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Summary

Background

1.1 Wholesale Line Rental (‘WLR’) allows alternative suppliers to rent access lines on wholesale terms from BT, and resell the lines to customers, providing a single bill that covers both line rental and telephone calls. Its introduction has been a significant stage in the development of competition in retail markets in the UK. A fully effective WLR product will bring major benefits to consumers in terms of increased choice, innovation and lower prices. Consumers in all parts of the country will have the opportunity to choose alternative suppliers who combine access and call services.

1.2 In 2002 BT was required to introduce WLR. This was linked to a form of incentive regulation - the retail charge control (‘RCC’) would be relaxed from RPI-RPI to RPI+0% when Ofcom assessed that BT had introduced a fit-for-purpose WLR product which was being actively used by competitors. This commitment gave BT an incentive to introduce WLR fully in a timely manner and also recognised that the market for these services would become more competitive through the introduction of a fit-for-purpose WLR, with competition itself controlling prices.

1.3 ‘Fit-for-purpose’ (‘FFP’) is to be assessed in terms of material compliance with a product specification and process implementation published in March 2003 and through an analysis of the market impact of WLR assessed against criteria also set in March 2003.

1.4 BT triggered the assessment on 8 July 2005 by writing to Ofcom and indicating that it considered that the WLR product now met the 2003 requirements and that the RCC should consequently be immediately relaxed. Ofcom has committed to complete the assessment by the end of 2005.

1.5 Ofcom subsequently conducted its own thorough review of the WLR product, assessing its performance against the 2003 criteria. On 7 October 2005, Ofcom published a consultation document (‘the consultation document’) which set out its analysis of the extent to which the WLR product meets the 2003 FFP requirements and inviting views on Ofcom’s initial conclusions. This statement summarises the responses to that consultation, updates the analysis where necessary and sets out Ofcom’s final conclusions.

Consultation Assessment

1.6 The product specification published in 2003 set out 38 main requirements which a WLR product would have to meet in order to be FFP. Having assessed the WLR services and processes introduced by BT, Ofcom proposed in the consultation document that 37 of these requirements had been delivered as originally specified or in a different form agreed by Ofcom and service providers subsequent to the March 2003 statement. Albeit in the case of two of these 37 the delivery was only marginally met. The 37 included exchange line types, supplementary services, forecasting and order queue management, consumer protection measures and most ordering, provisioning and fault management requirements.

1.7 The product area which Ofcom proposed did not meet the requirement was the process that enables service providers to transfer customers when they move home.

1.8 In addition, in order to measure the performance of WLR process implementation, 15 Key Performance Indicators (KPIs) were set in 2003. Assessing performance against these KPIs, Ofcom proposed in the consultation document that 13 of the KPIs met the requirements set (although four of these were met only in part). The two areas where Ofcom believed the requirements were not met relate to the availability of the ordering and fault management services.

1.9 The consultation document also included an ‘action plan’ provided by BT in which BT committed to make further improvements to the WLR product in system upgrades in December 2005 and April 2006. These addressed those shortcomings identified by Ofcom in the consultation document, including those areas where Ofcom judged the 2003 requirements only to have been met marginally.

1.10 The final part of the assessment was to consider the market impact of WLR and compare this to the levels set in 2003. This assessment was intended to capture whether the goal of greater retail competition was likely to be achieved taking into account the level of take-up of the WLR product. The levels set in 2003 for a FFP assessment were 50,000 WLR orders a month. The consultation document reported that the average monthly growth rate for WLR over the previous six months (February – August 2005) had been 115,758 lines, with an average of 80,798 residential and 34,960 business lines.

1.11 Ofcom concluded its assessment in the consultation document by proposing that, taking into account BT’s commitment to improvements in the action plan, WLR is FFP under the criteria set in 2003 and that the RCC should therefore be relaxed to RPI+0%. This was based on the 2003 criteria that if the WLR product meets most of the core requirements, the work outstanding is sufficiently minor, BT has committed to carrying out the outstanding work in a timely manner, and take up levels are significantly exceeding the targets set, then the RCC should be relaxed immediately.

Responses to the consultation

1.12 Thirteen responses were received to the consultation document. There was broad agreement with Ofcom’s assessment that:

• most of the core requirements of the Product Specification had been met;
• Ofcom had correctly identified the key areas where the requirements had not been met or only partially met;
• the BT Action Plan was the right way to address these shortcomings; and
• the market impact was double the target set in 2003.

1.13 However, nine of the respondents argued that WLR should only be considered FFP once BT had delivered its commitments in the Action Plan. They argued that the shortcomings with the current product were significant, not minor. Furthermore, they believed that BT would not have an incentive to deliver the Action Plan once the RCC had been relaxed. Some argued that many aspects of the WLR product should be assessed against a standard of equivalence of input to the parallel BTR product and that it would fail this test.

1.14 While agreeing that take-up significantly exceeded the targets set in 2003, some argued that these were lower than those achieved by CPS at a similar stage in market development and that other targets should be set.

1.15 BT and another provider argued that the requirements set in 2003 had been met and that WLR is FFP. Another agreed with Ofcom’s overall approach – that a FFP finding should be linked to an Action Plan – but argued that more items should be added to the Plan and additional incentives created on BT to deliver it fully and on schedule.

Ofcom’s conclusions

1.16 Ofcom has carefully considered all the responses to the consultation document, in particular, the views expressed in responses that the shortcomings correctly identified by Ofcom were in fact significant and hence that the RCC should not be relaxed until the commitments in the Action Plan have been delivered by BT.

1.17 Ofcom has taken account of the fact that the great majority of the core requirements have already been satisfactorily met. Furthermore, Ofcom has taken into account that BT has publicly committed in the Action Plan to delivering the outstanding improvements relatively quickly, with a third of all remaining improvements on track for delivery on 19 December.

1.18 Ofcom has also carefully considered the market impact of WLR to date. The very positive take-up figures reported in the consultation document have improved further. The average growth rate for WLR over the past six months is now 133,295 lines per month. Business WLR is growing by 34,649 lines per month on average and had reached 896,258 lines at the end of November 2005. Residential WLR is growing at 98,645 lines per month, and had reached 920,113 lines at the end of November. In the past 12 months WLR residential has grown by 846,853 lines. Approximately 4.7% of BT’s residential and 11% of BT’s business PSTN lines have transferred to WLR. These figures far exceed the targets set in 2003.

1.19 Ofcom’s requirement is to assess WLR against the criteria set out in the March 2003 statement and not against a standard of equivalence of input with BT Retail’s products. Equivalence of inputs will be delivered through the undertakings given by BT under the Enterprise Act 2002 as part of the Telecoms Strategic Review. Similarly, projections of take-up can only be judged against the levels set in 2003 and not figures set subsequently.

1.20 Taking all of this into account, Ofcom’s judgment remains that the outstanding shortcomings are minor in nature. Consequently Ofcom considers the correct conclusion to be drawn is that WLR is FFP under the criteria set in 2003 when considered in conjunction with BT’s improved Action Plan. Ofcom therefore concludes that the RCC should be relaxed to RPI+0% from the date of this Statement in accordance with Outcome 2 identified in the 2003 statement.

1.21 Nevertheless, it is essential that BT delivers the Action Plan fully and on schedule. In light of this, Ofcom has sought further assurances from BT that it will deliver the improved Plan within the timeframe required and has obtained from BT Openreach a written commitment which is being published in this statement. In addition, BT has agreed to report regularly to industry on the progress of the Action Plan and to publish its performance against the KPIs. Finally, Ofcom is making clear that it will review performance against the Action Plan in April and that it will direct BT to implement any necessary changes if any of the Plan commitments are not materially met.

1.22 The RCC provision contained in BT’s SMP Condition is itself due to expire on 31 July 2006. Ofcom intends to review the RCC provisions in the first half of 2006 and will consult on future options for the RCC in spring 2006.

• Wholesale Line Rental: Fit-for-Purpose Assessment - Statement [pdf]
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