31 October 2016

BT’s Regulatory Financial Statements, published last week,¹ show that in the last financial year it made returns around 8% above its ‘cost of capital’ – the cost of financing a business or investment.

Much of this was made by its Openreach infrastructure arm. In recent years, BT has invested in connecting street cabinets to fibre-optic broadband. Ofcom requires BT to provide access to its network for competitors, such as Sky and TalkTalk, to offer their own broadband services.

BT’s Regulatory Financial Statements show that, with take-up of superfast broadband increasing, returns in this market are now above its cost of capital, and the company is no longer losing money on the investment.

Ofcom has previously decided against controlling the wholesale prices BT charges to competitors for superfast broadband, to allow the market to grow and encourage further investment by BT.

As we have previously said, we will consider whether regulating BT’s wholesale fibre prices is now appropriate, to promote choice and availability of these important services.

Fair regulation for all

Where Ofcom regulates companies – and sets limits on the prices they can charge – we recognise the riskiness of new investments, which should be adequately rewarded for investment to take place.

This year, Ofcom completed a major review of how BT should in future attribute its costs to regulated services. We decided to reduce the costs that can be recovered through regulated prices in future.

Over time, this will lead to lower prices. The effect will be significantly to reduce BT’s returns on its regulated products.

Reflecting this, Ofcom announced new rules earlier this year requiring BT heavily to reduce wholesale charges on its high-speed business lines over the next three years.

These price controls on installing and repairing ‘leased’ fibre lines, which are used by larger businesses, came into effect this year. Ofcom estimates the new controls will reduce BT’s revenues by £800m over the next three years.

In the most recent financial year, ending in March 2016, these prices controls were not yet in place. Therefore, BT’s reported returns have increased as some of its costs have been removed.

Ofcom will continue to scrutinise BT’s costs and maintain a balance between allowing BT to become more efficient, and ensuring fair prices for competitors and their customers.

Consumer benefits

Regulation of BT’s prices has delivered significant benefits to consumers through innovation, lower prices and encouraging new companies in the market.²

Over the last ten years, regulation has also played an important role in growing the number of broadband providers that people can choose from. With BT’s competitors now able to access its network on equal terms, the UK has one of the most competitive markets in Europe.³

However, the importance of broadband to peoples’ working and personal lives – and their need for a fast, reliable service – has never been higher.

So while Openreach’s spending on its network has been increasing in recent years, there is a question about whether it will be sufficient in future, as people and businesses demand faster, more reliable connections to support a new generation of online services.

Ofcom wants to see greater investment and improved quality of service across the industry. We will propose new rules around Openreach’s repairs and installations in our forthcoming review of this market.

We are also clear that Openreach must become more independent from BT, making investment decisions in the interests of all telecoms companies and their customers.

In July, we proposed a model for how this will work, including greater separation between the management of Openreach and BT Group. We are carefully considering responses to our proposal, and will announce next steps shortly.