Next Generation Networks: Further Consultation

Executive Summary

Summary

Introduction

In November 2004 Ofcom published a consultation (“Next Generation Networks: Future arrangements for access and interconnection”) which explored the potential regulatory issues raised by the move to Next Generation Networks (NGNs). In this consultation we aim to establish a regulatory framework to address those issues and to support the development of NGNs. To do this we propose a number of policy principles and processes to support them.

Background

The introduction of NGNs is the most significant change to telecoms networks since competition was introduced two decades ago. These new networks have the potential to deliver significant benefits to consumers, competitive communication providers and BT. The plans announced by various communication providers will put the UK at the forefront of these developments. Ofcom is therefore committed to creating the conditions for all providers, including BT, to invest in NGNs. There will however be important effects on competition with many of the existing wholesale products and even some competitive models needing to change as the new networks develop. Ofcom has a clear role to ensure that consumers and competition get the full benefit from this transition.

We do not think it would be appropriate for Ofcom to become involved in increasingly detailed management of the transition to NGNs and specification of new products. We believe the most effective role we can take, and the purpose of this consultation, is to establish a clear policy framework and ensure that robust industry-led processes are in place to take forward the issues. This is in addition to our ongoing ‘business as usual’ role of informal dialogue and formal market reviews, and our backstop dispute resolution role.

The issues raised by the migration to next generation access networks, ie the migration from copper to fibre based access, are distinct from the issues raised by the migration to NGNs. This consultation does not aim to address these issues. Ofcom is considering them in a separate workstream.

Policies to enable NGN-based competition

In our first consultation we explored a range of issues that could be raised by the move to NGNs and received a wide feedback on these from stakeholders. Many of the specific issues raised are naturally at an early stage and this document does not seek to make premature conclusions on them. Instead, we have developed a set of governing policies, summarised below, to support the resolution of these issues and enable the development of NGN based competition. The implementation of some of these policies would be through our existing powers. The others are addressed through the undertakings which BT has proposed to offer in lieu of a reference by Ofcom under the Enterprise Act (see “Consultation on undertakings offered by British Telecommunications plc in lieu of a reference under Part 4 of the Enterprise Act 2002” published on 30 June 2005).

Investment climate for NGNs

The investment climate for NGNs will be affected by regulatory risks, including uncertainty about the level and nature of future regulation. Three areas where we are seeking to reduce this risk are set out below. These are summarised below.

Holistic approach to next generation voice interconnect

Clarity and predictability about the regulation of narrowband voice interconnection charges is particularly important for all communication providers making NGN investments. Our proposed approach for next generation narrowband voice interconnect is that where Significant Market Power ( SMP) is found, reasonable charges should take account of the need to avoid creating artificial arbitrage opportunities by taking a holistic approach to cost recovery that avoids distorting incentives, and the need to allow an appropriate return on BT’s investment in NGNs.

This policy would be implemented using our existing powers, and therefore there is no need for an undertaking from BT to address this issue.

Cost of capital

Ofcom acknowledges that there may be specific demand and technology risks associated with BT’s 21CN investment. Ofcom's consultations on risk and the cost of capital consider how Ofcom could take into account such risks in setting an appropriate investment return (see www.ofcom.org.uk/consult/condocs/cost_capital2/). We are not consulting on this issue in this document.

Reducing uncertainty for alternative providers

A key purpose of the policies proposed in this document is to help reduce uncertainty for alternative providers about the impact that NGN migration, specifically 21CN, will have on the current SMP access and interconnect arrangements.

Policies for existing SMP products

Continuity of existing SMP products for an interim period

To enable business planning for alternative providers there initially needs to be continuity of existing SMP products (t hose products that BT is obliged to offer in markets where they have Significant Market Power), but we believe that this should only be for an interim period during which both legacy and next generation products are available. To ensure a timely move to next generation interconnect we propose that legacy products should be withdrawn once there is no longer reasonable demand or when next generation products provide an adequate replacement that providers are able to migrate to.

This policy would be implemented using our existing powers under the Communications Act to impose and withdraw network access conditions in SMP markets.

Compensation arrangements for SMP product migration

BT’s migration to 21CN is expected to impact alternative communication providers in many ways, for example due to geographic migration of points of interconnect, technical changes to SMP products and system modifications. In summary, Ofcom considers that the key factors relevant to compensation arrangements for BT’s 21CN migration are:

• the extent to which these changes are unilaterally decided by BT without industry agreement;
• the distribution of benefits that accrue from these changes;
• the remaining life of any legacy interconnect equipment employed at the time of the change;
• the extent to which new interconnect investments are made by communication providers after they have been made aware of forthcoming changes that would impact that investment; and
• the additional cost necessarily and directly incurred a s a result of having to bring forward investment in new interconnect equipment.
  

This issue is addressed by the undertakings which BT has proposed to offer in lieu of a reference by Ofcom under the Enterprise Act (“BT’s Undertakings”).

Policies for next generation SMP products

No foreclosure of unbundled network access

BT has an incentive to optimise its network for end-to-end services, whereas other providers will need unbundled access to bottleneck elements that allow them to compete downstream with BT. There is a risk that BT’s decisions regarding the design, procurement and deployment of 21CN could unnecessarily foreclose the option of making these unbundled products available. Foreclosure of this nature would clearly raise serious competition concerns.

To avoid this foreclosure, w e propose that BT should ensure that other providers can purchase SMP products for accessing BT’s 21CN that allow other providers to effectively compete with BT’s end-to-end services. In addition, BT should not make any design decisions, the effect of which would be to prevent the provision of future SMP products, without fir st con sulting other communications providers and Ofcom.

This issue is addressed by BT’s Undertakings.

