Fixed access market reviews: wholesale local access

409 Pages·2013·2.35 MB·English

Fixed access market reviews:
wholesale local access, wholesale
fixed analogue exchange lines,
ISDN2 and ISDN30
Consultation on the proposed markets, market power
determinations and remedies

Consultation
Publication date: 3 July 2013
Closing Date for Responses: 25 September 2013

Fixed Access Market Reviews
Contents

Section Page
1 Executive summary 1
2 Introduction 10
3 Market definition and SMP analysis: WFAEL 21
4 Market definition and SMP analysis: ISDN30 53
5 Market definition and SMP analysis: ISDN2 78
6 Market definition and SMP analysis: Retail markets in the Hull
Area 99
7 Market definition and SMP analysis: WLA 112
8 Remedies: Approach 131
9 Remedies: Quality of service 136
10 Remedies: General Remedies for wholesale fixed access
markets 142
11 Remedies: WLA next generation access 220
12 Remedies: WLA current generation access 338
13 Remedies: WLA conclusion 357
14 Remedies: WFAEL 364
15 Remedies: ISDN30 and ISDN2 379

Annexes (published separately)

1 Responding to this consultation
2 Ofcom’s consultation principles
3 Consultation response cover sheet
4 Consultation questions
5 Sources of evidence
6 General analytical approach to market defintion and SMP
assessment
7 Regulatory framework
8 Equalities Impact Assessment
9 Quality of service: Current performance, impact of poor
delivery and establishing a reasonable level of
performance
10 Analysis of recent Openreach performance
11 Draft legal instruments
12 Glossary
Fixed Access Market Reviews

Section 1
1 Executive summary
Introduction
1.1 This consultation document sets out the preliminary conclusions of our review of fixed
access markets in the United Kingdom. We assess the state of competition in these
markets and, where we find that any of these markets is not effectively competitive as
a result of any communication provider (’CP’) having significant market power (‘SMP’)
in those markets, we propose regulatory obligations to address the competition
concerns we have identified arising out of that SMP. This may include, for example,
requirements to provide services1 and, in some cases, controls on the prices charged
for such services. In each case, we explain the approach we have adopted, the
analysis that has been undertaken and our proposals.
1.2 We intend to finish our review in time for any new rules, including, if appropriate, any
new charge control remedies, to take effect when the current set of charge controls
expire in April 2014.
Background
1.3 The Fixed Access Market Reviews (‘FAMR’) consider whether and to what extent
regulation is needed for the period 1 April 2014 to 31 March 2017 in the following
markets in the United Kingdom (‘UK’):
• Wholesale Fixed Analogue Exchange Lines (‘WFAEL’);
• ISDN30;
• ISDN2;
• additional retail markets in the Hull Area only - residential fixed narrowband
analogue access, business fixed analogue access; and
• Wholesale Local Access (‘WLA’)
1.4 We published a Call for Inputs (‘the 2012 FAMR Call for Inputs’) on 9 November 2012
and received responses from 22 stakeholders, ranging from individuals and local
councils, to communication providers.
1.5 Our provisional conclusions set out in this consultation have been based on the
information we routinely collect on these markets while carrying out our duties,
stakeholder responses to the 2012 FAMR Call for Inputs, discussions with industry
stakeholders and information supplied by CPs in response to multiple information
requests (made using our statutory information gathering powers), covering network
and financial data, along with relevant publicly available information (including
material from investor presentations and analysts’ reports).

1 Our consultation proposals for the form of Local Loop Unbundling and Wholesale Line Rental charge control
remedies will be published separately shortly after this document.
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Fixed Access Market Reviews

