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Ofcom publishes wholesale price proposals
for competitive broadband market
26 August 2004

Ofcom today publishes its final proposals for wholesale price reductions for Local Loop Unbundling (LLU) services. Subject to consultation, the price reduction will come into effect in December.

This will be the final stage of a process begun in May this year when Ofcom outlined its proposals to increase effective and sustainable competition in broadband.

Ofcom's framework is designed to provide proper incentives and rewards for investment for scale and reach: this will be particularly important for broadband networks providing always-on high speed internet access to content-rich material, voice calls by VoIP and Video on Demand.

Ofcom's May announcement set out the initial proposals of its Market Review on wholesale local access (which includes 'Local Loop Unbundling') but did not contain proposals on LLU prices. Ofcom also announced proposals for the wholesale margin on BT's range of DataStream products.

At about the same time, BT announced its own, voluntary, set of phased price reductions for these local loop services, some of which have already come into effect. BT also announced its acceptance of Ofcom's proposal for an independent Telecommunications Adjudicator who would
facilitate the industrial-scale provisioning of local loops to other operators.

Ofcom welcomed this commitment by BT to helping to develop a broadband market which could benefit both the industry and consumers.

It was, given the above, open to Ofcom simply to rely on BT's voluntary price-reduction proposals and the effectiveness of the Adjudication process.

However, many operators felt that, since this was a nascent market, there would be value in Ofcom undertaking an independent cost-oriented price review, to provide greater certainty for market entrants.

PRICING PROPOSALS

As a result, Ofcom is today publishing its own price proposals. Subject to the results of the consultation, these proposals will become effective from December.

The table attached sets out the wholesale connection and rental prices for LLU that applied in May before BT's reductions (Column A); current prices, part-way through BT's voluntary programme of price reductions (Column B); and the prices ceiling that Ofcom proposes should apply from
December (Column C). The percentage reductions shown are compared with the wholesale prices prevailing in May.

LLU connection and rental prices
	A Old	B Now	C Proposed	% Change from A to C
Shared access
Connection	£117	£83.33	£37.03	68%
Rental	£53	£27.12	£12.64	76%
Fully unbundled
Connection (transfer)	£88	£88	£50.70	42%
Connection (new provide)	£265	£223.33	£192.64	27%
Rental	£119	£105.09	TBD	N/A

Ofcom is not, at this stage, proposing to determine the final new rental price ceiling for fully-unbundled loops. This is 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 from this project will be published for
consultation by early November, with final proposals in Spring 2005. At that point Ofcom will then determine the rental price ceiling for fully unbundled local loops. In the meantime, BT's voluntary price reduction to £105 p.a. rental for such loops remains the applicable price.

Although Ofcom can determine the framework, it is the commitment of BT to make it work; and the commitment of the competing operators to invest, that will decide the range and reliability of services, their price, and hence their attractiveness to residential and business customers. That in turn will determine the success of Britain's broadband take-up.

TELECOMMUNICATIONS ADJUDICATOR

Early indications of the work of the Telecommunications Adjudicator are encouraging (particularly by comparison with the previous attempts to make LLU a reality in the UK). There is evidence that BT's commitment has been transmitted from its top management to those charged with
delivering effective, scaled provisioning of local loops.

Indications are that failure rates for new connections are dropping and throughput for new orders is increasing. There is emerging evidence of a high level of commitment from several of the alternative operators to investment in this opportunity, with Board level agreement to the placing of firm orders. The line-up of major operators who have
committed to the Telecommunications Adjudicator process has recently been completed by AOL and Energis joining the scheme.

The Adjudicator and BT have already agreed that industrially robust processes and systems will be put in place to provide the capability to enable the successful delivery of more than one million unbundled loops by 2005-06.

DATASTREAM

Ofcom is also publishing today the final statement on the margin for wholesale broadband access (DataStream) which sets a similar margin as proposed in the consultation in May.

Ofcom believes that Local Loop Unbundling offers the greatest potential for downstream service and price differentiation and competition. However, given that LLU requires substantial facilities and network investment by competitors and will tend for several years at least to be
economic only in metropolitan/dense urban areas, DataStream will play an important transitory role in these areas as well as a longer term role in smaller urban and rural areas.

Ofcom will publish an update on progress in this area in December as the new price reductions take effect. The short term objectives are clear: a significant increase in throughput for new orders being processed, moving from the hundreds and thousands to the tens of thousands per
month; and a significant drop in the failure rate for new connections.

Most of the debate to date has centred on the provision of data services over broadband. The next step for the market is the introduction voice services over broadband. To this end, Ofcom will be publishing proposals to encourage the development of voice over broadband in September.

Stephen Carter, Chief Executive, Ofcom, said: "Collectively, this new pricing structure, the industry participation in the Adjudicator scheme, and BT's fresh approach have the potential to add up to a faster broadband roll-out for Britain."