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UPD Sky, TalkTalk and Vodafone Moan of £140m Delay to Cheaper Broadband

Thursday, May 18th, 2017 (8:29 am) - Score 2,537

Broadband providers Vodafone, TalkTalk and Sky Broadband have complained that Ofcom’s delay to the introduction of their recently proposed wholesale price reduction on Openreach’s (BT) 40Mbps (10Mbps upload) Fibre-to-the-Cabinet (FTTC / VDSL2) service could cost consumers £140 million.

On 31st March 2017 the telecoms regulator, Ofcom, launched their ‘2017 Wholesale Local Access Market Review’ and as part of that they proposed to make a number of changes to help “promote competition and protect consumers from high prices” (here).

One of those changes involved imposing a significant price reduction on Openreach’s 40/10 FTTC “fibre broadband” product, which Ofcom described as being the “most important package” for consumers.

fttc_40mbps_wholesale_price_ofcom

The news should have been good but three of the markets largest telecoms operators – Sky Broadband, Vodafone and TalkTalk – have complained via the FT that Ofcom’s decision to delay the start of their review, until after a deal had been struck with BT over the future of Openreach, meant that their FTTC proposals arrived about a year late and this carries a cost.

A Vodafone Spokesperson said:

“As a result of the 12-month delay in implementing this initial charge control and the subsequent delay in further reductions, UK consumers are being over-charged by around £140m. This windfall gain will allow Openreach to invest in FTTP to cover a city the size of Cardiff.”

Openreach has already complained that the regulator’s proposed price cut does “not appear to incentivise more investment in ‘full fibre’ networks” (Ofcom hopes to foster more FTTP/H with their wider selection of regulatory changes) and they believe that their current prices are fair.

The regulator has promised to evaluate the new claim, although off-hand we can’t recall many occasions in the past where rivals have complained about the hypothetical impact of a delayed review in quite this way. It will be interesting to see if the Ofcom makes any related changes when they issue their final statement during early 2018.

Separately the regulator has also launched a probe into BT’s compliance with their 2016 Business Connectivity Market Review (here), which imposed a number of quality of service requirements. One of these, known as the ‘upper percentile limit’, required that no more than 3% of orders for relevant wholesale Ethernet services completed in the period 28th April 2016 to 31st March 2017 should be delivered in more than 159 working days (subject to a number of adjustments, such as taking account of customer caused delays). Ofcom is now examining whether BT has complied with this obligation.

UPDATE 3:33pm

One of the ISP’s has responded to our hails and clarified that the £140m claim may reference a new charge control that would have regulated MPF (LLU) prices from this April, which now won’t hit until April 2018.

The information appears to be confidential and I’ve been asked not to share the details, although current MPF pricing stands at £85.29 +vat per year (Openreach price list) and the ISPs appear to be saying that, following Ofcom’s own analysis, this should be reduced to around £80 (i.e. if this is not done then the providers claim BT would unfairly profit by up to £140m due to the delay).

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Mark Jackson
By Mark Jackson
Mark is a professional technology writer, IT consultant and computer engineer from Dorset (England), he also founded ISPreview in 1999 and enjoys analysing the latest telecoms and broadband developments. Find me on Twitter, , Facebook and Linkedin.
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56 Responses
  1. Avatar dragoneast says:

    I’ll be interested to see the final outcome on consumer bills. I’ll be especially interested to see whether anyone offers a nuts and bolts service close to the wholesale price. Rather I suspect that it’ll be the usual game of smoke and mirrors where may be one element of the bundle goes down in price and the rest go up, and no one will be any clearer what exactly they are paying for. If ISP profits take a hit, it’ll not be much to do with Ofcom, exempting the fines on the rare occasions when they can get caught. The joys of competition aka confusion, of course.

    1. Avatar George M says:

      Well the proof that consumers will never see any of the money comes from the annual decrease in wholesale phone line rental cost. And every year all these companies increase their line rental charges to consumers so increasing their own profit margin.

  2. Avatar CarlT says:

    Hmm. Being paid the same as you were before for an additional year is a windfall?

    Huh.

