BT 2005 Annual Report Download - page 22

&keep Local Loop Unbundling (LLU) at the heart of BT’s
wholesale broadband portfolio, building on the work
already done on industrialising LLU operations and
taking forward our previous commitment to cut the
price of fully unbundled loops;
&make sure the rest of BT’s broadband products keep
pace so that all service providers have a wide choice of
offerings to suit their business models;
&agree on the enduring economic bottlenecks (assets
that are not replicable in the medium term) and work
to ensure that regulation is focused around them; and
&set out the ground rules that underpin the
development of BT’s 21st Century Network.
Equally, as part of this package, BT would need Ofcom
to:
&commit to rapid, significant and ongoing deregulation
in certain key markets;
&create a stable investment environment, with the
Strategic Review and the associated studies concluded
successfully, so that investors are able to invest with
certainty; and
&enable BT to compete on a level playing field with
other operators in the market.
Cost of copper
Ofcom issued two consultation documents, in late 2004
and early 2005, concerning the valuation of the local
access network assets, with the intention of issuing a
statement in summer 2005. The review considered the
valuation of the copper local access circuits and the duct
through which these circuits pass. Ofcom considers the
local access network to be a ‘bottleneck’ (meaning that
other fixed line telecommunications operators wishing to
serve the majority of UK customers need to use BT’s local
access network to do so), and wishes to ensure customers
continue to be charged fair prices for the use of these
assets. The regulator considered alternative ways of
valuing these assets, and Ofcom anticipated that it would
conclude that the assets should be revalued at a lower
level. Such an outcome would result in lower wholesale
charges for the use of local access network assets.
Cost of capital
During its review of the PPC price control, Ofcom
concluded that it should amend the allowed rate of return
it should use, based on an updated calculation of BT’s
overall cost of capital. The September 2004 statement
used an allowed rate of return of 13.0% (on a pre-tax,
nominal basis), specifically for PPC prices, compared with
the 13.5% rate that the regulator had previously allowed
in other price controls. In January 2005, Ofcom issued a
consultation document that examined various aspects of
risk and reward, including aspects of the allowed return
that should be used by Ofcom in setting regulated prices.
The consultation proposed to review the calculation of
BT’s overall cost of capital, and also considered whether
to allow different rates of return for different parts of BT.
The regulator proposed to reduce BT’s overall cost of
capital, from the general current rate of 13.5%, and also
suggested that the local access network was less risky
than the rest of BT, and BT should therefore be allowed a
lower rate of return in regulated prices. Such an outcome
would result in lower wholesale charges for local access
network services.
Radio base station backhaul circuits and wholesale
extension services
During the 2005 financial year, we also launched two new
products in line with regulations contained in the Leased
Lines Market Review:
&RBS (radio base station backhaul circuits) – these are
circuits provided by BT to enable a mobile
communications provider to connect a radio base
station to its mobile switching centre; and
&WES (wholesale extension services) – these are circuits
provided over fibre, typically using Ethernet
technology, to enable a telecoms operator to connect a
customer site to its own switching site.
Neither product is currently part of a price control but
Ofcom has imposed various regulatory conditions on the
products, including notification and cost orientation
obligations.
Local Loop Unbundling
Local Loop Unbundling (LLU) enables operators to
connect directly to the consumer via BT’s copper local
loops and then add their own equipment to offer
broadband and other services. There are two types of
unbundled line:
&a fully unbundled line gives operators the exclusive use
of the copper line; and
&a shared access line only gives operators the use of the
high-frequency channel used for broadband and will
also be used by the customer’s fixed-line voice
provider.
During the 2005 financial year, Ofcom extensively
reviewed LLU regulation as it believed that development
of the LLU market, allowing operators to target
infrastructure investment and develop scale in the
creation of high-speed data services, would be critical in
ensuring a fully competitive and innovative telecoms
market for the long term. However, while LLU does offer
the potential for downstream service and price
competition in broadband, it also requires substantial
facilities and network investment by competitors.
Ofcom’s latest approach to regulating LLU focused on
process and price:
&in July 2004 Ofcom appointed the independent
Telecoms Adjudicator to handle process issues; and
&
Ofcom completed its review of LLU prices in December
2004 as part of the wholesale local access market review.
On 16 December 2004, Ofcom announced final
charges for most connection and rental prices for LLU
services. The charge reductions follow consultations
published on 13 May 2004 and 26 August 2004, and the
price ceilings came into effect from 1 January 2005.
Ofcom has published a full list of price ceilings at:
www.ofcom.org.uk/media/news/2004/12/nr_20041216
Funds for liabilities
Under conditions relating to the Electronic
Communications Code, an electronic communications
provider with apparatus on or in the public highway is
required to make financial provision to cover any damage
suffered by highway or other relevant authorities,
resulting from works carried out by the communications
provider, and for the removal of its network, if necessary,
in the event of the liquidation or bankruptcy of the
company.
The conditions require the company to provide Ofcom
annually with a certificate that, in the company board’s
Operating and financial review BT Group plc Annual Report and Form 20-F 2005 21