UPDATE Ofcom Force BT to Cut UK Standard Wholesale Broadband ISP Prices

Ofcom has today proposed several new measures that would effectively force BT to cut the cost of their fixed line wholesale broadband services (WLR, SMPF, MPF) to Internet providers (ISP) and redefine which parts of the United Kingdom (UK) should be subject to related regulation or indeed de-regulation.

The first charge control measure means that customers of both BT-based (Wholesale Line Rental) and unbundled (LLU SMPF and MPF) fixed line broadband services (e.g. TalkTalk, Sky Broadband etc.) could conceivably benefit from a small reduction in price, which would be effective from 1st April 2014 until 31st March 2017.

As with previous adjustments the prices would be set by charge controls linked to inflation (measured under the Consumer Price Index), which Ofcom believes can provide “an incentive for BT to make efficiency gains“.

In reality it’s usually a little more complicated than that and in the past BT has had a tendency to put up their standard phone line rental and call charges, which some see as a method to help it compensate for any Ofcom imposed reductions. However the proposed charge control adjustments are small and thus many ISPs may not feel inclined to pass them on (some might use them to cover rising costs in other areas).

Ofcoms Proposed Charge Controls

Fully unbundled lines (MPF)
The regulated wholesale price for this service today is £84.26 per year. Under Ofcom’s proposals this will fall in real terms by between CPI − 0% and CPI − 6% every year;

Shared unbundled lines (SMPF)
The regulated wholesale price today is £9.75 per year. Under Ofcom’s proposals this will fall in real terms by between CPI − 8% and CPI − 12% every year;

Wholesale line rental (WLR)
The regulated wholesale price today is £93.27 per year. Under Ofcom’s proposals this will fall in real terms by between CPI − 2% and CPI − 8% every year.

In related news Ofcom has also proposed to deregulate a larger slice of BTWholesale’s market. The changes would only apply to parts of the market where Ofcom has deemed BT to have Significant Market Power (SMP) in the delivery of broadband services, which is usually rural areas or locations where there’s little or no competition from rival ISPs.

Ofcom currently classifies different parts of the country based upon the amount of competition from ISPs in any given area (i.e. Market 1, Market 2, Market 3 and Hull). In short, Market 3 areas are home to several ISPs and thus have the lowest prices due to de-regulation, while Market 1 is the opposite and services are usually only available from BT (i.e. today Market 1 equates to the last 11.7% of premises in predominantly rural areas).

The regulator claims that, since its last review in 2010, “the area of the UK with effective competition has grown in the last three years from 78% to 90%” (mostly due to the expansion of cheaper LLU networks from TalkTalk and Sky Broadband etc.). As a result this means that the areas where no regulation of BT is needed have grown. The new solution thus proposes to re-draw the market definitions as follows.

Ofcoms New Market Definitions

Market A
Where there are only one or two potential significant wholesale broadband providers present or forecast to be present, which accounts for 9.6% of UK premises.

Market B
In which we believe there is effective competition, accounting for 89.7% of premises (exchange areas where there are three or more primary ISPs present or forecast to be
present).

Hull Area
Covers 0.7% of UK premises, where KCOM (KC) is the only significant provider.

Market B would thus be free of regulation since competition has already ensured a nice selection of ISPs and lower prices. In real terms this means that around 12% more UK premises than before might be able to benefit from cheaper services after having previously been classified in one of the country’s least competitive areas.

But Market A would still be subject to a price control on BT’s services at a level within the range CPI-7% to CPI-1%, together with cost accounting obligations. This is important because some BT based ISPs, such as PlusNet, can charge customers significantly more if they live within Market 1 (soon to be Market A) area as they cost more to serve.

A BT Spokesperson said:

“These proposals are complex and we will review them in depth. There are a number of areas where we believe Ofcom have not fully recognised the costs of providing services.”

Both of the relevant consultations are open until 25th September 2013 and Ofcom anticipates the complete conclusion of all its related fixed access telecoms market reviews by spring 2014, though we’ll probably hear the outcome for some of these proposals before then.

Wholesale Broadband Access Review Consultation
http://stakeholders.ofcom.org.uk/consultations/review-wba-markets/

Approach to Setting LLU and WLR Charge Controls Consultation
http://stakeholders.ofcom.org.uk/consultations/llu-wlr-cc-13/

UPDATE 8:20am

Here’s the full summary of charge control changes that Ofcom has proposed.

UPDATE 11:01am

Just to be clear because there’s some natural cross-over between Ofcom’s charge control and the semi-separate market de-regulation / definition changes. The regulators proposals to deregulate 90% of the UK relate to the broadband services provided by BTWholesale only (IPStream). We’ve also added a statement from BT above.