Ofcom decisions lack transparency
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.