  3. Avatar craski says:

    Maybe Sky Broadband, Vodafone and TalkTalk should match the figure and make a positive contribution to improving NGA and to set an example …

  4. Avatar Steve Jones says:

    Have they considered that if the cap had been brought in a year earlier it would very probably have been on a different schedule anyway? It doesn’t mean that everything would be moved forwards by that year and at those prices as, presumably, whatever assumptions that Ofcom used to produce those prices would have been different.

    Personally, I’m wondering what OR will do with regard to the pricing of the other packages. It’s going to be difficult to justify why the differential between the 40, 55 & 80 bands should significantly widen as this is all meant to be cost-based. At the moment, the 55 & 80mbps services are at a premium of about £1 & £2 per month respectively over the 40/10 service. Given that the ISP has to pay for the interconnects, then there’s probably not much difference to OR for the cost of provision anyway as the increased aggregate costs are probably covered unless OR need to upgrade their cabinet-to-head infrastructure.

    Presumably what OR will seek to do is establish g.fast as the premium product priced more like the current GEA-FTTC 80mbps wholesale product. We might also see that GEA-FTTP will diverge in pricing from GEA-FTTC and, even, GEA-G.FAST, even at the same speeds. That is easily justified by the higher costs of the FTTP deployment.

    nb. £140m sounds like a lot, but in terms of the average impact per customer over the period it’s rather low given there will be, perhaps, 10m or more FTTC customers.

    1. Avatar NGA for all says:

      Would a 5-10 year sunset date for telephony be sufficient to drive OR FTTP investment?

    2. Avatar Steve Jones says:

      I’m not sure what you mean for sunset delivery of telephony. Telephony is an ever-falling source of revenue and, for that matter, OR don’t get any revenue from phone calls. By and large OR’s income is

      If you are talking about MPF/LLU obligation withdrawal, then that would be relevant but it wouldn’t change much of itself. It would probably require a completely different calculation for the way costs would be recovered.

  5. Avatar NGA for all says:

    Ofcom’s ‘fair bet’ assessment was done on the first £1bn (10m premises) of the £1.5bn. It assumes BT invested a £100 a customer passed and Ofcom concluded a ROCE of 15% to support their conclusion.

    I hope enough LA’s and DA and Communities respond to this consultation and request Ofcom review the BT capital contribution to the subsidised works and check any distortion or excess gain and take steps to remove it if needed.

    1. Avatar CarlT says:

      I don’t see how Ofcom would have any jurisdiction over BDUK-related things.

    2. Avatar TheFacts says:

      Why can’t the LAs review their contribution? Or maybe they have.

    3. Avatar NGA for all says:

      CarlT They have a role in the state aid process, and this is now a product with a price control based on an assumption BT has invested a £100 a customer.

      The Facts – The ‘fact’ no LA has publicly acknowledged BT contribution is why the question needs to be raised. NO audit process has confirmed BT’s contributions.

    4. Avatar Steve Jones says:

      @NGA

      Review of whether BDUK is value for money or not or if BT met contractual requirements is precisely and absolutely nothing to do with Ofcom. That role is for the NAO and any local projects can raise concerns.I will repeat again, that all your claims about commitments on capital contributions are entirely besides the point. What counts legally is what was in the contracts and whether those conditions have been met or not or if fraud is involved (the latter is more serious of course). There may be political ramifications of loose claims, but that is also another matter.

      However, what Ofcom can look at is the market and return issues. As Ofcom have decided to regulate GEA-FTTC products, and there’s a requirement that they do so on cost-based terms, then they do have to make a judgement as to the rate of return on investments. As such, BT will only be allowed a return on its own investments. On regulated products, such as MPF, it is only the BT capital spend that counts. For example, they are not allowed a return on excess construction costs (which are not deemed to be BT investment) and they are not allowed returns on any part of investment that has been state subsidised.

      So that is possible, but everything else is pure speculation and falls under the jurisdiction of the NAO.

      nb. I should add that Ofcom will, as the market regulator, have had some input into the impact of state aid on competition.

