Posts Tagged ‘Ofcom’
Ofcom is obliged to not disclose the costing information that it gets from BT, which can be different from that which BT discloses in its regulatory financial statements. The Value Office Agency, which sets business rates taxes, does not disclose its financial model, or disaggregate BT’s products, so an important component of BT’s regulated prices is opaque.
Besides, BT sometimes changes the basis of its costs, as in “A6.47 BT has moved from an absolute valuation to a methodology based on indexing capital expenditure by RPI.”
This leave plenty to argue about. Sky and TalkTalk in particular are fighting a running battle with Ofcom over its assessment of the effect of business rates on BT’s prices for unbundled local loop lines (LLU). The debate forms part of Ofcom’s consultation on the fixed access market, which goes into excruciating detail, complete with triple negatives, on the business rates issue in Annexure 26.
The result of the debate is material to the two ISPs, which are the biggest exploiters of local loop unbundling. According to the Office of Telecommunications Adjudicator, by the end of May there were 9.3 million unbundled lines, and 5.68 million lines on Wholesale Line Rental (WLR).
The ISPs contend that BT receives a rebate on business rates due to LLU that amounts to an estimated cash value of £23/y per line. The rebate covers BT’s loss of profits due to the alienation of the full earning potential of the lines. The VOA and Ofcom consider those putative profits to arise mainly from “downstream” products from Openreach.
BT still makes money from renting out the lines, and besides any “lost profit” is at best a guess. Further, the business rates tax is a tax on assets, not profits. The ISPs believe whole of the rebate should be applied to the price BT charges for the line. Instead only 15p is. They say this leaves BT with net income from the rebate of more than £20/y/ULL. Put another way, this means the ISPs are paying around £180m/y in unjustified costs, which BT can then apply to subsidise downstream products.
They allege that Ofcom ignores this income from the rebate in assessing Openreach’s assets to price LLU. They allege that the resultant prices for LLU are higher than they should be, and that BT’s downstream products benefit from an illegal subsidy. They argue that since BT’s rebate is based on profits, not assets; if Ofcom disagrees, it should get the VOA to change the basis of its rating of BT, and not simply pass the extra costs on to the LLU operators.
Another issue that confuses matters is that Ofcom uses a theoretical all-copper network model for its sums. This disregards the thousands of kilometres of fibre BT has installed in the past five years. Fibre is cheaper to run than copper. TalkTalk’s plea for Ofcom to simply consider the outcomes produced in the market fell on deaf ears.
Ofcom has dismissed the ISPs’ objections, but it did go back to BT for more data about its costs. “We have also carried out a PWNRC (profit weighted net replacement cost) calculation using data on BT’s assets which are more detailed than those published in the RFS…In the light of this, we do not now consider that BT’s 2011/12 allocation of cumulo [business rates] costs to MPF and WLR services is reasonable.
“An allocation which is in line… would result in a reduction in the cumulo costs attributed to WLR rentals from £3.31 to between £2.80 and £2.98 in 2012/13 and a reduction in the cumulo costs attributed to MPF rentals from £3.16 to between £2.68 and £2.85 in 2012/13. We have reflected this reduced allocation in our charge controls,” Ofcom said in the annex.
Ofcom has now published the new LLU charge control decision. It comes into effect on 1 July.
Sky and TalkTalk did not respond to requests for comment.
Vodafone has called on European regulators to ensure that non-incumbent-owned mobile network operators have access to fibre backhaul on the same terms and conditions as their in-house operators or face a declining competitive ecosystem.
The call stems from a looming shortfall in microwave capacity and prohibitive pricing of incumbents’ fibre, poles and ducts to cope with the fast-rising volume of data traffic.
Research by Analysys Mason commissioned by Vodafone found that incumbent operators favour their in-house mobile operators when it comes to accessto a fibre-based backhaul. “These inputs are not always made available to competing operators as a wholesale or retail product with the desired interface, quality, speed or price.
“The fact that the required inputs are not available, or are extremely expensive, may dampen competition in the mobile market in some countries because the fixed incumbent operator is usually (with the exception of the UK) also a major mobile operator and can gain benefits as a result of this vertical integration – specifically the much greater capillarity of its fibre network,” it said.
The leased line market, in which the mobile operators are a large segment, contributed £2bn/y to BT’s £18bn turnover, the researcher found.
Ben Wreschner, who leads Vodafone’s regulatory economics section, said all Vodafone wants is access on equal terms and conditions as the in-house mobile operator. He said Vodafone accepted that there couldn’t be a single price across Europe, if only because labour prices differ. Instead he called for a harmonised approach to access to fibre for mobile backhaul.
He called on the European Commission to provide guidance to BEREC, the European telecoms arch-regulator, for directives that national regulatory agencies (NRAs) can implement to give effect to this.
The study showed that independent mobile operators use microwave extensively to backhaul their traffic. But they are running out of spectrum. The shift to small cells for LTE traffic is quickly eating up the available capacity. Vodafone’s preliminary report for 2014 revealed that 4G smartphone users use about twice as much data as 3G users, mainly to stream video. Smartphone penetration in Vodafone’s European markets is around 45%. Both factors are pushing mobile operators toward fibre, which has the required capacity to ensure an acceptable user experience.
The MNOs’ options are to switch to so-called E-band microwave in the 60-90MHz band, which due to rapid attenuation of signals, will require many more sites to be rented; to rent access to commercial fibre where available; to rent regulated fibre from the incumbent operators, or to build their own fibre networks.
Vodafone has bought some of its own fibre backhaul (eg Cable& Wireless), but it has cost billions and doesn’t always cover the cities where demand is greatest. Building new fibre would duplicate existing fibre networks, take a long time, and cost a lot more on top of their expensive mobile licences.
