Local loop unbundling: setting the fully unbundled rental charge ceiling and minor amendment to SMP conditions FA6 and FB6

Ofcom’s approach to setting the fully unbundled rental charge ceiling is the same as set out in the September consultation apart from the exclusion of excess construction costs. The following summarises Ofcom’s approach:

• Ofcom has used cost data for 04/05 from BT’s regulatory accounts;
• as this charge ceiling applies from January 2006, Ofcom has projected costs for 2005/06 to ensure that the cost data is consistent with the period for which the charge is intended to apply;
• an efficiency factor of 1.5% has been applied to 05/06 operating costs;
• a 10.0% rate of return on capital employed has been applied, as set out in the conclusions of Ofcom’s review of BT’s cost of capital;
• Ofcom has applied a 16% reduction to D-side copper costs to reflect the fact that shorter lines are used to provide broadband services;
• the costs for new drop wire installation for fully unbundled loops are recovered in the rental charge in order to achieve consistency between LLU, wholesale line rental (“WLR”) and BT’s retail products;
• Ofcom has disallowed some of BT’s proposed increase in drop costs and excluded those drop costs which are already being recovered through residential retail charges, in order to ensure no double recovery; and
• Ofcom has removed excess construction costs for which BT charges its customers and WLR service providers separately.

On the basis of this approach, Ofcom has set the fully unbundled rental charge ceiling at £81.69, which will take effect from 1 January 2006.