    5. Avatar TheFacts says:

      ‘The ‘fact’ no LA has publicly acknowledged BT contribution is why the question needs to be raised. NO audit process has confirmed BT’s contributions.’

      Why would they? Please give some links to BDUK audits.

    6. Avatar GNewton says:

      @Steve Jones:

      “and they are not allowed returns on any part of investment that has been state subsidised.”

      What about the BDUK-supported networks and cabinets? Isn’t BT offering commercial products using these networks (e.g. VDSL, some FTTP, see e.g. Infinity products) the same way it does on its fully commercially built networks and cabinets?

    7. Avatar MikeW says:

      They are gap-funded infrastructure. BT is allowed to make a normal level of return against their “normal” portion of expenditure, while the subsidy just fills the gap.

      If takeup gets too high, the return gets too high, and the excess profit gets shared with the LA in the form of clawback.

      As the accounts adjust for the clawback being returned to the LA, BT ends up making additional capex payments.

      High takeup => Excess profit => Clawback => Extra capex => Normalised profit

      BT then continue to make a standard RoI on the gap-funded infrastructure, but the gap gets shrunk a little.

    8. Avatar Steve Jones says:

      MikeW has covered it very well. That is BT will only be allowed a return on its share of the investment in BDUK infrastructure where prices are regulated. Ofcom has access to OR’s investment figures (beyond what are publicly available).

    9. Avatar NGA for all says:

      The BT capital contribution remains outstanding as the NAO, Audit Wales and Audit Scotland have only looked at the costs.

      If BT are only allowed to make a return on its share of the investment then Ofcom will need to do some reconciliation before they can make a determination on the prices.

      I can see why they might want to avoid it but it needs doing.

      Facts – there are no published audits on BT’s capital contribution.

    10. Avatar NGA for all says:

      Steve and Mike W – you make the case well for why BT should make a uniform capital contribution, and why Ofcom ought to confirm it.

    11. Avatar TheFacts says:

      @NGA – to confirm, you have no evidence that BT have not made any contribution?

    12. Avatar NGA for all says:

      @The facts – to confirm the information in the public domain suggests much of BT’s required capital contribution is yet to play a role in the rural connectivity upgrades.

    13. Avatar TheManStan says:

      @NGA – to confirm, this is the very same information that no one else interprets in the same way you do… including soulless tabloid journalists who wouldn’t blink at publishing such information…

    14. Avatar Steve Jones says:

      @NGA

      What matters legally is the contracts that were signed and whether the terms have been met and the invoiced costs presented accurately. That’s an auditing job, and so far there has been no serious suggestion from those involved in dozens of these projects that there have been any systematic issues on this front. Whatever figure you keep quoting on capital contributions is a complete irrelevance.

      Whether the BDUK project achieved what it set out to do, either as formally defined or what politicians cared to believe in the first place (and there is a substantial difference) is another matter altogether.

    15. Avatar NGA for all says:

      @Steve – the capital contribution is a legal requirement, and monies were made available to fix as much of rural connectivity as can be fixed. The truth on the costs took some time acknowledge. Reconciling the Capital contributions is outstanding but can and should be reviewed in this process.

      As you say BT should only earn a return on the funds it has invested, so why not determine and publish those?

    16. Avatar TheFacts says:

      @NGA – after many years on this subject the best you can come up with is ‘suggests’. Still planning a court case?

    17. Avatar TheFacts says:

      @NGA – only a legal requirement as part of the contract. How do you know the capital contributions have not been reconciled? There is no requirement for details of government/council contracts to be published.

    18. Avatar NGA for all says:

      @Themnstan I point you to WPQ 47312 where Matt Hancock stated BDUK do not hold a record of BT’s capital contribution. The question until answered and documented is a legitimate one.

      @TheFacts.. The discrepancy in the numbers are difficult to dispute, (State aid receipts/cab nos) hence the use of the Capital Deferral. More pressure will increase the Deferral and hopefully more rural areas will eventually get the upgrades originally intended, mostly from Openreach.

