Wholesale Line Rental: Reviewing and setting charge ceilings for WLR services

The following sets out Ofcom’s proposed approach to setting the residential and business analogue WLR charge ceilings only:

• Ofcom has used cost data for 04/05 from BT’s audited regulatory financial statements (published 2 September 2005);
• Ofcom has used the same methodology for projecting cost as used in setting the LLU charges, i.e. projecting costs for 2005/2006 (for further details see the document Local loop unbundling: setting the fully unbundled rental charge ceiling and minor amendment to SMP conditions FA6 and FB6 (published 7 September 2005);
• Ofcom is proposing to apply an efficiency factor of 1.5% 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 recent review of BT’s cost of capital;
• Ofcom has used the £58.51 estimate of copper costs as set out in the Valuing BT’s copper access network statement, which allows for an adjustment for Digital Access Carrier System (“DACS”) (i.e. the use of Pair Gain equipment). However, as Ofcom has excluded the cost of Pair Gain equipment from the charge, Ofcom has also excluded the adjustment related to DACS;
• Ofcom is proposing to disallow some of BT’s proposed increase in drop costs and excluded those drop costs which are already being recovered through residential retail prices, in order to ensure no double recovery; and
• Ofcom is proposing applying a cost volume elasticity (CVE) factor to BT’s selling and general administration (S&GA) costs.

Ofcom is proposing not to set charge ceilings for business ISDN2 WLR. This is because from its review of the charges Ofcom considers that the current charges appear reasonable; and Ofcom has not set charges for business ISDN2 WLR in the past, and to do so now would be an extension of regulation. BT is required, however, to ensure that the charge for this service is reasonably derived from the costs of provision based on a forward looking long-run incremental cost approach.