Ofcom consults on reductions in LLU and WLR prices

Ofcom today started a consultation on price controls for local loop unbundling and wholesale line rental products provided by Openreach, the functionally separate local access division of BT.

This consultation follows on from Ofcom’s finding in its wholesale local access and wholesale fixed analogue exchange line market reviews that BT held a position in those markets akin to dominance (in EU telecoms regulatory speak – ‘significant market power’). Each of those market reviews imposed various obligations on BT including an obligation to meet reasonable requests for network access, an obligation to publish a reference offer, cost-orientation requirements and a compliance with charge control requirements – the subject matter of today’s consultation. 

In common with other UK telecoms charge controls, the proposal is that the charge controls will take the form of an RPI-X% control (where RPI = retail price index and X is set at a level to ensure that BT’s expected rate of return reaches an ‘acceptable’ level by the end of the charge control period), although somewhat unusually a two year, rather than the more normal four year, period is proposed for the charge control.

The charge control has been structured as:

  • an individual control for metallic path facility (or MPF – the copper wire to the home);
  • an individual control for shared metallic path facility (or SMPF – the high frequency part of the copper wire to the home, used to provide broadband, rather than voice);
  • separate baskets for (i) MPF ancillary services, (ii) SMPF ancillary services; and (iii) co-mingling services;
  • an individual control for wholesale line (WLR) rental;
  • an individual control for WLR new connection; and
  • an individual control for WLR transfer.

Prior charge controls were reviewed by the Competition Commission (see here for LLU and here for WLR), and those determinations have been taken into account in this consultation as well as BT’s revaluation of its duct network. This consultation uses a WACC for BT of 8.6%, although this is subject to another consultation on the appropriate WACC.

Responses are due by 9 June.

UK wholesale broadband access proposed charge control: Ofcom estimates BT’s weighted average cost of capital downwards to between 8.5% and 10%

Ten days ago Ofcom published a lengthy consultation on charge control for Wholesale Broadband Access, accompanied by a report from the Brattle Group on BT’s equity beta.

Wholesale broadband access is the ‘current generation’ (i.e. primarily DSL) wholesale broadband access products sold by BT to its retail competitors. Ofcom’s most recent review of this market geographically segmented the UK into four distinct regions:

  • local exchanges where only BT is present (“Market 1”);
  • local exchanges where in addition to BT, two of BT’s material competitors are present or forecast, or where three of  BT’s material competitors are present or forecast but BT’s market share exceeds 50% (“Market 2”);
  • other local exchanges where BT is present that are not in Market 1 or 2; and
  • Hull (where only Kingston Communications is present).

Ofcom’s market review found BT to have market power in Markets 1 and 2 and Kingston Communications to have market power in Hull. In addition to various other remedies imposed by that review, Ofcom proposed a charge control on BT in Market 1 – hence this most recent consultation.

The consultation proposes to control the charge for BT’s 8 MBits/s IPStream Connect product only, on the basis that this comprises 86% of the product actually sold and that it will act as both a direct control and indirect constraint.  Ofcom proposes a three year RPI-X control, with X set so that by the end of the charge control period, BT is expected to be able to earn a level of return on the basket of services that is equal to its weighted average cost of capital. This objective of course requires Ofcom to form a view on BT’s cost of capital – hence the Brattle report.

The Brattle report contains both:

  • an analysis of BT’s equity beta based on a regression of daily returns for holding stock in BT and from holding a broad market index; and 
  • comparisons against two control groups, being other UK regulated utilities and publicly traded US telecoms stocks.

The Brattle analysis identifies BT’s one-year equity beta to be 0.96 and two-year equity beta to be 0.84.  This is higher than other UK regulated utilities and the report speculates that BT is not considered quite as ‘safe a haven’ as UK utilities.  By contrast, BT’s beta is in-line with the estimates for the US stocks considered. 

Section 6 of the Ofcom consultation then take into account both the Brattle analysis and other factors (primarily lower interest rate and corporation taxes and a reduction in the perceived riskiness of BT) to come up with revised estimates for BT’s cost of capital. These estimates are lower than those made previously in May 2009 as can be seen:

  • Openreach: May 2009 mid-point WACC 10.1% , proposed 2011 mid-point WACC 8.6%;
  • BT Group: May 2009 mid-point WACC 10.6% , proposed 2011 mid-point WACC 8.9%;
  • Rest of BT: May 2009 mid-point WACC 11% , proposed 2011 mid-point WACC 9.3%.

BT sets prices for passive access to ducts and poles

Before Christmas, this blog flagged that last-mile fibre access (also know as next generation access, or NGA) was a commercial and regulatory issue that would be high on the agenda over the coming years.  On Friday, BT announced its draft pricing and product proposals for ‘passive access’ to its ducts and poles in the UK.  (In the NGA world passive access is used to describe access to physical infrastructure, whereas active access means access to some form of wholesale service).

