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2021 WFTMR Volume 4: Pricing Remedies

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2021 WFTMR Volume 4: Pricing Remedies Promoting competition and investment in fibre networks: Wholesale Fixed Telecoms Market Review 2021-26 Volume 4: Pricing remedies Non-confidential – Redacted for publication [] STATEMENT: Publication date: 18 March 2021 Contents Section 1. Price regulation in Area 2 1 2. Price regulation in Area 3 41 3. Inter-exchange connectivity pricing 61 4. PIA charges 71 5. Ancillaries 114 6. Charge control design and implementation 140 7. Legal tests 168 2021 WFTMR Volume 4: Pricing remedies 1. Price regulation in Area 2 1.1 In this section we set out our decisions in relation to price regulation in the Wholesale Local Access (WLA) and Leased Lines Access (LL Access) markets in Area 2. We also set out our decision in relation to price regulation in the LL Access market in the High Network Reach area (HNR Area). Table 1.1 summarises our decisions. Table 1.1: Summary of decisions in Area 2 and the HNR1 Service Decision WLA in Area 2 a charge control on MPF and FTTC 40/10 rental charges, inflation-adjusted from 2021 levels2 a requirement that charges are fair and reasonable, on rental charges for higher bandwidths a charge control on FTTP 40/10 rental charges where a copper based 40/10 service is not available, set at a premium of £1.70 to the FTTC 40/10 price LL Access in Area 2 a charge control on rental and connection charges for leased lines of all bandwidths, inflation-adjusted from 2021 levels LL Access in the HNR Area a requirement that charges are fair and reasonable 1.2 We have decided to maintain existing price caps at their current levels in real terms for both WLA and LL Access services in Area 2. We consider that this will promote competition and investment in gigabit-capable networks by Openreach and other operators. It will also protect consumers and existing models of downstream competition in the short term. • It will promote competition through: making it attractive for telecoms providers to build new, competing networks themselves and/or enter into commercial arrangements with other network operators as opposed to relying on buying regulated wholesale services from Openreach; allowing sufficient margins for competing network operators; and providing a stable and consistent regulatory environment. • It will promote Openreach’s investment: as Openreach will have a strong incentive to invest in gigabit-capable networks given the threat posed by competing networks. We also expect Openreach to use its profits on copper services to invest in new networks. 1 As noted in Volume 3 Section 3, we are also imposing in each relevant fixed telecoms market an obligation for charges for network access to be fair and reasonable, except to the extent that a specific charge control or a basis of charges obligation applies. Our general position is that we would interpret this fair and reasonable requirement to mean that in the Area 2 and HNR markets, BT should not set prices that would equate to a margin squeeze under ex post competition law for existing and new forms of network access. 2 By FTTC 40/10 rental charges, we mean all VULA 40/10 (excluding FTTP 40/10) rental charges. Connection charges for MPF and VULA services are discussed in Section 5. 1 2021 WFTMR Volume 4: Pricing remedies • It will protect consumers and downstream competition because: for WLA services where we have charge controls, wholesale prices will not be able to increase in real terms; for WLA services where we do not have charge controls, prices will be constrained by the option of purchasing the charge controlled anchor products; for LL Access services, charge controls will apply to all speeds; and prices of both WLA and LL Access services will also be increasingly constrained by competition over time. 1.3 For LL Access in the HNR Area, we have decided that Openreach will continue to be obliged to set charges that are fair and reasonable. This will preserve investment incentives by allowing prices to be above cost to some degree. The greater degree of competition in the HNR Area will constrain Openreach’s ability to raise prices and protect consumers, and the fair and reasonable charging requirement will protect retail competition. 1.4 We explain our reasoning in the rest of this section. Stakeholder arguments and our response to them are set out in annex 12. 1.5 Where we are imposing charge controls, we set out the detail of these in Volume 4, Section 6. Our decisions in relation to price regulation of ancillary services in these markets is covered in Volume 4, Section 5. Our approach to price regulation in Area 2 1.6 For each of WLA and LL Access, there is a risk that, absent regulation, BT would have the incentive and ability to fix and maintain wholesale prices in Area 2 at an excessively high level and/or impose a price squeeze so as to have adverse consequences for end-users, including through weaker retail competition. To address these risks, we are imposing charge controls on the provision of WLA and LL Access, or a requirement that charges are fair and reasonable where no charge control applies. 