APPENDIX 11
Memorandum by Ofcom Office of Communications
Two issues arose during the oral evidence session
on 1 March on which we thought the Committee might welcome an
additional written submission from Ofcom: issues around consumer
information, searching and switching, and issues in relation to
LLU pricing and roll-out.
CONSUMER INFORMATION
AND SWITCHING
The need to ensure that consumers can make effective
choices was a key part of our Phase 2 consultation of the Review.
We set out a series of options for improving the flow of information
and for making switching between suppliers easier.
We sought views on a very wide range of possible
approaches. One option, which could be argued to be consistent
with our duty to act as a light touch regulator, would be to leave
the issue entirely to the market. But we think in a market of
the complexity of telecommunications, and where competition is
not fully developed, such an approach would not serve the best
interests of consumers. Indeed, it could significantly stall the
development of effective competition.
At the other end of the spectrum of options,
we could intervene to restrict the choice and range of products
and tariffs that can be offered by telecoms service providers—perhaps
in a similar way to the regulation of some personal finance products.
Again, Ofcom is minded to reject such an approach as unnecessarily
heavy-handed in a market where consumers strongly value innovation
and where the scale of consumer detriment which might arise from
customer confusion is clearly significantly less than in the case
of financial services.
Therefore we think the focus should be on improving
the quality and quantity of consumer information on which consumers
actually base their decisions.
One important element of making choices is being
able to compare different tariff packages on a like-for-like basis
and work out what offers the best value for money. We have consulted
on whether Ofcom should itself provide comparable price information,
specifically through some kind of price comparison engine on our
own website. But we questioned whether this would be an efficient
way to proceed. The complexity of telecommunications makes the
provision of simple but broadly accurate comparisons of the kind
which, for instance, energywatch provides on its website, actually
rather difficult in telecoms. Energywatch, like Ofcom, accredits
third parties to provide more accurate comparisons based on customers'
actual bills and behaviour. In our case the Ofcom PASS scheme
provides accreditation for tariff comparisons sites. uSwitch.com
is accredited under the scheme and produces a highly-acclaimed
and popular site. We would like to strengthen the Ofcom PASS scheme
to make the comparisons even more useful and accurate, and to
accredit further companies under the scheme.
We would also like operators themselves to produce
clearer information about their tariffs and services. There are
a number of measures that might be taken in this regard, including
some fairly straightforward measures like using simpler language
and consistent terminology. One particular area of concern is
comparative advertising. One suggestion in our consultation was
that we might work with the Advertising Standards Authority to
produce clearer rules on comparative advertising, particularly
in relation to new services such as broadband.
Finally, we looked at whether switching between
suppliers remains more difficult than it should be for consumers.
Research evidence included in the consultation document suggested
a more basic problem—that many consumers in the fixed market
are unaware of the choices that are already available to them.
Ofcom therefore asked whether simply communicating to consumers
that choices exist, for instance using newspapers, consumer magazines
and TV and radio programmes, might reap important dividends.
In parallel with considering consultation responses
to these options, we are initiating further research into consumer
information problems. In particular we are looking at how information
strategies used by other regulators have worked in practice, and
whether they have had a positive effect.
Our intention is that in our Phase 3 statement
in the summer we will set out a strategic approach to consumer
information and switching including specific timescales and deliverables.
LOCAL LOOP
UNBUNDLING (LLU)
At our oral evidence session, the Committee
noted concerns that alternative operators wishing to use LLU were
still encountering significant challenges in doing so. We thought
it would be worth briefly addressing three areas of specific concern.
LLU charges: In August 2004, Ofcom announced
proposals for significant reductions in LLU charges. These followed
on from earlier, voluntary reductions made by BT in May. Ofcom
set final LLU connection and rental charge ceilings in December
2004.
The table below sets out the wholesale connection
and rental prices for LLU that applied before BT's reductions
in May (Column A); BT's voluntary price reductions (Column B);
and the final price ceilings that have applied since 1 January
2005 (Column C). The percentage reductions shown are compared
with the wholesale prices prevailing before BT's reductions in
May.
