31 July 2017

BT’s Regulatory Financial Statements, published earlier this week¹ , indicate that in the last financial year it made returns around 7% (down from 8% in 2015/16) above its ‘cost of capital’ – the cost of financing a business or investment.

Much of this was made by its Openreach infrastructure arm.² 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.

As take-up of superfast broadband increases, returns in this market continue to rise above the cost of capital.

In March, as part of our Wholesale Local Access (WLA) market review, we proposed to maintain our policy of pricing flexibility for Openreach’s fastest broadband products, including those based on BT’s own investments in full-fibre networks, and its new G.Fast technology.

We are also consulting on proposals to protect broadband customers and promote competition, by cutting the wholesale price that Openreach can charge telecoms companies for its popular superfast broadband service, which has a download speed of up to 40 Mbit/s.

These measures are designed to provide incentives to both BT and the wider industry to invest in ultrafast networks, while promoting competition and protecting consumers from high prices.

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.

However, we will also 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.

Over time, this should lead to lower prices and a lowering of BT’s returns on its regulated products.

For example, last year Ofcom announced new rules requiring BT to heavily reduce wholesale charges on installing and repairing its high-speed ‘leased’ fibre lines, which are used by larger businesses. Ofcom estimates these price controls will further reduce BT’s revenues by £200m over the next two years.

Similarly, the proposals in Ofcom’s WLA Market Review would serve to lower returns in the residential broadband market over a period of three years from 2018/19.

Consumer benefits

Regulation of BT’s prices has delivered significant benefits to consumers through innovation, lower prices and encouraging new companies in the market.³

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.⁴

But 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 improved quality of service across the industry. Consequently, within the WLA Market Review, we have proposed stronger requirements on Openreach’s repairs and installations.

BT agreed in March to Ofcom’s requirements to reform Openreach, its network division. The changes mean Openreach becoming a distinct company with its own staff, management and strategy, and a legal purpose to serve all its customers equally.

We expect greater levels of investment to follow, as the reformed Openreach engages with industry to deliver widespread fibre networks, offering fast, reliable broadband.

1. BT is required to publish Regulatory Financial Statements four months after its financial year end.
2. http://btplc.com/Thegroup/RegulatoryandPublicaffairs/Financialstatements/2017/index.htm
3. For example, between 2009 and 2015, average broadband speeds quadrupled, but the cost of broadband hardly changed (Ofcom’s Consumer Experience 2015: Research Annex).
4. New entrants have a market share of more than 60% for fixed broadband subscriptions in the UK, according to the European Commission’s report Broadband market developments in the EU 2017.