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Ofcom Consult on Future Approach to Wholesale Fibre Broadband Costs

Monday, May 9th, 2016 (12:03 pm) - Score 1,152
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The UK telecoms regulator, as part of planning for future regulation (2017 Wholesale Local Access Market Review), has begun a new consultation to examine the wholesale costs of providing fibre optic based broadband and phone access services to ISPs (e.g. FTTH, FTTC).

Ofcom’s forthcoming WLA market review, which is due to begin “later this year“, will investigate the current market for the provision of fixed line connections used to provide telephone and broadband Internet services to homes and business. At this point the regulator has not taken a view on whether or what, if any, price regulation of fibre services may be necessary.

Readers might recall that the last 2014 Fixed Access Market Review (details) concluded that in the United Kingdom’s WLA market, excluding the Hull Area where KCOM is dominant, BT had SMP and that remedies were necessary. Various quality of service improvements and charge controls were then imposed on copper broadband services, but not on newer fibre solutions.

But before the next review begins Ofcom needs to consult on their general approach to cost modelling of fibre access services.

Proposals in this document

We are now consulting on our proposed general approach to cost modelling of fibre access services. Specifically:

a) We intend to use a bottom-up approach to estimate the costs to a hypothetical efficient operator of building a modern efficient Next Generation Access (NGA) overlay network2;

b) We set out the proposed design of the modelled NGA overlay network; and

c) We set out our proposals regarding the design of the cost model.

We are also publishing a spreadsheet model, reflecting the proposals above. We are making the model available now in order to give stakeholders the chance to comment on our approach and make any specific points about the model before we publish any specific proposals. This model is able to generate “unit costs” for NGA overlay services to the extent that it is sufficiently populated to do so.

We have provided this capability at this time so interested stakeholders are able to see the impact of changing model assumptions. However, the input numbers are placeholders and the outputs from this current model do not form the basis of any proposals for price

One of the biggest questions will be whether or not Ofcom finally moves to impose “superfast broadband” charge controls for services based on BT’s existing FTTC / VULA network, which currently covers 86% of UK premises and is being actively used by 5,907,000 lines (subscribers).

Ofcom’s above consultation will help the regulator to understand “whether the ‘fair bet’ on these investments has run its course” (i.e. is it time to regulate or not). TalkTalk and Sky Broadband would no doubt welcome anything that brings lower prices, while BT obviously wouldn’t.

However Ofcom’s recent Strategic Review did touch on the same area and at the time we noted that the regulator didn’t make any firm changes to the pricing of Openreach’s FTTC (VDSL) “fibre broadband” service (here), which is partly because they don’t wish to make FTTC so cheap that it might discourage investment in new / alternative networks.

On the other hand Ofcom also noted that their position might change in time for the aforementioned WLA review. “By 2020 superfast broadband services are predicted to account for the vast majority of broadband connections. Pricing flexibility will have been applied to BT’s FTTC investment for 10 years. For this market review, there will be a variety of arguments in favour of reduced pricing flexibility, including potentially reaching the original date for expected payback. In this context, we may be coming toward the end of the fair bet, which could result in a transition to some form of charge controls,” said Ofcom.

At this stage it’s difficult to know which way Ofcom will swing, particularly with the on-going USO debate and VDSL/FTTC likely to play a part of that. However we would at least be willing to bet against ultrafast FTTP broadband lines suffering any sort of charge control regulation as they’re still in the minority and even BT’s 2 million premises passed expectation won’t change that enough to cause a big shift on Ofcom’s part. BT’s G.fast roll-out may also fall into the same category.

Otherwise the closing date for responses to this consultation is 6th June 2016 and we’ll find out later this year whether BT will be forced to face tougher regulation or not, which may also depend upon whether they can reach a voluntary agreement with the regulator over their Strategic Review proposals. Politics and telecoms strategy.

Leave a Comment
3 Responses
  1. Avatar Steve Jones

    TalkTalk and Sky Broadband would no doubt welcome anything that brings lower prices, while BT obviously wouldn’t.

    I rather think that VM’s point of view should be considered too – they certainly won’t lobby for lower wholesale pricing. If Ofcom were to impose price controls such that GEA-FTTC wholesale pricing was to be considerably reduced, then it could well impact on VM network investment decisions. It would also erode the price advantage of LLU ADSL (albeit that the LLU operators would essentially be stuck with the costs of running MSANs at lots of exchanges for the voice service unless the switched to WLR).

    Then there is the issue about what might happen with the g.fast GEA product. Is that going to be price controlled, or is it going to be allowed a grace period?

    Personally I think that OR will have long ago factored in a reduction in the GEA product wholesale pricing. We are not party to their business model, but it has surely been included. Then there is the issue of the USO. If “excess” wholesale profits are part of the business model for the 10mbps USO, then what would happen there? When Ofcom start looking at the costs of an “overlay” network, what will they assume of the overall installed base? It makes a massive difference if (say) it’s just the urban areas or if there’s an assumption of (near) universal coverage from an overlay network.

    Of course one position (which Ofcom surely won’t do as they like to meddle) is to say that VM’s network rollout is destined to reach over 60% of UK premises and that will provide a very strong commercial imperative for OR to keep wholesale prices down in order to avoid haemorrhaging market share (the same for products too). As OR GEA products have national prices, there is no scope to increase prices in monopoly areas.

    Ofcom have already imposed their “margin squeze” tests on BT Consumer, there really isn’t much option for making more money at the wholesale (SMP) end rather than the Retail end (the classic issue with vertically integrated companies providing wholesale products).

  2. Avatar bob

    OFCOM still seem to be sitting on the fence with regard to OPENREACH. In my view proper separation of OPENREACH from the main BT group is the key to getting real competition in the market. This separation could be achieved by making OPENREACH a wholly owned BT company. At present outside of the cabled areas BT has a monopoly in the local loop. Overlaying a competing local loop is in my view not a viable option particularly as VM has already got a network in the areas of highest population but leaves geographically 75% of the UK stuck with BT

    Where small companies have tried to compete in the local loop BT seem to find these areas suddenly viable so it is a very high risk for other providers particularly when BT would currently have pretty much a 100% of the market it would take decades to gain a reasonable market share

  3. Avatar NGA for all

    It will be interesting to compare the proposed bottom up cost analysis given the NAO findings for BDUK and how this might help in recycling more funds for FTTP in deeply rural.

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