Acero 1045:

5.186 We are proposing to impose a range of both general obligations and price controls on BT in Market 1. The proposed set of remedies are:

 Requirement to provide network access on reasonable request

 Requirement not to unduly discriminate

 Requirement to publish a reference offer

 Requirement to notify charges, terms and conditions

 Transparency as to quality of service

 Requirement to notify technical information

 Basis of charges condition

 Charge control

 Requirement for cost accounting

5.187 We consider that this suite of proposed remedies would operate together effectively to ensure effective network access on terms and conditions that will enable third party providers to enter the market and compete with BT effectively in the downstream retail markets.

Consultation questions

Question 5.1: Do you agree with the general access and non-discrimination remedies Ofcom proposes to impose on BT in relation to the market for wholesale broadband access in Market 1? If not, please explain why.

Question 5.2: Do you agree with Ofcom’s proposal to impose a basis of charges obligation and a charge control on BT in relation to the market for wholesale broadband access in Market 1? If not, please explain why.

Remedies considered – Market 2

5.188 In this section we set out our approach to remedies in Market 1. We start by discussing three general options for remedies:

 Option 1: no remedies;

 Option 2: general access and non-discrimination remedies; and

 Option 3: price controls in addition to general access and non-discrimination remedies.

5.189 Having discussed the approach that we consider to be most appropriate, we then discuss each specific SMP condition in relation to whether it meets the relevant legal tests for imposing conditions on a dominant provider.

Option 1 (no regulation)

5.190 As set out in Section 4, Ofcom considers that BT has SMP in Market 2. In contrast to Market 1, however, there has been some entry by competitors to BT and there is some potential for further entry, although we believe this potential to be limited for the forward look period of this review.

5.191 In the absence of regulation on BT, competition would be limited to those providers that have deployed in Market 2. Further, in the absence of regulation, providers would be limited to competing in exchanges where they have deployed their own networks in order to use LLU. It may be argued that the absence of regulated

products may promote investment, because in order to compete, POs would need to provide their own capability based on LLU. However, in proposing that BT has SMP we have taken the view that there are barriers to entry in Market 2 due to the high sunk costs incurred in deploying LLU. Therefore, we do not expect that an absence of regulation is likely to promote a significant level of efficient investment by POs in entering the market, leading to competition.

5.192 As for Market 1, in the absence of regulation BT would have little incentive to provide wholesale products to these third parties as this would allow them to compete with BT’s retail divisions. As such, our analysis of the deployment by POs (current and planned) indicates that without regulated wholesale products, most POs would not be able to compete in large parts of Market 2.

5.193 The consequence of this would be a restriction of competition in Market 2 and in the provision of downstream broadband services.

5.194 For these reasons, Ofcom considers that ex-ante regulation is required to ensure that the benefits of competition in terms of price, product differentiation, choice of supplier and quality are optimised for citizens and consumers in Market 2. Ofcom considers, therefore, that it should impose ex-ante regulation in this market.

Option 2 (access and non-discrimination obligations)

5.195 Whilst there is some, limited competition in Market 2 based on the investment to date by POs other than BT, in the absence of regulatory remedies in Market 2, BT would not have the incentive to provide access to other providers and this could restrict competition in the provision of retail offers. An absence of wholesale products is unlikely to stimulate significant further investment from other providers.

5.196 Our view is that, as for Market 1, general access and non-discrimination obligations, supported by the relevant transparency obligations are required in Market 2. Whilst market conditions are different due to the limited competition and the potential for limited future investment in Market 2 compared to Market 1, we propose the following complementary remedies in order to allow network access and ultimately to promote competition:

 Requirement to provide Network Access on reasonable request;

 Requirement not to unduly discriminate; and

 Transparency obligations.

o Requirement to publish a reference offer;

o Requirement to notify charges, terms and conditions;

o Requirement to publish technical information

o Transparency as to quality of service; and

o Requirement to account separately.

