Next Generation Access – regulation of key input products

By Paul Brisby, Partner at Towerhouse Consulting

This section deals with Ofcom’s regulation of BT in the NGA space.  It looks specifically at wholesale markets:  what products must BT sell to other players?  On what terms?  What are the pricing rules?  It is largely concerned with Openreach (although we also touch on BT Wholesale) and covers the following wholesale product areas:

(i)              Local Loop Unbundling (LLU)

(ii)            Sub-Loop Unbundling (SLU)

(iii)           Physical Infrastructure Access (access to BT’s ducts and poles)

(iv)          VULA / GEA – this is the NGA-based BT product delivered at (or very near) the local exchange.  VULA stands for Virtual Unbundled Local Access and is Ofcom’s term.  GEA stands for Generic Ethernet Access and is BT’s term.  (The question of whether GEA is the same as VULA is complicated – see below).

(v)            Backhaul

(vi)          Wholesale Broadband (the only product in this note which is not provided by Openreach) – we deal with this only briefly.

Our aim here is to present a simple account of some of the key rules.  But you need to be aware that regulation[1] in this area is ultimately extremely complicated.  The Ofcom document dealing with items (i) – (iv) above is the Wholesale Local Access statement of 7 October 2010:  it’s 250 pages long; even then, to make proper sense of it you also need to read the consultations which preceded it – the one in March 2010 ran in total to 600 pages.  Then, to understand what the rules mean in practice, you need to plough through various previous Ofcom investigations, appeal cases at the Competition Appeal Tribunal and Competition Commission; separate detailed pricing rules running to hundreds of pages; and quite probably something from the European Commission as well[2].

So, if you want to make sense of the Ofcom rules without reading all that, this section is for you. 

Bear in mind, though, that it is only a summary.  If you need to use these rules in anger – if they really affect your business – you may end up getting to know some of the documents themselves in an unfortunate level of detail!  

1.    Introduction

Ofcom’s rules on most of these areas were set out in its statement on Wholesale Local Access of 7 October 2010 (WLA Statement) and the accompanying SMP Conditions.  Those conditions are the legal rules which generate binding obligations on BT[3].   

As well as making more-or-less final decisions in these areas, Ofcom also set out the steps which it believes are necessary to establish a clear regulatory framework which will allow competition in high speed broadband services to flourish. Ofcom notes that there had been significant investments in so-called super-fast broadband over the previous two years and that around 50% of UK households could now access these services.

Competition in these markets however remains in its infancy.  Ofcom's intention was therefore to establish a regulatory framework which would promote competition but would also support continued investment and innovation.  It will remain to be seen how this works in practice. 

2.    The WLA rules

Alongside the expected rules on LLU and SLU, the WLA statement provided that, for the first time, BT will be obliged to offer duct and pole access to its competitors and to provide access to its own NGA services.  The rules have three central elements:-

(i)              Virtual Unbundled Local Access (VULA).

Ofcom set out new rules governing BT’s NGA services.    In summary:

a.              Where BT deploys NGA, rival CPs will be able to use VULA to deliver high speed services using the BT network. This is intended to give them similar levels of control to that available using LLU. 

b.              As with LLU, in order to use VULA, CPs will need a network presence at or near the BT local exchange. 

c.              BT is now obliged to provide VULA on fair and reasonable terms and on the basis of Equivalence of Inputs or “EOI”[4]

d.              There is a raft of other obligations such as a rule requiring BT to comply with directions given by Ofcom and a procedure for the delivery of new products. 

e.              Note that there are no direct pricing obligations (though there are rules designed to prevent margin squeeze).

f.               Ofcom has said that VULA has to comply with 5 key characteristics:

i.       Localness:  interconnection for VULA should occur locally;

ii.      Service agnostic: VULA should be able to support a multitude of services (including voice)

iii.     Un-contended: dedicated capacity should be available to the end user;

iv.     Control of access: sufficient control of the access connection should be made available; and

v.      Control of Customer Premises Equipment (“CPE”): sufficient control of CPE should be available.

BT has chosen to comply with its VULA obligations through its GEA product-set.  It is beyond the scope of this paper to dissect the BT product set.  However, a key debate is about whether the GEA product set complies with the VULA criteria.  This is inevitable and is likely to continue through the life of the product for a simple reason:  whenever a new product development is requested, the first question asked will be whether it fits within the criteria specified by Ofcom.

Controversy may surround Ofcom’s decision not to make VULA subject to cost orientation but this was widely expected in the industry.  Ofcom believes that NGA development is at such an early stage that they believe it would have been difficult to determine the correct level of any cost orientation obligation.  More interesting is the new guidance on an ex ante approach to margin squeeze. Ofcom has identified the potential for BT to engage in anti competitive behaviour including the potential to engage in margin squeeze by setting “inappropriate price differentials” between VULA and BT’s retail offerings such as BT Infinity. It is also interesting to note that Ofcom has formally recognised that ex post competition law may not provide an adequate remedy to ensure that competition takes hold. Their solution is to set out guidance on the approach Ofcom would take when investigating any suggestion that BT’s pricing was creating a margin squeeze.  It remains to be seen how this will work in practice and the extent to which alternative providers have the will to pursue it.

