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1. In this annex we expand on BT‟s position as set out in paragraph 29 of our response to Question 16 and explain why we consider that imposition of an EOI obligation is inappropriate. We also expand on our concerns in relation to the treatment of volume discounts.

EOI is the most onerous non-discrimination obligation

2. This does perhaps go without saying. However, as we shall explain below, we consider that in practice there is in fact a “ladder of obligations” which has three rungs. These are (i) a

prohibition on undue discrimination obligation as it applies to a non-vertically integrated operator, (ii) a prohibition on undue discrimination as it applies to a vertically integrated operator and (iii) a requirement for EOI.

3. Given that BT is a vertically integrated operator and that wholesale AISBO services are upstream services, when Ofcom imposes the no usual undue discrimination obligation BT automatically goes to rung two of the ladder. We describe more fully below what this means in practice. 4. The more onerous the obligation that Ofcom proposes to impose, so the greater the justification

there must be for it. BT‟s contention is that the justification does not exist for Ofcom to impose the obligation which is the highest rung on the ladder of discrimination obligations.

There is no specifically identified market failure that justifies imposition of EOI

5. At paragraph 11.65, Ofcom identifies 4 potential non-price discrimination issues. These, and our commentaries on them are as follows:

a. Potential restriction of circuit routing rules so that CPs are forced to adopt inefficient network topologies. Ofcom describes the steps it has taken to address these issues, which do not include the imposition of an EOI remedy.

b. Design of adequate switching and migrations processes. Again, there is no suggestion here that this issue needs to be addressed by the imposition of an EOI remedy.

c. Openreach‟s product development process. Ofcom states that the issues raised by CPs could not easily to addressed by changes to the SMP conditions and continues that the New Network Access obligations and the obligation not to discriminate unduly, which will include EOI, already provide a clear framework under which BT must operate [paragraph 11.101], and that the concerns identified are best addressed at an operational level in the industry fora and in cooperation with the OTA. There is no discussion as to why an EOI remedy is

specifically needed here, and we do not see how a concern which is limited to how Openreach‟s SOR process works is sufficient to justify that in AISBO products should be made subject, in all respects, to an EOI obligation.

d. Potential discriminatory behaviour through Openreach Project Services. In its analysis of this issue, Ofcom note that these services are provided on an EOI basis and so are unlikely to be discriminatory. There is no discussion as to why an EOI SMP remedy is needed to resolve the perceived issue here. Again, Openreach Project Services are an extremely small part of the AISBO portfolio (arguably it is a non-product specific service) and so provides no

91 6. At paragraph 11.80, Ofcom considers a refusal to supply concern in relation to the provision of

specific backhaul products for mobile networks. Ofcom merely states that the proposed Ethernet access and backhaul obligations together with the obligation for BT to provide services on an EOI basis “will be sufficient to address any competitive concerns”. There is no discussion of exactly how an EOI SMP condition is required to meet any competition concerns or why a non- discrimination obligation would not be sufficient.

Ofcom focuses only on potential harm on the downstream market

7. In paragraph 11.143, Ofcom sets out why it believes that this remedy is needed. The argument advanced is that (i) Ethernet access and backhaul products are upstream inputs to two major retail telecommunications markets (we presume Ofcom means that they are inputs to products offered by BT and its competitors on those two markets), (ii) without EOI, BT could provide competitors with a different set of products to those it provides itself, and (iii) Ofcom considers that EOI consumption (by BT‟s downstream divisions) provided the right incentives on BT to implement changes and make better product variants available to its downstream divisions and competitors. There is no consideration whatsoever of the situation on the upstream market where BT competes with other large CPs. This is a material omission by Ofcom to have regard to relevant factors.

Ofcom makes only sweeping generalisations that are insufficient to justify EOI rather than an undue discrimination obligation.

8. We have seen from the above that Ofcom has advanced what is in essence a very generalised contention that EOI is required to prevent BT favouring its own downstream divisions. The general contention (that BT should not inappropriately favour its own downstream divisions) holds true equally in any situation where there are upstream and downstream markets where BT is active on both and is regulated upstream.

9. If such a generalised concern of this nature is sufficient to justify the imposition of EOI here, then in theory it would follow that Ofcom should in all such circumstances impose EOI rather than the usual undue discrimination obligation7_{. That that is not the case can be seen, however, from the}

fact that Ofcom is quite happy for a lesser obligation to apply in relation to wholesale TISBO services (which are upstream services that are inputs into downstream retail services). 10. Indeed, in proposing a less strict interpretation of non-discrimination for the wholesale TISBO

markets (i.e. a no undue discrimination obligation only) Ofcom note that this “may allow for flexibility and result in a more practical and cost-effective implementation of wholesale inputs where it is economically justified” [paragraph 11.140]. However, there is no discussion or justification as to why that approach cannot be followed in relation to the AISBO and MISBO markets.

11. Furthermore, in the case of wholesale low bandwidth services, Ofcom has shown it can be sufficiently comforted when the wholesale services are adequate to allow downstream replicability.

