Equivalence of Inputs and Functional Separation

1. BEREC Workshop on Equivalence of Inputs Equivalence of Inputsand Functional Separation Louis-Philippe Carrier 29 April 2014

2. Openreach-specific processes and governance are central in implementing Equivalence of Inputs. Products are “organically” EoI-compliant because: They are supplied by a functionally separate entity, limiting incentives for discrimination. They are scrutinised by Openreach’s Equivalence of Access Board (EAB) and Equivalence of Access Office (EAO). All the regulated wholesale access products are supplied by Openreach, (now) with almost no exception. The undertakings are frequently updated to ensure this. Ofcom maintains a regular dialogue (~ monthly) with the EAO. Functional separation provides Ofcom and stakeholders with a higher degree of predictability (products follow a certain “pattern” and processes are separate) and legal certainty (EoI obligations rely on clear, lasting and systematic legal provisions). This EoI/FS regime seems sustainably cost-efficient for BT, Ofcom and other stakeholders: it reduces litigation without generating the costs of structural separation. It was partly made possible by favourable conditions at the time. EoI was introduced with Functional Separation

3. VULA: 17m coverage 1.9m BT lines 500k CP lines Key: Relevant Market end-to-end build PIA: virtually zero WLA market (4) WFAEL market (NA) Duct and pole infrastructure WBA market (5) SLU: Main network to close Business market (6) Copper (sub-loops) Fibre Narrowband calls (2, 3) MCT (7) Copper (full-loops) LLU: ~6.5m full ~2.5m shared Spectrum VULA Mobile services Fixed voice lines Broadband (current) Broadband (superfast) Leased lines Mobile Providers Voice line resellers Internet Service Providers ICT Providers Mobile consumers Voice consumers Broadband consumers Business consumers

4. Following our Strategic Review of Telecommunications of 2005, we concluded: “Ofcom believes that the combination of these features (upstream market power and vertical integration) provides BT with both the ability and the incentive to discriminate against its downstream competitors, who are also its wholesale customers. Moreover, Ofcom suspects that BT may have engaged in conduct which has had the effect of restricting competition.” Concretely, there was a sense that LLU was going to be crucial to a more efficient, (network-) competitive telecoms sector. But this could not happen if the products were not well-defined enough and could allow BT to discriminate against its competitors. s.131 of the Enterprise Act 2002 allows Ofcom to make a market investigation reference to the Competition Commission where it has reasonable grounds for suspecting a restriction or distortion competition. s.154 of that Act allows Ofcom to accept undertakings instead of making such a reference, to reduce the risks of harm to competition and to consumers. Issues we met in 2005 led to the BT undertakings

5. Non-price discrimination can be difficult to address with the SMP regulation framework. Assessing the discriminatory nature of processes and definitions is potentially a lot of work. The design of EoI took that into consideration: Openreach provides local access and backhaul (leased lines) products. The Undertakings name the products covered, where possible. It uses separate accounts, location, systems. An audit verifies this. The brand is specific. The division is independent, with its own CEO. Information barriers are in place. The Office of the Telecommunications Adjudicator was also created at the time to solve LLU operational issues. EoI-related Litigation has been very limited. EoI provides a robust foundation for VULA products, which need a high level of transparency. Although NGA did not exist in 2005, the Undertakings were designed to facilitate its inclusion. The Undertakings reinforce our regulatory framework

6. There has been a large consensus, from the beginning, that EoI makes life easier for all stakeholders: The regime is well integrated in Openreach’s governance, its implementation fluid. For Ofcom, dialogue with BT is much easier, and the technical aspects are clearer. For the other CPs, EoI-based wholesale products offer important guarantees. In 2005, UKCTA described the Undertakings as “the most important advance in telecommunications regulation since BT privatisation”. In this context, day-to-day EoI implementation is relatively low-burden for Ofcom and stakeholders • The years since 2006 have seen a surge in LLU and a strong development of retail competition for broadband. Take-up of ADSL was strong by European standards.

7. Ofcom’s experience suggests some comments…

8. Question A – defining EoI: A general non-discrimination obligation remains necessary, as the incumbent may not always use the same inputs as the altnets. For example, BT uses SMPF/WLR to provide broadband access and voice, while most altnets use MPF. Question C – QoS: EOI itself does not guarantee a high level of QoS. Altnets still require SLAs, SLGs and KPIs specifying and reporting on quality parameters. Question D – information requirements: These need to be specified separately and through SMP conditions. Cf. FAMR2014: Besides EoI and accounting separation, “BT and KCOM must publish a reference offer which assists with the monitoring of their pricing strategies. They must also notify CPs of changes to charges in advance of implementation and give notification of technical information.” Question F – compliance regime: Ofcom is not involved in day to day compliance – however does have a duty to resolve disputes should this be required. EoI does not replace SMP regulation but complements it