VULA is envisaged to last for at least the next five years or until fully unbundled fibre services are available. VULA is intended to give altnets greater control over BT's FTTC-based broadband services, enabling them to differentiate their products both from one another and from the standard BT services. As we have seen in the past with products such as LLU, whether this is what happens depends on mundane but fundamentally important matters such as the terms and conditions offered by BT and the design of the systems introduced to deliver the service.  

(ii)       Physical Infrastructure Access (PIA)

The new PIA product will allow others to deploy their own NGA infrastructure between the customer and the local exchange, using BT's ducts and poles. This is expected to be particularly significant in areas outside BT’s own NGA roll-out.

PIA must be provided on fair and reasonable terms; on a non-discriminatory basis; and on cost oriented prices.  There is a raft of other obligations such as a rule requiring BT to comply with directions given by Ofcom and a procedure for the delivery of new products.  BT must publish a reference offer.

Ofcom set out a timeline for the development of the PIA product set (which is a new thing).

i.                BT’s initial reference offer (i.e. the contractual and commercial terms) was to be published within three months of the statement – i.e. by mid-January 2011;

ii.              A window of another three months was to be allowed for the negotiation of the offer with industry (which would notionally have run until mid-April but in fact is ongoing at the time of writing);

iii.             BT should then produce a revised reference offer within two months;

iv.            Ofcom have said that they would consider intervening if agreement could not be reached.

In theory, PIA should enable alternative operators to deploy superfast broadband services in areas where BT elects not to deploy NGA but much will depend on both the price and the terms and conditions. These in turn will depend on whether industry is able to collectively negotiate a fair and reasonable contract, and effective operational procedures, with Openreach.

This has already proven controversial – a public spat has arisen over pricing[5] - and the process of developing workable products is ongoing. 

Note also that PIA is not subject to EOI – but the undertakings contain some interesting rules that go some way towards that (also on SLU).

(iii)           Local Loop Unbundling (LLU) and sub-loop unbundling. 

Unlike VULA/GEA these product sets (in full and share form) exist already; the main difference is that LLU exists in a full, productised and more-or-less scalable form, backed up by a full OSS.  (The same is not necessarily true of SLU).  The key rules on LLU and SLU are these:

a.              It must be provided on fair and reasonable and non-discriminatory terms.

b.              BT is subject to a price control in relation to LLU services.  This means that Ofcom specifies detailed price rules for LLU.  Understanding this fully means reading not one, but several lengthy documents – Ofcom’s original price control statement, the Competition Commission ruling in the appeal made by TalkTalk against the decision, and Ofcom’s subsequent amendments.  Ofcom has also launched a review of that price control (which is currently ongoing). 

c.              Both LLU and SLU are subject to cost-orientation obligations.

d.              There is a raft of other obligations including a requirement that BT comply with Ofcom directions and a procedure for the delivery of new products.

3.    Other relevant rules

We have dealt with the key direct inputs for NGA and broadband services.  Other relevant areas include backhaul and wholesale broadband.  The key points to note are these:

·         BT must provide ethernet backhaul services up to and including 1Gb/s on fair, reasonable, non-discriminatory terms and on the basis of cost-oriented pricing.  It is also subject to a price control.  Ofcom is currently kicking off work to look again at the regulation of backhaul through its confusingly-named Business Connectivity Market Review – it issued a “call for inputs” on 21 April 2011[6].  Anyone at all interested in these areas is strongly advised to offer input. 

·         BT’s wholesale broadband services are also regulated in some areas (these go under names such as IPStream, IPStream Connect, and Wholesale Broadband Connect).  These are the only products considered in this note which are provided by BTWholesale rather than Openreach; they are relevant, though, because they affect the competitive environment.   The key thing to note here is that while BT is unregulated in the vast majority of the country (Ofcom considers that services based on LLU provide a significant competition constraint to BT), much of the “final third” is subject to regulation.  This means that for areas representing population coverage of some 20% of the population BT’s prices will be subject to regulation – though probably only for BT’s 8Mb/s IPStream Connect service.

·         Finally in this section, ancillary services are also regulated.  This might be anything from cable pull-through to renting space in a BT exchange.

4.    Commentary and practical issues

This section offers a little more insight into how the rules might work in practice; into what they actually mean; and into how they can be enforced.

The first point to note is that the whole regulatory structure puts an enormous level of responsibility on BT.   Most of these areas are complex and Ofcom almost always leaves the detail – and sometimes much more than just detail - to BT in the first instance.  The Ofcom rules on the whole don’t tell you much about the actual products – for those you have to look to BT.

The second point is that if you rely on these products to run your business, you can’t necessarily rely on BT or Ofcom to produce products that will work for you.  Ofcom is generally regarded as a very good regulator but they do not typically intervene at a really detailed level.  There are actually some pretty sound reasons for this:  first, a simple resourcing question – Ofcom doesn’t have the resources to control BT at the level of minutiae.  Secondly, a question of efficiency:  the (comparatively generic) rules set by Ofcom could have a near-infinite number of consequences at a level of detail.  Ofcom, then, needs to be guided in what and how to enforce and the people best-placed to do that are those already operating in (or seeking to enter) the market.