Last week Ofcom said it would give BT a further period of non-regulation of fibre prices for high speed (above 1Gbps), where it holds an effective monopoly outside London. It also promised to rule soon on a TalkTalk complaint that BT operates an illegal margin squeeze on fibre prices.
Wreschner said he was watching the margin squeeze decision with interest, but stressed that that is a different market (retail) to Vodafone’s concern (wholesale) about backhaul. “We think the wholesale market needs specific regulation,” he said.
This is why, although they face similar problems as altnets trying to provide fibre to rural homes and businesses, the mobile industry did not speak out when the BDUK process was being set up, he said.
Parliamentarians will meet tomorrow to discuss broadband policy amid growing anger and concern among businesses that almost £2bn in taxpayers’ subsidy will leave the UK in a worsening competitive position.
Digital Policy Alliance chairman Lord Erroll will chair the meeting (see below for details) that will hear from two recent papers that show that large parts of the UK will end up with broadband access one-fortieth of that of South Korea, and far behind France, Brazil and China by 2017, the deadline for the government’s current broadband spending plans.
The report from Digital Business First (DBF) flatly contradicts Ofcom’s recent finding that the UK leads Europe in high speed broadband. In an open letter to Ofcom CEO Ed Richardson, the DBF said, “When ranked against all 27 EU states (not just the five Ofcom conveniently chose for the sake of a headline) the UK ranks tenth, behind countries like Portugal, Denmark, Belgium, Lithuania and Latvia.
“Secondly, there are large areas of the UK (approximately 10 million homes and businesses according to the government’s own figures) that are to be supported with public funding to deliver ‘target’ broadband speeds of just 2Mbps and 24Mbps (via the BT network). These speeds are well below even Ofcom’s low threshold of ‘superfast’ broadband. These ‘have nots’, which include some of our most productive business premises in rural locations, are being left to languish in the slow connectivity lane indefinitely.”
The forum’s assertions are supported by a study of the effect of line lengths on broadband speeds by researchers at Edinburgh University. The researchers found that one in eight Scottish homes is unlikely to be able to get more than 24Mbps, and 40% of rural homes and businesses will struggle to get more than 2Mbps.
Openreach, BT’s network infrastructure division, redacts its line length information in recent public documents. However, in a 2011 report on line lengths and line costs to Ofcom, Analysys Mason said that BT had confirmed (in 2004) that its average line length (between the exchange and the premises) was 3.47km (including the dropwire length). “This provides a reasonably good reconciliation with the (2008) Sagentia analysis (3.34km average line length). The same presentation also confirmed the distribution of lengths between the cabinet and the customer, with a typical 420m length and a small proportion of lines (10%) with a very long length,” it said. Analysys Mason later calculated the average Openreach line length at 1.704km – a figure hotly disputed by Openreach.
A 2011 White Paper by Alcatel-Lucent on the use of vector technology with VDSL2, the technology chosen by BT for its next generation broadband roll-out, found that at 420m, the average download speed would be about 40Mbps, while at 1.2km, it would drop to about 24Mbps (see graph).
Figures from the Office of National Statistics show a declining trend in the construction of communications infrastructure (see graph). The ONS figures include post office buildings and sorting offices, but also exchanges and cables. This suggests that few new cables have been laid in the past 15 years, so Sagentia’s figures are likely to be reasonably accurate.
(Unfortunately, the ONS bundles sales figures for telecommunications equipment with those of computers. This makes it impossible to establish accurately what UK network operators have invested in network hardware and software.)
As noted earlier, Openreach’s capex has been steady at around £1bn for several years. But it is starting to decline as it comes to the end of its “commercial” broadband roll-out to cover two-thirds of the population, but only one-third of physical UK.
In BT’s case, Alcatel-Lucent appears to have made a convincing argument to go for vectoring over VDSL2. It said, “Reusing existing infrastructure reduces investment costs and risks. It also helps with eco-sustainability targets. With VDSL2 Vectoring, you can deliver higher speeds at about 1/3 the cost of deploying fibre. And any fibre investments to support VDSL2 Vectoring lower costs for future fibre deployments.”
But as its own figures show, this is true only where line lengths are short, and it does not appear to include any offset for reclaiming the copper and reusing the ducts.
DBF members Alex Pratt and Frank Nigrello, who represent local enterprise partnerships in Buckinghamshire and Oxfordshire respectively, accuse Ofcom of painting an “unduly rosy picture” that serves the UK badly. “It amounts to institutional denial of the need for a significant change in policy towards investment in digital infrastructure. It is leading to an unnecessary rapid regional and national decline in our relative productivity and competitiveness. It is akin to adding extra weight to handicap our businesses in what the prime minister has called ‘The Global Economic Race’.”
The DBF is highly critical of what it sees as the government’s casual approach to broadband. “Current government policy and funding has failed to bridge the superfast broadband infrastructure deficit for 35% of the UK,” it says. It attributes this to a lack of consultation with user communities; adopting the “least ambitious targets and technological means” to deliver them, and to a lack genuine incentives for investment in future-proof high speed broadband networks.
Quoting from the National Audit Office report on the rural broadband roll-out, the DBF said, “The department (of culture media and sport said) its aim was to achieve the most possible with the given funding, not to lever the maximum amount of private investment.”
It added, “The current argument between Ofcom and mobile networks on spectrum fees, with the latter threatening to reduce 4G coverage unless fees are lowered, points to a far less investment friendly approach in the UK.”
The DBF report also criticises the lack of ambition in making high speed broadband a universal service. Again quoting the NAO report it said, “The effect of designing a programme which only reaches 90% of the target area will make it more expensive at a later stage to cover the final 10%. It will also make it less commercially viable for anyone other than BT to bid, as no-one else will have existing infrastructure to bolt it on to.
