Home > Consultations > Consultation Documents > WLR Charges

Wholesale Line Rental: Reviewing and setting charge ceilings for WLR services

Consultation published: 09|11|2005
Consultation closes: 12|12|2005

Summary

Wholesale Line Rental – regulatory history

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 provide combined access and call services.

1.2 In August 2002, Oftel modified BT’s then licence to make the provision of a WLR product a regulatory obligation in accordance with the conclusions of the Director’s Review of the fixed telephony market published in the document Protecting consumers by promoting competition: Oftel’s conclusions (20 June 2002)¹. This document also set the starting charges for the WLR product. BT launched a basic WLR product (WLR1) in September 2002. Oftel considered that this basic product needed enhancing in order for it to be an effective mass-market product that was commercially attractive to service providers and to end users.

1.3 Therefore, Oftel consulted upon (in November 2002) and then published a statement (in March 2003) setting out the requirements for an enhanced, automated WLR product suitable for mass-market use, i.e. WLR2.

1.4 On 28 November 2003, Oftel published the conclusions of the Review of the fixed narrowband wholesale exchange line, call origination, conveyance and transit markets (the “Call Origination Market Review statement”)², which, among other things, restated BT’s requirement to offer analogue WLR services and additionally required BT to offer similarly enhanced and automated WLR services for ISDN2 and ISDN30. (There were previously ISDN2 and ISDN30 reseller products sold as Digital Calls & Access.)

1.5 BT launched WLR2 on 29 March 2004. BT informed Ofcom that it considered the upgrade of the ISDN2 and ISDN30 WLR products carried out in January 2005 substantively met the requirements of the Call Origination Market Review statement.

Reason for review

1.6 Charges for WLR products were last set by Oftel in August 2002. At that time, the rental charges for residential and business analogue WLR were set at £28.00 per line per quarter (£112.00 / line / year) and £29.87 per line per quarter (£119.48 / line / year), respectively. At the same time, these charges were also subject to a charge cap set at RPI-2%.

1.7 On 19 December 2003, Oftel opened an own-initiative investigation into BT’s charges for business ISDN2 WLR. On 17 June 2004, BT announced that it was reducing the price of business ISDN2 WLR to £55.00 per quarter, i.e. £220.00 per year (from £71.88 per quarter, i.e. £284.88 per year). Ofcom closed its investigation following the changes in BT’s charges, but noted that it would be necessary to review these charges once Ofcom’s review of the cost of the copper loop was completed and once there was more evidence on the take up of business ISDN2 WLR³.

1.8 On 18 August 2005, Ofcom published its statement entitled Valuing BT’s copper access network⁴. Also on 18 August 2005, Ofcom published the statement Ofcom’s approach to risk in the assessment of the cost of capital⁵. These documents were significant because a high proportion of the total cost of the WLR charges charge is determined by the cost of laying and maintaining the copper loop. As a result of these statements, Ofcom considers that the WLR charges – as set in August 2002 and changed in line with the charge control – do not adequately reflect BT’s costs.

1.9 BT voluntarily reduced the residential analogue WLR charge on 1 August 2005 from £9.24 / month (£110.88) to £8.74 / month (£104.88). However, no changes were made to either business analogue WLR or business ISDN2 WLR charges.

1.10 Despite BT’s charge reduction for residential WLR, Ofcom considers it appropriate to review the WLR charges for residential and business analogue WLR and business ISDN2 WLR to assess whether BT’s charges adequately reflect the costs that it incurs in providing these services and, if necessary, to set charge ceilings for these charges in order to ensure that BT’s charges are both certain and transparent and that BT is not able to increase its charges to excessive levels. For the reasons set out below, Ofcom considers that it is necessary to set charge ceilings for certain of the WLR services.

Approach to setting the WLR charge ceilings

1.11 The following sets out Ofcom’s proposed approach to setting the residential and business analogue WLR charge ceilings only:

Ofcom has used cost data for 04/05 from BT’s audited regulatory financial statements (published 2 September 2005);
Ofcom has used the same methodology for projecting cost as used in setting the LLU charges, i.e. projecting costs for 2005/2006 (for further details see the document Local loop unbundling: setting the fully unbundled rental charge ceiling and minor amendment to SMP conditions FA6 and FB6 (published 7 September 2005)⁶;
Ofcom is proposing to apply an efficiency factor of 1.5% to 05/06 operating costs;
A 10.0% rate of return on capital employed has been applied, as set out in the conclusions of Ofcom’s recent review of BT’s cost of capital;
Ofcom has used the £58.51 estimate of copper costs as set out in the Valuing BT’s copper access network statement, which allows for an adjustment for Digital Access Carrier System (“DACS”) (i.e. the use of Pair Gain equipment). However, as Ofcom has excluded the cost of Pair Gain equipment from the charge, Ofcom has also excluded the adjustment related to DACS;
Ofcom is proposing to disallow some of BT’s proposed increase in drop costs and excluded those drop costs which are already being recovered through residential retail prices, in order to ensure no double recovery; and
Ofcom is proposing applying a cost volume elasticity (CVE) factor to BT’s selling and general administration (S&GA) costs.

1.12 Ofcom is proposing not to set charge ceilings for business ISDN2 WLR. This is because from its review of the charges Ofcom considers that the current charges appear reasonable; and Ofcom has not set charges for business ISDN2 WLR in the past, and to do so now would be an extension of regulation. BT is required, however, to ensure that the charge for this service is reasonably derived from the costs of provision based on a forward looking long-run incremental cost approach.

1.13 On the basis of the approach set out above, Ofcom proposes setting the following charge ceilings. Table 1.1 sets out Ofcom’s proposed charge ceilings for line rental, transfer and new line installations for residential and business analogue WLR. Table 1.2 compares the proposed rental charge ceilings with the WLR rental charges prior to 1 August 2005 (i.e. before BT’s voluntary charge reduction). Table 1.3 compares BT’s current equivalent rental prices with the proposed line rental charge ceilings for WLR. (All values are exclusive of VAT.)

Table 1.1 – proposed charge ceilings for analogue WLR services

	New Line Installation Charge Ceiling	Transfer Charge Ceiling	Line rental Charge Ceiling
Residential WLR	£90.00	£2.00/line	£100.68/year/line
Business WLR	£90.00	£2.00/line	£110.00/year/line

Table 1.2 – proposed charge ceilings and previous charges for analogue WLR

	Rental (prior to 1 August 2005)	Proposed Line Rental Charge Ceiling	Reduction
Residential WLR	£9.24/month	£8.39/month	£0.85
Business WLR	£9.95/month	£9.17/month	£0.78

Table 1.3 – current BT Retail prices and proposed charge ceilings for analogue WLR

	Equivalent BT Retail Prices⁷	Proposed WLR line rental charge ceiling	Difference
Residential WLR	£8.94/month	£8.39/month	£0.85
Business WLR	£13.71/month	£9.17/month	£4.54

Next steps

1.14 Ofcom is consulting on these proposals until 12 December 2005. When Ofcom has considered responses to this consultation, it will decide whether to give effect to its proposals, with or without modifications, by publishing a final statement.