    19. Avatar NGA for all says:

      @Facts – because the state aid receipts of £966m divided by the cabinets delivered c28,000 leave no room for BT capital contribution. If you add what BT claim they paid as used in the CMS Inquiry, it would bring the total average to above £60k per cab, where BT separately said it was £26k in a separate piece of written evidence to the same committee.
      The Minister saying he has no record of BT’s capital contrinution should be enough for you to acknowledge the question is a legitimate one.

    20. Avatar TheFacts says:

      @NGA – link to Matt Hancock statement please.

    21. Avatar NGA for all says:

      @Facts search for Written Parliamentary Question site and input number provided.

      NO the issue is with BT Group and how it choose to game its costs and capital, including its representations to Parliament which are not given under oath.

    22. Avatar TheFacts says:

      @NGA – you are saying BDUK let a contract where they failed to correctly manage the costs. Sounds like you think BDUK are/were incompetent.

    23. Avatar MikeW says:

      @NGA
      >> Steve and Mike W – you make the case well for why BT should make a uniform capital contribution, and why Ofcom ought to confirm it.

      I agree on the former, but why would Ofcom be part of confirming?

      I know you like this crusade, but the fight over the NDA’s was precisely over this issue: would the capex data be released to the public? The battle was over years ago.

    24. Avatar MikeW says:

      @NGA
      >> the information in the public domain suggests much of BT’s required capital contribution is yet to play a role in the rural connectivity upgrades.

      Your partial read of information in the public domain lets you conclude this, but you also ignore other information in the public domain.

      If BT stopped making any capital expenditure on the NGA rollout, when the commercial rollout finished, why didn’t Openreach capex drop by £350pa in 2014/15? Why did it actually go up by £30m? Why does Frontier think that Openreach capex on NGA went up by £50m that year if there were no cabinets to spend on?

      Why, too, did Openreach capex keep going up in the following financial years?

    25. Avatar MikeW says:

      @NGA
      >> The Minister saying he has no record of BT’s capital contrinution should be enough for you to acknowledge the question is a legitimate one.

      The obvious followup question, unasked, is this: Should BDUK be expected to hold that information?

      Data that is audited, and subject to NDA terms, might not be held by a government department subject to the whims of an FoI.

      It would be far, far better to pursue the minister by asking what steps are taken to ensure that BT’s capital contribution is being made; whether those steps have been taken to completion; whether any anomalies have been found; whether the contributions have been made.

      The art of asking the right question seems to be lost. It is funny how that happens when people or groups are on a single-minded mission.

    26. Avatar Steve Jones says:

      @NGA

      Are you still banging this drum? Let’s take this key point of yours

      “the capital contribution is a legal requirement”

      Any legal requirement involving capital contributions will be set out in the contracts. That’s it. That’s what contracts are for. The policing of this is a matter for the auditing of accounts and invoices as defined in the contract. Those are not in the public domain. You cannot possibly know (unless you have some sort of privileged access) just what BT’s capital expenditure has been, so how you can be certain that BT have not met the legal requirements, I’ve no idea.

      However, what we do know (from BT’s public accounts) is that OR’s capital investment has been maintained even as the commercial rollout of FTTC started running down. Further, in the last couple of years there’s even been a notable increase (which I suspect is mostly down to the recognition of accelerated gainshare). In any event, whatever was being spent on the commercial FTTC rollout must have been invested elsewhere. Do you not think that might just be explained to a large part by capex on BDUK projects, or is that too simple for you?

    27. Avatar NGA for all says:

      MikeW – BDUK as the state aid authority has a duty to assure the BT capital contribution is paid as part of gap funding principle. Ofcom also has a role to play here.

      SteveW – Whatever is BT overall capital, it not broken down to permit the apportionment of cost you assume. BT capital had to increase to catch up on its Ethernet backlog for instance. It is not evident in the volume of cabinets or in the level subsidies pais. Much could be the capital deferral but this is for take up, not the capital owed.

    28. Avatar TheFacts says:

      @NGA – BT has to adhere to whatever the contract says, no more, no less.

    29. Avatar NGA for all says:

      Facts – If the administration of the contracts have permitted a non uniform capital contribution where BT pay less per premise than in a commercial area, then this needs reflecting in the WLA consultation. with lower prices or the option of BT topping up its contribution.

