This blog piece sets out an overview of the regulation of broadband networks in the UK, both now and in the future. As can be seen from the (very recent) dates on the various document referred-to, this is an area which is changing rapidly at the moment, and is a strong focus of both regulatory and of governmental attention.
The basic principles of telecoms regulation in the UK are that no access regulations will be imposed on any provider of electronic communications networks or services unless they have been determined to have “significant market power” (or SMP) in the relevant market, following a detailed market review and consultation. In the UK (aside from in the Hull area), as relevant to fibre, the only company with SMP in any part of any market is Openreach (owned by BT but structurally separated from it).
This means that in some cases Openreach is obliged by OFCOM to offer certain wholesale broadband products on regulated terms. In those cases, then, OFCOM’s regulations can have an impact both on the wholesale fibre broadband market and also, indirectly, on the prevailing retail prices that any ISP is able to achieve. In setting regulated wholesale prices OFCOM recognises that competing providers will only invest in building their own networks if this is more attractive than buying wholesale services from BT, and so the price of wholesale services, where they are regulated, must be set in such a way as to balance the incentives to invest in new networks (which would suggest higher wholesale prices) with the risk of harm to consumers through consequentially higher retail prices in the shorter-term.
Regulation can also, by making it easier and cheaper for new entrants to use Openreach ducts, reduce the cost of building a fibre-to-the-home (FTTH) network and recent changes introduced by OFCOM (as well as those it expects to introduce very soon) are expected (by OFCOM) to reduce the cost of building new FTTH networks by as much as 50%. More details are set out below.
The position under the most relevant market reviews currently is as follows:
- The Wholesale Local Access (“WLA”) Market Review (as of March 2018). This put in place measures to regulate wholesale services provided over BT’s Openreach network. This included making it easier and cheaper for competitors targeting the residential market to use BT’s ducts and poles to build their own fibreoptic networks, by mandating that Openreach offer “Duct and Pole Access” (DPA). OFCOM stated that their new DPA remedy could reduce the cost of building new infrastructure by 50% (para 1.28). OFCOM also required Openreach to offer a basic “anchor” “VULA” (virtual unbundled local access) service – at 40mb download, 10mb upload, to any ISP customers for a regulated price. This service is typically offered using fibre-to-the-cabinet – or FTTC technology and ISP customers are required to install their own equipment to take advantage of it. The 2018 WLA review brings down the price of the wholesale “anchor” service from around £90/year (excluding line rental) to around £60/year by 2021. Services at higher speeds are entirely deregulated – so Openreach is free to offer these services at any price it wishes, though of course the price it will be able to charge in practice will be limited by the “anchor” pricing (their ability to charge more will be limited by the fact that customers could always choose the “anchor” product if they don’t like the price offered for the alternative service). It is these higher bandwidth services that would be most relevant to services using FTTH (fibre to the home) technology. The WLA review also retained access and price regulation on BT’s legacy copper network (through a regulated LLU – local loop unbundling – service).
- The Wholesale Broadband Access (“WBA”) market review (31 July 2018). The WBA market “sits between” the WLA market and retail services and involves the provision of wholesale broadband services to ISPs where the ISP customer is not required to install their own equipment. The use of WBA products has declined in recent years as the larger ISPs (like Sky and Talktalk) have used products in the WLA market to access customers and have invested in their own equipment. OFCOM has progressively deregulated WBA in those parts of the UK where the presence of telecoms providers (using LLU) or Virgin Media’s own cable network has meant that consumers have sufficient choice of broadband providers. As of 2014 only 10% of UK premises were covered by WBA access regulations, and this latest review says that only 1% of the country now has little or no broadband competition. OFCOM found that although BT has SMP in this small area there is no need for price regulation (because of BT’s policy of setting national retail prices). Instead other remedies (like providing services on reasonable terms) are to be applied.
