Dispute relating to LLU MPF to WLR+SMPF simultaneous migration offer (CW/01097/12/12)

Transcription

1 Catherine Warhurst Ofcom Riverside House, 2A Southwark Bridge Road London SE1 9HA By only: 18 January 2013 Dear Catherine, Dispute relating to LLU MPF to WLR+SMPF simultaneous migration offer (CW/01097/12/12) I am writing in order to register Everything Everywhere Limited ( EE ) as an interested party in the outcome of this dispute. I also attach some brief submissions and information, which we hope may assist Ofcom in determining the dispute. Ofcom has defined the scope of the dispute as considering whether BT is compliant with its obligation under SMP Condition FAA3 not to unduly discriminate, in refusing to provide a reduction to the current LLU MPF transfer price 1 which is equivalent to that currently given under Openreach s LLU MPF to WLR+LLU SMPF simultaneous migration time limited special offer pricing notified in Openreach ACCN OR301 dated 12 September 2012 ( the Special Offer ). Under the Special Offer, the combined charge for a simultaneous MPF to WLR+SMPF migration is reduced by an absolute amount of This represents a discount of circa 25% off the standard combined charge of simultaneous MPF to WLR+SMPF migration of With the discount, the new combined charge is 50.90, which is still higher than the charge for a simultaneous WLR+SMPF to MPF migration of Trident Place Hatfield Business Park Hatfield Hertfordshire AL10 9BW t: ee.co.uk 1 EE understands this term to be what Ofcom has defined as MPF Single Migrations in Ofcom s Statement, Charge Control Review for WLR and LLU Services, 7 March 2012 ( 2012 Statement ) (see further details at 4.26 and footnote 157 of the 2012 Statement). Registered in England and Wales as Everything Everywhere Limited 1 Registered office: Everything Everywhere Limited Hatfield Business Park Hatfield, Hertfordshire AL10 9BW Company number:

2 EE has been strongly supportive of BT s development of the Special Offer. This is because Openreach s currently non-regulated and above cost charges for the simultaneous migration of a customer from an MPF based voice and broadband service to a WLR+SMPF voice and broadband service have historically made it very difficult for EE (and other small WLR+SMPF based operators) to effectively compete in the UK retail voice and broadband markets and to win customers from MPF based competitors. To give the matter some real-world context, under Openreach s standard pricing, it costs more for EE to acquire an MPF based customer from TalkTalk than it does for TalkTalk to acquire the same customer back again from EE. Over the course of a standard 12 month broadband contract, this means that EE needs to charge that customer an extra 2.90 per month to recover the additional upfront cost. When TalkTalk is charging only 6.50 per month for its Essentials broadband package, this additional cost makes it virtually impossible for EE to sustainably compete for MPF based customers (as EE has only two choices, absorb the extra cost or charge uncompetitive prices). Ofcom has acknowledged in its 2012 Statement that:...the existing services available to WLR based CPs may put them at a disadvantage compared to MPF based providers ( 5.86). Under the terms of the Special Offer (for as long as it remains in place) EE now only has to recover an additional 1.45 per month in switching costs compared with its MPF based rivals. EE considers that this amount is still too high to allow it to properly compete for MPF based customers. However, it does at least make important inroads into creating a technology neutral level playing field. It would be an extremely negative outcome for competition and consumers (and would negatively impact EE commercially) if as a result of this dispute the playing field was unfairly tipped fully back in favour of its MPF based rivals. EE sets out in more detail below the background facts and analysis that EE considers relevant to this dispute. Based on this, EE considers that Ofcom should find that there has been no breach of SMP Condition FAA3. For TalkTalk to succeed in its complaint, EE considers that it would need to establish that it is fair and reasonable for the current MPF Single Migration charge to be further discounted from its current level (by an amount equivalent to the Special Offer discount). Based on the cost analysis in Ofcom s 2012 Statement and the details set out in BT s Regulatory Financial Statements ( RFS ), EE can see absolutely no merit in such a claim. The current MPF Single Migration charge is already set by Ofcom at a level well below the Fully Allocated Cost ( FAC ) to BT of providing this service, and is only just above BT s reported Distributed Long Run Incremental Cost ( DLRIC ) of providing it. DLRIC costs may be expected to be no higher than any Long Run Average Incremental Cost ( LRAIC ) measure. As a matter of fundamental competition law principle, pricing below LRAIC indicates that an undertaking in a dominant position is not covering all of its attributable fixed costs for producing the goods or services in question and that an equally efficient competitor would be 2

