Leased Lines Charge Control

Summary

Overview

1.1 This consultation document contains Ofcom's specific proposals for new charge controls for certain leased lines services provided by BT.

1.2 A leased line is, in essence, a communications service which provides dedicated transmission capacity between fixed locations, which can be used to carry voice and data traffic. Many organisations, both in the private and public sectors, use leased lines to support a wide variety of information and communications technology ('ICT') applications, such as access to the internet, private voice and data networks, backup and disaster recovery, remote monitoring and telemetry applications.

1.3 Leased lines are also used by communications providers ('CPs') as a key building block in their communications networks. For example, mobile network operators ('MNOs') use large volumes of leased lines to carry mobile voice and data traffic between their radio base stations and their switching centres. Similarly, providers of fixed broadband services use substantial volumes of leased lines to carry traffic between local aggregation points, such as BT's local exchanges, and their core networks.

1.4 On 18 June 2012 we published the Business Connectivity Market Review Consultation ('the BCMR Consultation') in which we set out our analysis of competition in the provision of leased lines services in the UK . This analysis indicates that BT has Significant Market Power ('SMP') in the provision of a number of wholesale leased lines services. To address this SMP a number of remedies are proposed, including charge controls in some of the relevant markets which we have identified. This separate consultation therefore supplements that publication by seeking views from interested parties about our specific charge control proposals.

Our approach

1.5 In developing and designing our charge control proposals we have had regard to a number of objectives , amongst which:

• we want to ensure that the prices for wholesale leased lines services are not excessive and are broadly in line with the cost of provision. Wholesale prices for leased lines are likely to be reflected in retail prices. Excessive wholesale prices are likely to result in excessive retail prices, which would be to the detriment of consumers.
• we are seeking to promote efficiency in the provision of wholesale leased lines services. Through the structure of the charge control, it is possible to provide BT with the opportunity to make efficiency improvements. These improvements would also be in the interest of consumers, as they can ultimately share the benefits of greater efficiency.

1.6 We propose to introduce an RPI -X type control for the proposed main basket controls. This type of control aims to align prices with cost at the end of the charge control period (i.e. 2015/16). This approach has been widely used in the regulation of UK utilities, including those in the telecommunications sector. However, where competition is more established, in the West, East and Central London Area (the 'WECLA'), we propose a more deregulatory approach, with a 'safeguard cap'.

1.7 In the BCMR Consultation, we set out why we have chosen a forward-looking period of three years for this review. We consider that the duration of the proposed charge controls should be consistent with this forward-looking period.

1.8 Similarly to the existing leased lines charge controls, we propose to charge control traditional interface ('TI') and Ethernet services (known as alternative interface ('AI')) in separate baskets. However, in contrast to the existing controls, we propose to incorporate some of the additional ancillary services in the main baskets, e.g., associated ancillary services and equipment. We also propose to apply a number of sub-caps on certain services where the overall basket cap may not offer sufficient protection to customers.

1.9 Overall, we consider that our charge control proposals are appropriate to secure or further our statutory duties, including to ensure that we further the interests of citizens and consumers in the relevant leased lines markets.

Summary of proposals

1.10 We are proposing to have two separate service baskets for wholesale services:

i) TI; covering low, medium and high bandwidth services outside the WECLA, low bandwidth services within the WECLA and regional trunk services at all bandwidths.
ii) Ethernet; covering services up to and including 1Gbit/s outside the WECLA and Ethernet services above 1Gbit/s outside the WECLA.

1.11 In addition, we are proposing to separately control excess construction charges ('ECCs'), accommodation services and AI services in the WECLA; covering AI services up to and including 1Gbit/s inside the WECLA.

1.12 Our proposed central cases for the TI basket and Ethernet basket are RPI+3.25% and RPI-12% respectively. In respect of the AI services in the WECLA, we are proposing to apply a safeguard cap of RPI-RPI on each relevant service.

1.13 For ECCs, we are proposing average starting charge adjustments of -30% and then a sub-cap of GBCI -0% on each charge. For accommodation services, we are proposing a sub-cap of RPI-0% on each charge.

1.14 Following the recommendation within the BCMR, we also propose a safeguard cap on TI retail analogue services, which we propose to set at the same level as the overall TI basket of RPI+3.25%.

1.15 Table 1.1 below summarises our proposals.

Table 1.1 Summary of our proposals (based on a mid-point of our range)

*Sub-baskets control applies to the weighted average value of revenues of services within the basket. This is in contrast to a sub-cap which applies to each charge.

1.16 We consider that these charge controls proposals are sufficient to constrain BT's pricing. They will provide incentives to make efficiency improvements and are appropriate for achieving the other objectives pursued. We are therefore not proposing to impose a cost orientation obligation in addition to these charge controls.

Consultation

1.17 We welcome and invite views and comments on our proposals in this document by no later than 30 August 2012. Following our consideration of responses, we will consult with the European Commission, the Body of European Regulators for Electronic Communications ('BEREC') and national regulators in other member states before reaching our decision on our proposals. We expect to publish our statement early in 2013.