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Charge control review for LLU and WLR services

Summary

Executive summary

1.1 This consultation document contains Ofcom's proposals for new charge controls for Local Loop Unbundling (LLU) and Wholesale Line Rental (WLR) services.

1.2 We are proposing new controls as a result of our conclusions in the reviews of the Wholesale Local Access (WLA) and Wholesale Fixed Analogue Exchange Line (WFAEL) markets. In both markets, we have identified that BT (Openreach) has Significant Market Power (SMP) and that charge controls are necessary as a remedy to Openreach's ability to set excessive levels of charge for LLU and WLR services in the respective markets.

Structure of the proposed charge controls

LLU

1.3 As with the current controls, we propose to set individual charge controls for Metallic Path Facility (MPF) rental and Shared MPF (SMPF) rental, and separate baskets for MPF and SMPF ancillary services. We are also proposing to continue with a separate co-mingling basket for ancillary services used for both MPF and SMPF.

1.4 We are proposing some changes to the structure of the controls for MPF and SMPF ancillary services. Specifically, the changes we are proposing are:

  • Separate values of X for each basket. Based on our modelling we believe that this is necessary to establish the right glide paths to align charges and costs.
  • Separate controls outside of the main baskets for certain key migration services. This will ensure that the charges for these services do not become misaligned with their underlying costs as a result of being included in a broader basket, as was the case with MPF New Provide under the current controls.

1.5 In developing these proposals, we have taken account of the Final Determinations of the Competition Commission on points in the appeal of the current charge controls .

1.6 Based on the policy proposals and financial modelling explained in this document, we propose that the new charge controls for the rental services and main baskets for LLU will be set in the following ranges, in Figure 1.1.

Figure 1.1 : Proposed LLU charge controls

  Basket/service Range for charge controls Base case Ranges for charge ceilings for 1st period of the controls (from start date to 31 March 2012) Base case
MPF rental RPI-2.0% -RPI-5.0% RPI-3.5% £88.70 - £91.30 £90.00
SMPF rental RPI-11.6% - RPI-14.6% RPI-13.1% £13.50 - £14.00 £13.70
MPF ancillary services basket RPI-6.0% - RPI-9.0% RPI-7.5% N/A N/A
SMPF ancillary services basket RPI-9.4% - RPI-12.4% RPI-10.9% N/A N/A
Co-mingling ancillary services basket RPI+6.0% - RPI+9.0% RPI+7.5% N/A N/A

WLR

1.7 For WLR, we are proposing the same structure as applies in the existing control. For avoidance of doubt, that is that the proposed control will apply to the Analogue Core WLR rental service (‘WLR rental'), and we propose to continue to apply controls on the charges for WLR New Connection and WLR Transfer.

1.8 Based on the policy proposals and financial modelling explained in this document, we propose that the new charge controls for WLR rental and New Connection will be set in the following ranges. We are consulting on a number of options for the treatment of WLR Transfer and these are explained in Section 5.

Figure 1.2: Proposed WLR charge controls

Service Range for charge controls Base case Ranges for charge ceilings for 1st period of the controls (from start date to 31 March 2012) Base case
  WLR Rental   RPI-3.0% - RPI-6.0%   RPI-4.5%   £102.10 - £105.20   £103.70
  WLR New Connection   RPI-4.6% - RPI-7.6%   RPI-6.1%   £54.00 - £55.70   £54.90

Duration of the new controls

1.9 We are proposing that the new controls for both LLU and WLR services should run to 31 March 2014. This will enable review before the end of the forward look period for both the WLA and WFAEL market reviews. In developing this proposal, we have taken account of the requirements of the new European Regulatory Framework, scheduled to be implemented in the UK by May 2011.

Valuation of BT's duct network

1.10 Since completion of the previous Openreach charge control reviews, BT has undertaken a review of the valuation of its duct network. As a result, its Regulatory Financial Statements (RFS) for 2009/10 include a re-valuation of BT's duct network. BT has further provided an estimate of duct value to be used in the charge controls based on this re-valuation.

1.11 The cost of duct is a material input to the LLU and WLR charge controls, and we are consulting in this document on our treatment of the value of duct as an input to the charge controls. As part of our consideration of this we have reviewed our 2005 decision on the Regulatory Asset Value (RAV) of Openreach access assets. The RAV established a valuation of assets deployed before August 1997 on a historic costs accounting (HCA) basis, and assets deployed since August 1997 on a current costs accounting (CCA) replacement cost basis.

