to do with technology, but with physical constraints—finding space, building work, planning permission, installing security systems and air conditioning.[89] 90% of BT's exchanges are unmanned, which meant that further work was needed to establish exactly what had to be done in these exchanges. 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.

AVAILABLE SPACE IN EXCHANGES

36. There have been some disagreements over what constitutes sufficient 'space' to house other operators in BT's exchanges. Oftel told us that their staff had visited 8 sites where BT had said in their initial survey there was no space and "in one or two cases there was no space".[90] It would appear that some of the initial arguments arose over BT seeming to 'blacklist' certain exchanges. We understand that BT had, in response to a request from Oftel, carried out 'desktop' surveys of 800 exchanges and identified those in which there was not enough space. In their memorandum Energis said that BT's ADSL service, Openworld, was available at sites that "have been blacklisted for operators".[91] Cable & Wireless noted that "BT has installed its own equipment in some sites that are explicitly prohibited ('blacklisted') to other operators".[92] They later confirmed that BT had initially created the impression that there was a shortage of space in almost all exchanges, but that data and those categorisations have now been withdrawn.[93] BT told us that most of the problem surrounding the definition of what is "adequate" space has now been sorted out. BT have alerted their planners to "look a little more laterally" at how equipment may be accommodated.[94] It is, nonetheless, open to operators to approach Oftel and ask for independent verification of whether or not space is available in any particular exchange.

37. BT have agreed with Oftel that they will supply space with essential service to other operators—power, air cooling and security. The so-called 'hostel' arrangement means that a number of operators will be housed in a separate room. BT were adamant that other operators should not be allowed to intermingle their equipment with BT's, mainly for security reasons. Sir Peter Bonfield of BT told us "we must make sure at all times that we have the integrity of the network at heart". [95] Not all operators are happy with these arrangements. Mr Markham of OnCue Telecommunications told us they have made requests to BT for co-mingling. He quoted the example of America, where co-mingling does occur.[96] Sir Peter remarked "we could not agree with the industry in terms of the caged approach that was taken in the United States because it essentially reduces the available space".[97]

38. The Memorandum submitted jointly by a number of OLOs said: "there are some interesting examples of what BT considers to be reasonable space preparation, for example, repainting, floor coverings, and additional building security systems and separate access, all of which adds both to cost and to length of time taken to prepare co-location space, and seem at best curious and at worst, spurious".[98] Ms Natasha Hobday of Atlantic Telecom Group in oral evidence elaborated: "in Battersea we certainly get the impression that BT is taking the opportunity to have its security system upgraded to a fully card access based system for which we are paying £7,000".[99] Mr Allan of Thus told us "the sharing of costs is not a problem but the transparency on costs is not yet clear".[100] Mr Saunders of Kingston Communications said there were "significant concerns" about the level of costs and "a feeling that there is probably some degree of inflation" over and above what he would consider appropriate levels of charges.[101] BT denied that they were increasing costs unnecessarily. On 18 January 2001, Oftel announced it had started an investigation into the costs of co-location space. We look forward to the results of Oftel's investigation. 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.

39. There is some discrepancy in the length of time it is likely to take from when a site is handed over to an operator to when service is delivered. Energis think it will take around 4 months;[102] Kingston believe that once they get a standard mode of working, it would take around 4 weeks.[103] Energis explained that their equipment suppliers are looking at about 3 or 4 months to obtain the equipment and an additional month to install it.[104] There is still a considerable amount of uncertainty surrounding the timing of LLU and the ultimate delivery of high speed services to customers.

Terms and conditions

40. In the summer of 2000, BT started negotiations with other operators to produce a standard form agreement for the provision of Access Network Facilities (ANF); the contract which operators must sign to take LLU facilities. On 4 September 2000, BT published a version of the agreement which took into account some, but not all, of the other operators' concerns. On 27 September 2000, Oftel was asked to make a determination by a group of operators who felt that some of the terms offered by BT for LLU were unreasonable. The five main areas of concern were:

"the arrangements for the allocation of co-location space;

BT's contractual commitments (including its exclusion of liability);

the imposition of certain restrictions;

the withholding of information about resources; and

a general complaint about the 'quality' of BT's Agreement".[105]

41. On 23 November 2000, Oftel published a draft determination concluding that the Code of Conduct put forward by the other operators was reasonable and that BT's version should be amended accordingly. Oftel also determined that the Code of Conduct should form part of BT's ANF Agreement and that it should apply to BT.[106] A number of other detailed proposals were also made covering such areas as independent verification of BT's proposed charges, compensation, and a 'use it or lose it' clause. BT told us they were happy to accept the agreement with Oftel, but made the point that the industry was not presenting a unified front on some issues because they were looking to address different parts of the market.[107] On 21 February 2001, the final determination was published. 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.

