On 8 January 2020, Ofcom published a draft of the UK’s Wholesale Fixed Telecoms Market Review (WFTMR) that will cover the period 2021–2026. The review came as no surprise since the regulator had repeatedly stated its intention to consolidate the regulation of all wholesale fixed markets into one single review, and to move from a three-year to a five-year regulatory period to provide investors with a more certain and stable framework. The proposals take into account the faster pace at which full fibre deployment has happened over the last two years, and the role played by alternative operators in deploying fibre and in challenging Openreach. The industry’s broadly positive response to the proposals is a telling sign of how the market has changed, with competition between infrastructure providers on the rise and subsequent benefits for retail providers, who have more choice at the wholesale level. The main concern for some infrastructure builders is the time it will take to get the enabling regulatory environment in place if they are to meet the Government’s ambitious connectivity target.
The review is a fairly radical departure from cost-orientation in setting Openreach’s prices
The proposals Ofcom put forward for consultation are broadly in line with those announced in March 2019, when the regulator set out its preliminary view for the regulation of wholesale broadband between 2021 and 2025. In the last two years, a lot has changed in the UK’s broadband landscape, due to the emergence of wholesale operators alternative to Openreach which are deploying full fibre across the country and are pushing Openreach to do more of the same. While the UK still has a small full fibre footprint, the progress made by Openreach and the likes of CityFibre, GigaClear, and Hyperoptic (among others), has resulted in a significant rise in full fibre lines. Ofcom reported in December 2019 that the number of premises passed by full-fibre has reached 3 million, almost twice as much as the year before, and now amounts to 10% of premises compared to 7% at the start of 2019. The regulator’s proposals are designed to ensure this trend continues, that Openreach’s competitors continue to invest and grow while the incumbent also retains incentives to deploy full-fibre of its own. To this end, the most striking change on past reviews is the departure from cost-orientation in regulating wholesale prices for Openreach.
Ofcom’s new approach to price regulation will be nuanced, depending on the level of competition across different geographical areas. This is something Ofcom had already included in its initial proposals. The idea is to deregulate in competitive areas (Ofcom says there are no such areas yet, but it foresees they will emerge in the future), whereas access obligations would stay in “potentially competitive areas”. Here, Openreach would be subject to regulated prices adjusted for inflation for its entry-level superfast service (up to 40Mbps). If this is delivered over full-fibre, Openreach can apply a ‘fibre premium’ to the regulated price (Ofcom proposes this will sit around £1.50–£1.85). Higher speeds would not be regulated at all. In areas found to be non-competitive, Ofcom confirms its 2019 proposal to move to a pricing model for Openreach similar to the Regulated Asset Base (RAB) approach, which would allow the operator to better recover costs and reduce investment risk. In the non-competitive areas where Openreach commits to lay fibre, deployment costs can be included from the outset; otherwise, prices increase after Openreach has built. Ofcom will also look to impose a dark fibre access obligation here, so that other operators (including MNOs) can grow their networks in these areas.
Ofcom starts to address the challenges posed by the switch-off of Openreach’s copper network
Another reason why the WFTMR is important is that it comes at a time when Openreach is setting out its plans for the switch-off of its copper network. This poses three sets of challenges: ensuring that Openreach does not face the burden of running copper and fibre networks in parallel; protecting customers (especially the most vulnerable) during the transition phase; and safeguarding competition at the wholesale level (by reducing the risk that Openreach locks in its wholesale customers and gains a competitive advantage on other rivals currently deploying fibre). As a result, Ofcom restates its 2019 proposal for a two-year transition period in the exchange areas where Openreach builds fibre. Two years after Openreach has built fibre in a given exchange, regulated pricing on its copper network there will fall away. Ofcom expects this to result in wholesale customers moving to fibre, as Openreach will likely price its copper lines in a way that incentivises its customers to do that.