5.197 Without these remedies BT would be able to refuse to supply Network Access on reasonable terms, or would be able to supply such access but only in an unduly discriminatory way and this could limit the ability of third parties to compete with BT downstream. The result would be that consumers’ choice would be limited to those providers that had deployed using LLU (or Virgin via its cable network where available). As such, our rationale for proposing these remedies is similar to that set out for Market 1 (recognising that the market conditions vary).

Option 3 (price controls)

5.198 At the time of the last review, the level of growth in LLU was uncertain as LLUOs continued to deploy their networks. Our aim was to provide these CPs with the right conditions to deploy LLU in order to provide services in the downstream markets. Our concern was that price regulation of BT may set a wholesale price at such a level to act to inhibit the deployment of LLU in the less competitive areas. Therefore, we decided not to impose a cost orientation obligation or a charge control in any geographic WBA market.

5.199 Whilst BT has had some flexibility in the level it set wholesale broadband access prices, its ability to price excessively in areas where LLU based competition did not develop were constrained by a voluntary price ceiling. In addition, we effectively imposed a “retail minus” cap on BT’s wholesale broadband access price by imposing general access and non-discrimination remedies. Finally, in the 2008 WBA market review, we noted that we would monitor BT’s profitability in Market 1 and Market 2, and reconsider a price control if this became a concern.

5.200 Since the 2008 WBA market review, the rate of growth in fixed broadband subscriber numbers and LLU roll-out has decreased. Responses to our information requests did not indicate that POs currently had plans for rollout beyond 2010, although there may be some opportunity for further rollout for POs based on their own assumptions of market share and costs of rollout. Our view of the potential for LLU rollout (set out in Annex 12) is consistent with the limited forecasts provided by POs.

5.201 Furthermore, BT’s voluntary commitment to set wholesale broadband access prices below an agreed ceiling is set to expire on 1 January 2011. In light of this, and the scope for some further investment and competition benefits to emerge over the market review period, we need to establish what form of price regulation will be appropriate and proportionate in Market 2. We have identified a number of options for how we might approach price regulation in Market 2:

 Retail minus

 Cost orientation

 Safeguard cap

 Charge control

“Retail minus”

5.202 A “retail minus” cap provides a light touch approach to regulation and is appropriate in certain circumstances, for example when we consider a market is moving towards being competitive or there is a risk that price regulation could deter investment. While we do not consider that Market 2 will become effectively competitive during the period of the review, there may be the potential for some further investment or expansion by LLU operators beyond the June 2010 forecasts included already in our market analysis to take place. A “retail minus” approach to regulation in Market 2 may be sufficient to limit BT’s pricing freedom without stifling potential further investment.

5.203 As noted above, a “retail minus” cap is effectively imposed through a combination of the general access and non-discrimination remedies that we propose to impose to address SMP in Market 2. This is because if BT were to margin squeeze this would

equate to constructive refusal to supply. With a retail minus obligation in place, if the retail price is constrained e.g. by competition, then the wholesale price would also be constrained. Such a constraint may occur if BT sets a uniform national retail price, and the retail price in Market 3 geographic areas is constrained by competition. 5.204 However, a “retail minus” approach, alone, will not control the absolute level of BT’s

wholesale prices. The fact that BT currently set its prices close to their voluntary ceiling in Market 2, may suggest there is a risk that prices in Market 2 could increase further once BT’s voluntary commitment expires on 1 January 2011. This may

support imposing some form of safeguard cap on the absolute price level in Market 2, in addition to a “retail minus” regulation, to prevent the risk of excessive prices. It is also important to note that our assessment of market power in Section 4 above found that any further movements in Market 2 areas – in terms of further LLU investment or expansion by existing investors – is unlikely to be sufficient to deliver effective

competition. Therefore, while it is appropriate to take a light touch approach to price regulation in Market 2, at this stage some form of price control or safeguard, in addition to “retail minus”, is likely to be proportionate to the scale and nature of any further investment benefits in the market.

5.205 Finally, there are a number of pricing elements that make up the WBA products. Whilst retail minus may constrain the main rental prices, BT may be able to seek to set other prices in such a way as to restrict competition. For example, it may try to set the wholesale price for transfers between CPs at an excessive level to restrict

switching away from BT. In this case, we may need to intervene (or settle disputes) in future.