EU Caution Ofcom Over Regulation of BT’s FTTC “Fibre Broadband” Prices

The national UK telecoms regulator’s plan to control the margin between BT’s wholesale and retail superfast “fibre broadband” (FTTC) prices has suffered a setback, albeit a non-binding one, after the European Commission (EC) warned that the “proposed approach lacks the necessary flexibility” and could result in higher retail prices for consumers.

The situation stems from TalkTalk’s repeated accusations, which have often received support from Sky Broadband, that BT has been “abusing a dominant position” in its wholesale supply of FTTC services to rival ISPs by conducting an “abusive margin squeeze” in superfast broadband pricing.

Ofcom ultimately rejected TalkTalk’s complaint (here), but the regulator did separately propose a new Significant Market Power (SMP) requirement (here) that would ensure BT “does not set the [Virtual Unbundled Local Access] margin such that it prevents an operator that has slightly higher costs than BT (or some other slight commercial drawback relative to BT) from being able to profitably match BT’s retail superfast broadband offers” (VULA is what big ISPs use when selling FTTC).

Crucially Ofcom said that they wouldn’t just look at broadband in isolation and also intended to consider the impact of other aspects like BTSport TV content, which is offered for free to BT’s own retail broadband customers and at cost to rival ISPs. TalkTalk said they were “delighted” with the move, while BT described Ofcom’s statement as being “misconceived but not unexpected” and they rejected the idea of including BTSport into the test.

The first run of this margin test found that BT’s previous prices were fair and proposed no change, although BT fears that future runs using more current data after March 2015 might create some problems. This is partly related to BT investing ever larger sums of money into BTSport and not to mention the possible future impact of including mobile services into their bundles.

Ofcom originally planned to publish a final statement by the end of this month, although before that the proposal had to be reviewed by Europe. The EC have now furnished Ofcom with a formal non-binding comment on the proposals and they appear to have some reservations.

EC Letter Sample (Reuters):

“Ofcom’s proposed approach lacks the necessary flexibility in particular with regards to the treatment of costs for BT Sports … The Commission considers that the proposed static approach unduly limits BT’s commercial activity with regards to a market in which it does not have [Significant Market Power].”

One particular area of contention is with regards to how Ofcom’s proposal considers that the costs of BTSport would be spread over 5 years, while the EC suggests that BT should be given the benefit of recovering those costs over a longer period of time. The EC notes that the current proposal could also result in BT increasing their retail prices and reducing their costs for BTSport.

Naturally BT has welcomed the EC’s comment and called Ofcom’s new test “fundamentally flawed“, while also recommending that the regulator adjust their proposal to reflect Europe’s review. Meanwhile TalkTalk suggested that the EC’s statement otherwise endorsed Ofcom’s new margin squeeze regulation and added that, “this must be the beginning of the journey to bring down superfast broadband pricing“.

Finally, Ofcom said they would consider what the EC had said and review it before publishing their final statement “in due course“. It’s worth pointing out that a lot has happened since the draft obligations were first posted in January, not least with BT finalising a £12.5bn agreement to buy mobile operator EE (here) and their grab of more Premier League TV football rights for the 2016/17 to 2018/19 seasons (here).