Local loop unbundling: setting the fully unbundled rental charge ceiling and minor amendment to SMP conditions FA6 and FB6

Statement published 30 November 2005

Summary

Wholesale local access market review

1.1 In the Review of the wholesale local access market, 16 December 2004, (the “December statement”) Ofcom determined that BT has significant market power (“SMP”) in the market for wholesale local access in the UK excluding the Hull Area and Kingston has SMP in the wholesale local access market in the Hull Area. Ofcom imposed certain SMP services conditions on BT and Kingston in those markets and in respect of the provision of co-location. The provision of local loop unbundling (“LLU”) services is a specific remedy imposed on BT within the wholesale local access market.

1.2 LLU is a process by which the dominant provider’s local loops are physically disconnected from its network and connected to another communications provider’s network. This enables competing providers partly or wholly to lease a customer’s access line and provide voice and/or data services directly to end users.

1.3 The provision of LLU services is aimed at stimulating competition in the provision of broadband and voice services. LLU services are important because they allow competing providers to innovate, differentiate their product offerings to a greater extent and provide higher bandwidth services, a better range of applications and improved service levels.

Delay setting the fully unbundled rental charge ceiling

1.4 Ofcom deferred setting the charge ceiling for the fully unbundled rental charge when the other LLU charge ceilings were set in December 2004. This was because a high proportion of the total cost of this charge is determined by the cost of laying and maintaining the copper loop, the costs for which Ofcom was in the process of reviewing. Ofcom stated in the December statement that it would determine the fully unbundled rental charge ceiling on completion of the copper cost review. Ofcom published its statement entitled Valuing copper access on 18 August 2005 and therefore Ofcom is able to set a ceiling for this charge.

1.5 BT voluntarily reduced the fully unbundled rental charge on 1 August 2005 from £105.09 to £80.00. Despite BT’s charge reduction, Ofcom still considers it appropriate to set a charge ceiling for this charge in order to ensure that BT’s charge is both certain and transparent and that BT is not able to increase it to an excessive level.

The September consultation

1.6 Ofcom published a consultation document proposing a ceiling for the fully unbundled rental charge on 7 September 2005 (the “September consultation”). Ofcom has considered the responses to that consultation carefully and has taken them into account in making its final decision.

Approach to setting the fully unbundled charge ceiling

1.7 Ofcom’s approach to setting the fully unbundled rental charge ceiling is the same as set out in the September consultation apart from the exclusion of excess construction costs. The following summarises Ofcom’s approach:

Ofcom has used cost data for 04/05 from BT’s regulatory accounts;
as this charge ceiling applies from January 2006, Ofcom has projected costs for 2005/06 to ensure that the cost data is consistent with the period for which the charge is intended to apply;
an efficiency factor of 1.5% has been applied to 05/06 operating costs;
a 10.0% rate of return on capital employed has been applied, as set out in the conclusions of Ofcom’s review of BT’s cost of capital[^(-1-)];
Ofcom has applied a 16% reduction to D-side copper costs to reflect the fact that shorter lines are used to provide broadband services;
the costs for new drop wire installation for fully unbundled loops are recovered in the rental charge in order to achieve consistency between LLU, wholesale line rental (“WLR”) and BT’s retail products;
Ofcom has disallowed some of BT’s proposed increase in drop costs and excluded those drop costs which are already being recovered through residential retail charges, in order to ensure no double recovery; and
Ofcom has removed excess construction costs for which BT charges its customers and WLR service providers separately.

1.8 On the basis of this approach, Ofcom has set the fully unbundled rental charge ceiling at £81.69, which will take effect from 1 January 2006.

Minor amendment to SMP services conditions FA6 and FB6

1.9 SMP services conditions FA6 and FB6, requirement to notify technical information, currently require BT and Kingston to provide 90 days notice of new technical information or before amending existing technical terms and conditions. The Network Interoperability Consultative Committee (“NICC”) determines technical specifications with industry consensus and has its own processes for consulting on new, and changes to existing, technical specifications. It therefore appears unnecessary and inappropriate for BT or Kingston to separately provide 90 days notice for these particular specifications, which could cause unnecessary delay.

1.10 Therefore, Ofcom has amended SMP services conditions FA6 and FB6 to carve out technical specifications as determined by NICC from the 90 day notification requirement.

Footnotes:

1.- Ofcom’s approach to risk in the assessment of the cost of capital, 18 August 2005, which can be found at http://www.ofcom.org.uk/consult/condocs/cost_capital2/statement/

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