1.6 As part of this review, we have been undertaking analysis of quality of service (‘QoS’)
issues related to the provision of regulated access services. This has been prompted
by evidence of a decline in QoS provision and concerns expressed by industry
stakeholders and end users of these services. We present as part of this consultation
relevant research, analysis, conclusions on these issues and, where appropriate,
proposals for remedies to address these issues as they relate to the fixed access
markets.
1.7 We are also, at the same time as carrying out this review, carrying out a review of the
Wholesale Broadband Access Market. The consultation for this review will be
published shortly after this one, and references to this consultation are made where
appropriate.
Proposed conclusions
Market definition and SMP assessment
1.8 For the reasons set out in this document, for the majority of the markets under review
we propose to identify the same markets and make the same the market power
determinations as were made in the most recent set of reviews for these markets.
WFAEL
1.9 We propose defining the following markets:
• Wholesale fixed analogue exchange lines in the UK excluding the Hull Area; and
• Wholesale fixed analogue exchange lines in the Hull Area.
1.10 This definition includes fixed analogue exchange lines provided over alternative fixed
networks (e.g. cable and local loop unbundling (‘LLU’)) as well as narrowband
analogue exchange line services provided over a NGA network using an analogue
terminal adaptor (e.g. fibre-to-the premise (‘FTTP’)). It excludes exchange lines
provided over mobile and over-the-top broadband services (although we take into
account the growing constraint from these alternative technologies in our SMP
assessment).
1.11 While we recognise growing competitive constraints on WFAEL, not least the
increasing use of metallic path facility (‘MPF’), BT’s share is likely to remain above
50% and LLU CPs will continue to rely on WFAEL in some areas. We therefore
consider BT continues to have SMP in the wholesale fixed analogue exchange lines
market in the UK excluding the Hull Area. We also propose to find that KCOM has
SMP in the wholesale fixed analogue exchange lines market in the Hull Area given it
has a 100% market share and given the presence of material barriers to entry.
ISDN30
1.12 ISDN30 is an access service supporting up to 30 narrowband 64kbit/s channels and
is used most commonly to provide multiple telephone lines to larger business sites.
1.13 We propose defining the following markets:
• Wholesale ISDN30 exchange line services in the UK excluding the Hull Area; and
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Fixed Access Market Reviews

• Wholesale ISDN30 exchange line services in the Hull Area.
1.14 We propose to find that BT has SMP at the wholesale level in the UK excluding the
Hull Area, and KCOM has SMP at the wholesale level in the Hull Area. The proposed
findings of SMP are based on high market share, high barriers to entry and a lack of
countervailing buyer power.
ISDN2
1.15 ISDN2 is a narrowband access service designed to cater for smaller business sites
with single line ISDN2 services providing 2 channels (each 64kbit/s). We propose
defining the following markets:
• Wholesale ISDN2 exchange line services in the UK excluding the Hull Area;
• Wholesale ISDN2 exchange line services in the Hull Area; and
• Retail ISDN2 exchange line services in the UK excluding the Hull Area.
1.16 We propose finding BT has SMP at the wholesale level, but no SMP at the retail level
in the UK excluding the Hull Area, and KCOM to have SMP at the wholesale level in
the Hull Area. In both cases the finding of SMP is based on a high market share, high
barriers to entry and a lack of countervailing buyer power.
1.17 On balance we found no SMP at the retail level in the UK excluding the Hull Area due
to BT’s declining market share over time and modest barriers to entry and expansion
once the wholesale remedies are in place.
Other retail markets in the Hull Area
1.18 Previous reviews have identified the following markets:
• Retail fixed analogue exchange lines in the Hull Area;
• Retail ISDN2 exchange line services in the Hull Area; and
• Retail ISDN30 exchange line services in the Hull Area.
1.19 We find that there have been no developments since these markets were last
reviewed in 2009 that would have a material effect how these markets are defined.
1.20 However, having applied the three criteria test2 in accordance with the European
Commission’s Recommendation on relevant product and service markets in which ex
ante regulation may be warranted (‘the 2007 EC Recommendation’)3, we consider
that competition law would now be sufficient to address any competition concerns

2 The test sets out those conditions which must be met to warrant the imposition of ex ante regulation in markets
not listed in the EC Recommendation: the presence of high and non-transitory barriers to entry (of a structural,
legal or regulatory nature); a market structure which does not tend towards effective competition within the
relevant time horizon (examining the state of competition behind the barriers to entry; and the insufficiency of
competition law alone to adequately address the market failure(s) concerned.
3 EC, Commission Recommendation of 17 December 2007 on relevant product and service markets within the
electronic communications sector susceptible to ex ante regulation in accordance with Directive 2002/21/EC of
the European Parliament and of the Council on a common regulatory framework for electronic communications
networks and services, (2007/879/EC),
www.ec.europa.eu/information_society/policy/ecomm/doc/library/proposals/rec_markets_en.pdf.
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Fixed Access Market Reviews

