Powers under sections 87 and 88 of the Act
7.60 We are proposing to apply a charge control on BT as an SMP condition under section 87(9) of the Act. In respect of ECC services, we propose to apply a sub-cap of GBCI-0% on each individual charge. In respect of Accommodation services, we
279 See paragraph 13.21 of the BCMR Consultation.
280 See Table 87 in the BCMR Consultation.
281 See
http://www.openreach.co.uk/orpg/home/products/pricing/loadProductPriceDetails.do?data=kgnGm8X SPQZEY5UMJxGwO9yDfzzeTWgW5o%2FPQLWLvfwlMnGHsqdC0vzO163bJmh34D91D7M0q8u%2 F%0AIlSgtIFAKw%3D%3D
propose to impose a sub-cap of RPI-0% on both Cablelink services and the Access Locate Administration Fee.
7.61 The proposed controls for ECC and Accommodation services apply to specific services relating to the provision of TI and Ethernet services within the scope of the TI and Ethernet basket. The relevant ECC and Accommodation services are listed in Annex 8 of this consultation document.
7.62 Section 88 of the Act states that Ofcom should not set an SMP condition falling within section 87(9) except where it appears from the market analysis that there is a
relevant risk of adverse effects arising from price distortion and it also appears that the setting of the condition is appropriate for the purposes of:
• promoting efficiency;
• promoting sustainable competition; and
• conferring the greatest possible benefits on the end-users of the public electronic communications services.
7.63 In proposing charge controls, section 88 also requires that we must take account of the extent of the investment in the matters to which the condition relates of the person to whom the condition it to apply – i.e. BT.
There is a relevant risk of adverse effects arising from price distortion
7.64 As set out in the SMP analysis of the BCMR Consultation282, and explained further above in this Section, we consider the relevant risk of adverse effects arising from price distortion is the risk that BT might fix and maintain its prices for the specific services we propose to include in the price control in the relevant wholesale markets at an excessively high level.
Promoting efficiency
7.65 We consider that the setting of the proposed SMP condition is appropriate for the purpose of promoting efficiency, since in the absence of competitive pressures, we believe that BT could seek to impose charges not related to the costs of providing the services. By bringing prices more in line with the underlying costs, our charge control proposals will increase allocative efficiency.
Promoting sustainable competition and conferring the greatest possible benefits on end-users
7.66 We also consider that the proposed charge controls are appropriate to promote sustainable competition and to confer the greatest possible benefits on end-users of public electronic communications services.
7.67 The market analysis conducted by the BCMR suggests that there is a sufficient risk that BT might fix or maintain its charges for the services within the scope of the proposed controls on ECC and Accommodation services at an excessively high level, which would be to the detriment of competition. Preventing excessive pricing via a sub-cap would promote sustainable competition, which we consider is likely to be the
282 See for example paragraphs 10.196; 11.116 and 12.84 of the BCMR Consultation.
most effective way of benefiting end-users of public electronic communications services. It would enable greater choice of services for end users in terms of price.
7.68 In addition to reducing the level of ECCs, we have proposed appropriate safeguards in a form of sub-caps on individual ECC and Cablelink charges to ensure that Openreach does not price in an anti-competitive manner to the detriment of any end-user.
Investment matters
7.69 When proposing the ECC and Accommodation control we have also taken into account the need to ensure Openreach has the correct incentives to invest and innovate. In particular, we have sought to ensure that Openreach will be able to recover its costs. In relation to ECC services, we proposed the GBCI index which provides better indication of the trend increase in the cost of ECC provision.
We have considered the tests under section 47 of the Act
7.70 Any SMP condition must also satisfy the tests set out in section 47 of the Act, namely that it must be:
• objectively justifiable in relation to the networks, services or facilities to which it relates;
• not such as to discriminate unduly against particular persons or a particular description of persons;
• proportionate as to what it is intended to achieve; and
• in relation to what it is intended to achieve, transparent.
7.71 We consider these tests are satisfied.
The proposed SMP condition is objectively justifiable
7.72 In the BCMR we have proposed that BT has SMP in the markets covered by our proposed ECC and Accommodation services controls. In the absence of any charge control, this would allow BT to set charges unilaterally, leading to a risk of excessive pricing. This would have an adverse impact on both the ability of companies to compete in the downstream provision of leased lines services and on consumer choice and value for money. Our charge proposed charge controls have been designed to address this risk while allowing BT the ability to recover its costs, including a reasonable return on investment.
