In 2018, we published an article setting out Ofcom’s commitment to supporting investment in full fibre broadband and highlighted changes Ofcom was planning to introduce to applicable market regulation to support investment in fibre networks.

Market regulation in the wholesale fixed telecommunications market set out in our article fell away on 1 April 2021, and on 18 March 2021 Ofcom released its decision for regulation of the wholesale fixed telecommunications market from April 2021 until March 2026.

In this article:

  1. we set out a refresher of wholesale fixed telecommunications market regulation applicable prior to 1 April 2021, and a brief summary of Ofcom’s proposals for market regulation to support investment in fibre networks; and
  2. we also provide a high level summary of some of the main parts of the 2021-2026 market review decision, and identify which of Ofcom’s proposals have been implemented.

Previous market regulation[1]

In the UK Ofcom undertakes periodic market reviews and typically imposes access regulation on operators who have been found to have significant market power. Such regulation is intended to enable the market to function more competitively.

In the UK (aside from in the Hull area), as relevant to the wholesale fixed telecommunications market:

  1. the only company with significant market power in any part of any market is Openreach (owned by BT but structurally separated from it); and
  2. until 1 April 2021, regulation applied to Openreach in each of the wholesale local access, physical infrastructure and business connectivity, and wholesale broadband access markets (see our previous article for more detail on the specific regulations which applied in each market).

Ofcom’s proposals for future wholesale fixed telecommunications market reviews

In July of 2018, Ofcom published a report detailing proposals to reform how it carries out competition assessments during market reviews, so as to support investment in, and development towards, ‘full-fibre broadband’.

Changes foreshadowed by Ofcom to regulation in the wholesale fixed telecommunications market included:

  1. Taking different regulatory approaches for different areas depending on the level of network competition in each area.
  2. Setting prices for Openreach’s wholesale services in a way that supports investment in fibre.
  3. Regulatory intervention in areas where there is no prospect of network competition.
  4. Supporting the transition from copper networks to faster fibreoptic networks through prioritising stable regulated products and prices and consistent quality of service, to protect consumers during transition.
  5. Supporting a move towards unrestricted nationwide duct and pole access (DPA).

On 8 January 2020, Ofcom formally announced a comprehensive integrated market review of the “wholesale fixed telecommunications market” to replace the previous 3 different markets. The principles set out above were re-emphasised in Ofcom’s consultation paper.

2021-2026 Decision

Fast forwarding to last month, Openreach announced its decision for how it will regulate the wholesale fixed telecommunications market over the period of April 2021 to March 2026.

In particular:

  1. Ofcom has found Openreach to have significant market power in the markets for physical telecoms infrastructure, wholesale local access and leased line access markets.
  2. The decision is intended to facilitate the broader goal of encouraging investment in faster gigabit fibreoptic networks throughout the UK and to complement other areas of public funding and innovation, such as the UK Government’s commitment to extend coverage throughout the UK. Ofcom aims to do this by identifying and strategically regulating areas of limited competition and investment. Ofcom predict that the added regulatory certainty in addition to permitting companies to make a fair return will provide the necessary environment to encourage innovation in these areas.

In respect of the specific fixed telecommunications markets:

  1. Physical infrastructure market

Openreach was found to have significant market power in the national market for the supply of wholesale access to telecoms physical infrastructure (including aspects such as pipes, masts, ducts, inspection chambers, manholes and poles) for deploying a telecoms network in areas of the UK.

Openreach will therefore be obliged to provide physical infrastructure access (PIA) nationally through a service called Duct and Pole Access (DPA). This service will be subject to a cost based charge control. The aim is to facilitate competition by reducing upfront costs of building competing networks by up to 50% and therefore allowing greater opportunities for competitors to provide a fast and reliable services.

  1. Wholesale local access and leased line access (WLA) market

Regulation based on competition in the market

Openreach was also found to have significant market power in the WLA market for the supply of WLA at fixed locations (covering both the residential and business segments) in two geographic markets.