1.12 We are proposing that the RAV methodology established in 2005 remains appropriate. Our assessment of BT's revision of the value of post 1997 duct is that it does not represent a reliable estimate of the CCA value for the purpose of setting regulated charges. Accordingly, we are consulting on a range bases for the CCA valuation for post-1997 duct, derived directly from capital expenditure on duct since 1997, to be included in the costs and charges for LLU and WLR services.

Cost of Capital

1.13 Our proposals and the underlying cost modelling are based on a weighted average cost of capital (WACC) for Openreach of 8.6%. This is based on our current consultation on the WACC for BT, including the disaggregated WACC for Openreach, as part of the broader consultation on charge controls for Wholesale Broadband Access (WBA). Openreach's WACC is an important component of the costs of the regulated services covered by this consultation document and therefore, in our broader consideration of the WACC, we will take account of any comments from stakeholders on the WACC submitted in response to this consultation. For ease of reference therefore, the section of the WBA consultation document containing our proposals on the BT WACC is reproduced in this document at Annex 12 (Cost of Capital).

Timing of this review and the need for bridging arrangements

1.14 The new controls on which we are consulting in this document will not be in place in time for the expiry of the current controls on 31 March 2011. This is a consequence of the appeal of the existing controls which was finally concluded in October 2010 . Our work was scheduled to enable us to take account of appeal outcomes in developing our proposals for the next charge controls, and this meant that we were unable to complete the reviews before the expiry of the current controls.

1.15 To bridge the gap between the expiry of the current controls and the start of the new controls, Openreach has offered to adhere to charge ceilings calculated using the financial models used to set the current controls, adjusted for consistency with the remedies applied following the Competition Commission's Determinations in the appeal of the current controls. Figure 1.3 shows these price ceilings alongside current charge levels.

Figure 1.3: Bridging arrangement prices

Service Bridging charge ceiling Current charge (i.e. at 31 March 2011)
MPF Rental £91.50 £89.10
SMPF Rental £14.70 £15.04
WLR rental £103.68 £103.68
MPF New Provide £52.79 £62.11
WLR New Connection £48.22 £55.74
WLR Transfer £3.09 £3.09
Ancillary services The charge for individual services to rise by no more than 3%.  

1.16 We have indicated to Openreach that we consider that setting the charges on the basis indicated is a reasonable approach, and that we therefore do not intend to impose interim charge controls for the period between the expiry of the existing controls and the start of the new ones. We announced this publicly on 1 December 2010. Stakeholders should note that the X ranges on which we are consulting are calculated using the charges on 31 March 2011 (i.e. the current charges shown above) as the start point and not the bridging charge levels.

1.17 We are also proposing that the 90 day notification periods for regulated services be reduced to 28 days for the first charge changes in the next charge control period. This is will enable charges to be adjusted more quickly and reflects the fact that a 90 day notification prior to the start of the controls will not be appropriate .

Disclosure of financial modelling

1.18 Our modelling approach, together with the associated outputs, is explained in Section 7 and its supporting annexes. In addition we are making non-confidential versions of the charge control models available to stakeholders who request them. The charge control models have been developed using highly disaggregated data from Openreach containing cost forecasts and allocations of costs across Openreach's business – i.e. to LLU and WLR services, and also to services and activities which are out of the scope of this review. In developing our proposals on model disclosure and transparency, we have had regard to our obligations under the Communications Act 2003 (“the Act). We have also taken account of our Framework for Disclosure of Charge Control Models.

1.19 The proposed controls have been developed using three models - the Regulatory Asset Value (RAV) model, the Cost Allocation model, and the Cost Forecast model - and we are providing disclosure of these models as follows:

  • The full RAV model is available to stakeholders who request it from today.
  • Two non-confidential versions of the Cost Allocation model will be made available to stakeholders. An ‘empty model' is available to stakeholders who request it from today. This will provide visibility of the full functionality of the model. We will also provide a further non-confidential version of the Cost Allocation model showing information on the allocation of costs for in scope services and activities. This model will be available shortly, and we will notify stakeholders of this.
  • Two non-confidential versions of the Cost Forecast model will also be made available. An ‘empty model' is available to stakeholders who request it from today. We will also provide a further non-confidential version of the Cost Forecast model showing information relevant to the consultation. This model will also be available shortly, and we will notify stakeholders of this

1.20 Our approach to disclosure is explained in Section 6.

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