Br0kenTeleph0n3

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Posts Tagged ‘LLU

Ofcom decisions lack transparency

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Basic CMYKFor all the thousands of words that accompany Ofcom’s consultations, the fact remains that the process of setting the basic price of communications is not transparent.

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.

 

 

 

 

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Written by Br0kenTeleph0n3

2014/07/01 at 12:56

BT faces price cuts and refunds on unbundled products

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BT will have to change how much it charges for sub-loop unbundling products and may have to refund money for overcharging, according to a draft determination by the UK’s communications regulator Ofcom.

Ofcom’s heavily redacted draft decision, published on 14 June, relates to a dispute filed by Digital Region Ltd and Thales in February this year after BT’s Openreach subsidiary, which levies the charges, turned down a request to reduce the charges.

The charges have long been a bone of contention between BT and its competitors. The competitors have argued that BT inflated the prices artificially to raise barriers to entry .

Communications minister Ed Vaizey has said he would act on evidence of overcharging by BT.

One other company, whose identity was redacted, joined DLR/Thales in the dispute. Rutland Telecom expressed an interest in the case. It was asked for further information but did not respond, and so was not joined in the case.

DLR is an alternative communications service provider to BT in the south Yorkshire region. It sources the operation of its network services to Thales. It rents some of its physical network, such as the wires between the street cabinet and the customer’s home, from BT.

BT charges “connection fees” of £106.62 and £127.61 respectively where the customer buys both voice and broadband from DLR, or either voice or data from DLR with another provider supplying the other service. BT also charges an annual rent of £93.96 for the connection.

DLR/Thales told Ofcom it estimated the real price of the connection fee should be about £50 in both cases, and that the annual rent should be about £82.35.

DLR/Thales said equivalent prices in New Zealand and the Netherlands were about £50 and £27-28 respectively. However, Ofcom said DLR/Thales had not shown why these prices were relevant in the UK. “We consider that in this case…any international comparison will say very little about BT’s compliance,” it said.

All pricing details have been cut out of Ofcom’s draft determination. This makes it impossible to judge both the financial arguments on both sides and Ofcom’s determination.

This matters because many in the industry believe that BT has “captured” the regulator, a point made by the Guardian newspaper last year.

The parties and any other interested parties have until 5pm on 28 June to submit comments to Ofcom, after which Ofcom will make a final determination.

Update

A BT spokesman said, “We are pleased that DRL/Thales primary claim that the SLU connection charge should be reduced to £50 has not be upheld by the regulator.  Ofcom are proposing that BT make some minor adjustments to our SLU charges although we consider these to be unfounded and we will be responding to Ofcom in due course.”

In a separate dispute, Ofcom turned down a complaint by Opal Telecom (part of TalkTalk) and British Sky Broadcasting  (Sky) that they had overpaid Openreach for some local loop unbundling products.

The regulator acknowledged that the overpayment was due to it miscalculating the fee in 2009, but said a refund would not benefit customers or the level of competition in the market.

The Competition Commission found that Ofcom had “materially erred” by underestimating how fast Openreach could become more efficient; that its assessment of inflation of wage and energy costs was incorrect; and that it had made “certain errors” specifying price caps ancillary services.

Ofcom admitted these mistakes meant Opal and Sky overpaid Openreach.

“However we also note our view that Openreach complied with the regulatory obligations which Ofcom had set. We consider that legal and regulatory certainty in conditions set by Ofcom is important,” Ofcom said.

“We acknowledge that the sums sought by Opal and Sky are not in themselves insignificant, but we also consider that in the context of the overall value of the services provided, any harm to competition that arose during the relevant period was limited, and it is not clear that any retrospective repayment now would remove any alleged competition distortion or economic inefficiency.

“If we were satisfied that a repayment was likely to have a positive effect on consumers or competition, either directly or indirectly, this could alter the balance of relevant factors in favour of ordering a repayment. However, we note in this regard our view that, in the circumstances of these disputes, a repayment would be unlikely to have a significant impact (positive or negative) on competition or consumers.”

The parties have until 29 June to reply.