UK: Ofcom Consults On Cost Orientation, LLU And WLR Charge Controls And Disputed MPF Rental Charges

Last Updated: 5 January 2012

Article by James Walsh, Senior Associate, Telecoms Team and Charlotte Walker-Osborn Head of TMT Sector.

What? Ofcom is consulting on regulatory financial reporting obligations, LLU and WLR charge controls and Openreach's dispute with TalkTalk Group concerning metallic path facility rental charges.

So what? Cost orientation and charge controls are key remedies that are imposed by Ofcom on operators with significant market power ("SMP") in particular markets.  Financial reporting and charge controls are key to providing greater clarity on costs and charges to facilitate the effectiveness and development of competition in regulated markets.  The measures imposed need to be viewed within the context of the changes underway in the market towards next generation networks and services.

Review of cost orientation and financial reporting

Ofcom imposes cost orientation obligations on telecoms operators with significant market power to ensure that they set charges that are based on cost.  Ofcom has commenced a review of its use of cost orientation obligations, and at the same time is carrying out a review of the related issue of regulatory financial reporting obligations on BT and KCom.

Cost orientation requires that charges are "reasonably derived from the costs of provision based on a forward looking long-run incremental cost approach and allowing an appropriate mark up for the recovery of common costs including an appropriate return on capital employed".  The Network Charge Control guidelines published by Oftel in 2001 and case law are used to interpret this obligation.

Ofcom is seeking input on a range of issues associated with cost orientation, including its objectives, how it is currently used, what options there are for implementing cost orientation and what impact changes in technology should have on the use and interpretation of cost orientation.  We are expecting the review to produce a range of opinions given the current investment by BT and KCom in next generation networks and services sets a very different landscape from when Oftel originally imposed the Network Charge Control guidelines in 2001.

Regulation financial reporting is also under review.  BT and Kcom are currently required to provide Ofcom with a range of financial information on regular and ad hoc basis, and must also publish annual regulatory financial statements.  Ofcom has sought input on, among other things, the objectives of regulatory financial reporting, how it is currently used, what options are available for regulatory financial reporting, and what changes should be made to the currently regulatory financial reporting requirements imposed on BT and KCom.

The current consultation on regulatory financial reporting is in addition to changes that were imposed by Ofcom in June to enhance the presentation and improve the quality of BT's regulatory financial statements ("RFS").  Those changes included the imposition on BT of cost accounting and accounting separation obligations in the wholesale broadband access market, the removal of accounting separation and cost accounting obligations in the fixed narrowband wholesale services market, the tightening of BT's reporting on costs for number translation and bad debts on premium rate numbers in the call origination market, and improvements to the presentation of BT's regulatory financial statements.

Ofcom aims to complete this project in autumn 2012 and so has called for inputs by 6 December 2011.  There will be further opportunity to comment as part of the full consultation in Spring 2012.  There is likely to be an implementation phase once the proposals have been finalised.

Further consultation on LLU and WLR charge control

Ofcom has issued a further consultation on its proposals for revised local loop unbundling ("LLU") and wholesale line rental ("WLR") charge controls.  Ofcom consulted on a set of proposals on 31 March 2011 (when the previous charge controls expired) but received a variety of responses relating to the commercial and economic consequences of ancillary charge controls, the cost calculations for some services, and the practical implementation of the controls.

Ofcom has now reassessed the charge controls in light of a £100 million error in projected Information Service ("IS") expenditure and Ofcom's current understanding of RPI.  Stakeholders have until 23 December 2011 to respond.

Dispute between TalkTalk Group and Openreach on the annual charge for MPF rental

In the midst of Ofcom's current financial consultations on costs and charges for BT and KCom, TalkTalk Group ("TTG") has disputed rental charges set by Openreach for wholesale metallic path facilities (ie copper lines between local exchanges and customer premises) from 1 April 2011.  The MPF rental charge is a key cost that TTG must factor into its charges to customers for a range of services that it offers.

Openreach made a voluntary commitment that it would not charge more than £91.50 for annual MPF rental from 1 April 2011.  TTG assessed that the charge should be £90 and sought a decision from Ofcom to reduce the price charged by Openreach, and to award TTG a refund of overpayments already made at the higher £91.50 price.

Ofcom has proposed that Openreach's MPF rental charge is compliant with Openreach's regulatory obligations, being on fair and reasonable terms, conditions and charges, and being cost oriented.  Ofcom's consultation closed on 28 November 2011 and we expect a range of communications providers are anxiously waiting to hear Ofcom's final determination.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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