One important change compared to the 2019 proposal here is that the threshold for regulation to move from copper to fibre is now 75% of premises in an exchange area, rather than 100%. When that threshold is reached, the two-year transition begins: the first thing that happens is the ‘stop-sell’, whereby Ofcom no longer requires Openreach to provide new copper services. All new orders and upgrades will have to be on fibre. After two years, when the rollout is near complete, charge controls on copper are removed and those on fibre are set with the above mentioned price uplift (about £1.50–£1.85). Compared to the initial proposed threshold, these provisions could disappoint alternative operators since they result in deregulation for Openreach at an earlier stage. However, Ofcom is counterbalancing this with other measures designed to help alternative fibre builders, such as preventing Openreach from offering discounts (including geographically targeted discounts) that could stifle investments of rival operators. Openreach would also be required to give 90 days’ notice for the introduction of certain commercial terms which might create a barrier to using alternative network operators. During this notice period, Ofcom would assess the impact of the new commercial terms. The regulator also aims to review commercial arrangements proposed by Openreach to prohibit any arrangement that could deter rollout of alternative networks. Ofcom’s position is that, ultimately, deregulating copper prices in this way will also benefit alternative operators, because the move away from cost-oriented prices should result in retail broadband providers having a stronger incentive to seek alternatives to Openreach.
Operators’ broadly positive responses reflect the changes in the telecoms landscape over the last two years
Having to digest 936 pages across five volumes and an additional 23 annexes, operators have so far taken a cautious approach with initial public reaction to Ofcom’s proposals. Nonetheless, BT and Openreach have signalled their satisfaction for the direction of travel Ofcom is taking with the WFTMR. “BT welcomes the direction of Ofcom’s consultation on its approach to regulation from 2021–2026. It is critical that we have a clear, predictable and transparent long-term regulatory framework to create the right conditions for investment in digital infrastructure across the whole of the UK.” However, BT is concerned that having to wait one year for certainty around the regulatory enablers is “not good enough”, in a context where the Government is yet to clarify the deadline for its 100% Gigabit broadband target. Openreach labelled the proposals as “a big step in the right direction to give clarity and investment certainty”. CityFibre was more cautious, agreeing that Ofcom’s direction is right, but calling for it to “move further and faster” and to be even more proactive in addressing risks of competition being hindered by Openreach’s volume discounts and geographic pricing practices.
The tone of the initial response to Ofcom’s proposals is coherent with the changing landscape where the divisions of old between incumbent and alternative operators is not what it was. This is something that has been clear for about two years now, as seen during debates between stakeholders in forums such as the ISPA Conference. Openreach is gradually losing its status as a near-unchallenged provider of infrastructure (with the exception of more rural areas), and will welcome a more light-touch regulatory framework. Alternative providers are making significant inroads in the market, with the Government and Ofcom supporting their growth as a driver for competition. Retail broadband providers benefit from more choice at the wholesale level, as they no longer depend solely on Openreach’s infrastructure and have stronger bargaining power. All these factors have resulted in full-fibre deployment gaining momentum over the last two years. Ofcom’s new proposals continue on the same path, realising that market dynamics are now working far better than they did before.
Ofcom’s approach to regulating wholesale broadband is now more innovative compared to European counterparts
If they were passed in their current form, Ofcom’s proposals would set the UK apart from most other European countries in several respects. As shown in Assembly’s Regulated Wholesale Access: Fixed Tracker, physical infrastructure markets are generally still subject to ex-ante regulation. Ofcom identifies theoretical competitive areas in which regulation will fall away, although it notes there will be no such areas in the time frame of this market review. This is a near-first, with only one example (the Milan area in Italy) of areas where Market 3a is not subject to ex-ante regulation. In particular, all countries we’ve looked at still have ex-ante regulation for copper networks, with regulated prices still cost-oriented and generally based on LRIC models. Only in the Netherlands are prices subject to a safety cap adjusted for inflation, which is still based on an EDC (Embedded Direct Costs) model. Ofcom’s departure from cost-orientation would therefore mark a new approach with no precedent, although it fittingly comes at a time when infrastructure supply is becoming more competitive and broadband providers are increasing the pace at which they migrate to fibre.
Ofcom was also ahead of its counterparts in mandating unrestricted access to Openreach’s duct and poles in June 2019. This is something the regulator intends to maintain in the new proposal. Access to passive infrastructure has become of key importance not only for the deployment of fixed networks alternative to those of the incumbents, but also for mobile operators seeking to build adequate backhaul solutions, especially in view of the development of 5G. Most regulators still limit the use of duct and pole access for the purpose of building fixed broadband networks; an important exception is Portugal, where duct access is guaranteed by law and available to all operators. It is likely that more regulators will follow in the footsteps of Ofcom as they look to facilitate MNOs in building the new 5G networks; to this end, the review of the Recommendation on relevant markets the European Commission will carry out during 2020 could provide more clarity on possible uses of ducts and poles.