“Matters are made worse by the fact that BT is preventing local authorities from publishing plans showing which areas will not be covered, which would enable other, often community-based consumers, from filling the gap and ensuring 100% coverage.
“Witnesses from the broadband industry told us that potential investment by competitors had been lost. For example, UK Broadband has spent none of the £150m it had allocated for the programme. Fujitsu had also stated an intention to invest £1.5bn which has not been invested. In total, INCA estimated that the investment that had been foregone was at least £2.7bn.”
The DBF calls for a national broadband plan and responsibility for its delivery to be moved the department responsible for business and enterprise.
“Any incoming government in 2015 should be specifying a target of at least 100Mbps for the UK ‘have nots’ within two years,” it says.
It called for the UK to re-establish its world lead in mobile communications by “adopting an ambitious ‘can do’ approach to 5G technology”. 5G networks offer the prospect of universal ultrafast (1Gbps) broadband across the UK, it said.
It also called for changes to the terms of the 4G mobile licences to ensure that the coverage obligations include a signal strong enough to deliver 10Mbps inside a home for 98% of the UK population, a voice service, and for more than one 4G mobile network to have the above coverage obligation.
The meeting takes place on 24 March at 15.10-17.00 in Committee Room 4A, House of Lords, Westminster.
The agenda is:
* Welcome and introduction by Lord Erroll, DPA chairman
* Presentation of European Internet Foundation’s (EIF) report ‘The Digital World in 2030: What Place for Europe?’ by Peter Linton, advisor to EIF board of governors and co-author of the report
* Presentation of Digital Business First’s report “The UK’s enduring broadband deficit: A divided nation – Time for an effective plan” by Alex Pratt, chairman Buckinghamshire Business First and Buckinghamshire Local Enterprise Partnership (LEP).
* Comments by Stephen McGibbon, EMEA regional technical officer, Microsoft; Peter Olson, president of Digitaleurope and head of European Affairs, Ericsson; Alexandra Birtles, head of external communications, TalkTalk Group; and parliamentary contributions with closing remarks by James Elles, MEP and EIF co-founder.
So, what did we learn from Round 2 of the Public Accounts Committee (PAC) v BT/BDUK (rural broadband division)?
Hopefully not as much as we shall learn in the promised Round 3, but it had better come soon before we all lose interest and find better things to do with our lives, like learning macramé.
What did emerge were clearer reasons for BT’s secrecy. Former Ofcom official Sean Williams, who spoke for BT, said that the equipment BT is installing in the BDUK intervention areas is exactly the same as that which it is installing in its commercial roll-out. Therefore revealing the price it pays for equipment in the BDUK areas would help its competitors in the rest of the country.
This is disingenuous, perhaps delusional. No-one wants to duplicate BT’s copper network, so the price of a DSLAM and its path is irrelevant to competitors. The few firms that do want to provide connectivity in rural areas want to run fibre to the home or to a distribution point (call it a digital village pump if you will), and from there use high speed wireless to the home.
They would find it helpful if they could use BT’s ducts and poles and cabinets to do some of it, but as they would be able to offer faster speeds than BT’s copper, BT wants to keep them off its passive infrastructure at all costs.
Most would also like BT to backhaul their local traffic, but few can afford to pay the charges BT is asking to build (or light) the connecting fibres.
Someone should be checking these costs, because Ofcom has allowed BT to set its own prices for wholesale fibre access. In consequence Ofcom is now having to investigate a TalkTalk complaint that BT has run a margin squeeze on the product.
More to the point, in many cases BT fibre already goes to rural villages and towns, but only to schools and other public sector enterprises like hospitals and clinics. It would have been extraordinarily short-sighted of BT to run only a single fibre pair to each of these places, so there are likely to be spare unlit fibres in the neighbourhood. These could be put into service in short order at marginal cost. If someone was paying attention.
Even if BT was that myopic, there is likely to be spare capacity on the fibre pair due to different peak times for business and recreational traffic. Even if this got congested, well, BT now knows how to make ordinary fibre carry 1.4Tbps over distances of more than 400km. That should be enough for most rural communities, at least in the short term.
The other thing we discovered is BT’s employment of Catch-22 with respect to post codes. Williams said BT’s policy is that local councils are free to publish maps that contain BT’s proposed speed and coverage data down to seven-digit post code level. This is precise enough to say what upload and download speeds each and every premises in the country will be able to get. Two, Northamptonshire and Dorset have apparently done so. But it’s up to councils to decide.
Most other councils have published speed and coverage maps down to five-digit post code granularity. This is because, Williams said, the finer details revealed in the seven-digit post cost templates are secret and covered by the non-disclosure covenants in the contracts councils have signed with BT. Publishing them would break the contract and theoretically open them to legal action from BT.
Catch-22, or as Dirty Harry said, “You have to ask yourself a question – Do I feel lucky? Well, do you?”
Unfortunately none of the MPs on the PAC sought an assurance from Williams that BT will not exercise its rights if councils publish the speed and coverage details at the seven-digit resolution. Hopefully they will do so in Round 3.
One bit of good news that almost got lost in the noise is that BDUK’s analysis of early roll-out invoices suggest that BT has over-estimated by about one-third the associated management overhead costs.
It’s early days yet, and as the BT installation teams gain experience, those savings should grow. One hopes that they will not be used to finance the new £50m expansion of BT’s city fibre networks.
See the Round 2 video here starting at 16.53.20.
This is a guest post from Walter Willcox and David Cooper, who have been involved with Surrey village Ewhurst’s efforts to get high speed broadband. Regular readers will know that it’s not easy, as this post, based on their experience, shows.
Many local authorities that congratulated themselves for securing deals with BT are now employing their staff to promote the benefits of high speed broadband using BT’s marketing-speak, which can be grossly misleading and sometimes even false.
