BT believes that Ofcom should not accept this dispute for reasons which are dealt with in detail below:

Transcription

1 Costas Pittas Competition Policy Manager Investigations Ofcom Riverside House 2a Southwark Bridge Road London SE1 9HA 7 January 2014 Dear Costas, Dispute submission by Level 3 relating to historic PPC charges I am writing in response to your letter of 19 December 2013 seeking BT s comments on Level 3 s submission of a dispute. This relates to an alleged overpayment on charges for services below on the grounds that they were not cost oriented: 2Mbit/s PPC Local End Services between and 1 October 2009 and 30 September 2010, and additional Point of Handover (PoH) services between 1 April 2010 and 30 September BT believes that Ofcom should not accept this dispute for reasons which are dealt with in detail below: 1. Level 3 is seeking to misuse the dispute resolution provisions in the Communications Act to get Ofcom to make changes to an ex ante charge control with retrospective effect 2. Opening this dispute would be contrary to Ofcom s duties under the Communications Act 3. BT s charges were, in any case, cost oriented and there is no case to answer 1. Ofcom is unable to apply changes to a charge control with retrospective effect Level 3 is, in effect, asking Ofcom to set prices retrospectively for the elapsed period of a charge control (i.e. between October 2009 and September 2011). Level 3 s claim that BT s prices were not cost oriented is primarily based on from the findings of the Competition Commission (CC) and the Competition Appeals Tribunal (CAT) in resolving an appeal by Cable and Wireless and Verizon against Ofcom s 2009 Leased Lines Charge Control Statement, and Ofcom s 2011 LLCC PPC Point of Handover Pricing Review Statement. The CC and CAT s decisions are based on a forward looking assessment for the remaining period of the charge control i.e. from 1 October 2009 and 30 September 2010 for 2Mbit/s PPC Local End and between 1 April Theresa Brown Director, Wholesale Regulatory Affairs BT Wholesale Faraday Building pp 6.17F 1 Knightrider Street London EC4V 5BT tel mob theresa.brown@bt.com 1 of 5 British Telecommunications plc Registered Office: 81 Newgate Street, London EC1A 7AJ Registered in England and Wales no

2 2010 and 30 September 2011 for PoH services respectively. In reaching those decisions the CC and CAT did not (and legally could not) alter the regulatory status of the pricing of those services before the relevant dates. In January 2012 Ofcom rejected this approach in its determination of the TalkTalk MPF dispute by saying in paragraph 4.43 that: [.]. However, this would, in effect, be imposing a revised charge control on a retrospective basis in relation to a period that has already elapsed and notwithstanding that the future revisions have not yet come into effect. We note that it is settled law that we cannot apply an ex ante charge control with retrospective effect. Further, Level 3 has already had ample opportunity to make comments and raise any issues of concern during the year-long consultation process on the charging of PoH services. At no point in that process did Level 3 raise any issues relating to the cost orientation of these services. 2. Accepting this dispute would be contrary to Ofcom s duties in the Communications Act 2003 Ofcom has a duty under section 3(3) of the 2003 Act to exercise its dispute resolution powers in a manner that it is consistent with its previous practice and in a way that it is targeted only to cases in which action is needed. Ofcom s existing decision making practice makes absolutely clear that a charge controlled price is not the only charge that would satisfy the cost orientation obligation; that the cost orientation and charge control conditions are separate and distinct and that one cannot rely on a charge control price to prove that the charge is not cost-orientated. Ofcom has established these principles in its determination of 13 January 2013 in the Dispute between TalkTalk Group and Openreach relating to the MPF rental charge dated 23 January ( the TalkTalk MPF dispute ). TalkTalk brought a similar dispute to the one Level 3 is now asking Ofcom to resolve. TalkTalk argued that BT s MPF rental prices were not cost oriented during the elapsed period of the relevant charge control because the prices did not align with the charges set for the remaining part of the control. Ofcom rejected those allegations and established the principle that one cannot rely on a charge control price to prove that the charge is not cost oriented. If Ofcom opens the dispute brought by Level 3, then in line with its duty to be consistent Ofcom should apply the principles of the TalkTalk MPF dispute and reject the Level 3 dispute. Ofcom must target its dispute resolution powers to cases where action is needed. It is inappropriate to open up a dispute and spend resources and time when Ofcom s practice gives the parties clear guidance about the outcome of the dispute. There is no need for Ofcom to take action in this instance given the principles established in the TalkTalk MPF dispute. Level 3 is effectively inviting Ofcom to waste public resources in a matter the outcome of which is clear. 3. BT s charges were, in any case, cost oriented and there is no case to answer Notwithstanding that Level 3 is seeking changes to a charge control with retrospective effect, set out below is evidence that demonstrates that BT s prices subject to the dispute were, in fact cost oriented. Given this evidence, Ofcom should not open this dispute. First I want to stress that Level 3 has not brought any evidence to support its allegation that the prices are cost oriented other than point to the findings of the Competition Commission which made changes to the charge control on a forward looking basis. As established in the TalkTalk MPF 1 See