1.7 In developing our pricing remedies for Area 2, we have had regard to our overarching legal duties. Consistent with the approach to remedies set out in Volume 3 Section 1, we have exercised our discretion in setting these controls in favour of an approach that promotes competition and investment in gigabit-capable networks, by Openreach and other operators. The resulting network competition will provide increasing protection for consumers in the long term, and in many areas effective competition may emerge such that the need for regulation falls away. This will take time and therefore we seek to protect consumers and existing models of downstream competition in the short term. 1.8 This approach to pricing was trailed in the DCR (2016), with implementation taking shape in our WLA (2018) and BCMR (2019) decisions. • In the WLA (2018), we introduced a cost-based control on Openreach’s prices for its wholesale services up to 40 Mbit/s and allowed pricing flexibility on services with speeds above 40 Mbit/s. We considered that this would support competitive network deployment during the review period, and that pricing flexibility on higher speeds would progressively increase the benefits of investment in competing networks as demand for higher speeds increased. 2 2021 WFTMR Volume 4: Pricing remedies • In the BCMR (2019), Ofcom’s decision on LL Access services in areas with limited competition (BT Only and BT + 1 areas) was also guided by the aim of promoting network-based competition, while protecting telecoms providers in the period during which network-based competition developed. The charge controls we imposed were not cost-based. Rather, we held prices flat in nominal terms (CPI-CPI). 1.9 We are starting to see the benefits of our approach. In addition to existing competition, predominantly from Virgin Media’s network, we are now seeing significant additional competition emerging from a number of network operators (see Annex 3). Our market analysis suggests that with enabling remedies, competitive network investment in Area 2 could be material. 1.10 In setting pricing remedies, our priority in areas that could support material and sustainable competitive commercial investment is to continue to promote network competition, given the significant benefits of this over competition based on regulated access to BT’s network.3 Moreover, we see this present period as a window of opportunity for competing network build, as Openreach has not yet upgraded the majority of its network to full fibre. There is also the possibility of long-term strategic partnerships with MNOs who are rolling out 5G. It is vital that we do not undermine this investment, missing this opportunity, and compromising the interests of consumers over the longer term. 1.11 Encouraging competition in networks that offer broadband services will also put pressure on Openreach to build gigabit-capable networks at scale.4 Competitive pressure, combined with regulatory support for Openreach’s build, will therefore drive the transformation of Openreach’s network, adding to the benefits arising from a more competitive future. 1.12 The Virgin Media network already provides a valuable source of competition in Area 2 and over the next few years we expect Virgin Media to invest further in its network, both to increase its coverage and to upgrade it to be gigabit-capable. Our pricing remedies therefore not only need to support investment by new competing networks, they need to recognise existing sources of competition. 1.13 The considerations discussed above apply to price regulation of both WLA and LL Access products in Area 2. We are keen to encourage investment in different types of network, although much of the investment is expected to be by networks offering a range of services to both business and residential customers.5 We also take into account that regulation of each market affects incentives to invest in networks that support services in both markets. Wholesale Local Access services in Area 2 1.14 We have considered different options for setting charge controls in the WLA Area 2 market, including approaches suggested by stakeholders. We assess which would meet our 3 We describe the benefits of network competition in Volume 1, Section 2. 4 We describe the benefits and importance of gigabit capable networks in Volume 1, Section 2. 5 See Annex 3. 3 2021 WFTMR Volume 4: Pricing remedies objective of promoting competition and investment in gigabit-capable networks by Openreach and other network operators, and also protect consumers and existing models of downstream competition in the short term.
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