Cost orientation review

  • Start: 05 June 2013
  • Status: Closed
  • End: 17 July 2013


1.1 Under the Common Regulatory Framework (CRF), Ofcom, as national regulatory authority for telecommunications regulation, is obliged to conduct periodic market reviews, and determine whether particular markets are effectively competitive. Where Ofcom finds that the market is not effectively competitive, it must identify the undertakings with significant market power (SMP) on that market and impose appropriate ex ante obligations on such undertakings to address the competition problems identified. Where the market analysis indicates that a lack of effective competition means that the operator concerned may sustain prices at an excessively high level, or may apply a price squeeze, to the detriment of end-users, such remedies may include price remedies.

1.2 Since the CRF was implemented in the UK in 2003, Ofcom has undertaken a significant number of market reviews, and has imposed price remedies, including for example charge controls and cost orientation obligations, in all of them. We have recently published a statement in the Business Connectivity Market Review and our programme of market reviews continues.

1.3 In light of our experience of the effectiveness of these price remedies, and in particular cost orientation obligations, we have considered afresh in general terms the way in which we might use them in the future. This document focuses on the cost orientation obligations we impose in SMP conditions in fixed telecommunications, as there are no cost orientation SMP obligations in place in mobile markets.

1.4 While we will consider what remedies are appropriate, and the form that such remedies should take, in each market review, here we set out at a general level the factors we are likely to consider in deciding whether and which price remedy is appropriate, and if we consider a cost orientation obligation is necessary, the form this obligation should take. We consider in particular how the use of a cost orientation obligation may relate to our use of charge controls.

1.5 This document does not affect cost orientation obligations set in past market reviews and compliance with such obligations. Cost orientation obligations which have been set previously have been set in the particular context of individual market reviews and therefore impose particular obligations. We cannot, and do not seek to use this document to have any effect on the nature of those obligations or the construction of the SMP conditions which have previously been set in relevant markets. Any references to existing cost orientation conditions are therefore purely indicative and do not affect the operation of those conditions.

1.6 In November 2011, we published a call for inputs through which we sought stakeholders’ views on setting and monitoring cost orientation obligations (-1-). In light of the responses to that call for inputs, we are now publishing this consultation. We welcome stakeholders’ views on the thoughts set out in this document. We do not anticipate following this consultation with a statement; instead it will be more appropriate for us to take views into account as we work through our programme of market reviews. We will, however, publish a summary of responses later in 2013.

Outline and summary

1.7 The remainder of this section discusses the legal framework for imposing pricing remedies, and in particular, the limitations to imposing such remedies. We also provide an overview of how we have used cost orientation in past market reviews.

1.8 Section 2 then discusses how we may use cost orientation obligations in the future. We consider that different market conditions may give rise to different competition concerns and hence, different types of price remedies. In general terms, we look at which pricing remedies may be appropriate in markets for key wholesale inputs, markets for new services, markets for declining services and prospectively competitive markets.

1.9 Section 3 sets out the form such cost orientation obligations may take where we determine that a cost orientation obligation is appropriate. We discuss in particular the different cost standards, and how one can approach changes in cost over time. For example:

  • Where we use a cost orientation obligation in conjunction with a charge control, it is likely to be appropriate to continue to use distributed stand-alone cost (DSAC) to establish or set the price ceiling in advance for the duration of the market review period.
  • In those more limited circumstances where cost orientation is being used as a fallback for a charge control, it may be more appropriate, depending upon the circumstances, to use a ‘FAC+’ approach i.e. fully allocated costs plus a small factor to allow for uncertainty of costs from year to year.
  • In other situations, such as cost orientation in a prospectively competitive market, the details of the condition might be specified somewhat differently (e.g. there might be a stronger argument to use DSAC instead of FAC+).

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