The replicability of BT's regulated retail business services and the regulation of business retail markets

Statement

Summary

Introduction

1.1 BT has Significant Market Power (“SMP”) in the retail markets which include exchange line services, inland calls and low bandwidth leased lines. In these markets BT is obliged, amongst other things, to offer services at standard published prices, terms and conditions, and is prohibited from unduly discriminating.

1.2 For some time, Ofcom has faced pressure from business users, as well as from BT itself, to allow BT to respond to the demands of individual business customers by offering unpublished bespoke prices for services in business retail markets where BT still enjoys SMP. Ofcom has also been concerned that the requirement to adhere to standard published prices may be muting competition by facilitating price following by BT’s competitors.

1.3 Regulation of wholesale markets is intended to facilitate the development of competition in downstream retail markets, by enabling competitors to use BT wholesale services to compete with BT in those retail markets, fairly and on level terms.

Regulation of BT’s retail business services

1.4 On 7 September 2005, Ofcom published a consultation document, Regulation of Business Retail Markets, (the “September 2005 Business Pricing consultation”) which invited comments on what form regulation of BT’s retail business exchange line services and business inland call services should take when these are deemed to be replicable by BT’s competitors. The preliminary view expressed by Oftel in that document was as follows;

• where BT’s retail business exchange lines and business inland call services can be replicated by BT’s competitors, BT should be permitted to offer bespoke prices for these services not necessarily available to all comparable customers;
• bespoke prices should not fall below a price floor which covers transfer charges for network components plus fully allocated retail costs;
• BT should not be obliged to publish bespoke prices, as this may mute competition by making it easier for competitors to predict BT’s sales strategy;
• BT would be expected to assess each bespoke price for compliance with the Competition Act and any ex ante safeguard tests, and to demonstrate that it has adequate management systems to ensure such compliance; and
• these principles can equally be applied to prices offered to larger and smaller businesses but, as a precautionary measure, should initially be limited to prices offered to customers spending more than £1m per year with BT, until BT’s management systems have been adequately tested.

1.5 Stakeholders were invited to respond to this proposition by 16 November 2005. Having considered the 14 responses received, Ofcom has concluded that the proposition summarised in paragraph 1.4 above is appropriate and proportionate, and should be given legal effect when the relevant services are considered replicable.

Mixed service bundles

1.6 Ofcom concluded in a preceding statement, BT’s Pricing of Services for Business Customers published on 27 May 2004 (“the May 2004 Business Pricing statement”), that when BT’s retail business exchange line services, inland calls and leased lines are deemed to be replicable, Ofcom should no longer presume that service bundles which mix those services with services from other markets where BT does not have SMP are unduly discriminatory (and, therefore, in breach of the prohibition of undue discrimination referred to in paragraph 1.1 above). The May 2004 Business Pricing statement also concluded that such service bundles should be required to pass an implicit price – cost test. Subsequently the September 2005 Business Pricing consultation, however, expressed the view that where the services from markets where BT has SMP are deemed replicable such bundles should not be required to pass such a test at the individual product level as, in the presence of replicability, competitors should be able to compete to supply the complete service bundle. Stakeholders were invited to comment on this proposition, in addition to the wider proposition set out in paragraph 1.4 above.

1.7 Having considered responses to the September 2005 Business Pricing consultation, Ofcom has concluded that the implicit price – cost test need not be applied at the level of individual services in respect of service bundles which mix services from SMP markets with services from other markets, provided that the services have been deemed to be replicable.

Replicability assessment of exchange lines, inland calls and leased lines

1.8 The May 2004 Business Pricing statement referred to in paragraph 1.6 above, concluded that BT’s business retail exchange line, inland call and leased line services were not replicable. In a subsequent consultation document Replicability of BT’s regulated business services, published by Ofcom on 20 July 2005 (“the July 2005 Replicability Assessment”) Ofcom reconsidered whether these services are now replicable by BT’s competitors, typically, by using BT’s Wholesale Line Rental (“WLR”), Carrier Pre-Selection (“CPS”) and Partial Private Circuit (“PPC”) services.

