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Fixed access market reviews: wholesale local access, wholesale fixed analogue exchange lines, ISDN2 and ISDN30

Executive Summary

1.1 This consultation document sets out the preliminary conclusions of our review of fixed access markets in the United Kingdom. We assess the state of competition in these markets and, where we find that any of these markets is not effectively competitive as a result of any communication provider ('CP') having significant market power ('SMP') in those markets, we propose regulatory obligations to address the competition concerns we have identified arising out of that SMP. This may include, for example, requirements to provide services and, in some cases, controls on the prices charged for such services. In each case, we explain the approach we have adopted, the analysis that has been undertaken and our proposals.

1.2 We intend to finish our review in time for any new rules, including, if appropriate, any new charge control remedies, to take effect when the current set of charge controls expire in April 2014.

Background

1.3 The Fixed Access Market Reviews ('FAMR') consider whether and to what extent regulation is needed for the period 1 April 2014 to 31 March 2017 in the following markets in the United Kingdom ('UK'):

  • Wholesale Fixed Analogue Exchange Lines ('WFAEL');
  • ISDN30;
  • ISDN2;
  • additional retail markets in the Hull Area only - residential fixed narrowband analogue access, business fixed analogue access; and
  • Wholesale Local Access ('WLA')

1.4 We published a Call for Inputs ('the 2012 FAMR Call for Inputs') on 9 November 2012 and received responses from 22 stakeholders, ranging from individuals and local councils, to communication providers.

1.5 Our provisional conclusions set out in this consultation have been based on the information we routinely collect on these markets while carrying out our duties, stakeholder responses to the 2012 FAMR Call for Inputs, discussions with industry stakeholders and information supplied by CPs in response to multiple information requests (made using our statutory information gathering powers), covering network and financial data, along with relevant publicly available information (including material from investor presentations and analysts' reports).

1.6 As part of this review, we have been undertaking analysis of quality of service ('QoS') issues related to the provision of regulated access services. This has been prompted by evidence of a decline in QoS provision and concerns expressed by industry stakeholders and end users of these services. We present as part of this consultation relevant research, analysis, conclusions on these issues and, where appropriate, proposals for remedies to address these issues as they relate to the fixed access markets.

1.7 We are also, at the same time as carrying out this review, carrying out a review of the Wholesale Broadband Access Market. The consultation for this review will be published shortly after this one, and references to this consultation are made where appropriate.

Proposed conclusions

Market definition and SMP assessment

1.8 For the reasons set out in this document, for the majority of the markets under review we propose to identify the same markets and make the same the market power determinations as were made in the most recent set of reviews for these markets.

WFAEL

1.9 We propose defining the following markets:

  • Wholesale fixed analogue exchange lines in the UK excluding the Hull Area; and
  • Wholesale fixed analogue exchange lines in the Hull Area.

1.10 This definition includes fixed analogue exchange lines provided over alternative fixed networks (e.g. cable and local loop unbundling ('LLU')) as well as narrowband analogue exchange line services provided over a NGA network using an analogue terminal adaptor (e.g. fibre-to-the premise ('FTTP')). It excludes exchange lines provided over mobile and over-the-top broadband services (although we take into account the growing constraint from these alternative technologies in our SMP assessment).

1.11 While we recognise growing competitive constraints on WFAEL, not least the increasing use of metallic path facility ('MPF'), BT's share is likely to remain above 50% and LLU CPs will continue to rely on WFAEL in some areas. We therefore consider BT continues to have SMP in the wholesale fixed analogue exchange lines market in the UK excluding the Hull Area. We also propose to find that KCOM has SMP in the wholesale fixed analogue exchange lines market in the Hull Area given it has a 100% market share and given the presence of material barriers to entry.

ISDN30

1.12 ISDN30 is an access service supporting up to 30 narrowband 64kbit/s channels and is used most commonly to provide multiple telephone lines to larger business sites.

1.13 We propose defining the following markets:

  • Wholesale ISDN30 exchange line services in the UK excluding the Hull Area; and
  • Wholesale ISDN30 exchange line services in the Hull Area.

