Home > Consultations > Consultation Documents > WLR Charges > Statement

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. WLR services give consumers in all parts of the country the opportunity to choose alternative suppliers who could provide them with access and call services.

1.2 On 20 June 2002, the Director General of Telecommunications (the “DGT”) published the statement entitled Protecting consumers by promoting competition: Oftel’s conclusions in which he modified BT’s licence to, amongst other things, require BT to provide WLR services and also set the charges for certain WLR services. The first basic WLR product (WLR1) was available from September 2002. WLR1 was not, however, sufficiently developed for it to be an effective mass-market product at that stage and, therefore, further work was required to improve upon its capabilities.

1.3 On 11 March 2003, therefore, the DGT published a statement entitled Wholesale Line Rental: Oftel’s conclusions in which he set out what BT needed to do to improve WLR (WLR2).

1.4 On 28 November 2003, the DGT 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”) , which, among other things, restated the requirement on BT to offer analogue WLR services and additionally placed a requirement on BT to offer digital WLR services equivalent to ISDN2 and ISDN30.

1.5 WLR2 was available from 29 March 2004. BT had simultaneously been carrying out work in relation to the digital products and informed Ofcom in January 2005 that it considered that the ISDN2 and ISDN30 WLR products substantively met the requirements of the Call Origination Market Review statement.

Reason for review

1.6 The charges for WLR have not been reviewed since the starting charges were set by the DGT in June 2002. At that time, the rental charges for residential and business analogue WLR products were set at £28.00 per line per quarter (£112.00 per line per year) and £29.87 per line per quarter (£119.48 per line per year) respectively. These charges were also subject to a charge control set at RPI-2%.

1.7 On 19 December 2003, the DGT opened an own-initiative investigation into BT’s charges for business ISDN2 WLR. On 1 October 2004, BT reduced the charge for business ISDN2 WLR to £55.00 per quarter. Ofcom considered that this voluntary reduction in charges was sufficient for it to close the own-initiative investigation opened by the DGT. Ofcom stated, however, that it would review charges for business ISDN2 WLR once it had completed its investigation into the value of BT’s copper access network and it had more evidence on the take up of business ISDN2 WLR .

1.8 On 18 August 2005, Ofcom published the statements entitled Valuing BT’s copper access network and Ofcom’s approach to risk in the assessment of the cost of capital respectively. The significance of these documents in this context is that a high proportion of the total cost of WLR products is determined by the cost of laying and maintaining the copper loop.

1.9 BT had, prior to these two statements, reduced the residential analogue WLR charge from £9.24 per month (£110.88 per year) to £8.74 per month (£104.88 per year). It did not, however, change its charges for either the business analogue or business ISDN2 products.

1.10 Ofcom did not consider that the residential analogue charge change was sufficient in itself to provide industry-wide certainty in relation to WLR charges and nor was it clear that the reduced charge actually reflected the costs that BT incurs. Ofcom considered, therefore, that it was appropriate to review the charges for the residential and business analogue products and the digital access products to ensure that they were cost reflective. In addition, Ofcom considered that it might be necessary to cap the maximum level of WLR charges. For the reasons set out below, Ofcom has concluded that it is necessary to set charge ceilings for certain WLR products.

The November consultation

1.11 On 9 November 2005, Ofcom published the consultation document entitled Wholesale Line Rental: Reviewing and setting charge ceilings for WLR services (the “November consultation”) in which it proposed to set charge ceilings for certain WLR products. Ofcom has considered the responses to that document in coming to the final conclusions that it has set out here.

Approach to setting the WLR charge ceilings

1.12 Ofcom’s overall approach is little different to that set out in the November consultation. It has, however, accepted that the provision of pair gain equipment (the Digital Access Carrier System or DACS) can be an efficient way to deploy a local access network. In summary, therefore, Ofcom has:

• used cost data for 2004/05 from BT’s audited regulatory financial statements, which were published on 2 September 2005;
• used the same methodology for projecting cost as used in setting the charges for local loop unbundling, i.e. projecting costs for 2005/06 (for further details see the statement entitled Local loop unbundling: setting the fully unbundled rental charge ceiling and minor amendment to SMP conditions FA6 and FB6, which was published on 30 November 2005 );
• applied an efficiency factor of 1.5% to 2005/06 operating costs;
• used the £58.51 estimate of copper costs (see footnote 5);
• applied a 10.0% rate of return on capital employed (see footnote 6);
• disallowed some of BT’s drop costs and excluded others which are already being recovered through residential retail prices in order to ensure no double recovery; and
• applied a cost volume elasticity (CVE) factor to BT’s selling and general administration (S&GA) costs.

1.13 Ofcom has not set charge ceilings for business ISDN2 WLR because it has concluded that BT’s charges are reasonable when compared to the cost stack for this product. In addition, Ofcom did not wish to increase regulation especially given that it was unnecessary to do so.

1.14 On the basis of the approach set out above, Ofcom has set charge ceilings as set out in Table 1.1.

Table 1.1 – charge ceilings for analogue WLR services

	New line installation charge ceiling	Transfer charge ceiling	Line rental charge ceiling
Residential WLR	£88.00	£2.00 per line	£100.68 per line per year
Business WLR	£88.00	£2.00 per line	£110.00 per line per year

1.15 The Direction which sets in place these charge ceilings is at Annex 1. The Direction also states that BT need not set charges for these services on the basis of its long-run incremental costs including an appropriate mark-up and a reasonable return on its investment (LRIC+) because these charge ceilings have been set following Ofcom’s valuation of BT’s copper access network and cannot said to be based on LRIC+, as required by SMP services condition AA3. In addition, Ofcom has disapplied SMP services condition AA4 (the charge control condition) in relation to WLR products (see Annex 2) and has given its consent for BT to introduce these charges on 1 March 2006 and, therefore, give less than the ninety days’ notice as it would otherwise be required to do by SMP services condition AA6. The consent is set out at Annex 3.

Equivalence

1.16 Ofcom may reassess the charge ceilings for WLR products should it be necessary to do so. For instance, WLR products will be provided by Openreach, and Ofcom understands that this change and the development of equivalence of inputs for WLR may lead to significant changes in the costs of and charging structure for WLR products (paragraph 3.4 provides further details on equivalence of inputs). Therefore, Ofcom considers that it may be necessary to reassess the level of the charges at that time, i.e. in time for the launch of the equivalence of input WLR product in the first half of 2007.

1.17 Ofcom may also find that it is appropriate to apply a charge control which would be set for a predefined period and could be set in a manner which would have a similar effect to the charge ceilings set out in this statement (for example, each product could be individually indexed).

The full document is available below:

• Wholesale Line Rental: Reviewing and setting charge ceilings for WLR services [pdf]
  Full Print Version

Back to top