identified in each market. Therefore, in light of this, we consider that it is not
appropriate to identify and analyse these retail markets in the Hull Area.
WLA
1.21 WLA refers to the fixed connection from the local exchange/access node to the end
user. That connection is an input into a variety of retail services – narrowband
telephony, broadband (both standard and superfast), ISDN2, and ISDN30.
1.22 We propose defining the following markets, based on the proposed findings of
substitutability between different forms of broadband (including cable within the
market, but excluding mobile):
• the supply of loop-based, cable-based and fibre-based wholesale local access at
a fixed location in the UK excluding the Hull Area; and
• the supply of loop-based, cable-based and fibre-based wholesale local access at
a fixed location in the Hull Area.
1.23 We propose that BT and KCOM have SMP in the UK excluding the Hull Area and the
Hull Area respectively, reflecting their high and stable market shares and the large
barriers to entry at this level.
Remedies
1.24 We first detail the general remedies we are proposing for all markets where we have
provisionally identified SMP, before detailing the specific access remedies we are
proposing for each market.
General remedies
1.25 We propose in general to maintain the current set of general remedies4 imposed in
the markets in which we are proposing in this consultation to find SMP in the UK
excluding the Hull Area and the Hull Area respectively. Our analysis indicates that
these remedies continue to be appropriate, though in some areas they may need to
be modified or extended. We also propose the imposition of certain additional
remedies to address quality of service issues.
1.26 The more substantive changes, and our reasons for them, are set out in summary
below.
Quality of service
1.27 We have proposed additional obligations on BT to address concerns as to whether
there are appropriate incentives on BT to maintain quality of service delivery with
respect to the provision of access services. Specifically we are proposing to:

4 General remedies are remedies not specific to any particular product or service, but which provide general
obligations which apply to most, if not all, products and services with the aim of promoting competition, and
include: a requirement to provide network access on reasonable request; request for new network access; no
undue discrimination; Equivalence of Inputs, requirement to publish a Reference Offer; requirement to notify
charges, terms and conditions; requirement to notify technical information; quality of service obligations; cost
accounting; and accounting separation.
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Fixed Access Market Reviews

• specify the minimum set of services against which BT is required to offer
SLA/SLGs;
• require BT to provide specified KPIs for WLA, WFAEL, ISDN2 and ISDN30; and
• require BT to meet minimum standards for specified services in WLA and WFAEL
market.
1.28 In addition, we set out our expectation for the process of negotiating new, or
modifications to, SLA/SLGs
Basis of charges
1.29 Unlike in previous reviews, we are not proposing to impose Basis of charges across
all products. Instead, we propose a Basis of charges obligation be imposed only on
the following products:
• Sub-Loop Unbundling (‘SLU’);
• Physical Infrastructure Access (‘PIA’);
• Time Related Charges (‘TRCs’);
• Special Fault Investigations (‘SFIs’); and
• electricity charges.
Equivalence of Inputs (‘EOI’)
1.30 We propose an EOI obligation on BT to provide network access on an EOI basis. We
propose that this obligation will apply to the provision by BT of network access which
it is providing on an EOI basis as at the date the proposed SMP condition comes into
force.
Price notification
1.31 We intend to retain 90 days notice for existing wholesale products for WLA and
WFAEL but propose to reduce notice periods for ISDN2 down to 28 days – the same
as ISDN30. We also propose 28 days notice for price reductions (including special
offers) for WLA products.
Statement of Requirements (‘SoR’)
1.32 We are proposing to include a requirement that Openreach’s SoR guidelines meet
the principle that the reasons for rejecting SoRs are clear and transparent. We also
provide guidance on how any confidentiality concerns arising out of this requirement
might be addressed, including the use of the Office of the Telecommunications
Adjudicator and independent consultants.
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Fixed Access Market Reviews