1.14 We propose to find that BT has SMP at the wholesale level in the UK excluding the Hull Area, and KCOM has SMP at the wholesale level in the Hull Area. The proposed findings of SMP are based on high market share, high barriers to entry and a lack of countervailing buyer power.

ISDN2

1.15 ISDN2 is a narrowband access service designed to cater for smaller business sites with single line ISDN2 services providing 2 channels (each 64kbit/s). We propose defining the following markets:

  • Wholesale ISDN2 exchange line services in the UK excluding the Hull Area;
  • Wholesale ISDN2 exchange line services in the Hull Area; and
  • Retail ISDN2 exchange line services in the UK excluding the Hull Area.

1.16 We propose finding BT has SMP at the wholesale level, but no SMP at the retail level in the UK excluding the Hull Area, and KCOM to have SMP at the wholesale level in the Hull Area. In both cases the finding of SMP is based on a high market share, high barriers to entry and a lack of countervailing buyer power.

1.17 On balance we found no SMP at the retail level in the UK excluding the Hull Area due to BT's declining market share over time and modest barriers to entry and expansion once the wholesale remedies are in place.

Other retail markets in the Hull Area

1.18 Previous reviews have identified the following markets:

  • Retail fixed analogue exchange lines in the Hull Area;
  • Retail ISDN2 exchange line services in the Hull Area; and
  • Retail ISDN30 exchange line services in the Hull Area.

1.19 We find that there have been no developments since these markets were last reviewed in 2009 that would have a material effect how these markets are defined.

1.20 However, having applied the three criteria test in accordance with the European Commission's Recommendation on relevant product and service markets in which ex ante regulation may be warranted ('the 2007 EC Recommendation') , we consider that competition law would now be sufficient to address any competition concerns identified in each market. Therefore, in light of this, we consider that it is not appropriate to identify and analyse these retail markets in the Hull Area.

WLA

1.21 WLA refers to the fixed connection from the local exchange/access node to the end user. That connection is an input into a variety of retail services - narrowband telephony, broadband (both standard and superfast), ISDN2, and ISDN30.

1.22 We propose defining the following markets, based on the proposed findings of substitutability between different forms of broadband (including cable within the market, but excluding mobile):

  • the supply of loop-based, cable-based and fibre-based wholesale local access at a fixed location in the UK excluding the Hull Area; and
  • the supply of loop-based, cable-based and fibre-based wholesale local access at a fixed location in the Hull Area.

1.23 We propose that BT and KCOM have SMP in the UK excluding the Hull Area and the Hull Area respectively, reflecting their high and stable market shares and the large barriers to entry at this level.

Remedies

1.24 We first detail the general remedies we are proposing for all markets where we have provisionally identified SMP, before detailing the specific access remedies we are proposing for each market.

General remedies

1.25 We propose in general to maintain the current set of general remedies imposed in the markets in which we are proposing in this consultation to find SMP in the UK excluding the Hull Area and the Hull Area respectively. Our analysis indicates that these remedies continue to be appropriate, though in some areas they may need to be modified or extended. We also propose the imposition of certain additional remedies to address quality of service issues.

1.26 The more substantive changes, and our reasons for them, are set out in summary below.

Quality of service

1.27 We have proposed additional obligations on BT to address concerns as to whether there are appropriate incentives on BT to maintain quality of service delivery with respect to the provision of access services. Specifically we are proposing to:

  • specify the minimum set of services against which BT is required to offer SLA/SLGs;
  • require BT to provide specified KPIs for WLA, WFAEL, ISDN2 and ISDN30; and
  • require BT to meet minimum standards for specified services in WLA and WFAEL market.

1.28 In addition, we set out our expectation for the process of negotiating new, or modifications to, SLA/SLGs

Basis of charges

1.29 Unlike in previous reviews, we are not proposing to impose Basis of charges across all products. Instead, we propose a Basis of charges obligation be imposed only on the following products:

  • Sub-Loop Unbundling ('SLU');
  • Physical Infrastructure Access ('PIA');
  • Time Related Charges ('TRCs');
  • Special Fault Investigations ('SFIs'); and
  • electricity charges.