3 foreclosed from the market 2. Ordinarily, such behaviour would be identified by competition law regulators as evidence suggesting serious abusive conduct on the part of the dominant undertaking. Ofcom has exercised its discretion to set this charge in its 2012 Statement on the basis that Ofcom believes this charge to be fair and reasonable. Whilst TalkTalk has challenged a number of aspects of Ofcom s charge control before the Competition Appeal Tribunal ( CAT ), TalkTalk has not challenged this aspect of it. Prima facie, where a product such as MPF Single Migration is individually charge controlled by Ofcom (and in particular where that charge is already set below the FAC of supply and only just above DLRIC), both BT and other communications providers ( CPs ) ought to be able to have regulatory certainty for the period of the price control as to that price. This is important to enable BT and other CPs to make commercial investment and retail pricing decisions based on this pricing, without having to worry that BT s other SMP conditions may be interpreted so as to oblige it to drop the charge even further below FAC. As the CAT found in Telefonica UK Limited v Ofcom [2012] CAT 28:...in the context of the present case we do not think it helpful to say that the burden lay on Vodafone and H3G to justify the disputed charges. The reason is that the charges complied with the existing charge control regime, or at least nobody contended the contrary. Thus there was, prima facie, nothing that required to be justified. Indeed, if anything it might be said that it was for Telefónica to show why the charges were unfair and unreasonable, despite their apparent compliance with the SMP conditions. ( 105) If BT were to reduce the current MPF Single Migration charge of by 25%, then the resulting charge of would be around 24% lower than BT s DLRIC of providing the service (of 33.19) 3 and around 32% lower than the FAC cost 4. Given that the Special Offer combined price of for an MPF to WLR+SMPF migration represents a charge that is still circa 1.7 times higher than the FAC for the MPF to SMPF component of the simultaneous migration, EE would be simply astounded if BT s non-discrimination obligations required it to offer such a discount. Background 1. Interpretation of BT s non-discrimination obligation BT s non-discrimination SMP condition FAA3 relevantly provides as follows: FAA3.1 The Dominant Provider shall not unduly discriminate against particular persons or against a particular description of persons, in relation to matters connected with Network Access. 2 European Commission s Guidance on the Commission s enforcement priorities in applying Article [102] of the EC Treaty to abusive conduct by dominant undertakings (2009/ C45/ 02) :, paragraph 26 3 See Statement, Figure 4.1 3

4 FAA3.2 In this Condition, the Dominant Provider may be deemed to have shown undue discrimination if it unfairly favours to a material extent an activity carried on by it so as to place at a competitive disadvantage persons competing with the Dominant Provider. EE considers that a refusal to entertain a request for a discount to a charge which is objectively justifiable and price controlled does not amount to anti-competitive discrimination. Prima facie, the fact that the discounted price would be below the operator s FAC and not cover the operator s DLRIC of providing the service constitutes such objective justification. To stick to the controlled price and to refuse to provide such a discount can be considered neither undue discrimination nor unfair favouritism. 2. Current switching cost asymmetry A CP can use MPF Single Migration 5 to switch to MPF (which supports voice and broadband): from WLR (which supports telephone only); or from MPF, (which supports voice and broadband); or from WLR and SMPF (which supports voice and broadband). 6 MPF Single Migration is currently subject to a separate charge control. In Ofcom s 2012 WLR and LLU Charge Control Statement, Ofcom estimated the Fully Allocated Cost ( FAC ) of an MPF Single Migration as 7 : in 2010/11; and in 2013/14. The charge controlled price set by Ofcom is in fact already significantly lower than the FAC of MPF Single Migration having been set at for 2012/13 and to be set at as from 1 April The reason that Openreach s regulated charges for MPF Single Migrations are so much lower than the cost of that service is because Ofcom has made a regulatory decision to align the regulated charges for the two services 9 despite it being significantly cheaper for Openreach to provide 5 Referred to in Openreach s price list as MPF Connection charge - Singleton migrations ( Transfer from WLR/SMPF (i.e. from WLR and/or SMPF) or Change of CP migrations (i.e. from MPF)). 6 Ofcom Statement, Charge Control Review for WLR and LLU Services, 7 March 2012 ( 2012 Statement ), Statement, Figure See 2.do Statement,

5 migrations from MPF to SMPF (with an estimated FAC of in 2010/11 and in 2013/14) 10 than from SMPF to MPF. In contrast to the MPF Single Migration charge and the charge for migrations from MPF to SMPF, the charges for migrations from MPF to WLR are not currently charge controlled by Ofcom. Ofcom has historically explained its approach based on the low volume of MPF to WLR migrations, with Openreach estimating that there were around 85,000 MPF to WLR conversions in 2009/ Whilst Ofcom s 2012 Statement does not disclose precise volumes of WLR to MPF conversions, it does state that the numbers of MPF to WLR are far lower than this number. 12 BT s RFS for 2012, suggest that for the year ended 31 March 2012 there were 768,307 MPF Single Migrations. 13 The current, non-regulated Openreach charge for migrations from MPF to WLR is Under this pricing, to simultaneously migrate a customer from an MPF based voice and broadband service to a WLR+SMPF based voice and broadband service, a CP must pay to Openreach a total sum of ( for the WLR migration for the SMPF migration). This represents a charge which is more than double the FAC for the SMPF migration, even though the simultaneous additional WLR migration requires no additional engineer visit and no material extra work to be done by Openreach. EE firmly believes that these high charges are a key reason for the current low level of MPF to WLR migrations. Under the Openreach Special Offer, the combined charge for a simultaneous MPF to WLR+SMPF migration has been reduced by 17.50, to The represents a charge that is still circa 1.7 times higher than the FAC for the MPF to SMPF component of the simultaneous migration and circa 1.5 times higher than the equivalent charge for a simultaneous migration to MPF from WLR+SMPF. 14 It is EE s hope and belief that, although the discounts under the Special Offer in EE s view do not go far enough to reducing the charge for simultaneous MPF to WLR+SMPF migrations so that it is truly cost based and although they are currently only temporary in nature and due to expire on 30 April 2013, they will prove to assist pro-competitive conduct in the voice and broadband markets by smaller WLR+SMPF based operators such as EE by enabling them for the first time to more sustainably compete for MPF based customers Statement, Figure See 2012 Statement, See 2012 Statement, See 14 It is not clear what will happen to the combined special offer price on 1st April when the standard charge for MPF and SMPF single migrations is reduced pursuant to the charge control from the current charge of to the new charge of If it is not reduced, then, until it expires on 30th April 2013, this special offer price will become 1.65 times higher than the equivalent MPF to WLR+SMPF migration charge as from 1 April

6 We would be very happy to answer any further questions that Ofcom may have regarding this response. Yours Sincerely, Kim Hilton Head of Regulatory Law Ph: