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Explanatory Statement

Summary

1.1 This statement confirms Ofcom’s proposal, set out in its March Consultation document, to allow Retail price controls (RPC) to lapse on their expiry on 31 July 2006. This is a landmark decision and affirms Ofcom’s intention to withdraw from regulation as soon as competitive conditions allow.

1.2 RPCs have been in place since 1984 when BT was privatised. These controls have delivered substantive benefits for consumers and have protected them by securing year on year price reductions in real terms in markets where competitive pressure alone has until now been too weak. These price reductions for telephony services mean that the UK now has some of the lowest prices for residential telephony among developed countries .

1.3 Reductions in prices have been accompanied by a significant increase in the choices available to consumers and reflect an increased level of competition in the retail markets which continues to strengthen and grow. This competition has been facilitated by the improved effectiveness of regulation of the wholesale telephony markets. At the same time consumer protection measures have been enhanced through changes in other regulation including BT’s Universal Service Obligation (USO).

1.4 Ofcom notes that retail price regulation can have an impact on the wider market (e.g. possibly restricting tariff innovation) and therefore, allowing the RPC to lapse means that from August 2006 the market, rather than regulation, will determine the price of retail telephony services. BT will be in a similar position to all other communications providers and will have the ability to set the price of their services in response to competitive conditions in the retail markets.

1.5 There will also be additional safeguards for certain low spending consumers. At the same time as the RPCs lapse, BT has provided a number of assurances for the period up to the end of 2007.

1.6 The Communications Act and the European regulatory framework on which it is based require Ofcom to undertake reviews of markets from time to time. Ofcom will be conducting the next full review of the markets for fixed narrowband retail services next year. As part of this review Ofcom will assess the impact of removing the RPC and could, if it were necessary, take steps to address any adverse consequences.

Background

1.7 The current set of controls was put in place in June 2002 by Oftel's review of the fixed telephony market entitled “Protecting consumers by promoting competition: Oftel's conclusions” . The controls started on 1 August 2002 and were for a period of four years; these controls expire on 31 July 2006. The RPCs regulate the price of a basket of residential retail telephony services, namely: local, national and international calls, calls to mobiles, operator assisted calls and exchange line rental. The RPC applies to the expenditure on these services of the lower 80% of BT’s residential customers by spend. The effect of the controls, which is now set at RPI+0% is that BT cannot increase charges for the basket of services in real terms (i.e., overall retail prices cannot go up by more than RPI).

1.8 These controls and their scope were confirmed by the market review statement dated 28 November 2003 entitled “Fixed Narrowband Retail Services Markets - Final Explanatory Statement and Notification” (“the Final Statement”) . This document set a condition placing the original control of RPI-RPI on the services BT provides in the relevant markets under the new European regulatory framework. This condition also provided that the control was to be relaxed to RPI+0% after BT had provided a “fit-for-purpose” Wholesale Line Rental (WLR) product that was being taken up actively by BT’s competitors.

1.9 On 15 December 2005 Ofcom determined that BT’s WLR product was fit-for-purpose, reflecting a range of factors including the fact that the product had had a significant impact in the market with over one million WLR lines used by residential consumers. Accordingly, the RPC was relaxed to RPI+0% with effect from 1 January 2006.

1.10 In September 2005, Ofcom accepted undertakings from BT in lieu of a reference to the Competition Commission under the Enterprise Act 2002 . By the terms of these undertakings, BT is required to provide various wholesale products at a standard known as “equivalence of inputs” (EoI). By this standard, BT is obliged to use the same wholesale products and services itself as it provides to other communications providers. BT is required to implement EoI in relation to WLR products by 30 June 2007. However, if BT fails to implement EOI by 31 December 2006, it is required to provide other communications providers with a specific allowance.

The March Consultation

1.11 On 21 March 2006 Ofcom published a consultation document entitled “Retail Price Controls” (the March Consultation). In the March Consultation, Ofcom identified a number of options for the future of regulation once the existing price controls expired on 31 July 2006. These were:

• Option 1: no regulation in place of RPC – no charge control from 1 August 2006 with no additional consumer protection ‘assurances’ from BT;
• Option 2: roll-over of the existing charge control – a continuance of the safeguard cap (RPI+0%) on a basket of access and calls for Y% of subscribers by expenditure (currently Y = 80%);
• Option 3: safeguard cap on BT’s entry level tariff, BT Together 1 (BTT1), or any replacement; and
• Option 4: no charge controls from 1 August 2006 but voluntary assurances provided by BT.

1.12 Having analysed all four options Ofcom proposed that the RPC should be allowed to lapse but with certain safeguards. Ofcom’s recommended option was therefore Option 4. The proposal took account of commercial, regulatory and market-led developments that have occurred since the market review in 2003. These developments have led to increasing competitive pressure on BT in the retail markets. The consultation explained how increasing numbers of consumers have switched to BT’s competitors. These competing providers offer WLR, LLU, CPS/IA and VoIP services. The range of services, the ability to switch and the migration of increasing numbers of customers represent an increasing constraint on BT’s prices for its retail services. The March Consultation also noted that the ability of other communications providers to compete effectively would be enhanced further when EoI is delivered by the middle of 2007.

1.13 In considering what should happen after July 2006, Ofcom was mindful that certain groups of vulnerable consumers may require more protection than the average consumer who could switch easily. The Universal Service Obligation protects specific consumer groups through the special tariff scheme supplied by BT . There are however, also low spending consumers who may not qualify for protection through the USO. For these consumers competition in the services they purchase may be weaker, leaving them vulnerable to price rises. However, the availability of alternative WLR services and the fact that switching has become easier places competitive pressure in general on prices in the market

1.14 Therefore, as a safeguard over and above the protections offered by the USO, BT agreed with Ofcom to offer a number of assurances relating to the pricing of the line rental (i.e., the monthly fixed fee) that it charges for its basic exchange line services, and to the pass-through in respect of mobile termination rates.

Consultation responses and Ofcom’s decision

1.15 A range of responses was received to the March Consultation. Ofcom has considered and analysed them in light of its statutory duties. Many of the responses, including those from BT, the Scottish Executive, the Welsh Assembly Government and the Communication Workers Union provide support for Ofcom’s proposal.

1.16 Industry respondents acknowledged there had been significant developments in both wholesale and retail markets since the RPC was imposed in 2002 although in general, they favoured delaying deregulation until after the delivery of EoI. Ofcom understands the concerns that have been expressed by such respondents but believes that the RPC should not be used as a lever in relation to wholesale regulation when retail competition has developed to such a point that, along with other safeguards, the RPC is no longer needed.

1.17 In relation to concerns that were raised particularly by individual respondents, Ofcom considers that BT’s assurances, in conjunction with ongoing regulation such as BT’s obligations under its USO, are sufficient to ensure that prices faced by low spending consumers are appropriately controlled. Ofcom, having taken account of all respondents’ views, has therefore decided to allow the RPC to expire. There will be no further price control regulation on BT’s retail prices with effect from 1 August 2006.

1.18 As indicated in the March Consultation, Ofcom will also undertake a full market review of the retail markets during 2007. It is anticipated that this review should be completed at about the same time as the assurances provided by BT will expire.

1.19 The ending of retail price control after more than twenty years is a major alteration in the regulatory regime. The March Consultation outlined that Ofcom was considering a public information campaign to raise consumer awareness of the change. This UK wide campaign will commence forthwith and will help consumers to understand that from 1 August 2006 consumer choice rather than regulation will be the key determinant of the price and quality of services that customers receive. Annexes 1 and 2 set out the details of this information campaign.

The full document is available below:

• Retail Price Controls - Statement [pdf]
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