7 _{In the next paragraph we shall explain why the specific concerns listed by Ofcom in paragraphs 11.143 and}

92 12. So, BT contends that if Ofcom is to pass the legal tests to justify the most onerous of non-

discrimination tests, it must have a higher bar to clear than generalised assertions of concerns about downstream discrimination. In our view, in this regard, Ofcom has failed to satisfy the legal tests set out in section 46 of the Act.

Ofcom‟s justification for imposing EOI rather than undue discrimination is flawed because it mischaracterises what is required of BT under each of the two remedies.

13. Ofcom states that “prohibiting undue discrimination while stopping short of EoI could result in BT providing competitors with a different set of products to those it provides to itself, potentially using different processes and systems for their development, delivery, maintenance and repair”. This suggests that without an EOI SMP remedy, BT would be able to provide different products in the ways Ofcom suggests. Other examples given in paragraph 11.143 include a lack of EOI acting “as an impediment to improved products being made available equally promptly to BT and to its competitors”, different SLAs and SLGs, different repair timescales and developments to meet downstream BT requirements.

14. This is misleading and represents a fundamental mis-statement by Ofcom of how the existing no undue discrimination obligation works. Ofcom‟s own guidelines of November 2005 on Undue discrimination by SMP providers (the Discrimination Guidelines) specifically deal with these issues in sections 3.15, 3.19-3.20 and Annex 1, paragraphs 1.6-1.7 and 1.9. In summary, the Discrimination Guidelines state that “non-price differences in transaction conditions by a vertically integrated SMP provider favouring an internal customer can be presumed to harm competition”. At paragraphs 5.17 to 5.19, Ofcom‟s approach is explained. It states, in essence, that it may presume that differences in transaction conditions offered by a vertically integrated SMP provider to an internal and external customer amount be undue discrimination and that it “may presume that such differences are, or will be capable of harming competition”. The burden will then be on the vertically integrated operator to justify its position.

15. Put simply, in a case such as this, BT will, by virtue of an undue discrimination condition, be subject to an obligation not to indulge in any form of non-price discrimination unless it can be absolutely sure that it will be able to rebut the assumption that any such discrimination is a breach of the obligation8.

16. For the sake of completeness, in the table below, we list the types of concerns expressed by Ofcom in paragraph 11.143 and show where they are referenced in the Discrimination Guidelines:

8 _{Furthermore, the potential for very significant financial penalties if it cannot successfully rebut the breach}

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Ofcom concern Where addressed in Discrimination Guidelines

Provision of a different set of products Annex 1 paragraph1.6 Use of different processes and systems for

product development, delivery, maintenance and repair or maintenance and repair on different timescales

Annex 1 paragraph 1.6 and 1.7

Potential impediments to making improved products available equally promptly and incentivising better product variants

Annex 1, paragraph 1.7 and 1.9

Different levels of quality, e.g. different SLAs

and SLGs Annex 1, paragraph 1.8

Creating new variants to fulfil the requirements of its downstream division, taking longer to address, or avoiding addressing the requirements of its competitors.

Annex 1, paragraph 1.4, 1.7 and 1.10. NB – this is also a matter that is currently addressed through the current existing SOR processes under Condition HH9.

17. Consequently, Ofcom is incorrect when it states BT could engage in these practices if there was no EOI SMP remedy. Therefore, the examples given above do not provide any justification as to why an EOI SMP remedy is required or justified.

18. We must comment here on Ofcom‟s assertion (for example as set out in paragraph 11.143, final bullet) that the EOI obligation it proposes is no more onerous than the existing Undertakings obligation which requires Openreach to supply certain services on an EOI basis. There is, perhaps, a degree of irony in Ofcom‟s assertion that the SMP EOI obligation will be “a very similar” requirement to the Undertakings requirement.

19. We note (and deal more fully in section 5 of our response) that the definition of EOI in the legal instrument at Annex 14 differs from the definition of EOI imposed in relation to the supply of VULA at the conclusion of the Wholesale Local Access market review which in turn differs from the definition set out in BT‟s Enterprise Act Undertakings. Whilst BT‟s clear position is that we do not consider that there is any need for an EOI obligation, we would add that we consider the wording proposed here to be even more problematic than the WLA wording and therefore invite Ofcom to compare the two.

20. In our response to Ofcom‟s consultation in the Wholesale Local Access market review, we expressed concern that the VULA EOI condition was more onerous than BT‟s Undertakings EOI requirement. At paragraph 8.119 of its final statement, Ofcom stated:

“On this point, whilst we have used the term EoI in the SMP framework it is important to note

that the SMP requirements flow from Article 10 of the Access Directive and therefore, are completely separate to and independent of the BT Undertakings. Whilst there are similarities between the EoI SMP obligations and the EoI requirements under the BT Undertakings, each is imposed pursuant to distinct powers and applies in a different context. Under the BT Undertakings EoI is used in the context of organisation separation and thus deals with the interaction between different groups of BT. However, under the SMP framework, EoI only

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applies to the provision of Network Access products within a defined market. However, we

will interpret and apply each of SMP condition FAA11.3 and the EoI requirements under the BT Undertakings in a consistent and coherent manner.”