Surrey County Council, indeed all county councils, should pay more attention to the technical details.
Take the claim that BT is installing “fibre broadband”. In Ewhurst and almost every other village in the country, the final link between the cabinet and the premises is copper or sometimes aluminum. It is remarkable that no-one has asked the Advertising Standards Authority to investigate BT’s “fibre broadband” claims for possible misrepresentation.
But there is a more important practical issue: millions of subscribers are likely never to get the service promised by BT and paid for by taxpayers under the BDUK contracts.
The often-stated figures for those “Having Access” are based on the total number of telephone lines in the fibred-up street cabinet, yet very few of the new cabinets approach that capacity. Surely the ASA should require the cabinet capacity to be clearly stated?
BT deploys new upgraded full-featured fibre to the cabinet (FTTC) cabinets with a capacity of 192 or 288 lines, but BT’s investment in the cable infrastructure is limited to single ducts and a single set of tie cables that each provide a capacity of just 100 lines.
BT is on record saying that it will install more cabinets if the demand is there. Inevitably this means delay, sometimes of over 80 days, while remedial work is done to the cables, followed by even more delay to install a second cabinet.
Most of the BDUK contracts to date are supposed to complete by the end of 2014 or 2015, so what happens if a cabinet’s full capacity is needed after the contract ends?
Similarly, do local authorities realise that to meet demand greater than that provided by the first cabinet, the streets will have to be cluttered with more cabinets? Besides, who will pay for the extra cabinets post 2015?
In addition, technology advances such as G.fast and vectoring, which have still to be proven in the field, are dead ends because of the copper in the last mile. BBC Newsnight and others reported last August that FTTC was the wrong technology in the opinion of experts, here and here.
The local authorities’ lists of postcodes that BT will cover disregard the known line performance and lengths. BT knows the limitations of the service speeds and provides that data as soon as a cabinet is forecast for service. For example, in Peaslake, Surrey BT told the Surrey County Council it will cover the postcode GU6 7NT; yet superfast broadband is unavailable at all 10 addresses, according to the BT Wholesale estimator.
Those unfortunate subscriber at the extremes of the network, or with sub-standard lines, are not even informed by the BT estimator that the fibre cabinet is commissioned. (However the curious may pick up that the category “Fibre Multicast”, which is still shown, indicates that the cabinet is enabled.)
BT is very good at promising the world, but once a customer is hooked for its VDSL service there can be a distinct change of attitude. The subcontractors that BT Openreach hires for installations simply don’t carry the test equipment that can confirm the line’s performance. They rely on a speed test which, just after installation, is tuned to the maximum possible speed. This can change in just 48 hours. At one site we know of, a sync speed of 40Mbps on 9 July degenerated to only 4.38 Mbps by 08:09 on 11 July.
Subscribers then risk a charge around £170 to fix the wires if a fault is detected within their curtilage* (the area around your premises over which you are deemed legally to have control).
A number of ISPs are now offering self-install packages but the result is likely to be more disgruntled customers. How many end users have a detailed understanding of house wiring, let alone line performance issues? Surely Trading Standards should insist on a proper performance test once the connection has had time to “bed down”?
The difference it makes can be material. One case we know of concerns a new Sky self-install where the installation produced 13 Mbps. After remedial works to the house wiring the speed jumped to 28Mbps. That is still well below the “up to” 42Mbps the user was led to expect.
The separation of powers between Openreach and its wholesalers means that when a fault occurs, the end user has to convince the ISP, and the ISP has to convince Openreach to fix it.
This thread on the Kitz bulletin board (two pages) shows just how hard it can be to figure out and fix what’s wrong. It shows clearly that faults on the copper (telephony) network can destroy broadband performance, and that Openreach’s process and practice to fix them is arcane and open to error, to say the least.
Those responsible for making policy and for paying BT might also like to ask how BT can invest a billion pounds on TV sports contracts while Openreach’s maintenance performance has been so bad for so long that it has accepted it must pay fines if it misses certain targets.
Even casual observers can see signs of poor maintenance. For example electricity poles are quite properly being replaced, but the old rotting and unsightly poles remain lashed to the new ones, apparently because Openreach can’t afford to swap the cables from the old poles to the new ones.
These may be boring technical details, but in the end, they determine the customer experience. BT may be able to buy off shareholders with dividends and politicians with promises, but only performance will win the hearts and minds of customers.
As BT is the monopoly supplier in most rural areas, unhappy customers have only the ballot box through which to voice their displeasure. With elections just 18 months away, anyone whose job depends on a vote should start getting their hands dirty with the technical details of superfast broadband.
Regulator Ofcom reacted this week by announcing that Openreach,which has an effective monopoly over last mile fixed access, has agreed new targets for service, and may pay fines if it misses deadlines.
The news will be welcomed by communications providers (CPs), but the terms are not onerous. The deal comes into full force only from April 2016, by which time Openreach should have largely finished providing fibre to its street cabinets to handle GPON for next generation broadband.
The new targets cover “wholesale line rental” and “metal path facility”, the two most common products Openreach provides to resellers, says Ofcom. They include 80% of repairs completed within two working days, 80% of new lines provided within 12 working days, and realistic estimates of when customers can expect the service they ordered.
Failing to meet the new targets, averaged over 12 months, opens Openreach to Ofcom sanctions, including fines. However Ofcom proposes that BT can use “extreme weather” as an excuse for missing targets for up to three per cent of repairs and one per cent of new installations in a “typical” year.
In a statement the regulator said, “Ofcom is concerned about the time it can take for Openreach to complete this work. The problem was most acute during 2012, when installations and repairs were to some extent hampered by extremely wet weather conditions.”
According to Ofcom, Openreach’s performance has since returned to pre-2012 levels.