LLU CONNECTION AND RENTAL PRICES
| A Old | B BT's voluntary
reductions
| C Final | % Change
from A to C
|
| Shared access | |
| | |
| Connection | £117 |
£83.33 | £34.86 | 70%
|
| Rental | £53 | £27.12
| £15.60 | 71% |
| Fully unbundled | |
| | |
| Connection (transfer) | £88
| £88 | £34.86 |
60% |
| Connection (new provide) | £265
| £223.33 | £168.38
| 36% |
| Rental | £119 | £105.09
| TBD | N/A |
| | |
| |
Ofcom will return to other pricing issues in the next phase
of its work, including the prices for migration from another broadband
product to LLU and the costs of co-location of apparatus at an
exchange. We will also be setting the rental price ceiling for
fully-unbundled loops (as opposed to shared access). To determine
a fair price for this it is necessary to take a view of the cost
of the underlying copper assets, because a very high proportion
of the costs for this service is determined by the cost of laying
and maintaining the copper loop between the Local Exchange and
the home or business premises.
Recognising this, Ofcom is running a separate analysis to
assess copper loop costs which will address issues such as the
valuation of the asset, the attribution of costs to the copper
loop and the appropriate recovery approach. The initial proposals
on this were published for consultation in November last year,
with further proposals due to be published within the next few
weeks. Once the question of underlying costs of copper are resolved,
Ofcom will then determine the rental price ceiling for fully unbundled
local loops. We aim to complete this process by the end of 2005.
In the meantime, BT's voluntary price reduction to £105 pa
rental for such loops remains the applicable price.
Process issues: Ofcom has recognised that rapidly
developing "fit for purpose" and efficient industrialised
processes for delivery of unbundled lines are as important as
price reductions. The lack of fit for purpose processes is one
of the key reasons why potential investors were deterred from
entering the market using LLU.
Ofcom has created the Office of the Telecoms Adjudicator
to help to quickly deliver industrialised processes for LLU. Peter
Black, the Telecoms Adjudicator, brings a wealth of practical
experience over many years in the industry to these issues, and
is setting product/process specifications and implementation plans,
overseeing implementation, assessing the performance of operators
in meeting their objectives and resolving disputes. The OTA has
established Key Performance Indicators (KPIs) to measure how well
BT is performing in delivering fit for purpose LLU.
The OTA's most recent report, published on 8 February, highlights
good progress, but variable performance in some operational areas:
— 31,000 lines had been unbundled by 31 January
2005. This number has grown from around 12,000 in May 2004. The
OTA had targeted 50,000 lines by February 2005.
— Performance is behind OTA Key Performance Indicator,
Right First Time, which measures delivering working service in
time to meet customers' expectations. Actual delivery is variable
at 50-60%, against the OTA target of 75% Right First Time by February
2005, rising to 85% in the near future.
It is clear, therefore, that significant improvements remain.
Nonetheless we believe the establishment of the OTA has been a
significant success and has the support and commitment of the
industry.
LLU backhaul: "Backhaul" is the term used
in the industry for the connections between the local exchange
domain and the core network—what is sometimes described
as the "middle mile". For LLU operators, backhaul is
a key requirement and pricing and process issues in relation to
backhaul are therefore very important.
Whilst there is scope in theory for backhaul to be provided
competitively in many parts of the country, in the short term
LLU operators may be reliant on a BT wholesale service. We have
worked with BT to allow a more flexible wholesale backhaul product
which addresses the needs of LLU operators. We will be setting
charges for this service later this year alongside the other remaining
LLU charges mentioned above. This will remove one concern of LLU
charges that there is currently uncertainty about the future evolution
of pricing for these products.
Some operators have called for LLU backhaul products to be
included on the list of "enduring economic bottleneck"
services to which the "equality of access" provisions
set out in our TSR Phase 2 consultation would apply—for
instance equivalence of input, possible inclusion in the list
of services provided by BT's proposed Access Services Division.
As noted above, there is theoretical scope for replication of
backhaul so it is unclear that this product should be regulated
as tightly as, for instance, the copper local loop itself. But
Ofcom will be considering this carefully as it firms up its proposals
on "real equality of access" between now and the end
of the Review.
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