BT Take Ofcom’s FTTC Margin Squeeze Test to Competition Authority

Telecoms giant BT has formally tabled an appeal with the Competition Appeals Tribunal (CAT) against Ofcom’s new “margin squeeze” test, which is designed to keep the operators FTTC “fibre broadband” prices under control by forcing them to “maintain a sufficient margin between [their] wholesale and retail superfast broadband charges“.

Some readers might recall that this situation first began in 2013 after TalkTalk complained that BT was “abusing a dominant position” in its wholesale supply of superfast broadband (i.e. up to 80Mbps capable FTTC Virtual Unbundled Local Access [VULA]) services to rival ISPs by conducting an “abusive margin squeeze” in superfast broadband pricing (here). BT completely refuted the claim and Ofcom later rejected it (here).

Never the less Ofcom still agreed to impose a new Significant Market Power (SMP) requirement on BT to ensure they didn’t “set the VULA 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” (here).

The test also factored other aspects of BT’s retail pricing, such as how it bundles in free BTSport (TV) content with broadband, although the European Commission (EC) cautioned Ofcom (here), in a non-binding comment, that its approach “lacks the necessary flexibility“.

In particular the EC highlighted how Ofcom had considered that the costs of BTSport should be spread over 5 years, while the EC suggested that BT needed to be given the benefit of recovering those costs over a longer period of time. But Ofcom’s final statement seemed to largely ignore the EC’s advice (here) and this appears to form the crux of BT’s CAT complaint, even though the EC’s comment was “non-binding“.

A BT Spokesperson said (Telegraph):

“As we said in March, we are not opposed to the principle of a margin squeeze test – and in fact Ofcom has confirmed that we currently pass the test – but the proposed test is flawed. Ofcom has not adequately addressed the concerns of the European Commission, who said BT should be allowed more flexibility to recover its sports costs over a longer period.

The effect is to provide unwarranted regulatory protection to the likes of TalkTalk and Sky in supplying their superfast broadband services, while at the same time making BT’s entry into sports broadcasting even more challenging.”

At this point Ofcom’s test has no impact on BT’s prices, although TalkTalk believes that it will act as a positive weight to prevent the operator abusing their position in the future. ISPreview.co.uk understands that the first compliance report, using more recent data, is due to be submitted to Ofcom for testing before June 2015 and no doubt BT’s rivals will be watching very closely to see what the outcome of that is.

Ultimately TalkTalk would prefer to see BT being completely neutered by having its Openreach division forcibly separated from the whole, although Ofcom and the Government have indicated that they still prefer a softer approach to regulation. Mind you, that didn’t stop the regulator last week proposing to open up BT’s Dark Fibre network to rivals (here).

As it stands Ofcom’s margin test will continue to be valid during the CAT appeal process, which itself could take around a year to complete and after that there’s always the possibility of even more legal squabbles.