    30. Avatar TheFacts says:

      @NGA – what does the IoW contract say?

      Do you have anyone who agrees with you on this, you seem to have made zero progress over the last 5 years.

    31. Avatar NGA for all says:

      @TheFacts many agree, and the separation of Openreach is one consequence. Blagging the issue is not answering the question posed.

    32. Avatar TheFacts says:

      @NGA – to be clear. Unnamed others agree with you that there is no BT capital contribution yet you cannot posts links to confirm? And this has resulted in the separation of Openreach even though BDUK and the LAs have said there are not any issues with the contracts.

    33. Avatar NGA for all says:

      @Facts the submissions by CDS and other LA to Select Committees shows there were and are significant issues with their relationship with BT.

    34. Avatar TheFacts says:

      @NGA – but none stated relating to BT contribution?

  6. Avatar NGA for all says:

    @Themnstan I point you to WPQ 47312 where Matt Hancock stated BDUK do not hold a record of BT’s capital contribution. The question until answered is a legitimate one.

    1. Avatar TheFacts says:

      @NGA – your issue is solely with the handling of the projects by BDUK.

    2. Avatar NGA for all says:

      Facts. No, the only issue is the misrepresentation by BT of key data to Parliament and state institutions, denying the UK the full upgrades it needs.
      Commercial Investment was not £2.5bn-£3bn, it was £1.5bn at most and is generous.
      Matched funding is not the £1bn promised but some number yet to be determined.
      Passing premises did not cost £500 a premises (BT oral evidence to CMS select Committee 2016) but closer to £130 for FTTC in phase 1.
      The £446m capital deferreal owed to Government is a testament to the above
      The further separation of Openreach does nothing, so the review in the WLA consultation is needed to rectify the above misbehaviour.

    3. Avatar TheFacts says:

      @NGA – let’s start lower down. The LA’s let the contracts and agreed the wording. They should know if the numbers are right.

      As an example with some figures from a while ago, please confirm if correct.

      Isle of Wight – 109 cabs, BT £1.6M, BDUK £3.1M, LA £3.1M. Correct or not?

    4. Avatar NGA for all says:

      Fatts – that’s the budget for the IoW, no evidence in the IoW report that BT’s contribution was paid.

      I think BT received £3.26m for 109 cabinets so little room there for BT to make a capital contribution. It could be sitting in a hidden accrual. Note BT stated Phase 1 cabinet averaged £26k each, and there are no real extras as BT had provisioned c150 cabinets of its own.

      IoW did not report clawback, but this should not impact the £1.6m capital promised by BT.

    5. Avatar TheFacts says:

      @NGA – do you have a link to the IoW report please?

    6. Avatar TheFacts says:

      @NGA – The IoW Scrutiny Committee seem happy.

    7. Avatar CarlT says:

      As I understand it BT didn’t promise £1.6 million in capital. They promised £1.6 million in CapEx and OpEx.

      The formula for commercial deployments was based on CapEx and OpEx, which includes any additional hardware, ties, etc above the original install, over an expected lifespan.

      I would imagine the same goes for gap funded areas.

    8. Avatar NGA for all says:

      @CarlT It is £1.6m towards permitted costs and permitted costs exclude operational costs.

    9. Avatar NGA for all says:

      CARL T – Ofcom in their deliberations have shown for the first £1bn or 10m premises pass (£100 a premise passed.), BT has gleaned a 15% ROCE and this has informed the above pricing proposal.

      IoW is c22k subsidised premises so even if BT came good with £1.6m (of which there is no written evidence) it is less than the £100 a premise passed assessed by Ofcom.

      The opportunity is to build more network.

  7. Avatar TheFacts says:

    @NGA – To conclude this discussion – neither BDUK or any LA has stated that BT has not made a capital contribution.

    1. Avatar NGA for all says:

      The Minister says he has no record of it, and no LA has reported the presence of BT’s capital. The audits have only referred to the fact it should be present. They cannot confirm it has been paid.

    2. Avatar TheFacts says:

      The minister and the LAs don’t seem to see any issues.

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