Equivalence of Inputs ('EOI')

1.30 We propose an EOI obligation on BT to provide network access on an EOI basis. We propose that this obligation will apply to the provision by BT of network access which it is providing on an EOI basis as at the date the proposed SMP condition comes into force.

Price notification

1.31 We intend to retain 90 days notice for existing wholesale products for WLA and WFAEL but propose to reduce notice periods for ISDN2 down to 28 days - the same as ISDN30. We also propose 28 days notice for price reductions (including special offers) for WLA products.

Statement of Requirements ('SoR')

1.32 We are proposing to include a requirement that Openreach's SoR guidelines meet the principle that the reasons for rejecting SoRs are clear and transparent. We also provide guidance on how any confidentiality concerns arising out of this requirement might be addressed, including the use of the Office of the Telecommunications Adjudicator and independent consultants.

WLA - NGA remedies

Virtual Unbundled Local Access ('VULA')

1.33 VULA provides CPs with access to BT's NGA network through a virtual connection giving them a defined link to their customers, with substantial control over that link. We propose that BT should continue to provide VULA services to all CPs on reasonable request.

VULA characteristics

1.34 We consider that the current characteristics remain appropriate for the next market review period, and that BT's VULA product has either met the characteristics or that progress is being made to do so without requiring further action from Ofcom.

VULA pricing

General approach to VULA pricing

1.35 We do not propose to regulate the price of VULA, thus allowing BT to retain pricing flexibility on NGA pricing. In particular, we consider that competitive constraints exist which are likely to reduce the risk of unregulated VULA pricing (such as the pricing of CGA services and Virgin's services). Further, there remains uncertainty about future demand for NGA services and the profile by which NGA investment should be recovered. As such, determining the level of charges remains difficult and carries a risk of setting inappropriate price levels that would particularly harm incentives for efficient investment (either expanding the network or improving technology) and BT's ability to experiment with pricing to encourage fibre take up.

VULA switching

1.36 While our general approach to VULA pricing, as described above, is to provide BT with pricing flexibility, we consider that it is appropriate to distinguish switching costs from the general pricing approach as the costs of switching are particularly important for retail competition (this is particularly important in light of BT Retail's high share of VULA connections).

1.37 Stakeholders have raised concerns regarding the £50 charge for VULA to VULA migrations, which we consider to be high when benchmarked against similar services/activities (such as WLR Transfer and IPStream migrations - both around £10). As such we propose to introduce a charge control for the VULA to VULA migration charge which sets the price in the range of £10 to £15.

1.38 Some stakeholders also raised concerns about the 12 month wholesale minimum contract term for VULA, for both new connections and migrations. In comparison, most Openreach rental products have a one month minimum term. For migrations only, we think it is likely to ultimately be in consumers' interests to restrict the minimum term for migrations at the wholesale level to one month following a migration, as it may facilitate switching and promote retail competition for VULA services

VULA margins

1.39 Stakeholders raised concerns about BT maintaining an inappropriate margin between its wholesale VULA prices and its retail superfast broadband prices (the VULA margin). Accordingly, in this review we set out our proposals regarding the ex ante regulation of the VULA margin. In doing so, we note that, separately, Ofcom has opened an ex post Competition Act 1998 investigation in response to a complaint from TalkTalk alleging that BT has been engaging in a margin squeeze with respect to the VULA margin.

1.40 In this review, we first propose that it is appropriate to intervene to promote competition in relation to superfast broadband by requiring BT to set a VULA margin under our ex ante powers and not to rely solely on ex post competition law. This is based on our assessment of the importance of superfast broadband in the future and of effective retail competition in its supply.

1.41 Second, we propose that our intervention be specifically designed to address the potential concern that BT sets a VULA margin that does not allow an operator that has slightly higher costs than BT (or some other slight commercial drawback relative to BT) to profitably match BT's retail superfast broadband prices. We propose it is not appropriate to intervene to address the concern that BT sets a VULA margin that does not allow such an operator to profitably significantly undercut BT's retail superfast broadband prices.