BT is careful to position the new draft product proposals as complementary to its existing (active) Generic Ethernet Access products which it ‘expects … will form the basis of most [of BT’s competitors’ offerings]’. However, BT’s competitors may of course have a different view.  In reality, the impact and usage of BT’s new products will depend on their pricing, both in absolute terms as well as relative to active products and the underlying technology used by its competitors.

In terms of pricing, BT is proposing that duct access will start from £0.95 per metre per year, with various additional charges for ancillary services, whilst pole sharing access will be around £21 per pole, per year.   In BT’s view the duct access is around 15% less than international comparables, although I haven’t seen any underlying analysis to support that contention.  Going beneath BT’s headline figures, the list of ancillary services is extensive and it looks like the level of the charges will be material for most purchasers, so the detail is well worth looking at.

So far as the regulatory background is concerned, the position is somewhat complex, with regulators in Europe and the UK both having taken an interest and the waters muddied even further by the interplay between traditional electronic communications regulation of markets in which players hold significant market power and BT’s Enterprise Act undertakings.  Regulation in the UK is of course subject to EU thinking, in particular the Commission’s  recommendation on NGA which takes into account views of the European Regulators’ Group (BEREC) .

The Commission’s recommendation makes clear in outline that the regulatory requirements on BT in relation to ducts and poles  should include:

  1. duct access on an equivalent basis (para 13 of Recommendation);
  2. cost-orientated pricing for access to existing civil engineering infrastructure (para 14);
  3. mandated reference offer (para 15);
  4. requirement to install capacity for other operators when undertaking future civil engineering works (para 16); and
  5. provision of information to a central database (para 17).

Some of this was picked up by Ofcom in its October 2010 Review of the Wholesale Local Access Market, where following a finding that BT had significant market power in the UK (except Hull)  in the market for wholesale local access services (being those based on copper loops, cable networks and optical fibre at a fixed location), it imposed a range of remedies relating to local loop unbundling (LLU), sub-loop unbundling (SLU), virtual unbundled local access (VULA) and physical infrastructure access (PIA) – with the last relating to ducts and poles.

The obligations imposed on BT pursuant to that market review specifically relating to PIA (i.e. ducts and poles) are to:

  1. produce a draft reference offer by mid-January (i.e. the latest announcement) – although this need not support leased line services at this stage;
  2. launch the product by the ‘middle’ of the year (which translated from Ofcom-speak,  I would take to mean that BT need to have something in play by September);
  3. pricing should be cost-orientated (which means argument is likely);
  4. provide network access, to not discriminate unduly, to keep separate accounts and to publish certain information.

Although not referenced in Ofcom’s market review, the various requirements under BT’s undertakings in relation to NGA and equivalence are also relevant (although, Ofcom has expressly decided to not implement a para 13 equivalence requirement), as is Ofcom’s separate consideration of industry-wide mandation of infrastructure sharing.  As can be seen, last week’s announcement is the start of a process that will play out over the rest of this year (and beyond).  Challenge at this stage is unlikely, but the experience of the launch of almost any new product (interconnection in 1984, LLU in 2000) suggests that disputes may well be on the horizon.

Key telecoms regulatory issues for 2011 (do too many connectives watch star trek?)

With my first post done, I thought it best to try and provide a little substantive content.  Two years ago, I spent some time interviewing various CEOs, strategy and regulatory directors in various international communications companies to get their thoughts on the big issues that were coming up.  With the end of the year approaching it seemed like an opportune time to revisit that research and reflect on whether those issues were still current, and therefore worth continuing to follow.

At the time of the research, our over-riding thesis was that the telecoms industry was going undergoing structural changes that meant that regulatory structures well-suited to dealing with steady-state markets were being overwhelmed by the changes confronting them.  The market and regulatory result was likely to be similar to that experienced when other step-changes (competition, mobile telephony, broadband, etc) impacted on the market – confusion and delay.  Events over the past two years (even putting aside the small matter of the global financial crisis) would appear to have validated that idea.

The themes identified in 2008 were:

  1. Consumers, rather than the market players, were the long-term winners.  Amongst the market players, returns to the incumbents’ shareholders were better than the new market entrants.
  2. Next generation access (that is, high-speed fibre based last mile connectivity to the home or business) would be the defining issue for the telecoms industry globally.  Regulators however did not know how to approach the issue.
  3. The tension between the pipes and the poetry (telecoms infrastructure v content and services provided over that infrastructure) was starting to surface – and in particular how the costs of network upgrades would be financed.  Net neutrality had not at that stage really crossed the Atlantic, but the industry could see the way the winds were blowing.
  4. Spectrum availability,  in particular as an enabler of ubiquitous ‘current speed’ broadband, was identified as a critical factor issue to resolve, even before the iPhone and iPad.

Looking back, those themes still as relevant today as they were in 2008, so I will return to them in future posts.

Finally, the star trek reference of the title has got nothing to do with trying to spoof search engines, but in the real world it does strike me that we need less ‘next-generation’ ideas and more plain English action plans to actually make things happen.