Trading Desk - Compensation Remains Master Agreement's Detour

Posted: 04/2001

Trading Desk

Compensation Remains Master Agreement’s
Detour
By Bruce Christian

Compensation, and who should pay it if QoS standards are not met, remains the
major roadblock in the telecom industry’s acceptance of a proposed master
trading agreement for buyers and sellers of bandwidth.

The master trading agreement draft was posted in December on the Competitive
Telecommunications Association (CompTel, www.comptel.org)
website. It remains a "working" document, says the organization’s
president, H. Russell Frisby Jr., but he is optimistic that the compensation
questions can be resolved.

CompTel took the lead a year ago to facilitate the agreement’s creation and
to form the Bandwidth Trading Organization (BTO), the group that came together
last summer to represent the interests of companies that deal in the buying and
selling of bandwidth. CompTel refuses to endorse the proposal. However, Frisby
says the organization does support a master trading agreement as a way to
facilitate competition, and that is why the compensation matter needs to be
resolved.

"We hope to reconvene the BTO," says Frisby. "Our role in this
has always been as a facilitator. Hopefully, we can talk to some of the key
players."

The BTO-produced document shows the influence of the utility companies-turned
telecom providers, which already are experienced in commodities trading. Enron
Broadband Services (www.enron.net) and El
Paso Global Networks Co. (www.epglobalnetworks.com)
reportedly took lead roles in crafting the document.

Frisby notes that most BTO members already are using the master agreement as
a blueprint for their bandwidth trading contracts. At its foundation, the
agreement is a risk-management tool.

The mitigation of risks associated with credit, delivery, performance and
price all were taken into account in the proposed agreement.

In fact, according to Chris Noon, vice president of bandwidth trading at El
Paso Global Networks, the contract achieves all the goals the BTO set out to
accomplish. He explains the master agreement has built-in flexibility, which
allows each company to determine individual needs unique to the specific
transaction for which the contract is signed.

Noon says the benefits of a firm contract are obvious, and the agreement will
make the product more reliable.

In its current form, the master agreement supports long-haul private line
point-to-point bandwidth, long-haul wavelength point-to-point bandwidth, local
loop bandwidth, IP transit, IP transport and storage capacity. In addition, the
document provides mechanisms for the transaction of physical derivative
products.

According to CompTel, a master agreement gives buyers and sellers a more
efficient way to negotiate their deals quickly, with shorter confirmation time.
It also allows the parties to manage their credit risk more effectively, because
of the allowance for netting of transactions and the special protections given
to master agreements under U.S. bankruptcy law.

CompTel also says a master agreement fosters more party equity, as either
party can buy or sell under the standardized terms and conditions. If the master
agreement is used in negotiating a deal, buyer and seller must agree to its
terms. This removes the inequality that sometimes exists between buyer and
seller.

The agreement provides for SLAs for the various products, but standards in
meeting the service levels have been left blank. This allows for individual
parties a negotiation to determine the levels at which they are most
comfortable.

In addressing liquidated damages associated with the individual product SLAs,
the agreement supports the notion that transactions occur on a "firm"
basis, where delivery dates and performance obligations are known and are backed
by damage compensation. This has been the most controversial topic, because some
industry players point out that telecom services are not like gas, oil and
electricity. Where the latter "flow" and can be turned on and off,
telecom services need to be provisioned. A buyer may contract for telecom
services, but those services may not be provisioned within the time the buyer
wants. If this does not occur, who is at fault, and who should be responsible
for compensation?

Noon notes that the agreement addresses liquidated damages in a manner that
is standard in other commodity trading industries. The replacement price quoted
in the agreement is borrowed from the Uniform Commercial Code for breach of
contract.

In a recent issue of The Bandwidth Desk (www.scudder publishing.com),
Noon explains that in the BTO’s master agreement, if a seller does not deliver,
or not all the bandwidth bought is delivered, then the liquidated damage
provision kicks in at 125 percent of the contract. But some telecom companies
are balking at this automatic provision for non-delivery.

A spokesperson at a neutral exchange, speaking on background, calls the
detractors’ position ridiculous, saying it is incumbent on industry players to
take responsibility for non-delivery of sold services.

He says that as long as finger pointing takes the place of accepting
responsibility, the standard contract never will have meaning.

Despite that view, others working within the trading environment, such as
Brent Wilkins, chairman and president of Chapel Hill Broadband Inc. (www.chbroadband.com),
have more hope. Wilkins says the master trading agreement is a fluid document
that will evolve with the industry.

"As far as trading bandwidth on exchanges, it is not a question of if,
but when," Wilkins says. "The way that wholesale telecom is bought and
sold is changing."

He says the proof has been obvious in the past year.

"When CompTel was in Long Beach [February 2000], if you began talking
about trading bandwidth, you would see eyes glaze over, because no one knew what
you were talking about," Wilkins says.

It was a different story during CompTel’s Feburary 2001 Conference in
Orlando. Because of the growing interest and acceptance, the conference featured
three educational sessions on bandwidth trading, and the number of vendor booths
associated with bandwidth trading was more than doubled from the February 2000
show, Wilkins notes.