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Ofcom consulting on review of BT Openreach pricing
Friday 30 May 2008 11:44:45 by Andrew Ferguson

Way back in 2005 Ofcom required BT to form a new organisation which dealt with the core local loop on the basis of equal access for all communications providers. This resulted in Openreach being created, whose most visible presence to the public will be the branding on the various vans maintaining the local loop. Ofcom has now announced a consultation period as part of a review into the prices Openreach is allowed to charge.

A set of ceiling prices were established in 2005 for the main products:

  • Residential Wholesale Line Rental (WLR): £8.39 per month. This is what many line rental deals utilise.
  • Business WLR: £9.17 per month
  • Fully unbundled lines (MPF): £6.81 per month. This is where the line connects only to the communications providers hardware at the exchange. The largest user of MPF is TalkTalk which uses it to provide telephone and broadband services.
  • Shared unbundled lines (SMPF): £1.30 per month. Only the broadband side of the telephone line is unbundled, the consumer still has to pay line rental which can be to BT Retail or any other provider using WLR. Services like O2/Be utilise SMPF.

The cost of fully unbundled lines is currently £80 per year, but is set to rise to the maximum possible of £81.69 from 1st August 2008. In terms of volume, unbundled products are running at over four million lines.

Openreach has had a difficult time in its first couple of years of existence, just a few months into its creation it was met with rapid growth in the popularity of unbundled services and at times has had to borrow engineers from other parts of the BT Group. The Telecommunications Adjudicator reports track the problems that Openreach has had with getting lines activated correctly, e.g. the report for August 2007.

This review of Openreach pricing comes at a time when according to evidence submitted to Ofcom, Openreach indicates that due to cost pressures the regulated charges are not sustainable. Looking at things at a simple level, since 2005 one can presume salaries have increased within Openreach and costs like fuel for its fleet of vans will be increasing.

Looking from the other side, there will be pressure for Openreach to reduce its fault rates before prices can go up, even if just to keep pace with inflation. One solution could be to link possible relaxations in the price ceilings to actual performance targets. TalkTalk has issued a statement stating that it has put network expansion on hold for now.

We welcome Ofcom’s review as it will consider the broader context of LLU provision, including BT Openreach’s overall efficiency and profitability, as well as the impact of any price changes on competition and consumers.

Of course Openreach should be able to make a fair return – and actually it already is, we understand Openreach makes 15% across its whole portfolio - but that return should not be at the expense of innovation and customer choice and value.

Any price further increase beyond the agreed £81.69 level is unjustifiable given the current poor levels of service. TalkTalk has already put further network expansion on hold, and we believe other LLU operators will slow their move to Next Generation Networks if prices are increased.

We believe it is too early for Ofcom to start changing the rules on LLU provision while Openreach remains inefficient. Consumers have benefitted greatly from competition in this market and allowing Openreach to increase prices would be a retrograde step.

TalkTalk statement on Ofcom's review of Openreach

With TalkTalk being the prime user of MPF in the consumer arena any increase in price will impact on its margins and may lead to price rises for consumers. There is the danger though that if Ofcom caps MPF pricing at the level it is now, that Openreach may make cost savings elsewhere to meet its performance targets for MPF. Alternatively, charges for things like engineer visits and new telephone lines could rise, impacting on a much wider segment of the market.

This review is not going to be easy, individual providers will consider their position to be the most important and whatever is decided the full impact needs to be considered. Starving Openreach of funds will serve no one, as this could mean even less willingness to remove DACS (line sharing devices) from the local loop and the few instances of line upgrades that improve broadband speeds may vanish.

The consultation closes on 8th August 2008, which should be plenty of time for providers to get their responses in. Given the rate at which the price of fuel, electricity, gas and food is rising it may be the turn of broadband to stop bucking the trend, any price rises from Openreach are likely to ripple through to the consumer, or for providers using BT Wholesale services offset any savings from its next generation products.