Walter Wilcox, spokesman for the Surrey village of Ewhurst, which had an independent deal with Vtesse Networks for a fibre network “gazumped” by BT, reports, “Ewhurst (has been) without VDSL for 80 days due to inadequate equipment provision. (It has taken) 22 days to repair storm damage on eight lines at two locations.”
Ofcom also appears to be asking Openreach customers to pick up the cost of meeting the new targets. “Any increase in charges resulting from the changes would be at wholesale level, and estimated by Ofcom to be in the order of a few pennies per month. Telecoms bills have fallen in real terms over the past 10 years, and Ofcom wishes to ensure that services remain competitive and affordable for consumers.”
The proposals are part of a consultation relating to Ofcom’s fixed access market review, which closes on 13 February 2014. Ofcom will announce its decisions in spring 2014.
The contract for ‘superfast broadband’ that the Welsh Assembly Government (WAG) has signed with BT will deliver less than politicians have promised in public statements, and appears to deal with BT and Openreach as a single entity in violation of a BT regulatory undertaking to “functionally separate” the two.
It also raises questions about the legitimacy of the money given to BT because of how it will be used.
These conclusions come from broadband consultant Richard Brown who has already asked the European Parliament whether the WAG can use SuperFast Cymru money to overbuild the FibreSpeed coverage area which has already received state aid.
Brown obtained a heavily redacted copy of the ‘Superfast-Cymru‘ contract after an eight month battle using the Freedom of Information Act (FOIA). He says the financial, coverage and timing details of the contract are missing, but what remans is still revealing.
He notes that while the contract is between BT Plc and the WAG, it is signed on behalf of BT by outgoing Openreach CEO Liv Garfield.
“There is a legal governance issue (imposed in theory by Ofcom) that each part of the BT group should have ‘Chinese walls’ between them to prevent unfair exposure to competitive information leaking from one wholly owned subsidiary to another,” Brown says.
“There is a fundamental concern that if Openreach is supposed to be a functionally separate organisation, and the CEO of Openreach is the signatory to the contract then information must (by definition) be being passed between Plc and Openreach, in a manner that has been expressly forbidden by the legal undertakings given to Ofcom.”
Brown says WAG ministers are guilty of overpromising in public what the contract will deliver in terms of speed.Ofcom has accepted the European Commission’s definition of “superfast” to mean download speeds of at least 30Mbps.
“The Welsh Government have not contracted BT to enable the delivery of superfast broadband to premises in Wales, simply that the core infrastructure (exchanges and cabinets) will enable a measurement of premises passed to reach a total of 95% for up to 24Mbps speeds,” he says.
This view is confirmed in Clause 21.4 of the contract: “The Grantee acknowledges that the Welsh Ministers will not pay any contribution or subsidy to the Grantee in respect of the Last Drop Connection” ie, the link between the street cabinet and the premises. This rules out WAG support for any fibre to the premises.
The contract commits BT to meet three targets by 30 June 2016 or at the latest by the ‘Drop Dead Date’, which has been redacted:
- 90% coverage of all premises in the ‘intervention area’ at >30Mbps PPiR and a minimum of 2Mbps CIR (committed information rate)
- 95% at >24Mbps with a minimum of 0.5Mbps CIR
- 40% coverage with >100Mbps with a minimum of 10Mbps CIR.
Brown says Target 2 is dismaying. “At no stage have the ministers ever claimed anything lower than 96% coverage for superfast broadband under this contract. It is clear that there is a degree of wishful thinking by the ministers that BT will choose to deliver more than they are contracted to do.”
Brown estimates 30,000 homes and businesses may be disappointed if BT fails to meet the 96% coverage target claimed by ministers. No-one knows who they might be because the post codes of the coverage area are secret.
Brown further believes there is a difference between what the WAG told the European Commission it wanted state aid permission for, and what it is buying from BT. The European Commission’s 2005 decision on state aid in the case of UK’s Rural Broadband Access Programme made it clear that only capital costs are eligible for state aid.
It said “Eligible capital costs such as investments in communications networks and equipment necessary to provide the requested broadband services have to be directly attributable to the project and incurred during the period of the Broadband Service Agreement. No operating costs will be financed.”
According to Brown, the works that are required under that contract appear to enforce requirements on BT that are explicitly not being paid for.
The Superfast Cymru contract requires BT to supply “Operational Works” that consist of maintenance and wholesale services and the sales and support of wholesale services.
Maintenance covers “updating, maintenance, fault management, performance optimisation (when required) and capacity augmentation.” Wholesale services covers “services to enable retail service providers to provide retail services over the network.”
“The inclusion of the clauses compelling BT to deliver such ‘value added’ services, as opposed to them being part of the funded delivery, lends weight to the likelihood that the ministers have assisted BT in being as tax efficient as possible,” Brown says.
Brown believes taxpayers will have to pay BT’s costs to sell them broadband. Clause 16.6 states “…The Welsh Ministers shall only pay Financial Contributions in respect of those marketing activities that the Welsh Ministers have approved in accordance with the Marketing Plan.”
This clause is wholly inappropriate, says Brown. He says Page 4 Section B makes it clear that the grant is a capital grant to BT on the grounds that infrastructure is being purchased.
“Such a commitment by the Welsh Government gives BT a disproportionate market advantage over other wholesale providers, and as such would be considered a significant influence into the market dynamics.”
Brown questions how much money BT will actually contribute to the Superfast Cymru project. The contract caps The WAG’s contribution at £195m. He notes BT has indicated its total investment in Welsh broadband, including its commercial rollout, is £220m. At Clause 21.5 the ministers “acknowledge and accept that the Grantee has made a contribution of a sum at least equal to the Maximum Grant.” That suggests BT’s extra contribution to Superfast Cymru is just £25m.