WLA – NGA remedies
Virtual Unbundled Local Access (‘VULA’)
1.33 VULA provides CPs with access to BT’s NGA network through a virtual connection
giving them a defined link to their customers, with substantial control over that link.
We propose that BT should continue to provide VULA services to all CPs on
reasonable request.
VULA characteristics
1.34 We consider that the current characteristics remain appropriate for the next market
review period, and that BT’s VULA product has either met the characteristics or that
progress is being made to do so without requiring further action from Ofcom.
VULA pricing
General approach to VULA pricing
1.35 We do not propose to regulate the price of VULA, thus allowing BT to retain pricing
flexibility on NGA pricing. In particular, we consider that competitive constraints exist
which are likely to reduce the risk of unregulated VULA pricing (such as the pricing of
CGA services and Virgin’s services). Further, there remains uncertainty about future
demand for NGA services and the profile by which NGA investment should be
recovered. As such, determining the level of charges remains difficult and carries a
risk of setting inappropriate price levels that would particularly harm incentives for
efficient investment (either expanding the network or improving technology) and BT’s
ability to experiment with pricing to encourage fibre take up.
VULA switching
1.36 While our general approach to VULA pricing, as described above, is to provide BT
with pricing flexibility, we consider that it is appropriate to distinguish switching costs
from the general pricing approach as the costs of switching are particularly important
for retail competition (this is particularly important in light of BT Retail’s high share of
VULA connections).
1.37 Stakeholders have raised concerns regarding the £50 charge for VULA to VULA
migrations, which we consider to be high when benchmarked against similar
services/activities (such as WLR Transfer and IPStream migrations – both around
£10). As such we propose to introduce a charge control for the VULA to VULA
migration charge which sets the price in the range of £10 to £15.
1.38 Some stakeholders also raised concerns about the 12 month wholesale minimum
contract term for VULA, for both new connections and migrations. In comparison,
most Openreach rental products have a one month minimum term. For migrations
only, we think it is likely to ultimately be in consumers’ interests to restrict the
minimum term for migrations at the wholesale level to one month following a
migration, as it may facilitate switching and promote retail competition for VULA
services
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Fixed Access Market Reviews

VULA margins
1.39 Stakeholders raised concerns about BT maintaining an inappropriate margin between
its wholesale VULA prices and its retail superfast broadband prices (the VULA
margin). Accordingly, in this review we set out our proposals regarding the ex ante
regulation of the VULA margin. In doing so, we note that, separately, Ofcom has
opened an ex post Competition Act 1998 investigation in response to a complaint
from TalkTalk alleging that BT has been engaging in a margin squeeze with respect
to the VULA margin.
1.40 In this review, we first propose that it is appropriate to intervene to promote
competition in relation to superfast broadband by requiring BT to set a VULA margin
under our ex ante powers and not to rely solely on ex post competition law. This is
based on our assessment of the importance of superfast broadband in the future and
of effective retail competition in its supply.
1.41 Second, we propose that our intervention be specifically designed to address the
potential concern that BT sets a VULA margin that does not allow an operator that
has slightly higher costs than BT (or some other slight commercial drawback relative
to BT) to profitably match BT’s retail superfast broadband prices. We propose it is not
appropriate to intervene to address the concern that BT sets a VULA margin that
does not allow such an operator to profitably significantly undercut BT’s retail
superfast broadband prices.
1.42 Third, we propose to supplement the proposed obligation on BT to supply VULA on
fair and reasonable terms, conditions and charges with guidance on how we are likely
to undertake our assessment when testing whether the VULA margin complied with
that obligation. This includes that, when assessing the appropriateness of the VULA
margin, an adjusted equally efficient operator test would best describe the approach
we are likely to adopt in practice, in order to address the potential concern detailed in
the paragraph above. We also describe in detail the characteristics of such an
operator, including its existing subscriber base, its telephony and broadband
products, its copper access technology, the audio-visual services it supplies and its
customer lifetimes.
SLU
1.43 SLU allows OCPs to deploy their own NGA network between the exchange and
(usually) the cabinet, using BT’s lines from the cabinet to the end user. We propose
to maintain the obligation on BT to offer SLU across the UK excluding the Hull Area
to all CPs on reasonable request. This will provide CPs with a complementary
alternative to VULA to offer superfast services by deploying their own NGA networks,
or to exploit areas where NGA has not been deployed (e.g. final 10%).
1.44 With respect to pricing, we propose a Basis of charges obligation to address the risk
of excessive prices. The relevant condition will set out that prices should be set to
reflect the price differentials for the corresponding LLU services (given that they draw
on the same costs).
PIA
1.45 PIA provides other CPs with access to BT’s network infrastructure (e.g. ducts and
poles) to enable other CPs to deploy their own NGA networks. We propose to
maintain an obligation on BT to offer PIA across the UK excluding the Hull Area to
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