Charges for SMP products to be based on efficient design

To support the above policy, BT needs an incentive to design 21CN so that required SMP products can be provided in an efficient way. Therefore we propose that BT’s charges for regulated products delivered over 21CN should be set on the basis of efficiently incurred costs. These are the costs it would have incurred if it had designed and built 21CN in the mo st efficient manner reasonable to provide that access. This means, for example, that if BT ignored providers’ requirements and made it more costly to provide SMP products, it would end up bearing these additional costs itself.

However, we recognise that any design process cannot allow for the efficient provision of all possible products for an indefinite period of time. Therefore we propose certain exclusions to this policy including cases where BT has consulted, but found no evidence of demand.

This issue is addressed by BT’s Undertakings.

Equivalence of input for next generation SMP products

‘Equivalence of inputs’ (EoI) was set out in our strategic review as a requirement for BT to make available the same SMP products and services to others as it makes available to itself, at the same price, and using the same systems and processes. In addition we set out the principle that EoI should be enforced when the cost is proportionate, and in particular that it should apply for all new wholesale SMP products, processes and systems, and therefore to all new SMP products delivered over 21CN.

To ensure that EoI can be achieved for new wholesale SMP products and systems, 21CN and its associated systems will need to be built to support EoI from the outset. However, we recognise there may be products where it is not reasonable practical to apply EoI (even on a new network).

This issue is addressed by BT’s Undertakings.

No retail services to be launched without associated wholesale inputs

If BT introduced new retail ^(-1-) services or features without corresponding wholesale SMP products, or if these did not allow alternative providers to launch a competing services at the same time, this would clearly have an impact on the development of competition in the downstream market. Similarly if BT were able to offer cheaper retail services because of its ability to provide the service end-to-end over its NGN, other communication providers are likely to be disadvantaged if they are unable to do the same due to the unavailability of an appropriate NGN interconnect product.

To address these issues, Ofcom’s proposed policy is that where BT’s ability to deliver a downstream service is dependent on the availability of an upstream input, and where BT has SMP in the relevant upstream market or can reasonably be expected to have SMP in the future, BT must not launch the new downstream service until it has also provided access to the upstream input. These upstream inputs must be available to other providers sufficiently in advance of the downstream services in order for other providers to launch downstream services simultaneously.

This issue is addressed by BT’s Undertakings.

LLU-based competition & broadband dial-tone

As a result of deploying its NGN, BT expects to be able to migrate customers between different products and services purely through software control, ie no physical re-configuration of the network would be required. The ability to enable broadband service in this way is known as ‘broadband dialtone’. Our previous consultation identified that this capability could create a major challenge for LLU-based competition.

Whilst the solution to this issue is unclear at the moment, we believe it is important to establish the principle that BT should ensure that LLU operators do not suffer a material competitive disadvantage as a result of this capability.

This issue is addressed by BT’s Undertakings.

Wider NGN issues

In addition to competition issues related to access to BT’s network, there are also a number of NGN regulatory issues relevant to a wider set of communication providers. These include:

• number portability;
• end-to-end call quality;
• emergency call prioritisation; and
• emergency call location.
  

The move to NGNs creates a chance to address any limitations of existing implementations and to revisit the overall approach taken. Ofcom’s view is that the move to NGNs is a timely opportunity to consider all issues of this nature , and it is important that they are considered by the industry now, whilst NGNs are still being planned. These issues relate to our existing powers and therefore are not covered by BT’s Undertakings. We will continue to work with the industry to ensure that they are addressed.

Consumer protection

Whilst the move to NGNs has huge potential to bring benefits to consumers, given the scale and complexity of the transition, adequate protection for consumers will be essential during and after the transition process. Ofcom’s proposed policy principles in relation to NGN consumer protection are that:

• The services offered to consumers on NGNs should at least be equivalent to their existing services. Ofcom believes that this is anyway a fundamental premise of operators move to NGNs and that NGNs will also allow providers to offer many improved and innovative services.
• Consumers should suffer no detriment during the transition to NGNs, for example due to loss of access to emergency services, or degraded call quality.
• Any changes to end user services are fully explained to consumers.
  

We will work with industry to ensure that these issues are addressed. In addition, BT’s Undertakings include a commitment to participate in a new body (discussed below) which could address these issues on an industry wide basis.

Effective industry led processes

There needs to be effective industry led processes to ensure that the transition to NGNs is successful. Ofcom’s proposals for these processes and the bodies with ownership of them are:

• SMP product migration and development of new SMP product requirements to continue to be the responsibility of Consult 21 (the industry liaison programme established and run by BT).
• BT and other providers to engage in commercial negotiation on a multi-lateral basis through Consult 21 and on a bi-lateral basis.
• UK NGN technical standardisation to continue to be the responsibility of the Network Interoperability Consultative Committee (NICC), but with NICC re-constituted as an independent industry owned body.
• A new multi-lateral industry group (provisionally known as ‘NGNCo’) to take ownership of the transition from existing to NGN networks, including operational planning and oversight, end user communication, and development of new models for interconnection.
• Disputes that arise from the planning or implementation of any communication providers (including BT’s) NGN transition to be referred to an operational dispute adjudicator for time-limited binding arbitration.
• All policy and commercial disputes to be dealt with by Ofcom (business as usual)
  

The ‘NGNCo’ and operational dispute adjudicator will need BT’s commitment to participate in order to be credible and effective. This issue is addressed by the undertakings, where BT has proposed to commit to participating in such bodies when they are set up.

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Footnotes:

1.- ‘Wholesale’ service in this context means any upstream input where BT has SMP , and ‘retail’ service means any service downstream of that wholesale input (ie not only those down services sold directly to end users)