On 24 July 2018 OFCOM published Regulatory Certainty to Support Investment in Full Fibre Broadband. This confirmed OFCOM’s likely approach to supporting investment in “full-fibre broadband” (ie FTTH) going forward. In particular this document says that OFCOM will make some changes to the current situation. OFCOM intends to offer access-seeks yet-greater flexibility when it comes to buying the DPA (duct and pole access) product from Openreach (specifically it says that DPA will in future be open to ISPs who wish to serve businesses as well as those targeting the residential market). It also states that OFCOM will support the transition from copper to fibre (eg by requiring assistance to vulnerable consumers as a switchover is made) and that Openreach will be given the opportunity to make higher returns where a risky investment is successful (see below for OFCOM’s most recent statement in this). Thus the future framework, to be consulted on in detail in the coming months, seems likely to involve:
- Openreach being mandated to provide a DPA nationwide and without restrictions. This is expected to start as from 2020.
- In “competitive” areas (where there are 3 competitive fixed networks) there will be no other access regulation aside from DPA (ie the current rules around the provision of an “anchor” VULA service will go)
- “Potentially competitive” areas are those where OFCOM thinks more infrastructure could be built economically. In these areas OFCOM will incentivise new network deployment whilst still ensuring consumers remain protected. This means that there will be continued pricing flexibility for higher bandwidth services with a safeguard “anchor” service at regulated prices. This “anchor” price may allow a “small premium” for full-fibre based products (as opposed to the current anchor VULA product whose pricing is based on FTTC technology).
- In “non-competitive” areas, additional regulation (aside from DPA) is likely to be required in the longer term. This will involve placing regulatory limits on price rises and may also involve requiring Openreach to offer unlit strands of its optical fibre (“dark fibre”) to competing providers. At present, and following litigation on the subject, Openreach is not obliged to offer dark fibre products at all.
A few other points or developments are potentially relevant:
- On 1st August 2018 OFCOM published its statement regarding BT’s regulatory accounts. This says that last year (2017/18) BT made returns of 7% above its “cost of capital”. Although not clear from this statement, BT’s WACC is assumed in other OFCOM publications to be around 9%. “Much of this” (high) return is apparently the result of Openreach’s successful investment in street cabinets and fibreoptic broadband. OFCOM acknowledges that this is high but says that they have deliberately set regulation to allow adequate reward for risky investments. They also point out that the price of the regulated “anchor” VULA service will fall in the coming years.
- On 5 June 2018 the government published a “briefing paper” on a introducing a broadband universal service obligation in the medium term. This will involve giving all (or almost all) UK residents the legal right to request a broadband connect of at least 10Mb/s for a set price. OFCOM will be charged with administering this and it seems likely this will involve setting up an industry subsidy fund. This may involve a levy on some, or all, retail broadband services in the UK. OFCOM is expected to give further details shortly.
- On 23 July 2018 the government published its Future Telecoms Infrastructure Review. This outlines the government’s ambition to encourage greater investment in fixed and wireless networks. The aim is to have 15 million premises connected to “full fibre” broadband (ie FTTH) by 2025, with the whole country covered by 2033 and the majority of the population covered by new 5G networks by 2027. The government’s analysis is that without regulatory change only 75% of the country, at best, will ever get full fibre networks. In order to support further investment the government will take measures such as simplifying access to multi-dwelling units, standardising the approach to streetworks across the country and looking at applying a DPA-type access obligation to infrastructure owned by other (non-telecoms) utilities like power, gas and water networks. The government also suggests that public subsidy of around £3-5 billion (awarded on specific projects by competitive tender) will be available to support investment in “the most difficult to reach” areas.
- The EU is about to introduce a new European Communications Code reforming the entire telecoms regulatory regime in the EU in various ways. The most recent near-final version was published on 29 June 2018. This (if it becomes law in the UK – which is likely irrespective of the terms of Brexit since OFCOM has indicated their intention to continue to work closely with the EU) will introduce a new mechanism under which fibre investments that are made by SMP operators (Openreach in the UK) in conjunction with third parties (this is called “co-investment”), will be exempt from access regulation in certain circumstances. It is unclear exactly how this would work with the current and planned future regulatory structure for the UK but it would seem to mean that, at least in theory, some of Openreach’s new fibre investments may not be subject to DPA, or to other regulation like restrictions on price rises, even if in “non-competitive” areas. We have blogged about this in detail here.