3 dispute that a charge control price is not the only figure that would be compliant with the cost orientation obligation. Secondly, the relevant cost standard used by Ofcom to evaluate cost orientation in previous disputes is Distributed Stand Alone Cost ( DSAC ). In the 14 October 2009 PPC dispute Determination 2 Ofcom said in paragraph of its determination: As we explain in Section 5, given our duties and obligations, we consider DSAC is the most appropriate cost benchmark against which to assess BT s charges. We therefore remain of the view that the use of DSAC to calculate the level of overcharge would strike a balance between the interests of the Parties. The PPC dispute determination also considers, in addition to the first order test of DSAC, the rates of return on a fully allocated cost basis (see 5.39). Ofcom reaffirmed the reliance on DSAC as the first order test in the TalkTalk MPF dispute (see paragraph 4.10). Below I review the information published within BT s Regulatory Financial Statements ( RFS ) to show that there is no evidence that BT s charges for these services were above the DSAC ceiling. 1) 2Mbit/s PPC Local End Services. Table 1 below shows the Fully Allocated Cost ( FAC ) and DSAC of the 2Mbit/s PPC Local End service during the period during which Level 3 claim BT was in breach of its cost orientation obligations Table 1: 2Mbit/s PPC Local End Service Costs Reference FAC DSAC 2009/10 RFS p , /11 RFS P , Between 1 October 2009 and 30 September 2010, the PPC 2Mbit/s Local price was between and This is considerably below DSAC and is also substantially below FAC. On this basis there is no evidence that the prices charged were not cost oriented. 2) PoH Services DSAC information is not available at the level of the individual PoH charges subject to this complaint; however BT does publish details about the revenue and cost of PoH services in Section 8.8 of the RFS under the heading Technical areas (Point of Handover) (Annex 11). Table 2 below summarises the return on Mean Capital Employed shown for these services within the RFS: Table 2: Market summary for Technical Areas (PoH) m Revenue CCA Operating Return Return on MCE Costs 2011/ % 2010/ % The above demonstrates that the revenues earned from Point of Handover services during this period were significantly below cost. 2

4 It is also important to recognise that Ofcom changed the basis of cost recovery for PoH services from October This is explained in more detail in Ofcom s LLCC PPC Points of Handover pricing review Statement of 21 September ( PoH Statement ) which implemented the Competition Commission decision to change the basis of cost recovery for PoH services to a LRIC basis. Following the Competition Commission s ruling, the CAT remitted the issue of the charging for PoH services back to Ofcom. Ofcom established a new policy project to look at the specific PoH issues remitted by the CAT. Ofcom decided to implement prices on a LRIC basis, using a bottom-up model to estimate the cost of providing PoH services on an incremental cost basis. This represented a major policy change from the previous approach based on the FAC costs incurred by BT in providing these services. The price changes imposed by Ofcom from October 2011 were the result of a change in the approach to setting the PoH charges and had nothing to do with cost orientation. Rather the prices were reduced as a result of the move to a LRIC basis because it: Follow(s) the cost causality principle closely (by only including costs incurred directly to provide PoHs) Is likely to promote more effective and sustainable competition by only taking into account the costs incurred as a result of CP s demand for PoHs. 4 It is clear that LRIC is a lower-bound for cost orientation, with cost ceilings typically substantially higher to allow for the recovery of common costs. The rates of return shown in the RFS indicate that prices for PoH were unlikely to be excessive and may, in fact, be too low. Level 3 has therefore wrongly attributed the reduction in prices for PoH to a breach of a cost orientation obligation, rather than the actual reasons, which are set out in the PoH Statement. This statement was the culmination of a year-long consultation on the approach that should be adopted in setting Point of Handover prices. It would be fundamentally wrong and unfair to retrospectively apply price changes made as a result of this consultation process as part of the resolution of a series of price control matters that resulted in a change in the basis of recovery of costs. The changes to PoH prices were implemented within the context of a charge control basket, allowing BT to recover the common costs previously allocated to PoH services elsewhere in the PPC charge control basket. Conclusion For the reasons outlined above with regards to imposing a revised charge control on a retrospective basis, Ofcom should not accept this dispute. Ofcom has clearly established that a single charge control price does not set the standard for a cost oriented price. In light of this clear guidance, opening up this dispute will be contrary to Ofcom s duty to use its dispute resolution powers in a consistent and targeted way. In any event, there is no case to answer in respect of the 2Mbit PPC Local Ends. It is clear from the information published in the RFS that prices have been below DSAC (and indeed below FAC). No other evidence has been submitted to show that charges for this service were not cost oriented. 3 See paragraph 1.8, 4 See PoH Statement, paragraph 1.8

5 In respect of the PoH services, again no evidence has been offered as to why the charges were not cost oriented. The price changes in October 2011 were primarily driven be the need to change the basis of how BT recovered common costs previously allocated to PoH services. This is simply a policy change in the approach taken to recover common costs and cannot reasonably be interpreted as evidence that cost orientation obligations had not been met. In the absence of any evidence to suggest cost orientation obligations have not been met (and given the strong evidence shown that the charges were, in fact, cost oriented), Ofcom should not open an investigation into Level 3 s dispute. Yours sincerely, Theresa Brown