Prices and costs

42. On 29 December 2000, Oftel published the final wholesale prices for BT's unbundled local loop. Operators taking a local loop from BT will pay a rental of £122 per year and a one-off connection charge of £88. The final retail charges to customers will be set by the operators.[108] In addition, operators face substantial costs in implementing LLU. The cost of building a typical room in an exchange has been put at between £36,000 and £95,000.[109]

Co-location and distant location

43. It is not strictly necessary for operators' equipment to be located in BT's exchanges. It can be in adjacent buildings or street cabinets and linked to the exchange by a tie circuit. Of the initial 361 sites allocated, only 190 were to have full co-location. Mr Saunders of Kingston Communications told us of concerns with distant location:

it reduces the market they can reach;

the longer the loop and the longer the physical connection the lower the data rate that can be offered;

co-location provides a safer environment. [110]

There are ways of addressing these problems. The marketplace is already limited by the distance from the local loop. Some rural areas are too distant for LLU to have an appreciable effect.[111] OnCue told us they are discussing with BT ways to mitigate the problem of signal degradation by designing a cable that would limit the loss of signal capability.[112]

44. Ms Emma Gilthorpe of Cable & Wireless agreed that most operators were taking a mix and match approach to LLU.[113] Colt Telecommunications noted that distant location was a poor substitute for physical co-location.[114] There are also planning considerations and problems locating suitable properties. However, some companies do see distant location as the way forward and are developing a portfolio of sites for letting to operators. Redstone Telecom are reported to have applied for distant location at 1,250 BT exchanges.[115]

Roll-out of BT's ADSL programme

45. In 1999, BT announced their intention to invest £5billion over 5 years for network modifications to support their ADSL rollout. By March 2001 BT plan to have 415 exchanges equipped with ADSL, potentially covering around 50% of households and businesses—11.5 million households and 1.4 million businesses.[116] BT provides wholesale ADSL services to other operators. Ms Anne Lambert of Oftel told us that "other service providers can take this product and get it on exactly the same terms as BT's own retail arm".[117] BT's prices are subject to a complaint submitted to Oftel by other operators.[118] Mr Allan of Thus told us that BT has the largest potential market share and the fastest roll-out of service "because the industry cannot offer an economic service because BT is currently offering a product which, we would argue, is less than cost".[119] 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.

46. Ms Gilthorpe of Cable & Wireless told us one of the key issues is "the discrimination BT is engaging in, in that it is favouring its own business". Whilst BT will have ADSL equipment fitted to up to 800 sites by July 2001, other operators will only have 200 in buildings and 400 distant sites.[120] Mr Edmonds told us that a major impulse in terms of unbundling was to get BT to roll out its own ADSL programme "which it had sat on for years". The threat of unbundling from November 1998 produced BT's ADSL programme.[121] ADSL provides consumers with access to a range of other products, including faster internet access which will help facilitate the e-economy. Despite the complaints of other operators, one positive result for consumers from LLU to date is the speedier introduction of BT's ADSL programme.

Kingston Communications

47. Kingston Communications are also mandated to unbundle their local loops. In oral evidence Mr Saunders of Kingston Communications told us that at the time of the original consultation on broadband access, it was concluded that "there was no demonstrable demand for the unbundling of the Kingston local loop which in policy terms remains the position".[122] He went on to say demand at the current time was zero and they did not have "a concrete dialogue in place with any other operators either about wholesale access or indeed local loop unbundling".[123] BT told us that they first showed an interest in understanding Kingston's offer of LLU on 19 October 2000 and repeated the enquiry once the EU Regulation was passed.[124] We trust that Kingston Communications are now working towards LLU.

Other European countries

48. It has been suggested that the UK is lagging behind other EU Member States. Nine countries have now mandated LLU.[125] Mr Mark Daeche of Atlantic Telecoms Group pointed out the difference between Germany and the UK is that in Germany the process of LLU is well defined.[126] Ms Hobday pointed out that in France there was a similar "parallel working" as in the UK with development of regulation alongside industry discussions but in France they appear to have drawn more strongly on what has happened in other countries and as a consequence operators get access more quickly.[127]

49. Alcatel expressed the opinion that the UK was ahead of most of Europe, with effective deployment only marginally ahead in Germany and perhaps Holland.[128] Ms Gilthorpe of Cable & Wireless remarked that Germany is often seen as "having bundling on tap ready for people to walk in and take advantage of. The reality is far from that". She went on to say that Deutsche Telekom "is equal to BT in its tactical obfuscation of the issue".[129] Mr Edmonds thought there was no doubt the UK had fallen behind Germany but he hoped "we are going to catch up with Germany and the Netherlands...by the end of next year".[130] In the course of our visit to Brussels in February 2001 we raised the issue with Commission officials and sought some objective assessment of comparative progress. 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.