On the question of VAT, at Clause 21.11 WAG and BT agree between themselves the the contract does not cover payment in consideration of services to the ministers and that the deal is therefore exempt from VAT.
“BT are compelled to deliver wholesale services as a result of this contract (even to the extent that the Ministers have chosen to engage in price manipulation in the market space). Wholesale service provision as a requirement of the contract, does not allow for the contract to be considered as a ‘capital investment’ only contract,” says Brown.
Summing up Brown says the 96% coverage ministers claim will be delivered “does not represent a percentage of homes and businesses that will receive superfast broadband/fibre broadband. The measurement is solely on premises passed. Premises passed is a measurement of presumed capability that considers only the core infrastructure.
“This utterly ignores the capability of the line between the exchange/cabinet and the premise to deliver the faster services.”
Brown referred to the Aus$24bn Australian National Broadband Network, which also used premises passed, and which the head of BT’s NGA rollout Bill Murphy has branded a failure on Twitter.
Brown says “In August the industry press was awash with headlines … which suggest that there are approx. one third of all the (Australian) premises passed that are unable to gain access to the increased service speeds.
“Premises passed is simply not a measure of the amount of the population that will be able to gain access to improved services. It is simply a measure of the capability of the core network – something that will not change Wales’ future, but will certainly enhance BT’s.”
After analysing financial information BT must by law provide to the regulator Ofcom because it has “significant market power” i.e. an effective monopoly in certain markets, Frontier Economics (FE) found that returns on BT’s regulated services were consistently above the rate required to compensate investors, (the weighted average cost of capital as determined by Ofcom), and that wholesale prices could have been on average 10% lower over the period.
The report corroborates an earlier finding by Wik Consult in support of TalkTalk’s complaint to Ofcom that BT indulges in a “margin squeeze” by overcharging for wholesale products. Wik found that Openreach’s costs to build its FTTC network are £4.39 per line per month. BT Openreach charged resellers £7.40 or £9.95 depending on the bandwidth provided.
FE, a top 10 European economic consultancy, is chaired by former UK civil service boss Gus O’Donnell, who is widely known by his initials. On taking over as FE’s chairman in July he said he had come to respect FE “hugely”. “Not only is Frontier at the forefront of applying economics to tough public and private sector issues, it has an internal culture that is second to none.”
The FE report, The Profitability of BT’s Regulated Services, was commissioned by Vodafone. It shows that regulated wholesale prices would have been 10% lower on average, had they been set such that BT had earned a return at the benchmark level set by Ofcom. Because they weren’t, BT was able to earn on average an extra £600m/y for the period.
It found Ofcom is aware BT has been able to earn returns in excess of its cost of capital. It quotes Ofcom’s 2013 consultation on the fixed access market (now being assessed) saying, “BT’s reported profitability was significantly in excess of its cost of capital. We believed that this was prima facie evidence that wholesale charges for ISDN30 might be above the competitive level.”
FE also found that BT had to repay customers for overcharging. “For some markets where BT had cost orientation obligations, BT has been found later to have set prices above a cost oriented level and has been required to make repayments to the purchasing communication providers. The overcharges include £151m for certain Ethernet services and repayments of £42m for certain partial private circuit services.”
FE notes several potential reasons for BT being able to earn regulated returns above its weighted average cost of capital. These include
- differences between Ofcom’s and FE’s estimates of BT’s cost base
- some prices are based on costs that do not directly reflect BT’s actual costs
- BT may price services above its fully allocated costs
- Ofcom may have set RPI-X% charge controls too low, and
- some costs may have been allocated to the wrong service.
“Further analysis is required to understand which combination of these reasons may explain the results shown above,” FE said.
If tomorrow’s meeting to get a grip on the provision of next generation broadband access (NGA) in the “Final 10%” is not to produce a damp squib, the government needs to commit itself to true competition in telecoms market.
Culture minister Maria Miller called the meeting between her, communications minister Ed Vaizey, and representatives from BT, BDUK and six would-be alternative network operators (altnets) who are looking for money from the Rural Community Broadband Fund (RCBF) in the wake of the highly critical National Audit Office report into value for money from the rural broadband process overseen by BDUK.
Some of the six altnets have been waiting more than a year because the fund won’t release the money until it knows for sure that the areas the altnets plan to cover won’t be over-built by BT’s BDUK-funded roll-out.
BT claims commercial confidentiality in the terms and conditions of its contracts with local councils, especially the speed and coverage details of its roll-out, Besides, they are subject to change following a survey of its local assets, it claims.
BT may claim, but the claim does not stand up. In the appeal of Derry vs the Information Commissioner, the Information Tribunal “upheld the ICO view that a written agreement between two parties did not constitute information provided by one of them to the other, and that therefore, a concluded contract between a public authority and a third party does not fall within section 41(1)(a) of the (Freedom of Information) Act.”
S41 is the bit about commercial confidentiality.
The tribunal went on to say, “We are aware that the effect of our conclusion is that the whole of any contract with a public authority may be available to the public, no matter how confidential the content or how clearly expressed the confidentiality provisions incorporated in it, unless another exemption applies.” (Emphasis mine.)
It also noted that depending on the circumstances, some information obtained from a third party may count as confidential. This was information regarding a pre-contractual negotiating position, and “technical information” either contained within the body of a contract or provided as a separate schedule.
Regarding prior negotiating positions: as noted by reader Mike Phillips, the councils last year ran their open market consultations to identify the so-called ‘white areas’, i.e. locations that require subsidy as well as the ‘no-build’ areas that BT would not consider for three years.
It is not clear why BT should be granted the latitude of service delivery promises being “subject to survey” when it is not available to other suppliers, nor that end users should be denied a higher degree of certainty about where, when and what kind of service they might receive from BT.