Comments

Posted by chrysalis over 9 years ago
are talktalk saying openreach have a 15% profit margin? if so that is indeed healthy. But I did seem figures somewhere that openreach revenue was below the level garuantueed by ofcom which would indicate a price increase is inevitable.
Posted by CARPETBURN over 9 years ago
Id actually go further than they have and say some of the profit making throughout the BT organisation is more than a touch healthy (look at charges to install a new line, re-connect etc etc). I hate to be cynical but could this be a BT ploy to try and muscle LLU providers and gain back trade now BTs ADSL2+ is finally here??? Either way at the moment can’t say im bothered if its just talk talk complaining, that company should focus more on its own ineptness before they worry about others.
Posted by chrysalis over 9 years ago
of course, a increase in the price would benefit BT two fold, increased revenues from LLU operators and if it means LLU operators increase retail pricing to compensate it then also makes their own BT retail look more competitive.
Posted by CARPETBURN over 9 years ago
Yep or in other words... again they show how much of a cash cow they are... Still id like to think anyone with a good LLU provider wouldnt drop it for capped, throttled and limited BT based services again
Posted by herdwick over 9 years ago
I wouldn't expect anyone with a good LLU provider to change to a capped, throttled and limited LLU service either :-)

BT and OFCOM appear to calculate that neither MPF or SMPF charges cover their costs - so LLU is effectively being subsidised by non-LLU lines.
Posted by Dawn_Falcon over 9 years ago
Because BT have stacked the figures that way, yes. And OFCOM are playing along as usual.
Posted by KarlAustin over 9 years ago
"Id actually go further than they have and say some of the profit making throughout the BT organisation is more than a touch healthy (look at charges to install a new line, re-connect etc etc)" - Yes, but those come from BT Retail in the most part (BT retail pays OpenReach the same fee as any other provider). So that isn't the OpenReach part of the group - OR is supposed to be there to treat all providers equal, so you can't say, "But BT Retail make good money, so OR should be run at a loss" as that isn't fair and equal, you have one provider subsidising the others.
Posted by KarlAustin over 9 years ago
If the prices set, covered costs and left a margin back in 2007, I can see quite easily how they wouldn't now, just look at how much diesel has gone up in the last month, let alone the last 10 months (98p vs 128p on average). That's without any other costs rising, like materials (copper cable anyone?) or prices from other suppliers.
Posted by CARPETBURN over 9 years ago
quote"BT and OFCOM appear to calculate that neither MPF or SMPF charges cover their costs - so LLU is effectively being subsidised by non-LLU lines."
And i should care why?
quote"Yes, but those come from BT Retail in the most part....."
Hence why i said THROUGHOUT the BT organisation.
Posted by chrysalis over 9 years ago
herdwick clever wording, costs are covered it is profiteable but it is below a profit margin pre agreed between BT and ofcom, just a tad different than saying its not covering costs.
Posted by discussdiscus over 9 years ago
BT have never done anything to improve both phone and broadband unless they were forced to do so, long ago the chairman of BT delayed broadband by years because he said there was no call for it. So What Has Changed! BT and any part of what was BT will fill there pockets BECAUSE THATS WHAT THEY HAVE ALWAYS DONE
Posted by Somerset over 9 years ago
Didn't BT want to fibre the country but the government wouldn't let them?
Posted by CARPETBURN over 9 years ago
Yea thats right somerset live in the past... If they wanted to fibre the country im sure today in the present where most of us live the government would say sure go right ahead and even give them a pat on the back.

Honestly stop living in the past..... Didnt the government encourage motorway building in the past but dis-courage it today??? Opps for a moment i almost time travelled back with you.
Posted by Dawn_Falcon over 9 years ago
Investment Windows

...

Oh right, the past *is* relevant
Posted by Somerset over 9 years ago
Carpetburn - what's your way forward to give the majority of the country fast internet access?
Posted by CARPETBURN over 9 years ago
Actually force BT to invest seriously and heavily would be a start, at the moment they basically get away with murder. (ADSL2+ is NOT serious investment, that is pocket change for them, if it wasnt share holders would be suffering rather than getting fatter pockets).
CONT....
Posted by CARPETBURN over 9 years ago
The UK should have schemes like parts of Europe have had to get faster broadband infrastructure in place... Ok i know over night its not going to revolutionise the whole country and whatever is done will be slow but you have to start somewhere. The UK also needs more competition, be that directly to BT or in the cable market, at the moment to have broadband you basically either have to have a BT phone line and line BTs pockets or Virgin Cable and line theirs.
Posted by CARPETBURN over 9 years ago
Why cant cable licenses be given to different individual companys around the country?? (much like the USA) see they have opportunity...Im sure BT, Sky and some of the mobile telcos would like a slice of the cable broadband pie...An open market leads to investment, improvement and competition.
Posted by CARPETBURN over 9 years ago
Things like H20 networks is a good start, imagine if say there were a dozen companys like that given government backing and various locations popping up that offered services like that... Price would drop as there is competition and growth would also take place. One thing is certain waiting for BT to get off their backsides isnt gonna get the job done. I dont just blame them though, our government are hot air also, blabbering on about broadband Britain but thats all they do... blabber.
Oh and appologies to everyone for the length of this.
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