Gigabit fibre to the home in the UK: Ofcom finalises regulatory framework and Government announces funding package for the “last 20%”

On 18 March 2021, Ofcom published the outcome of its Wholesale Fixed Telecoms Market Review (“WFTMR“).

On 19 March 2021 the UK Government’s Department for Culture Media and Sport (“DCMS“) announced £5 billion of funding and initiatives for its ‘Project Gigabit’ (“Gigabit Package“).

Taken together, the two documents set out a regulatory and funding framework for the UK gigabit fibre access market that is avowedly pro-investment in competitive access networks, rather than seeking short-term consumer benefits from regulation of access networks to stimulate downstream services competition. It marks a shift from Ofcom’s recent focus on service-based competition and short-term consumer benefits back to its predecessor regulator Oftel’s focus on network competition and investment incentives.

Key positive headlines include: 

  • the opportunity for operators (including the incumbent BT) to generate returns from new fibre investment with no price caps on full fibre connections provided by BT, and Ofcom providing assurance that there will be no cost-based price controls for at least the next ten years;
  • the regulated prices for BT’s benchmark wholesale broadband access product will increase year on year – this effectively sets the market price that BT’s competitors have to match in their downstream product offerings; and
  • the introduction of constraints on BT’s ability to foreclose the market with ISPs (through volume or geographic discounts) and (in a separate switching initiative) easier broadband switching for end-users.

However, beneath the positive headlines, some aspects of the WFTMR and the Gigabit Package are less pro-investment that might be expected, in particular:

  • increases in the price of access to passive duct infrastructure as a result of changes in the cost-allocation methodology;
  • the ability of BT to increase prices for its ethernet access direct (EAD) product used for backhaul from remote builds; and
  • BT’s relatively favoured market position in relation to ‘Area 3’ build, which may inhibit investment and build from its competitors which would otherwise have taken place.

Ofcom’s 2021 Wholesale Fixed Telecoms Market Review 2021-2016

Although the WFTMR was concluded after Brexit, and effectively sets the regulatory framework for the fibre access investment in the UK, it is structured as a series of parallel market reviews undertaken under the EU harmonised telecoms regulatory framework. 

Each market review first defines the relevant economic market for an ex-ante regulatory review, then assesses if any market participants have market power, then considers what remedies (if any) are appropriate. Unfortunately this structure makes the document unnecessarily inaccessible.

Markets defined and reviewed

Ofcom defined a single upstream market for the supply of telecoms physical infrastructure across the UK (except Hull), with three down stream product markets:

  • wholesale local access (“WLA“) market, with 2 geographic markets:
    • Area 2 – where there is likely to be competition to BT in commercial deployment of networks
    • Area 3 – where there is unlikely to be competition to BT in commercial deployment of networks
  • leased line access (“LLA“), with 4 geographic markets:
    • Central London – with multiple established competing networks
    • High Network Reach (“HNR“) – with 2 or more competing networks
    • Area 2 – where there is likely to be competition to BT in commercial deployment of networks
    • Area 3 – where there is unlikely to be competition to BT in commercial deployment of networks
  • inter-exchange connectivity (“IEC“), with 3 geographic markets:
    • BT+2 alternatives exchanges
    • BT+1 alternative exchanges
    • BT only exchanges

With the exception of Central London and HNR, Areas 2 and 3 have the same geographic scope for WLA and LLA. 

BT has Significant Market Power in physical infrastructure and some downstream wholesale markets

Ofcom found that BT had significant market power in the following 8 markets:

  • physical infrastructure market;
  • WLA:
    • Area 2
    • Area 3
  • LLA:
    • HNR
    • Area 2
    • Area 3
  • IEC:
    • BT+1 alternative exchanges
    • BT only exchanges

Obligations imposed on BT

In all markets where BT has significant market power, Ofcom has imposed remedies selected from a ‘menu’ of:

  • network access
  • transparency
  • non-discrimination (or its big brother ‘Equivalence of Inputs’ or EoI)
  • financial reporting
  • charge control
  • quality of service
  • prohibition of geographic discounts.

Physical Infrastructure market remedies

Ofcom requires BT to provide cost-based, non-discriminatory, transparent access to its physical infrastructure. However, during the course of the consultation Ofcom’s position shifted, at it will allow BT to recover more of its costs related to physical duct infrastructure, increasing its competitors’ costs.

WLA and LLU market remedies

In the leased lines HNR market, Ofcom requires BT to transparently provide access to contemporary interface leased lines on an EoI basis. However, no charge controls are imposed and BT is not required to provide dark fiber.

In the WLA and LLA Area 2 markets, Ofcom requires BT to transparently provide access on an EoI basis to:

  • MPF
  • FTTC
  • FTTP/ G.fast
  • contemporary interface leased lines

BT is not permitted to offer geographic discounts and there are no charge controls on FTTC (other than 40/10), FTTP or G.fast (other than 40/10 if no copper available).

Flat (in real terms) safeguard prices controls are imposed on MPFs, FTTC 40/10, FTTP 40/10 (if no copper available) and contemporary interface leased lines.

BT is not obliged to provide dark fibre.

In the WLA and LLA Area 3 markets, Ofcom requires BT to transparently provide access on an EoI basis to:

  • MPF (except for new copper services)
  • FTTC
  • FTTP/G.fast
  • contemporary interface leased lines

BT is not permitted to offer geographic discounts and there are no charge controls on FTTC (other than 40/10), FTTP or G.fast (other than 40/10 if no copper available).

Flat (in real terms) safeguard prices controls are imposed on MPFs, FTTC 40/10, FTTP 40/10 (if no copper available) and contemporary interface leased lines.

BT is obliged to provide transparently provide access to cost based dark fibre on an EoI basis.

Additional remedies relating to copper retirement and a fibre premium apply in WLA and LLA areas 2 and 3:

  • when an exchange has >75% ultrafast coverage, subject to 12 month notification, a ‘stop sell’ of WLA new provides, and parallel running of charge controls on FTTC 40/10 and FTTP 40/10
  • when an exchange has complete ultrafast coverage and two years have passed since ‘stop sell’ was imposed, subject to a 12 month notification, the charge control on FTTC 40/10 removed if FTTP is available
  • there is a £1.70 per month fibre uplift for full fibre 40/10 over copper 40/10 in exchanges where openreach has deployed >75% ultrafast coverage

IEC

In the IEC BT only exchanges market: 

  • Ofcom requires BT to transparently provide access on an EoI basis to contemporary interface leased lines and dark fibre
  • Contemporary interface leased lines are subject to a safeguard price control of no increase in real terms, whilst dark fibre is to be provided on cost based terms

In the IEC BT +1 exchanges market, Ofcom requires BT to transparently provide access on an EoI basis to contemporary interface leased lines subject to a safeguard price control of no increase in real terms.

DCMS Gigabit Package

The UK government’s expectation is that the regulatory framework described above, together with announced investment plans from operators will lead to private sector deployment of gigabit capable broadband across 80% of the UK.

The objective of the Gigabit Package is to provide government funding to enable nationwide coverage – addressing the 20% that would otherwise be left behind as commercial unviable. This objective is to be achieved through:

  • government procurement contracts in commercially unattractive geographic areas; and
  • gigabit broadband vouchers that residents and businesses can use to support installation costs for hard to reach individual premises.