BT’s response to Ofcom’s consultation document “Business Connectivity Market Review: preliminary consultation on passive remedies” 5 January 2015 NON CONFIDENTIAL VERSION Comments on this response should be sent to: Matt Cherry, BT Group Regulatory Affairs, via email at [email protected] Non Confidential Version Contents 1. Executive Summary ................................................................................................................. 5 2. Outline ................................................................................................................................... 9 Introduction ....................................................................................................................................... 9 The evidence shows that the level of regulation should be reduced rather than increased ............ 9 An appropriate assessment framework is vital (Section 3) ............................................................. 11 Significant innovation benefits from passives have not been identified (Section 5) ...................... 12 The adverse impacts of passive remedies are large (Section 6) ...................................................... 13 Assessment of the options for passives (Sections 7 to 9) ................................................................ 13 3. Ofcom’s Framework for assessing passive remedies ............................................................... 15 Introduction ..................................................................................................................................... 15 The Consultation approaches the problem from the wrong perspective ....................................... 16 The framework needs to assess whether passives appropriately address the problem identified 17 The relevant factors in the framework ............................................................................................ 18 The framework must be clearer on how factors are balanced ....................................................... 20 A more appropriate long run framework is required ...................................................................... 21 4. International benchmarking of business connectivity markets and the implications for the UK debate on passive remedies ....................................................................................................... 23 Introduction ..................................................................................................................................... 23 International benchmarking of Ethernet services ........................................................................... 23 Dark fibre in EU member states ....................................................................................................... 26 5. Benefits of passive remedies are limited ................................................................................ 28 Introduction ..................................................................................................................................... 28 Allocative efficiency and downstream regulation ........................................................................... 28 Limited innovation benefits from passive remedies ....................................................................... 29 Impact of passive remedies on quality of service ............................................................................ 32 Impacts of passive remedies on productive efficiency .................................................................... 36 6. Impacts and risks of passive remedies: the costs .................................................................... 38 Introduction ..................................................................................................................................... 38 Markets are operating well under the current regulatory structure and this would be put at risk were passive remedies to be introduced ........................................................................................ 39 Impacts of passive remedies on industry structure and competition ............................................. 40 Switching supplier would be harder ................................................................................................ 41 Adverse impacts of passive remedies on existing investment ........................................................ 41 The fair bet principle ........................................................................................................................ 43 Passive remedies would incentivise inefficient entry; the costs of competition need to be assessed ........................................................................................................................................... 44 Page 2 of 122 Non Confidential Version Chilling effects on all infrastructure providers’ investment ............................................................ 44 Common cost recovery and arbitrage ............................................................................................. 45 Other costs and distortions which need to be taken into account ................................................. 48 7. Scope considerations ............................................................................................................. 49 Introduction ..................................................................................................................................... 49 Potential applications for passive products ..................................................................................... 50 Impact of passives on common cost recovery ................................................................................. 50 Product and geographic scope of any passive remedies ................................................................. 51 Arrangements for new infrastructure ............................................................................................. 52 The form of non-discrimination obligation ...................................................................................... 54 8. Design considerations: Implementation of passive remedies .................................................. 55 Introduction ..................................................................................................................................... 55 Developing and implementing passive remedies in relevant SMP markets ................................... 55 Product Specification and Reference Offers .................................................................................... 56 Systems and Processes .................................................................................................................... 57 Pricing .............................................................................................................................................. 57 Additional factors............................................................................................................................. 58 9. Pricing issues ......................................................................................................................... 60 Introduction ..................................................................................................................................... 60 Interaction with active pricing structure ......................................................................................... 61 No pricing obligation at all ............................................................................................................... 61 Fair, reasonable and non-discriminatory pricing ............................................................................. 62 Charge control and cost based pricing ............................................................................................ 62 Charge control and retail (active) minus approach ......................................................................... 63 Consideration of arbitrage in relation to duct and dark fibre ......................................................... 64 10. Response to specific consultation questions........................................................................... 66 Annex 1: Meeting future demand for Fronthaul/Backhaul capacity for MNOs ............................. 74 Summary .......................................................................................................................................... 74 Inaccurate assumptions linking C-RAN to dark fibre ....................................................................... 75 Potential Openreach options ........................................................................................................... 76 The future capacity requirements of the MNOs.............................................................................. 76 Technology assumptions are important .......................................................................................... 78 Commercial options may also support MNOs’ capacity requirements ........................................... 79 Conclusions ...................................................................................................................................... 80 Annex 2: The applicable legal framework.................................................................................... 82 A. Introduction ............................................................................................................................