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Charge control review for LLU and WLR services - Statement

Statement published 06|02|12

Executive summary

1.1 On 3 February 2012, Ofcom notified the European Commission of provisional new charge controls that will apply to certain services provided by Openreach, BT's wholesale access division. Ofcom will adopt the new controls, subject to the outcome of the European Commission's new consultation process.

1.2 This draft Statement is the substance of that notification. It contains Ofcom's proposals for new charge controls for Local Loop Unbundling (LLU) and Wholesale Line Rental (WLR) services. Ofcom is publishing this draft statement to provide transparency of the European Commission notification process as this is the first time this new procedure has been used for a major regulatory decision on telecoms in the UK.

1.3 Under the revised European Framework that was transposed into UK law in May 2011, Ofcom is required to submit charge control proposals to the European Commission for their review. The European Commission has one month to review the draft decision during which it can comment and/or initiate further examination. The Body of European Regulators for Electronic Communications (BEREC) and other equivalent EU Member State national regulatory authorities also have the opportunity to comment during this one month period.

1.4 This is a change to the previous process under which Ofcom consulted with UK stakeholders and the EU at the same time. Following the changes, Ofcom is now required to consult the EU after having undertaken a UK consultation. In this case, Ofcom carried out consultations in March and November 2011 to obtain the views of stakeholders including BT Openreach, its customers and its competitors. The provisional prices being notified to the EU by Ofcom already take account of the outcome of these consultations.

1.5 Charge controls for these services are being set as a consequence of our 2010 reviews of the Wholesale Local Access (WLA) and Wholesale Fixed Analogue Exchange Line (WFAEL) markets. In both markets, we identified that BT (Openreach) has Significant Market Power (SMP) and that charge controls are necessary as a remedy to Openreach's ability to fix or maintain prices at an excessively high level for LLU and WLR services in the respective markets.

1.6 As part of this charge control review, we undertook a further examination of the WLA and WFAEL markets to satisfy ourselves that there has not been a material change in either market since Ofcom's market power determinations in relation to those markets. As set out in this draft Statement, we have determined that there has been no material change to either market since the 2010 determinations and that it remains appropriate to set charge controls.

1.7 The previous charge controls expired on 31 March 2011. Since 1 April 2011 Openreach has been setting charges in accordance with a voluntary commitment. This voluntary commitment expires on 31 March 2012.

1.8 The charge control will cover two years (2012/13 and 2013/14) after which any extension of the controls will be subject to further market reviews.

Structure of the charge controls

LLU

1.9 We are setting individual charge controls for Metallic Path Facility (MPF) rental, Shared MPF (SMPF) rental, and key migration services (see Figure 1). We are setting separate basket controls for the remaining MPF and SMPF ancillary services. We are also setting a separate Co-Mingling basket for ancillary services used for both MPF and SMPF.

1.10 We have decided that the new charge controls will commence on 1 April 2012.

1.11 Based on the policy proposals and financial modelling explained in this draft Statement, our proposed LLU charge controls are set out in Figure 1.1.

Figure 1.1: Proposed LLU charge controls

Basket/service Charge control for 2012/13 Charge control for 2013/14
MPF rental £87.41 RPI-5.9
SMPF rental £11.92 RPI-15.9
MPF Single Migration £33.54 RPI-11.3
MPF New Provide £51.16 RPI-14.2
SMPF Single Migration £33.54 RPI-11.3
SMPF Provide £33.54 RPI-11.3
MPF ancillary services basket -3.6% RPI-9 %
SMPF ancillary services basket -7.6 % RPI-13 %
Co-mingling ancillary services basket 1.8 % RPI-3.6 %

 

WLR

1.12 For WLR, we are setting charge controls on the same services as in the previous charge control. That is, the charge control will apply to the Analogue Core WLR rental service (‘WLR rental'), and continue to apply to the charges for WLR New Connection and WLR Transfer.

1.13 Consistent with the charge controls for LLU, the new charge controls for WLR services will commence on 1 April 2012 and will set a specific sterling cap for 2012/13.

1.14 Based on the policy proposals and financial modelling explained in this draft Statement, our proposed WLR charge controls are set out in Figure 1.2.

Figure 1.2: Proposed WLR charge controls

Basket/service Charge control for 2012/13 Charge control for 2013/14
WLR Rental £98.81 RPI-7.3 %
WLR Transfer £3.29 RPI %
WLR New  Connection £50.06 RPI-10.2 %

 

Valuation of BT's duct network

1.15 The cost of duct is a material input to the LLU and WLR charge controls. While the value of BT's duct assets appeared relatively stable from 2005-2010, we observed that in 2010 BT had undertaken a review of the valuation of its duct network and as a result the RFS for 2009/10 included a significant upward revaluation of its duct network, with the consequence that the proposed value of duct assets, to be used in the setting of the charge controls, was significantly increased.

1.16 As a consequence we have undertaken a review of our treatment of the value of duct to be used as an input to the charge controls. This review included a re-assessment of the 2005 review on the RAV of Openreach access assets. The RAV established a valuation of assets deployed before August 1997 on a HCA basis, and assets deployed since August 1997 on a CCA replacement cost basis.

1.17 As set out in Section 3, and Annex 1, we consider that the RAV methodology established in 2005 remains appropriate. Our assessment of BT's revision of the value of post August 1997 duct is that it does not represent a reliable estimate of the CCA value for the purpose of setting regulated charges. Accordingly, we have decided to estimate the value of post August 1997 duct through a RPI indexation of BT duct expenditure since August 1997.

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