The third point flows obviously from the first two:  if you have requirements of these regulated products, you need to be very clear with BT and (possibly) also with Ofcom about what they are. 

It’s worth looking a bit more at how this plays out in practice.  We’re going to focus here on pricing. 

There are two quite distinct kinds of direct pricing rule: 

i.                A (generic) cost-orientation rule:  this rule simply says that BT has an obligation to ensure that its prices (say, SLU rental) are reasonably derived from its costs

ii.              A price control:  this sets more detailed rules for BT’s prices. 

Obviously, the first of those gives BT potentially quite a lot of freedom.  Its exact meaning has in fact been very controversial (at the time of writing, BT is seeking leave to appeal to the Court of Appeal on the matter) but Ofcom’s view is that there is an initial test requiring the price to be between a ceiling (distributed stand alone cost or "DSAC") and a floor (distributed long run incremental cost or "DLRIC").   In terms of what those mean in practice, for some services the difference between the two can be hundreds of percent. 

The price control, you might think, would be much more precise – and you’d be correct.  A price control proceeding is long and complicated and in the case appealed by TalkTalk (on LLU pricing) the final decision ran to something around 270 pages. Even then, though, a lot of freedom is left to BT.  An Ofcom price control will typically take a service – say, MPF rental and, rather than specifying a particular price, will simply say “the price of this service must decrease [or may increase] by a minimum [maximum] of X% per year – with an allowance for inflation”.  Often several services are lumped together in a basket and, provided the price of the basket complies with the rule, the individual prices within it may change.

Some of this is currently being tested.  Visible signs include the public spat about PIA prices (see above).  Sharp-eyed observers will also have noted a dispute submitted to Ofcom on SLU prices by Digital Region (the publicly-funding NGA provider in parts of South Yorkshire); Ofcom is also looking at another dispute on ethernet pricing.

This brings us to enforcement.  It is pretty unusual for Ofcom to take direct enforcement action against BT for breach of SMP conditions.  This means that most serious players will want, at some stage, to test BT’s compliance for themselves.  There are a number of ways of doing this – the best-known (thought definitely not the only ones) being disputes and complaints.  The good news is that, used properly, these routes can be pretty effective[7]

Another interesting point is that regulation is very different for different products.  LLU (MPF and SMPF) is heavily regulated, with a full set of standard regulatory obligations, a cost orientation obligation and a pretty detailed (and closely-targeted) price control; ethernet similarly.   VULA, though, is much less regulated with no direct price regulation at all; SLU and PIA sit somewhere in the middle. 

All of this is complicated by the possibility of appeals and, these days, most of the really big decisions are appealed.  If you want to know more about this, you can read our paper on it here:  http://www.towerhouseconsulting.com/telecoms_news.htm

5.    Conclusions and tips

In all of this complexity, how can we make sense of this in practical terms?

First, it’s a good idea to know the basics about the products you plan to use.  Double check and remember the key obligations.  Likely candidates are fair and reasonable terms, non-discrimination, cost orientation – possibly also EOI and price control.   Take time to think about what they mean for you.

Secondly, unfortunately, no-one else is going to look after your interests.  This means that you need to be very clear about what you want / expect from BT.  Ask clearly and ask in writing.  (A written request is required to trigger some regulatory obligations.)  Get involved in the Ofcom proceedings that set the rules (market reviews or price controls) – either directly or through one of the industry associations.

Thirdly, don’t forget the contractual angle.  Hopefully it’s clear from the rest of this note that most of the regulatory rules are pretty generic.  The contract with BT is your opportunity to put flesh on those bones and almost all contracts have a periodic review.  (On the flip side, a bad contract can do you real damage.)

Finally, you may ultimately have no choice but to ask Ofcom for help in a formal way.  This is not something to take lightly but, equally, is genuinely not something to be frightened of if you really have to do it.   At the time of writing Ofcom is consulting on new dispute resolution guidelines which are designed to make that process more streamlined.

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[1] We deal with SMP conditions in this section; BT’s undertakings are dealt with elsewhere.  Note however that there is often overlap and in particular that Equivalence of Input (EOI) obligations often exist under the Undertakings, rather than under the rules discussed in this section.

[2]There’s another 600 pages in the Ofcom statement which covers backhaul

[3]It’s common practice (and rightly) to read the SMP conditions in the light of the Ofcom statement which accompanies them.  In strict terms, though, it is only the Conditions themselves that are binding – a point emphasized by the Competition Appeal Tribunal recently in a ruling on PPC trunk charges.

[4]EOI means that BT has to supply the same product to everyone downstream, including its own downstream businesses.  We have deliberately not quoted precise rule-numbers in this note – it would substantially increase the length of the note and actually looking at individual rules in isolation is quite a bad idea – but the relevant rule here is FAA11.3.  In case you’re interested.

[7]We don’t deal with the role of the OTA in this note but they deserve an honourable mention for their tireless work helping to make regulation work in practice