Executive summary
1.1 This document concerns Openreach's wholesale Ethernet leased line services known as Ethernet Access Direct (EAD). Communications providers (CPs) use EAD both to provide business end-users with services, such as Internet access, and as components in the provision of fixed and mobile broadband services to the mass market.
1.2 In providing EAD services, Openreach sometimes needs to carry out construction to extend its network to the end-users' premises. In such cases, it charges bespoke excess construction charges (ECCs).
1.3 Openreach is working with the industry on a programme to re-engineer its provision process for EAD and improve its delivery performance. As part of this programme, it has proposed to change the way it charges ECCs relating to EAD services, in order to simplify part of the provision process.
1.4 Openreach has proposed to exempt new provisions of EAD services from the first £2,800 of ECCs, and to make up the resulting loss of its revenue with a balancing charge of £548, which would be part of the standard connection charge for EAD. The proposed change would apply to all EAD services except EAD Resilient Option 1.
1.5 Openreach's charges for both ECCs and EAD fall within the scope of the leased lines charge control (LLCC), which we imposed on BT in March 2013 in concluding our most recent review of competition in the provision of leased line services. The LLCC requires BT to reduce each year a broad basket of charges for Ethernet leased line services, including EAD connection charges. However, ECCs are not included in this basket and are subject within the LLCC to a separate control on each charge. If Openreach were to proceed with the proposed change, the balancing charge of £548 could be construed as part of the EAD connection charge, and this would not allow Openreach to comply with the LLCC, unless it made a compensating reduction in other Ethernet charges.
1.6 Our initial analysis found that Openreach's proposed change would reduce significantly the lead times for provision of most of the EAD orders which incur ECCs. The analysis also showed that the proposed change would have no net impact on Openreach's revenues, and so is not likely to renew potential concerns of excessive pricing, which we had addressed by imposing the LLCC. Although we identified some distributional effects, with "winners and losers" among end-users and CPs, we thought that the benefits would be substantial enough to outweigh any concerns that such effects might raise.
1.7 On 14 February 2014 we published a consultation in which we proposed to issue two Directions which would have the effect of allowing Openreach to comply with the LLCC if it were to proceed with its proposed change. Importantly, we considered that, if Openreach were to proceed with its proposed change, the Directions would ensure that the conditions we imposed on BT in the LLCC would continue to address both the competition problems for which they were imposed, in particular excessive pricing, and the specific policy objectives which we sought to balance when we imposed them.
1.8 In response to our proposal, Vodafone, Talk Talk, MBNL, Level 3, Gamma and Gradwell, in addition to BT Group and Openreach, said they supported the proposed Directions. They identified reduction in lead-time, increased certainty of prices, improvement of end-users' experience and reduction in handling costs as particular benefits. Verizon opposed the proposal, arguing that while it and some other CPs would pay more, BT Group would derive net financial benefit, because the average of ECCs per order which the rest of BT is charged in consuming EAD from Openreach is higher than the overall average of ECCs for all EAD orders. Virgin Media, Talk Talk and MBNL also described a similar potential concern.
1.9 We have carefully considered the responses to the consultation, and have set out our considerations in this Statement. We consider that the Directions would be objectively justifiable, proportionate, not unduly discriminatory and transparent, and that their effect would further the performance of our relevant duties in the Communications Act 2003 ("Act").We have therefore decided to issue the Directions, enabling Openreach to proceed with its proposal.
1.10 The Directions, and their Schedule, are published at Annex 1.