BT and the local authorities with whom it has contracts might like to argue that the speed and coverage templates (SCTs) falls into the “technical information” category.
BT is not using secret technology to fulfill its BDUK contracts . It is hard to see why it should keep the SCT secret. However, it does stop altnets from identifying and working in the remaining white areas. This cannot in the public interest, and one could argue that for local authorities to think and act otherwise would be in dereliction of their fiduciary duties.
Having sought and received legal opinion on publishing the SCT details, it is inconceivable that BDUK is not aware of these issues. Moreover, in response to a Freedom of Information request, it has indicated that it expects the SCT details to come out in due course.
One need not wonder whether BT will defend its carefully-orchestrated position and resist the disclosure of SCTs. It has form. The FOI trail on Liverpool Direct (BT’s controversial joint venture with the Liverpool City Council) and here and here shows how hard it will fight (but lose) to keep its contracts secret.
Just who will fight BT’s corner has been subject to change. However, it was revealed on Friday that BT had dropped Sean Williams, its head of strategy, who spoke for the telco when the House of Lords was interested in broadband. BT will now be represented by Openreach CEO Liv Garfield and NGA roll-out boss Bill Murphy, who were the original choices.
Had Williams stayed on, Miller would be been within her rights to question his deal-making authority. This is because Ofcom has required BT to run Openreach “functionally separate” from its other operating companies, even though Williams admitted to the lords that Openreach contributes to and shares the same capital pool as the other BT operating companies.
Because of “functional separation” Williams would be have been hard-pressed to commit Openreach to anything. If he could, it would reveal functional separation as a myth and possibly expose Ofcom for improper application of its own regulation.
Whether this matters is moot. At the annual seminar of INCA, the Independent Networks Co-operative Association, last week, Frank Mather, the DG Connect official who looks after the UK broadband issues, said the European view was that Britain has forsaken competition for transparency as a way of regulating and achieving its broadband goals.
The NAO showed how successful that strategy has been with respect to the £1.2bn BDUK process. In fact, both MPs and civil service have done even worse trying to govern using transparency – the banking crisis, Libor, crime statistics, even MPs’ pay, to name some more serious incidents.
In a recent blog, the well-connected Philip Virgo paraphrases economist Michael Beesley’s insight that “it is impossible for officials or regulators to understand that cost bases of the industries they seek to plan or control. Therefore they should not try. They should instead focus on quality of service, price and barriers to competition (particularly those blocking innovative new entrants), leaving those regulated to work out how to exploit opportunities to make more money by using innovation to deliver better services at lower cost. “
Part of Beesley’s heritage is due his exposure to the privatisation of British Telecom in the 1980s. In an obituary, Christopher Foster wrote of Beesley, “Sir Keith Joseph asked him to look into the possibility of liberalising British Telecom. Though not all his recommendations were accepted, he argued for more competition than the government was ready for (it would have been better if he had been listened to). Nonetheless, his views were influential on the form of that privatisation – and all subsequent privatisations, and their regulation.”
Beesley’s ideas were later incorporated in the monopoly price governing formula “Retail Price Index-x%”, which Ofcom modified to “Consumer Price Index-x%” in its latest proposals governing Openreach’s monopoly over wholesale broadband and landline services.
So what can Miller get from tomorrow’s meeting? Clearly BT must give her a bone to throw to the Public Accounts Committee, which meets to discuss the NAO report, to save her face. The (leaked) Pennell report that BDUK “lacks commercial nous” suggests she now has the power to bend her civil servants to her will or to ignore them.
Malcolm Corbett, INCA’s executive director, who will be at the meeting, says altnets will be seeking the following:
- that the six projects in the room get their money and protection against BT overbuilding them for a period
- that BT publishes its actual costs, ie invoices and payslips, for state-aided NGA roll-outs
- that Miller re-opens negotiations on Open Access with respect to BT (and other networks) poles and ducts and even fibre
- that the government allows the introduction of alternative models to gap funding and sources for future roll-outs. (The INCA seminar revealed that the only public money in Stockholm’s highly successful Stokab dark fibre to the premises network was SEK50,000 spent on the feasibility study; the rest came from government and bank loans and re-invested profits.)
One more thing Miller might get. The INCA meeting heard that there is apparently a consultants’ report doing the rounds in BDUK that cross-matches business premises against postcodes and BT’s NGA roll-out. The relationship is inversely proportional, ie the more densely businesses cluster the less likely they are to be passed by BT fibre. This is because BT doesn’t want to swop relatively lucrative leased lines for cheaper broadband connections.
There is plenty of evidence:
- the legal challenge to BDUK’s original Superconnected Cities project
- Virgo’s reportage of BT’s preference to build fibre to the home in sparsely-populated rural Lancashire in competition to B4RN rather than crowded EC1
- former BDUK-community linkman Mike Kiely’s frustrated attempts to get fibre into a Shoreditch co-op that houses 89 mainly high tech start-ups
- a new proposal from BT to Lorne Mitchell’s Goudhurst NGA project, just as they are about to award a contracts, among others.
If true, it shows two things. One is that BT responds only to competition. Secondly, it appears BT is sabotaging Miller’s efforts to build Britain’s economic renaissance on the networked creative, innovative, entrepreneurial sector. Four hundred years ago the heads of those responsible would have decorated London Bridge.
The government’s rural broadband programme will transfer £1.2bn to BT, finish two years late, and rely on civil servants to establish whether it has received value for money.
“The rural broadband project is moving forward late and without the benefit of strong competition to protect public value. For this we will have to rely on the department’s (culture media & sport – DCMS) active use of the controls it has negotiated and strong supervision by Ofcom,” said Amyas Morse, head of the National Audit Office.
