On 29 March 2019, the UK regulator Ofcom set out its initial approach for the next Fixed Telecoms Market Review, which will cover the years 2021–25; for the first time, a market analysis will have a time frame longer than three-years. Ofcom’s main objective is to ensure competition continues to develop, while at the same time supporting the recent surge in fibre investment, resulting from the rise of alternative operators which are seeing a strong investment case, particularly in urban areas, and ensuring Openreach continues to deploy fibre to improve connectivity and enable 5G in rural areas. The regulator also set out measures to facilitate migration from copper to fibre, by phasing out regulation and price controls on copper products.
The main objective: safeguarding competition while fostering investment in fibre
Both the UK Government and Ofcom have identified the need to support fibre development in the country, be it for home broadband, business connectivity, or 5G deployment. The government set a target to reach 15 million full-fibre premises by 2025. Ofcom set out a broad strategy in July 2018 to facilitate the achievement of these objectives. The strategy relies on network-based competition, which means both BT and alternative operators should be provided with a regulatory environment that facilitates network investment. To this end, Ofcom has already made plans to enhance duct and pole access conditions. Alongside ducts and poles, Ofcom is now looking at the regulatory measures for the wholesale fixed telecoms markets, to apply from 2021 until 2025. For the first time, a market review will have a five-years time frame, instead of a three-year one; this will allow Ofcom to have a more holistic approach, combining business and residential market in one review, and should provide more certainty for investment.
The consultation opened on 29 March 2019 sets out Ofcom’s initial views; the regulator will run further consultations on more detailed draft remedies at a later stage. The key points of the current consultation relate to: geographical differentiation of remedies, depending on levels of competition; ensuring Openreach continues to have incentives to invest in fibre across the country; and facilitating the transition from copper networks to full-fibre, in a way that protects consumers. Ofcom is seeking views on its initial approach until 7 June 2019; it expects to come up with a full proposal in December 2019, together with the market analysis and findings of SMP.
Geographical differentiation of remedies reflects developing competition, and aims to bring fibre and 5G to rural areas
Ofcom’s proposals aim to support a ‘step-change’ in fibre investment. The regulator notes investment is now coming not only from Openreach, but also Virgin Media and new entrants such as CityFibre, Hyperoptic, and Gigaclear. As a result, Ofcom divides the country in three types of areas: competitive areas, where no regulation will be imposed; areas where competition is developing (about two-thirds of the UK); and non-competitive areas i.e. the ‘final third’. Where competitive networks are being built, the regulator makes a significant departure from its historical approach to regulation, and aims to ensure operators obtain a fair return (‘fair bet’) on their investment. This is achieved in two ways: setting regulated prices only for ‘entry-level’ superfast services, leaving all other services unregulated; and maintaining stable rates for Openreach’s entry-level superfast broadband (up to 40Mbps) and high-capacity leased lines, based on the cost of new entrants instead of the costs of BT.
The above approach is designed to guarantee higher margin for all operators in urban areas (the first 70% of the UK), while at the same time allowing network competition to develop. In rural areas, where the investment case for networks alternative to Openreach is weaker, Ofcom wants to continue to facilitate competition at the retail level, while helping Openreach spread the cost of fibre investment across a wider base of consumers. Here, the approach will be similar to the ‘regulated asset base’ (RAB) model, which has worked in other network utility industries (such as energy networks) as a way to foster investment while cutting costs: under the RAB model, regulated companies can retain the funds generated by cost savings. Access to Openreach’s dark fibre will also be mandated in rural areas, at a cost-based price including a ‘reasonable return’ on Openreach’s investment; this provision aims to foster 5G deployment outside cities, as mobile operators need fibre access for backhaul to their mobile base stations, and support business connectivity.
Regulation of copper products could fall away to facilitate migration to fibre
Quality of Service requirements are one aspect of Ofcom’s proposal which will not change across the different areas of the UK. Ofcom aims to retain QoS standards across the current range of regulated products where it finds SMP, without seeking further quality improvements in the levels set for Openreach. This is the result of a balance between the need to protect consumers during the migration from copper to fibre, while allowing BT sufficient flexibility to invest into the new network. Where BT has SMP, Ofcom sees the risk it could have an incentive to provide suboptimal QoS, which would be detrimental for both competitors and consumers; the regulator also notes its current approach to QoS requirements, resulting from market reviews between 2014 and 2018, has resulted in steady improvements for both wholesale local access services and leased lines services. As a result, Ofcom proposes to retain the same obligations for KPIs, SLAs, SLGs, and level of standards; for FTTP products, Ofcom is open to input as to which safeguards could be appropriate, having in mind the protection of customers using FTTP while allowing sufficient time to identify such standards; these could be imposed after the Fixed Telecoms Market Review (FTMR) is finalised in 2021. For Physical Infrastructure Access (PIA) Ofcom will monitor Openreach’s progress against the KPIs agreed with industry, before deciding on any QoS standards to be imposed after 2021; for dark fibre, Ofcom will consider the need for any specific standards separate from Ethernet standards as part of the FTMR (currently, dark fibre and ethernet are subject to the same requirements).
Once Openreach has completed its fibre roll out, the challenge will be in the migration of customers from the copper network. Ofcom aims to create incentives to a smooth transition, to avoid the cost of running two networks and encourage all providers to promote full-fibre. The framework will rely on three pillars: allowing for future regulated products to move from copper to fibre; permitting a mark-up on regulated price, so that network investors can realise the ‘value premium’ of full-fibre in terms of speed and resilience; and giving Openreach greater flexibility in setting prices of copper-based products. Ofcom’s view is that, the higher the difference between copper and fibre prices, the weaker will be the incentive to migrate. As a result, it proposes two requirements on Openreach: to provide 100% coverage in an exchange area, since it plans to deploy fibre on an exchange-by-exchange basis; and to provide a 40/10Mbps fibre service, to match current performances of copper-based products. In the meantime, Ofcom will continue to regulate copper-based services for at least two years, after which Openreach will no longer be required to provide those services, and price regulation on them will be lifted, thereby strengthening the incentive to move to fibre.
