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16|12|03

Oftel and Ofcom publish proposed regulation of Wholesale Broadband Access Market

The decision follows the publication earlier this year of a consultation document setting out the terms of a market review of wholesale broadband services. The scope of that review included proposed definitions of broadband and an analysis of the extent of competition in the wholesale market.

Given the fact that the broadband wholesale access market review coincided with the transition to Ofcom, and given the strategic importance of broadband to the communications sector as a whole, the draft decisions set out in this proposals were jointly reviewed by both the Director General of Oftel and the Ofcom Board.

It was clear to both regulators that the market has moved significantly in the last two years, with the emergence of a widening market offering both alternative technologies and alternative suppliers.

However, it is also clear that at this point in time there is a national and distinct market in wholesale broadband services, and that BT is the dominant provider of those services. As such, both Oftel and Ofcom found that BT had Significant Market Power (SMP).

The Director General of Oftel, David Edmonds, said:

“These proposals will address a competition deficit. They will bring clarity and predictability to a strategically important and distinct market, enabling other network operators to compete effectively against BT and, in turn, leading to greater choice and value for the consumer.”

The Chief Executive of Ofcom, Stephen Carter, said:

“Broadband Britain needs broadband competition at the wholesale level as well as the retail level. Ofcom believes that these proposals will create the right balance of certainty, alternative supply and incentives to invest.”

This is the seventh of ten major market reviews undertaken by Oftel. The remaining three reviews will be completed by the new communications regulator Ofcom during 2004.

The market reviews are conducted under the terms of the EU Regulatory Framework for electronic networks and services and replace the existing regulatory regime for telecommunications.

Background on wholesale broadband access

The large majority of UK Internet Service Providers (ISPs) are dependent upon suppliers of wholesale broadband access in order to deliver the benefits of high-speed, always-on connections to their domestic and business customers.

BT is the predominant supplier of wholesale broadband access to ISPs, most of whom use a family of BT broadband products called IPStream to connect their customers directly to BT’s network. BT’s IPStream products are known as intermediate services, enabling ISPs to sell broadband connections to consumers at the retail level.

BT’s network operator competitors also sell wholesale broadband access to ISPs. However, those network operators do not bypass BT’s infrastructure altogether. They make use of BT’s broadband-enabled local loops and, typically, a significant amount of BT’s routing network.

They therefore connect to BT’s network backbone (via what is known as an ATM Interconnection) using a family of BT products called Datastream. Those network operators then build their own broadband access products for ISPs on top of BT’s Datastream products.

If the Datastream price is too close to the IPStream price, BT’s network operator competitors cannot make sufficient margin on their activities, and therefore cannot compete effectively with BT in the wholesale market providing services to ISPs.

The decision framework

Oftel and Ofcom have found that:

1. The market for broadband internet services is distinct from that for dial-up internet access. The wholesale broadband market should therefore be considered in its own right rather than as a sub-set of another market. The regulators also found that the wholesale broadband market is national in nature.

2. BT has Significant Market Power (SMP) in the UK wholesale broadband market (excluding Hull). Oftel and Ofcom are therefore proposing the following regulatory obligations on BT:

• requirement to provide Network Access on reasonable request;
• requirement not to unduly discriminate;
• requirement to publish a reference offer;
• requirement to notify terms and conditions;
• requirement to notify technical information;
• requirement to provide quality of service information;
• requirement to establish a statement of requirements for new access;
• requirement to have accounting separation

A clear and predictable margin for alternative network operators

Oftel and Ofcom also found that BT should be required to provide its Datastream products on a retail minus basis.

A requirement to offer Datastream at a retail minus price means in particular that BT must allow sufficient margin between the price it charges for its IPStream products and the price charged for the Datastream products.

The actual retail minus margin will be set following consultation in the first quarter of 2004.

Oftel and Ofcom explored the option of requiring BT to offer its Datastream products on a cost plus basis. Under a cost plus ruling, BT would only be able to recover its costs plus a reasonable return on investment when setting the price of a product.

However Oftel and Ofcom concluded that such a ruling could act as a disincentive to further network investment and as such could inhibit the growth of the broadband market as a whole.

The regulators also considered options including the withdrawal of regulation in this market, but concluded regulatory obligations remained necessary to ensure fair and effective competition.

UK individuals and organisations with an interest in the wholesale broadband market have until 6 February to comment on the draft decision document. The proposals will also be considered by the European Commission.

Full details of the draft decision can be found online - see Related Items.

Ends.

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