III. CONCLUSIONS

50. LLU is important and will, eventually, bring benefits for businesses and consumers. We have some concerns that companies now appear to be pulling out of the process. NTL were one of a handful of companies that withdrew early on. They cited the principal reason for their withdrawal as the "commercial uncertainty surrounding the size of the market for, and price and quality of, LLU-enabled DSL services".[131] Ms Machin of Energis told us that they were considering scaling back on their initial investments "simply because of the uncertainties and difficulties" they are having constructing a business plan.[132] In January 2001, it was reported that both Kingston and Thus had pulled out of LLU.[133] Kingston appear to have decided to restrict their activities to the business market for the time being. Thus confirmed they had decided to withdraw from LLU. The decision of companies to pull out of LLU may reflect a slow-take up of broadband services. Anecdotal evidence would suggest that BT's ADSL service is not selling as quickly as they had hoped. At the same time, BT are reported to be facing a complaint from Internet Service Providers that they are restricting the number of customers other operators can sign on whilst endeavouring to sign on more customers themselves.[134] 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.

51. Ms Hobday of Atlantic Telecom Group noted that "there are certainly battles to come with loop provisioning, with the manual automated procedure, with the alternated ordering procedure, and precisely how outmoded is BT's current ordering process and what is the adjustment and what are the actual physical problems".[135] She referred to a "huge information asymmetry" between BT and the other operators. 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.

52. During oral evidence, Patricia Hewitt, Minister for E-Commerce told us that she would be keeping in touch with BT and the other operators to ensure that LLU stays on track.[136] She also said she would look at putting the results of this monitoring on the internet. We wrote to her to request clarification of her plans for monitoring and to request monthly updates be submitted to the Committee, in confidence if necessary. We welcome the Minister's confirmation that Oftel will publish a document, to be updated monthly, on their website. The first 'factsheet' was published on 1 March 2001.[137] It is a useful and clear assessment of the current situation. We recommend that the Government encourage the European Commission to produce a similar document detailing progress across all Member States

53. There is no doubt that LLU can bring advantages for consumers by providing one channel for broadband services such as distant learning, telemedicine, and teleworking. Many operators are likely to target the business rather than the consumer market.[138] 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.

SUMMARY OF CONCLUSIONS AND RECOMMENDATIONS

Broadband Fixed Wireless Access

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

Bow Wave Process

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).

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).

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).

Timetable

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).

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).

Kingston Communications

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

Practical considerations

We understand that Oftel has had little hands-on experience of the practicalities of LLU and that some senior officers had not even visited an exchange.

The episode has shown up some weaknesses in Oftel's grasp of the technical issues involved (paragraph 35).

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).

Terms and conditions

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

ADSL

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

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).

e.Europe

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).

Conclusions

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).

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

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).

1 For example, see: Telephone Numbering, Fifth Report, Session 1998-99, HC 139, Q95, (Evidence taken on 10 February 1999); "Building Confidence in Electronic Commerce": The Government's Proposals, Seventh Report, Session 1998-99, HC 187, Q405 (Evidence taken on 2 March 1999); The Work of Oftel, Minutes of Evidence and Memoranda, Session 1999-2000, HC 93-i, Q56 (Evidence taken on 7 December 1999). Back

2 HDSL is High Data Rate Digital Subscriber Line, ADSL is Asymmetrical Digital Subscriber Line, VDSL is Very High Data Rate Digital Subscriber Line Back

3 See paragraph 45 Back

4 UK Online: the broadband future. An action plan to facilitate roll-out of higher bandwidth and broadband services, February 2001, para 1.1 Back

5 Integrated Services Digital Network (ISDN) is based on the existing digital Public Switched Telephony Network. It provides digital links to customers and end to end digital connectivity between them. The maximum speed is 128kbit/s Back

6 Higher bandwidth is defined in UK Online as services provided at speeds greater than 384 kilobits per second (kbits/s) (para 1.1) Back

7 EC Regulation on Local Loop Unbundling (EC/2887/2000) Back

8 Ev, p54 Back

9 Qq 64-65 Back

10 Ev, p57, para 3.10 Back

11 DTI press notice P/2000/776, 20/11/00; see also FT 21/11/00 Back

12 Oral Evidence 13 December 2000, Q21 Back