Following the broadband money

Posts Tagged ‘TalkTalk

BT’s broadband rip-off – the evidence

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Credible evidence that BT is charging more than double what it should for wholesale superfast broadband products has probably prompted national regulator Ofcom to investigate a complaint that BT is conducting an illegal margin squeeze.

The evidence is contained in a confidential report commissioned by TalkTalk, currently the biggest user of BT’s local loop unbundling (LLU) products, which made the complaint.

Ofcom presently does not regulate BT infrastructure provider Openreach’s pricing for SFBB fibre products believing to do so would discourage BT’s claimed £2.5bn investment in fibre to the cabinet (FTTC). Openreach’s prices are generally meant to be very close to its costs, especially where it has ‘significant market power’, in this case, outside the Virgin Media Docsis footprint.

The 59 page report found that Openreach’s costs to build its FTTC network are £4.39 per line per month. BT Openreach charges resellers £7.40 or £9.95 depending on the bandwidth provided. Current prices for BT’s Infinity FTTC services start at £13/month and go up to £26/month. BT Retail offers discounted prices of £6.50 and £20 per month respectively for the first three months.

The report, by German telecommunications analysts Wik Consult, is a sequel to its 2012 report to ECTA, the association of European challenger carriers, that found incumbent operators price LLU access so high as to leave no money for LLU carriers to profit or invest in network upgrades or expansion. It showed that LLU had been a failure in Europe, allowing incumbent operators to retain almost 100% of the market.

“At the prices charged for copper, all the cash flows have gone to the incumbent, and entrants have been persistently cashflow negative,” Wik reported, adding the same might become true for access to fibre-based products unless regulators stopped it.

For its report to TalkTalk, Wik modelled Openreach’s costs based on publicly available information. It found the main factors that affect its costs are penetration (take-up of GEA on the FTTC platform), the weighted average cost of capital (WACC) including any risk premium applied to NGA, the extent to which existing ducts can be reused for the installation of fibre between the street cabinet and local exchange, the depreciation method and asset lifetimes.

It checked the results produced by its base model and sensitivity tests against BT’s own statements and evidence from more developed markets in Europe. The checks suggest Wik’s assumptions and conclusions are conservative.

In particular, it suggests that 65% of non-Virgin Media SFBB subscribers will take up an service provided using Openreach infrastructure. Active electronics had a life span of eight years, cabinets and fibre 20 years each, and ducts 40 years, it said.

Almost two years ago Kevin McNulty, Openreach’s general manager for next generation access commercial partners, told Br0kenTeleph0n3 BT’s NGA financial plan was based on a break-even period of 10 to 12 years and a 20% take-up.

For the record, Ofcom announced on 1 May that it would investigate a complaint from TalkTalk Group that alleged BT has been conducting an illegal “margin squeeze” on wholesale access to Generic Ethernet Access (GEA), BT’s FTTC product.

Ofcom said the complaint alleged abuse of “a dominant position in breach of (regulations) in relation to the supply of superfast broadband (‘SFBB’). Specifically, (TalkTalk) alleges that BT has failed to maintain a sufficient margin between its upstream costs and downstream prices, thereby operating an abusive margin squeeze.”

Ofcom said it could investigate such allegations if it had “reasonable grounds” for suspecting a breach.

TalkTalk said in a statement, “We have long maintained that there needs to be tighter regulation in superfast broadband to ensure a level playing field and therefore deliver real benefits for consumers and businesses. We are pleased that Ofcom is taking this matter seriously and have decided there is reasonable suspicion to investigate BT’s fibre pricing.”

BT said it was “disappointed” by Ofcom’s decision.

Ofcom expects to report its initial findings towards the end of the year. It will decide then whether or not to proceed.


Written by Br0kenTeleph0n3

2013/05/05 at 08:56

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.


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.