1.42 Third, we propose to supplement the proposed obligation on BT to supply VULA on fair and reasonable terms, conditions and charges with guidance on how we are likely to undertake our assessment when testing whether the VULA margin complied with that obligation. This includes that, when assessing the appropriateness of the VULA margin, an adjusted equally efficient operator test would best describe the approach we are likely to adopt in practice, in order to address the potential concern detailed in the paragraph above. We also describe in detail the characteristics of such an operator, including its existing subscriber base, its telephony and broadband products, its copper access technology, the audio-visual services it supplies and its customer lifetimes.

SLU

1.43 SLU allows OCPs to deploy their own NGA network between the exchange and (usually) the cabinet, using BT's lines from the cabinet to the end user. We propose to maintain the obligation on BT to offer SLU across the UK excluding the Hull Area to all CPs on reasonable request. This will provide CPs with a complementary alternative to VULA to offer superfast services by deploying their own NGA networks, or to exploit areas where NGA has not been deployed (e.g. final 10%).

1.44 With respect to pricing, we propose a Basis of charges obligation to address the risk of excessive prices. The relevant condition will set out that prices should be set to reflect the price differentials for the corresponding LLU services (given that they draw on the same costs).

PIA

1.45 PIA provides other CPs with access to BT's network infrastructure (e.g. ducts and poles) to enable other CPs to deploy their own NGA networks. We propose to maintain an obligation on BT to offer PIA across the UK excluding the Hull Area to CPs on reasonable request, for the deployment of access networks. This will provide other CPs with a complementary alternative to VULA for offering superfast services by deploying their own NGA networks or to exploit areas where NGA has not been deployed (e.g. the final 10%).

1.46 With respect to pricing, we propose a Basis of charges obligation to address the risk of excessive prices.

WLA - CGA remedies

1.47 LLU enables other CPs to take control of BT's physical telephone lines so that they can provide services direct to consumers. This has been a successful remedy in promoting competition and investment. Take up is high and, despite competition from NGA-based services, is likely to remain so over the next review period. We therefore propose to continue to oblige BT to offer an LLU product and ancillary services to all CPs on reasonable request.

1.48 To address the risk of excessive pricing, we propose a charge control for LLU rentals and certain other ancillary services, including migrations and new provides, and removing the current Basis of charges obligation for these services. However, we propose a Basis of charges obligation on TRCs and SFIs, which require charges to be set on a reasonable forward looking fully allocated cost basis.

1.49 We also propose a Basis of charges obligation on electricity charges, which will require charges to be set on the basis of wholesale electricity charges plus an appropriate mark-up to reflect the costs related to the wholesale purchase of electricity and the setting of electricity charges.

WFAEL

1.50 WLR allows OCPs to compete with BT's downstream businesses. The remedy has been, and continues to remain, a key support of effective competition in the provision of fixed narrowband services at the retail level, and, therefore, we propose to maintain an obligation on BT to provide WLR to all CPs on reasonable request.

1.51 To address the risk of excessive pricing, we propose a charge control for WLR rentals, transfers and new provides and propose to remove the current Basis of charges obligation. We however propose to adopt a Basis of charges obligation for time related charges, which will require prices to be set on a reasonable forward looking fully allocated cost basis.

ISDN30

1.52 We propose to maintain the obligation on BT to provide wholesale ISDN30 to allow other CPs to compete with BT in the provision of downstream services. To address the risk of excessive pricing, we also propose to maintain charge controls on wholesale ISDN30 services based on the current level of charges.

ISDN2

1.53 We propose to maintain the obligation on BT to provide wholesale ISDN2 to allow other CPs to compete with BT in the provision of downstream services. To address the risk of excessive pricing, we propose to reduce the ISDN2 transfer charge to £10, introduce charge controls for ISDN2 rentals, transfers and connections, and remove the current Basis of charges obligation.

Consultation and next steps

1.54 We invite comments from interested parties on the proposals in this document. The consultation period runs for 12 weeks and the deadline for responses is 25 September 2013. We aim to publish our conclusions in the first quarter of 2014.

1.55 As noted above, we also intend to publish in the next few weeks the LLU and WLR Charge Control consultation detailing our charge control proposals forming part of this review. The consultation periods for these two consultations will overlap, giving stakeholders the opportunity to review the complete package of remedies before responding to the consultations.

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