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:
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.