[Bold emphasis added]

21. We see no such statement from Ofcom that they consider the same to be true here.

Furthermore, given the significant consequences in the event of non-compliance, and that any such statement is a only a statement of Ofcom‟s view at the time of the statement, and that in the event of dispute as to the precise nature of our obligation, a tribunal will look at the words of the obligation as they are written on the page, if Ofcom does intend the two obligations to be the same (including the same checks and balances), they should be drafted the same in all relevant respects. That achieving this would, we believe, mean importing into the SMP regulation a much broader swathe of regulation than that which is set out in Annex 14 also tends to suggest that it would be more appropriate for Ofcom to rely on the normal undue discrimination obligation as that applies to a vertically integrated operator.

Ofcom has failed to have regard to the potential impact on BT as a competitor on the upstream market.

22. We have identified above that Ofcom has had no regard to the consequences of imposing EOI on the upstream wholesale AISBO market. BT‟s concern here is that the imposition of an EOI obligation will impose a competitive constraint on BT in the upstream wholesale AISBO market with is a disproportionate burden, and indeed that there is a real possibility that it will create an increased barrier to entry or expansion for BT‟s competitors on that market that, in the short to medium term, will act against the interests of consumers. It is incumbent on Ofcom to satisfy itself that that is not the case, or BT will be failing in its primary duties to promote the interests of consumers.

23. BT‟s fundamental concern is that the wholesale AISBO market is not one in which BT is a monopoly provider of a bottleneck service. BT believes that the market is already competitively supplied in the WECLA and that competition is developing rapidly elsewhere. At the very least, this is a prospectively competitive marketplace. It is an accepted regulatory thesis that as markets tend towards competitiveness, so regulatory burdens can be reduced. Here, however, notwithstanding the growth in competition, Ofcom now proposes that the most onerous form of non-discrimination obligation should be applied. Culturally, that seems patently wrong.

24. Customers for AISBO services are not mass market consumers. They are business customers with sophisticated needs. They welcome the ability for suppliers to tailor their services to meet their specific needs. Imposition of an EOI obligation risks reducing BT‟s ability to respond to their needs and in circumstances where BT is competing against other suppliers, that is to put BT at a significant, and unjustified, disadvantage.

25. EOI also results in a very high degree of transparency. As markets tend towards the competitive, pricing transparency can pose more of a threat than a benefit. If other competitors have clarity and certainty of BT‟s prices it is easier for them to price against them, at prices higher than might be charged if there was no such transparency. Similarly, if the functionality of BT‟s products is known, they can add on “just enough” of an enhancement to their offering to make it more attractive, knowing that they will learn when BT amends its offering to include similar functionality to all.

95 26. Seen through the lens of a new entrant competitor to BT for the upstream wholesale AISBO

service, an obligation which incentivises BT to enhance its offerings at the earliest possible date may be a bad thing. A competitor in the upstream AISBO market could well benefit from a delay in BT developing its products in this market, as it gives them an opportunity to start selling products that are better than BT‟s and removal of such a “breathing space” could well be a barrier to entry or expansion.

27. Equally, BT could be disincentivised from innovating if, because of an EOI SMP obligation, BT is required to notify CPs at the same time of what developments it is making, thereby removing the possibility of any first mover advantage. An EOI SMP condition could therefore have the

opposite effect to that envisaged by Ofcom, by encouraging BT to wait for others to innovate before making any developments of its own.

28. It is clear that by focusing only on the downstream market, Ofcom has not made any assessment of these issues. BT contends that in a market such as the wholesale AISBO market which is at least prospectively competitive, there are real downsides to imposition of an SMP EOI obligation and that when weighed in the regulatory balance, they outweigh the risks that will arise

downstream if BT is subject only to the normal undue discrimination obligation (as that applies to a vertically integrated operator).

Conclusion on EOI

29. As the above shows, Ofcom has not demonstrated that there is a need for an EOI obligation over and above an undue discrimination obligation. We note also that Ofcom has not demonstrated that the existing non-discrimination obligation has to date failed to address Ofcom‟s identified concerns about the possibility of BT engaging in unduly discriminatory practices. An EOI SMP obligation also runs the risk of delivering outcomes on the wholesale AISBO market that are contrary to Ofcom‟s objectives. Consequently, imposition of an EOI SMP remedy is not objectively justified and would be a disproportionate burden.

Requirement not to unduly discriminate – treatment of volume discounts.

30. BT disagrees with Ofcom‟s assessment of volume discounts and considers that these should be treated the same term and geographic discounts, i.e. that there should be no presumption that they are discriminatory and should instead be assessed on a case by case basis.

31. Whilst BT‟s downstream divisions could benefit from volume discounts offered by Openreach, there are several significant players in the AISBO markets, such as C&WW, Sky, TTG, etc, particularly in relation to 1G services, who are able to win and place large orders for AISBO circuits. Consequently, it would not always be downstream BT that would win large contracts and so benefit from such discounts.

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Question 17: Do you agree with the remedies that we propose for BT in the wholesale MISBO