The NAO has been investigating whether Broadband Delivery UK, the quango set up in DCMS, will deliver value for money.
It was expected to be critical; the Cabinet Office National Project report recently judged the BDUK project amber/red, meaning it is in danger of missing its targets. Few will have guessed how bad things are.
In the very baldest terms, the NAO said there is £1.2bn available to provide high speed (>24Mbps download) to areas outside BT’s commercial roll-out to two-thirds of the country. All of it will go to BT.
Central government’s contribution is £530m; the balance comes from local authorities’ budgets which are funded by the taxpayer, and BT. BT’s contribution will be 23%, way down on the 36% estimated in 2011.
There are 44 projects that call for 4.6 million houses to have access to ‘next generation’ broadband; BT has already won 26, and it has no competitors.
The original completion date for 90% of homes was May 2015. Last week DCMS increased the coverage target to 95%, and extended the deadline to 2017.
BT said in response, “BT’s fibre programme has been one of the most efficient in the world with the company going further and faster than industry experts thought possible. BT has applied these cost efficiencies to its BDUK work and so the company is delivering excellent value for money.”
It argues there was strong competition when prices were set at the start of the process. “That ensured counties have benefited from the best possible terms.
“Deploying fibre broadband is an expensive long-term business and so it no surprise that others dropped out as the going got tough,” it said.
On the specific claim that BT is likely to contribute 23% of the total funding or some £356m, BT said, “We would like to highlight we have committed more than £500m to date. With more than a third of the contracts yet to be signed, including a very large one in Scotland. We believe we will contribute around 38% of the total funds by the end of the programme, which is well above the 23% claimed in the report.”
Asked why, when the state aid issue delayed things for six months, the deadline is now two years later, BT said, “The timescales for when individual contracts are signed are out of our hands as these are dictated by the individual councils. Our commercial fibre roll out is at least 18 months ahead of schedule so we have proved we can roll out fibre at great pace.”
Few Br0kenTeleph0n3 readers will be surprised by the NAO’s findings. But some might be taken aback by the NAO’s plain-spoken statements of fact. It is rare, given that ‘superfast broadband’ has been such an iconic target for this government, and the vested interest in BT’s on-going attempts to rubbish criticism of the project, that the circumstances have been set out so plainly.
Indeed, the NAO has merely scratched the surface. It could have explored and said much more about why the BDUK Framework process attracted just two bidders from nine invited. These were BT and Fujitsu, which pulled out in March.
It could have said much more about the reasons for the six month delay before the European Commission swallowed its reservations and passed the Framework as fit for purpose. The commission spent weeks waiting for information from BDUK.
However, these would have placed responsibility squarely with individuals, and the tradition here is to apportion responsibility collectively, except in the most egregious circumstances.
That said, some people will have a chance to explain what they have been doing for the past three years. They include Colette Bowe and Ed Richardson, chairman and CEO respectively of Ofcom, the regulatory watchdog that became BT’s lapdog. They will face MPs on the culture, media and sport committee on Tuesday 9 July.
Next up on Monday 15 July are believed to be BT Openreach CEO Liv Garfield and Bill Murphy, MD of BT’s NGA project. They have been invited by culture secretary Maria Miller to face representatives from six alt-nets, including B4RN CEO Barry Forde, who are trying to get the go-ahead to build in the ‘Final 10%’ that BT won’t cover. The trouble is, BT won’t say what it’ll cover and when, leaving the alt-net vulnerable to state-funded competition from BT.
If that meeting agrees that BT is not allowed to overbuild where the alt-nets run, the alt-nets might say it was worth the trip.
Finally the Public Accounts Committee, chaired by Labour leader Margaret Hodge, is likely to want to explore why the Conservatives scrapped Labour’s plan for a national 50Mbps broadband network by 2013, funded by a 50p ‘broadband tax’ on fixed phone lines. But who shall be the victims? Will it be communications minister Ed Vaizey, who has presided over BDUK for the duration. What about BDUK head Rob Sullivan, or Matt Agar, who has been the lynchpin in the BDUK works? Or BT CEO Ian Livingston, who in September is destined for the lords and a job as investment minister at the department of business, innovation and skills? Or his successor, the former Procter & Gamble soap and nappy salesman Gavin Patterson?
Entertaining as such spectacles might be, there is serious work to be done. Ofcom’s role may be crucial. But it may need a shake up. It refuses to accept its decision to allow BT to refuse the use of its physical poles and ducts for third party leased lines had any effect on the BDUK process. Yet this was the main reason why everyone except BT and Fujitsu dropped out of the BDUK framework bid. Geo CEO Chris Smedley was particularly forthright in his comments.
Ofcom suggests he should have gone through proper channels rather than ‘have a slanging match’ in the press. Asked why, if it was aware of the problem BT’s terms and conditions for access to its physical infrastructure (PIA) were causing, it did not consult further, an Ofcom spokesman said it believed its feedback process was clear and transparent and should have been used.
The spokesman felt there may be “a new role” for PIA in future. This might also involve Active Line Access, a standard way for fibre carriers to connect that was developed but not enforced by Ofcom.
(There is more to be said about PIA because it is addressed in detail in Ofcom’s Fixed Access Market Review consultation published the day before the NAO report. But that is for another time.)
Just ahead of the NAO report Ofcom set out a consultation that makes it easier and cheaper for firms that rent fibre from BT to switch.
In a more formal statement referring to the Office of Fair Trading investigation into competition in public sector procurements, which include rural broadband and the still-born £150m Superconnected Cities project, Ofcom said it doesn’t regulate public service procurement or contracts. “Rather, we regulate competition in the private telecoms sector. Likewise, the BDUK programmes are entirely matters for DCMS,” it said.
Whether it can persuade others that is the case remains to be seen.