These two geographic markets are:

(i) Area 2: a geographic market comprising postcode sectors where there is already some material commercial deployment by rival networks to Openreach (i.e areas where there is a potential for competition). In such markets, Openreach will be required to provide wholesale access to its network, with prices for Openreach’s entry level superfast broadband service (“Anchor VULA” – see below) subject to charge controlled regulation. This is to encourage further investment by providing regulatory certainty but without the need to be so intrusive as to regulate the whole range of Openreach’s services. Openreach’s higher speed services have not been restricted in the same fashion (other than that the prices must be reasonable) so as to provide an incentive for Openreach and for other competing networks to contribute to developing high speed networks. In these areas Leased Line Access (LL) services and services to High Network Reach areas continue to be controlled in line with inflation and as Ofcom deem as fair and reasonable; and

(ii) Area 3: a geographic market comprising postcode sectors where there is unlikely to be material commercial deployment by rival networks to Openreach (i.e. non-competitive markets). In such markets, a cost-based charge control is to be put into place to allow Openreach to recover their costs from both existing copper networks and its investment in future full-fibre networks. The controls target both WLA and LL services. In relation to WLA services, the controls will be implemented against ‘metallic path facilities’ (MPF) services and all VULA services (excluding fibre to the premises (FTTP) 40/10 services) in areas where copper 40/10 services are available and all services where copper 40/10 services are not available. The controls in relation to LL services are targeted at connection charges on leased lines on all bandwidths and rental of dark fibre access from Openreach.

In Area 1 market areas (such as areas of dense urban locations with two or more existing network operators) Ofcom has stated the intention to not intervene with further regulations in order to encourage innovation in the market. At this stage no such “Area 1” areas have been identified through the market review process. Ofcom however predicts that as further innovation creates greater competition and these areas develop it will be necessary to evaluate the regulatory position to continue facilitating network innovation.

Such regulation based on level of competition reflects Ofcom’s proposals from 2018 and in 2020.

Anchor VULA product

Openreach will continue to be required to supply a basic “anchor VULA” (Virtual Unbundled Local Access) service at 40 MB download/10 MB upload in Areas 2 (and Area 3) regions at regulated prices. No other “active” products are regulated, however it is intended that regulation of the “anchor VULA” product will affect the entire market.

Support for Openreach in the retirement of its copper network

In response to the retirement of copper, Openreach’s copper products in exchange areas where 75% of the premises have access to fibreoptic services will no longer be subject to access regulation. Charge controls will also be removed once complete fibre coverage has been reached.

In areas where services are delivered over full fibre, Ofcom has permitted Openreach to charge more for 40 MB speeds in order to reflect the additional customer benefits, such as speed and reliability, that new fibreoptic networks offer.

The aim of this regulation is to remove the burden on Openreach of running two parallel networks.

Dark Fibre

Finally, Openreach will be subject to the obligation to provide access to dark fibre for the supply of leased line access in Area 3.

  1. Inter-exchange connectivity (IEC)

Openreach was found to have significant market power in the IEC market in exchanges where Openreach is the only telecoms provider present, or where only one other telecoms provider is in the exchange in addition to Openreach.

In both types of exchanges, Openreach will be required to provide access to Contemporary Interface (CI) Leased Lines. Openreach will be obliged to provide access to dark fibre in exchanges where it is the only telecoms operator in the exchange and the nearest rival is more than 100m away.

In respect of pricing remedies, in both types of exchanges, Openreach’s supply of CI Leased Lines will be subject to a charge control on rental and connection charges (inflation adjusted from 2021 levels). In Openreach only exchanges, Openreach’s supply of dark fibre will be subject to a cost based charge control.

  1. Future Regulation

In addition to setting out the regulations due to stay in force until March 2026 Ofcom acknowledged that their continued goal of  encouraging innovation and investment in fibre networks would require additional certainty due to the money involved and the longer term paybacks required. To address this Ofcom stated that:

  • There is no expectation of introducing cost-based price controls until at least 2031 and that the wholesale access prices due to apply from their decision will likely remain until 2031;
  • Beyond 2031 if competition and investment is still in the process of emerging, regulation would follow to continue to support development of competition and investment in required markets; and
  • If there is a need to move to cost-based regulation in future, the “fair bet” principle will be honoured meaning that Openreach will be permitted to make returns in excess of its cost of capital (to reflect the risk being taken in building this infrastructure in the first place). Openreach would therefore maintain its ability to earn a return above its cost of capital over the whole fibre investment cycle whilst ensuring that investment continues to follow.[2]

[1] Ofcom Wholesale local access market review (2018) access-market-review; Ofcom Wholesale broadband access market review (2018).

[2] Ofcom Statement: Promoting investment and competition in fibre networks – Wholesale Fixed Telecoms Market Review 2021-26 (2021). Page 3.