BT 2014 Annual Report Download - page 52

49
The Strategic Report
Delivering our strategy
Delivering our strategy
Ofcom
Ofcom is the independent regulator and competition authority for the
whole UK communications market.
Its main duties are
• to further the interests of citiens in relation to communications
matters and
• to further the interests of consumers in relevant markets, where
appropriate by promoting competition.
Under the powers of the Communications Act, Ofcom sets conditions
that CPs must comply with. Some conditions, known as General
Conditions, apply to all CPs. These mainly deal with protecting
consumers general access and interconnection, planning for
emergencies, providing information to Ofcom, and allocating and
transferring phone numbers.
Other conditions apply to certain individual companies that Ofcom
has decided are universal service providers or have SMP in a particular
market. Anyone can appeal against Ofcoms decisions through a number
of routes, including to the Competition Appeal Tribunal (CAT) or to the
High Court.
Following a market review, if Ofcom decides that a CP has SMP, it can
put controls in place, typically on the prices which the CP can charge.
Ofcom will generally try to set charges that are reasonably based on costs
and an appropriate return on the capital invested.
We are the designated universal service provider for the UK (except for
the Hull area where it is KCOM Group) and so we have certain universal
service obligations. Our main obligation is to make sure that basic xed-
line services are available at an aordable price to all consumers in the
UK. We are also obliged to provide public payphones.
Impact of regulation
There were a number of regulatory decisions and outcomes of appeals
that aected us during the year and will impact us in the future.
Overall, regulatory price reductions lowered our group revenue and
EBITDA by £150m to £200m in the year.
• Ofcom completed its review of the Wholesale Narrowband market,
which covers calls and interconnection services. New controls came
into eect on 1 January 2014 and will run until 30 September 2016.
The main change was to reduce the amount we can charge other
CPs for delivering their calls to customers on our network (xed call
termination). The impact of this will be partly oset by an increase in
the amount we can charge CPs whose customers make calls on our
network (xed call origination).
• During the year Ofcom started a review of both the Fixed Access
market (covering WR, U, GEA, ISDN 2 and ISDN 30 products)
and the Wholesale Broadband Access market (covering IPstream,
Datastream and WBC). This review is not expected to be completed
until June 2014. Related to this, Ofcom is expected to publish a
consultation on guidance for applying an ex ante margin squeee
test in the summer.
• In May 2013, Ofcom opened an investigation following a complaint
which alleges that BT has abused its dominant position, such that the
margin between the prices BT Consumer charges for some of its bre
broadband products, and the wholesale price charged by Openreach
for the relevant network inputs, is insucient to allow other CPs to
compete protably. We refute this allegation. We expect Ofcom to
reach a decision later in 2014.
• In August 2011, the CAT decided in favour of our wholesale ladder
pricing policy. adder pricing links the amounts that BT charges
mobile operators for mobile calls to 0800, 0845 and 0870 numbers
terminating on our network to the retail price charged by mobile
operators to their customers. In July 2012, the Court of Appeal
overturned the CATs decision. We were granted permission to appeal
to the Supreme Court and the hearing took place in February 2014.
A decision by the Supreme Court is expected later in 2014.
• In June 2010, Sky appealed to the CAT against Ofcoms decision to
regulate Sky Sports 1 and 2. In August 2012, the CAT decided in Skys
favour. We successfully appealed the CATs decision  in February
2014, the Court of Appeal published its judgment that the CAT must
now reconsider the case. Sky has sought permission to appeal the
Court of Appeal judgment from the Supreme Court, which is expected
to decide by July 2014 whether or not to grant permission.
• We have raised a complaint with Ofcom over the wholesale supply
terms Sky is insisting on for Sky Sports 1 and 2 for customers using our
YouView set-top box. Ofcom opened a formal investigation in June
2013 and its investigation continues.
• In December 2012, Ofcom issued nal determinations on disputes
over historic Ethernet pricing. Ofcom concluded that between April
2006 and March 2011 the prices we set for certain Ethernet services
were too high resulting in an overcharge of £151m over this period.
We recognised this amount as a specic item charge in 201213
(see page141) but we disagree with the determinations and have
appealed to the CAT.
See Ofcomos website at www.ofcom.org.uk
for more details on regulation
BTs Undertakings
In response to Ofcoms 2005 strategic review of telecommunications, we
put forward some legally binding undertakings under the Enterprise Act
2002. These Undertakings (which included the creation of Openreach)
began in September 2005. They aim to give clarity and certainty to the
UK telecoms industry about the way we provide upstream regulated
products. This in turn supports eective and fair competition in related
downstream markets.
Our relationship with HM Government
We can be required by law to do certain things and provide certain
services to government. For example, under the Communications
Act, we (and others) can be required to provide or restore services
during disasters. The Civil Contingencies Act 2004 also says that
the Government can impose obligations on us (and others) at times
of emergency or in connection with civil contingency planning.
The Secretary of State can also require us to take certain actions in
the interests of national security and international relations.
Overseas regulation
The degree of regulation in international markets varies widely.
This can hinder our ability to compete. We are pressing incumbent operators
and their national regulatory authorities around the world for fairer,
cost-related wholesale access to their networks.
We are in discussions with both the EC and US regulatory authorities
over what we believe to be premature deregulation of parts of the US
telecoms market. This has made it more dicult for non-US CPs to enter
and compete in the US while European telecoms markets remain open to
competition from US operators.