The proposed SMP condition does not discriminate unduly
7.73 The proposed charge controls would not discriminate unduly against particular persons or a particular description of persons, since any CP (including BT itself) can access the services at the proposed level of charges. We consider that the proposed charge controls do not discriminate unduly against BT as the controls address BT’s market position, including its incentive and ability to set excessive charges for services falling within the scope of the controls.
The proposed SMP condition is proportionate
7.74 The charge controls are proportionate because they directly address the risk of excessive pricing identified by the BCMR and are focused on ensuring that there are reasonable prices for the services in question. Openreach’s obligations apply to the minimum set of charges required for the delivery of bottleneck services. They are focused on ensuring that there are reasonable prices for those access services, which are critical to the development of a competitive market. Openreach is also allowed to recover its costs. The charge controls provide Openreach with the incentives to invest and develop its network.
7.75 For the reasons set out above, therefore, we consider the proposed SMP condition is:
• appropriate to achieve the aim of addressing BT’s ability and incentive to charge excessive prices for ECC and accommodation services;
• necessary in that it does not, in our view, impose controls on the prices BT may charge for ECC and accommodation services that go beyond what is required to achieve the aim of addressing BT’s ability and incentive to charge excessive prices for these services; and
• such that is does not, in our view, produce adverse effects which are
disproportionate to the aim pursued which is to address BT’s ability and incentive to charge excessive prices for ECC and accommodation services.
The proposed SMP condition is transparent
7.76 Finally, for reasons discussed above, we consider the proposed SMP condition is transparent. Its aims and effect are clear and it has been drafted in the proposed SMP condition so as to secure maximum transparency. The proposed text of the SMP condition has been published with this consultation. Its intended operation is also aided by our explanation in this consultation.
We have considered sections 3 and 4 of the Act
7.77 We also consider that the ECC and Accommodation services control fits with our duties under sections 3 and 4 of the Act.
7.78 For the reasons set out above, we consider that the proposed control will, in particular, further the interests of citizens and of consumers in relevant markets by the promotion of competition in accordance with section 3 of the Act. In particular, we have had regard to the development of effective competition in downstream markets.
7.79 We have also had regard in proposing the control on ECC and Accommodation services to the desirability of encouraging investment and innovation in the wholesale markets in which the BCMR Consultation proposes we should impose a charge control and which therefore also form part of the proposals on which we are consulting in this consultation document.
Summary
7.80 In this Section we outlined our proposals for the charge controls to be applied to Accommodation services and ECCs.
7.81 We propose a series of caps relating to the individual services. In each case the caps are proposed to relate to each charge within the groups of services. We propose:
• that ECCs be subject to a cap based on GBCI-0%;
• that accommodation services (Access Locate and to Cablelink) be subject to a cap of RPI-0%.
7.82 We propose to require Openreach to price relevant leased lines accommodation products no more than the pricing co-mingling services in support of LLU.
7.83 In addition, we propose that the starting charge for the new ECC basket should include a starting charge adjustment of 30%, to be applied by setting specific starting charges for certain l services where data is available and a general 30% across other services.
Section 8
8 Proposed controls for AI services in the WECLA
Introduction
8.1 In the BCMR Consultation, we are proposing to identify a geographic market covering an area that we refer to as the West, East and Central London Area (the
‘WECLA’) for wholesale low bandwidth alternative interface symmetric broadband origination (‘AISBO’) at bandwidths up to and including 1Gbit/s (we will refer in this Section to services falling within that proposed market as ‘AI services in the
WECLA’). We are proposing to make a market power determination that BT has SMP in that market, based on our overall assessment of the economic characteristics283. However, in the BCMR Consultation our view is that the prospects for competition in this market over the course of the forward-looking period are better than in other markets, noting especially that demand is expected to continue its rapid growth and a number of large operators have significant network infrastructure in the WECLA.
8.2 This Section sets out our proposals for a charge control to be imposed on BT in respect of AI services in the WECLA. We first set out the background by
summarising our proposal in the BCMR Consultation that BT has SMP in this market and we then identify and discuss possible price control options.