1.9 Stakeholders were invited to respond to the July 2005 Replicability Assessment by 14 October 2005. Having considered the 12 responses received, Ofcom has concluded that BT’s retail business exchange line and inland call services are still not replicable. Ofcom has concluded, therefore, that the changes to regulation summarised in paragraph 1.4 above should not be triggered at this time.

1.10 Ofcom believes, however, that it is feasible for BT to address certain specific deficiencies in its WLR and CPS services and, having achieved that, competitors will be able to replicate BT’s retail business exchange line and inland call services. Ofcom has set out these deficiencies in Sections 4 and 5 and summarised them in Section 9 of this Statement.

1.11 The July 2005 Replicability Assessment also considered whether BT’s PPCs now enable BT’s retail low bandwidth leased lines (up to 8Mbit/s) to be replicated. However, as noted in the September 2005 Business pricing consultation, the Universal Service Directive severely limits Ofcom’s ability to consent to BT offering unpublished bespoke prices for the minimum set of leased lines (up to 2Mbit/s). Where the market for the minimum set of leased lines is not competitive, National Regulatory Authorities must impose certain conditions on providers with SMP, including requirements relating to discrimination, cost orientation, transparency and tariffs. Nevertheless, a finding of replicability would remove the presumption that when retail leased lines are included in a service bundle with non-SMP products such service bundles are unduly discriminatory.

1.12 Having reviewed responses to the July 2005 Replicability Assessment, Ofcom has concluded that BT’s low bandwidth leased lines are still not replicable. Ofcom believes there are a number of issues outstanding with BT’s PPC implementation that are a bar to replicability and these are discussed in Section 6 and summarised in Section 9. In addition, Ofcom is concerned that the pricing model used to determine PPC pricing may lead to disparities between the cost base of retail leased lines and of PPCs leading to competition issues with respect to the PPC as an effective remedy to BT’s SMP in the market for low bandwidth retail leased lines. Ofcom is therefore proposing to conduct a short review of the PPC pricing model shortly after the publication of this statement. It is possible that the result of this review may indicate that a more thorough review of the leased line market is warranted.

Next steps

1.13 Ofcom has concluded that once BT has resolved the issues identified in this document which are a bar to replicability Ofcom should no longer presume that when products, in respect of which replicability is deemed to be possible, are bundled with products from non-SMP markets that such bundles are unduly discriminatory; and that BT be given consent in respect of business exchange line services and inland calls to offer bespoke pricing in offers to customers with an annual spend with BT above £1 million. The form of consent, when given, will be conditional on BT observing the price floor summarised in paragraph 1.4 and will relate to the obligation contained in condition D3 Requirement to publish charges (see Annex 2), (imposed on BT on 28 November 2003) to adhere to published prices, terms and conditions unless Ofcom otherwise consents in writing. BT will also continue to be required to comply with relevant ex ante SMP conditions, e.g. undue discrimination, and competition law.

1.14 Ofcom anticipates that once BT believes it has resolved the outstanding issues which are a bar to replicability, it will write to Ofcom informing it of this view. Ofcom will then determine whether it believes the outstanding issues have been satisfactorily resolved and, if so, will consult on this view and the draft form of consent. This consultation is expected to last one month and upon its conclusion Ofcom will publish its final statement. For the avoidance of doubt, this consultation will be concerned solely with the issues identified in this Statement.

1.15 It is not necessary for BT to wait until the outstanding issues with all three products (CPS, WLR and PPCs) are resolved before informing Ofcom as described in 1.14 above. Each product can be examined separately and the relevant consent published if appropriate.

1.16 While the conclusions of this statement relate only to BT, it is Ofcom’s view that the principles can equally be applied to Kingston Communications plc in the retail markets where that provider has SMP, and in which it is subject to similar regulatory constraints. Ofcom has not, however, assessed whether the retail services offered by Kingston Communications plc can be replicated in the Hull area where Kingston Communications has SMP.

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